February 8, 2008

1) There are an usual number of anomalies in the market piling up right now. Tax free municipal bonds are now yielding more than taxable treasury bonds. This is happening because there are fears about the muni bond insurers going under, which is pointless since muni bonds rarely default. In normal times muni bonds yield 30% less than treasuries. Normally hedge funds would step in and buy munis and short treasuries against them and eliminate this anomaly. But the hedge funds are being hit with margin calls as a global deleveraging unfolds. Hedge Funds call this kind of trade "buying a dollar for 70 cents".

4) Here is another one. GE common is yielding almost double 2 year treasuries. The stock has fallen from $43 to $33 in 4 months and now yields 3.2% vs. 1.9% for notes and you get all of the future growth in GE earnings for free through stock appreciation. Jeff Imelt says that 10% revenue growth for 2008 is 'in the bank'. One opportunity for GE is in the fact that Los Angeles is expected to have power brown outs this summer and GE has a 40% market share in gas turbines.

3) The stimulus package has been passed by congress and is expected to add 0.7% to GDP growth this year. The $300 checks go out in May and will start being spent in June. By then the recession will be over so it will be useless in terms of heading off the current slowdown, especially if people just use the money to buy a Chinese made CD player. This is basically just a feel good program in an election year.

4) Wheat has been limit up every day this week for a total move of 15% to 1,150 cents a bushel. A global food shortage is developing as several rich countries like Brazil and China scramble for supplies. Poor countries in Africa can no longer afford to pay. This could be the year of food as a big trade.

5) A record $3.4 trillion is sitting in money market funds yielding close to zero. When the markets turn they will rocket because there is so much firepower available.

6) Another quiet day. No one doubts that this is anything but a calm between storms. One is increasingly hearing the term 'tape bomb.'