February 12, 2008

1) Did you know that if the rest of the world ate like Americans the world food supply would have to increase 2.4 times? This is one of the factors driving up commodity prices. Some 24% of US corn production now goes into ethanol. Commodities markets are so small that one hedge fund could buy the entire open interest in any one of them. That is why when they go up, they go up really fast. It is like trying to get a billion dollars through the eye of a needle. This will provide strong underlying support for many commodities for the next decade.

2) Treasury secretary Hank Poulson announced the 'Hope Now” coalition of five major banks to initiate a 30 day moratorium on all foreclosures. This is another feel good measure that will not work. A popular Wall Street expression is that 'hope turns to bloat.'

3) Warren Buffet has offered to buy the entire $800 billion municipal bond portfolio of the three bond issuers, Ambac, MBIA, and FGIC. This will never happen because it would mean spinning off the only profitable parts of their business and leaving them only with sub prime toxic waste. It does underline the extreme cheapness of muni bonds at the moment, and Buffet's offer will stand as a stop out in case the above three insurers go under. Muni bonds rocketed on the news. I mentioned the attractiveness of muni bonds in my February 8 comments.

4) William Lerach plea bargained to a two year prison sentence and $7.6 million in restitution for illegal payments to his plaintiff witnesses. There was no figure more universally despised in Silicon Valley for his bogus class action suits on earnings shortfalls. It's a great deal. He will go to a camp, be out in a year, and gets to keep the $2 billon he made in the racket. Stamps anyone?

5) The global FIFO phenomenon is generating a major hedge fund trade at the moment. The idea is that since the US will go into recession first it will be the first out, with Europe lagging. Hedge funds are shorting US Treasuries and going long European bonds in massive size to take advantage of this. It looks like a good trade.

5) The Sports Illustrated annual swim suit issue came out today. For the last 45 years when blondes are on the cover the Dow Jones goes up 11.6% that year. With brunettes it is only 2.2%. This year the cover girl is blonde. BUY!

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