Market Comments for June 3, 2008
1) There was massive liquidation of hedge fund longs in crude, with outstanding positions being reduced by 80%, according to CFTC statistics. Crude plunged today from $129 to $124.50. The crude July 150 calls you could have shorted yesterday at $280 could be bought back today for $70. The one day profit on this would have been $283,000. The combined profit on the two crude options trades I recommended so far would have been $773,000, or 25.8% of your $3 million capital. These kinds of profits can only be made in rare markets with extreme volatility and enormous divergences from traditional benchmarks, like we have now.
2) Lehman stock fell another 10% today as it led the charge to the downside for the financials. Bond insurance rates are now indicating a 60% chance of a default on Lehman debt. However, junk bond spreads, LIBOR spreads, credit default spreads for other companies, and volatility indexes, are indicating that the current financial meltdown won't be as severe as the one in March.
3) The US is facing an engineer crisis. Last year China graduated 644,000 engineers, India 350,000, and the US only 70,000. Although half of the Chinese and Indian engineers are only educated to the level of a US trade or technical college, half of all US engineering graduates are foreign born. The reasons given are the starvation of funds for the K-12 public education system over the last 30 years, bleeding off of the best students into higher paying professions in investment banking and law, and the fact that engineering is not 'cool' outside of the gaming community.
4) The publicly traded stock exchanges such as CME Group (CME) and NYSE-Euronext (NYX) have been beaten with the ugly stick this year. The stocks are off up to 45%. There are fears that government regulation will force them to turn off the printing presses. Since these are the guys who sell shovels to the gold miners, they bear watching on any upturn in trading volumes. Of the two, NYX is the better play.
5) In the last week, I have seen a number of bizarre reports of theft as the commodity boom wreaks its unintended consequences on the economy. Gone missing are used restaurant grease (for biodiesel), fertilizer, guano, manhole covers, copper rain gutters from luxury homes, crude oil taken directly from wells, and of course lots of gasoline. Local police departments are unequipped to deal with this crime wave. Can we expect a 'French Fry Grease Special Victims Unit'?
6) At the G-7 meeting in Barcelona, Fed chairman Ben Bernanke provided some verbal support for the dollar which jumped to $1.54/euro.
7) Emerging markets have had nothing less than a spectacular run. A booming global economy and torrid commodity prices have enabled them to run up huge current account surpluses and reserve for the first time in their histories. Many are now net creditors to the US. Talk about trading places! But things have run too far too fast and the charts are close to a double top. Go short the iShares MSCI Emerging Market ETF (EEM) at $50. If things go bad, emerging markets will drop twice as fast as developed markets. Don't believe the decoupling theory for a nanosecond. Diversification often just means losing more money in more places, only with more exotic sounding names. You could also use a short emerging markets position to hedge a long US equity position.