April 17, 2008

Market Comments for April 17, 2008

1) There was a major sell off in the bond market today. Since Monday the 30 Treasury futures have fallen from 120 to 116. This is a huge move. A normal leverage ratio for this trade is 5:1, so a short on Monday would have yielded a 20% return. As you know, I have been pounding the table about shorting bonds for months.

2) Natural gas soared to $10.55/btu, a new high for the year, on fears of supply shortfalls this summer. Natural gas has been one of my core longs since the beginning of the year and is up 40%. My short term target is $13/btu.

3) Copper finally broke through $4/pound on massive Chinese buying. Yesterday's hot Chinese Q1 GDP figure encouraged traders to increase longs. I have been recommending longs in copper since $3/pound. Copper is now up 33% from there. China announced that its current account surplus rose by $150 billion to $1.67 trillion in Q1. This is the largest quarterly increase in world history. China now has enough reserves to pay for its infrastructure build out for the next ten years. This will lead to acceleration in the appreciation of the Chinese Yuan against the dollar.

4) Southwest Airlines (LUV) announced earnings much better than expected. In 2006 it hedged 70% of its 2008 fuel costs and 50% of its 2009 fuel costs at $50/barrel in the futures market. This means that its fuel costs are half of that of other airlines. This hedging profit totaled $1 billion last year. Brilliant. A classic example of a best of breed company.

5) Google (GOOG) reported spectacular earnings after the close today and the stock jumped 11% to $504 in aftermarket trading. They are seeing no slowdown in the global economy whatsoever. Google should be a core holding in any US stock portfolio. The stock has been up 15% during a time when the Dow was virtually unchanged. This is the kind of out performance that you are looking for in a well run hedge fund, known in the trade as 'Alpha'. Today's news augurs well for the stock market tomorrow.

THOUGHT OF THE DAY

A number of technical indicators started to flash 'all clear' this week. The spread between Fed funds and the two year Treasury note has declined from 100 bp to 15bp. The VIX volatility index has fallen from 31% to only 21% as fears of big stock market drops diminish.  A big sell off in the Treasury market means investors are taking off their safety trade and moving into higher risk trades like commodities, especially crude, natural gas, and the other longs I have been recommending