June 20, 2008

Global Market Comments for June 20, 2008

1) Crude crashes, down $7 from yesterdays high to a low of $132 on news that China is raising retail gasoline prices by 17% and diesel prices by 18%. Prices are still well below market levels and may be raised again after the Olympics to prevent rioting during the games. China accounted for 40% of the growth in world oil consumption last year. Demand destruction goes global. Watch for an imminent peak in crude.

2) German 10 year bund yields hit 4.70%, a six year high. Expect US Treasury yields to follow and bond prices to fall big. See my earlier recommendation to sell 30 bond futures at 120. This is one of the most compelling shorts out there right now.

3) There is a rising outcry to build more nuclear plants in the US, where one has not been approved for 30 years. McCain has made construction of 30 plants part of his campaign and the industry wants 100. Nuclear now accounts for 16% of the US electricity supply, compared to 39% from coal, 19% from hydro, 15% from natural gas, and 10% from oil. France gets 75% of its electricity from nuclear.

4) According to Goldman Sachs, high gas prices are hurting the $50 million a year Nevada prostitution industry, which is permitted in counties with populations fewer than 400,000. These very remote houses of ill repute rely on truckers as their principal clients. With diesel fuel at $5.50/gallon there are fewer truckers to go around. One entrepreneurial house is offering a two for one if you spend your tax rebate check there.


The August $155 calls you sold short yesterday for $3 could be bought back today for only $1, creating a one day trading profit of $600,000. It only took a move in crude from $138 to $132, caused by the China fuel price increases, to create this profit. These kind of profits are only possible when you get one month's worth of price movement compressed into a single day, as we are seeing in the crude market every day now. Time to take the profit and resell these again on the next spike up. No point in carrying the weekend risk with the big oil meeting on Sunday. It is also a classic example of how a hedge fund works. Find the lowest risk trade out there, wait for an event driven extreme price movement to give you a great entry point, and then leverage up. Don't stay married to the position, bank a profit as quickly as possible. This is how well run hedge funds generate their huge returns.