June 4, 2008

Market Comments for June 4, 2008

1) Weekly Crude supplies increased and both India and Malaysia announced they are cutting gasoline subsidies, indicating that global demand destruction is accelerating. Crude fell from $125 to $121.80. Traders are now selling every rally. If this picks up momentum, we could see $100 in a few weeks. Airlines rocketed today, going up 5%-10% across the board.

2) General Motors announced that sales for May were down a staggering 30%. The company is closing four truck plants and laying off 10,000 people for a cost savings of $1 billion. It is also putting its Hummer division up for sale. The trouble is that no one wants to buy a single Hummer, let alone the entire division. The launch of the Chevy Volt has been pushed back to 2010. The stock has hit a 26 year low. GM's US market share fell below 20% for the first time in May. GM stock is acting like it is going to zero. I remember when this was America's preeminent company. Oh, how the mighty have fallen!

3) In May the number one selling car in the US was the Honda Civic, the first time since 1991. The car gets 35 miles/gallon, costs $20,000 new and comes with a 100,000 mile warranty. The hybrid costs $26,000.

4) Lehman has become the lead stock in the market. They said that they have no need to raise capital. The trouble is that no one believes them. The stock has plummeted from $50 to $29 in 5 weeks. Today the Lehman July $2.50 puts traded in huge size. Then Merrill Lynch put out a 'buy' recommendation and we got a rally back to $32. The company put on hedges against many of their lower rated debt positions at the bottom of the market in March. Since then the debt markets have improved, so now the hedges are costing them a fortune. The company is due to report its first loss in a few weeks since the company went public in 1992.

5) Talk about unintended consequences of high gasoline prices. Profits are surging at insurance companies because less driving, and slower fuel saving driving, means fewer car accidents. Buy Geico and Allstate. AAA members are deliberately running out of gas so they can get a free gallon that members in distress deserve.

6) The ultimate solution to the food crisis will be greater productivity through genetic engineering. In 1960 US farmers produced 16 bushels of corn per acre. They currently produce 156 bushels per acre. If only we could get the Europeans, who have a phobia about genetic engineering and call it "frankenfood", to eat the stuff!