April 9, 2008

Market Comments for April 9, 2008

1) Weekly crude inventories showed a decline of 3.2 million barrels, 5 million barrels less than expected. Prices jumped to a new all time high of $112.30 barrel while the Dow fell 49 points. Gasoline at $4/gal is imminent and may see $5/gal before this is all over.

2) A consortium of three private equity firms, Apollo, TPG, and Blackrock are buying $12 billion of sub prime loans from Citicorp at 90 cents on the dollar.

3) The REIT exchange traded fund, RWR, has jumped from $62 to $76 in the past month, an increase of 22%. Sam Zell, no dummy in this space, has been a large buyer of his own REITs at a discount over the last few months. This could signal a turnaround in the commercial REIT market, another 'all clear' signal.

4) Crude has historically traded at 14 times the natural gas price on a BTU adjusted basis. It is now only at 11 times. A reversion to the mean would take gas prices up to $14/BTU. You can buy gas now at $9.75. Buy natural gas, or buy natural gas and short crude. Unlike crude, there is an actual supply/demand balance to justify higher prices in natural gas.

5) A lot of people are talking about Starbucks as a turnaround play, which has fallen from $40 to $17.  The return from retirement of founder Howard Schultz is focusing a lot of attention on the stock. The company now has 16,000 stores worldwide serving 15 million customers a day, with 1/3 overseas. All of the future growth will come from overseas. China has only 600 stores now and could eventually reach the US store count of 11,000.

6) Sugar is a strong buy here at $12/pound. Crude at $112 will drag up ethanol, which outside the US is made from sugar. It has lagged other commodities. India, the other major exporter after Brazil, is starting to restrict food exports to head off famine. The listing of sugar futures and options on the new Intercontinental Exchange (ICE) has vastly increased the liquidity of these instruments bringing in new classes of investors with new capital. My short term target is $15/pound, up 25%.


The next 200 point pop in the Dow will come when a couple of multinationals report fabulous earnings because of the weak dollar. This will happen early next week.