February 19, 2008

1) Sony won the format war with its blue ray DVD's. The final nail in the coffin was Walmart's announcement last week that it will no longer carry Toshiba's rival HD-DVD format machines. This is the first time that Sony has won one of these wars. Remember Betamax?

2) Credit Suisse announced $2.8 billion in write downs because of 'mispricing' by traders. 'Mispricing' is Swiss German dialect for "rogue trading". The market has become inured to these announcements so no sell off today.

3) Under the Fed's TAF program it has loaned $50 billion directly to European banks in February so far, and $200 billion since the program started in December. The Fed has morphed into the de facto European central bank. This will eventually be highly inflationary.

5) The crisis in the Auction Rate Securities market spilled over into every corner of the corporate debt market at the end of last week, from triple 'A' corporates to junk. More credit spread repricing which in the long term can only be good for investors, especially those with new money. Stocks are being supported by a flight to quality bid as investors shun any kind of debt instrument as fallout from sub prime.

6) Treasury bond prices fell off a cliff today. I recommended you sell all bonds when the 10 year yield was 3.22% in January. It is now 3.85%. If you have any bonds left anywhere please, please sell them. They will go down a lot more when real inflation hits next year.

7) If you remember my S & P 500 1200-1450 short strangle recommendation in January, it expired out of the money on Friday with the index at 1,352 for a total profit of 5% plus. You could put the same trade on now and take in another 5% over the next four weeks. The total profit on this would be $200,000 on $2 million in capital over two months.

8) There are rumors that Lehman Brothers is about to announce large losses in real estate lending. A rogue commercial real estate department?  'Lehman lied' isn't exactly something they'd like to read in the papers these days.


The US is setting itself up for a serious bout of stagflation from next year. We will be coming out of this recession with oil in the $60s-$70s and most other commodities at all time highs, so imagine what inflation will do when the economy recovers. Yet housing will still be a major drag on the market for a couple of years. The last time this happened was during the seventies, which no so coincidentally was the last time the US lost a war.