April 25, 2008

Market Comments for April 25, 2008

1) There is a growing consensus that the euro has peaked for the year at $1.60. The currency ($XEU) is a strong short against the dollar at these levels. If the Fed doesn't cut interest rates next week you can expect the euro to collapse and stocks to soar. Commodities have started a major sell off with the exception of Natural Gas, which hit a new 2 ½ year high today of $11.15.

2) The sell off in the bond market is accelerating and is going global. There was a major crash in the Japanese government bond market last night. The selling was so aggressive that authorities halted the futures market for 15 minutes. Yields on the 10 year JGB have shot up from 1.35% to 1.70% this month. US 2 year Treasury notes are yielding 15 bp over Fed funds.

3) You're not drinking enough double shot frappocinos! Starbucks announced terrible earnings and the stock fell 12%. Howard Shultz says the economic environment is the worst in the company's history.

4) More info on Apple. Mac's global pc market share has risen to 3.8%, a new high. With its current leverage, each 0.25% increase in market share sends $700 million straight to the bottom line. There is an easy 50% move up in the stock to $250 in the next year. Lenovo is now looking at selling its laptops with the option of having Mac operating software. Another thing helping Apple is the fact that up to 40% of the Vista copies sold in Asia are pirated and that many companies are delaying the adoption of the Microsoft operating system until the bugs are worked out.

5) The spreads over Treasuries on every type of debt instrument are shrinking dramatically, including munis, sub prime loans, credit default swaps, commercial loans, and corporates from triple A's to junk. The appetite for risk is back, at least temporarily.

6) Consumer sentiment dropped to a 26 year low in March according to the University of Michigan. The Dow sold off 100 points.

7) The Shanghai market was up 9% yesterday, its biggest gain in 6 years. Olympics here we come!

8) Fact of the day: Click fraud accounts for 16% of all internet advertising.

9) The 2-10 year Treasury spread has dropped to 150 bp. I recommended a 10:1 leveraged short last month at 260 bp. The trade would have made 11%.