June 9, 2008

Market Comments for June 9, 2008

1) Lehman announced a Q2 loss of $2.8 billion, far worse than expected, and a highly dilutive common and preferred fund raising of $6 billion.  This is Lehman's second $6 billion fund raising in two months. The stock dropped an immediate 12%. Moody's downgraded the company yet again. The company is raising money they said they didn't need as recently as last week to cover losses they said they didn't have. At this point chairman Dick Fuld and CFO Erin Callan have lost all credibility. Even if they survive in their present form, the reduced leverage means they will be making a lot fewer profits in the future. One of the biggest buyers of the new issue was the New Jersey state pension fund, where Governor John Corzine is the former head of Goldman Sachs.

2) The corn crop is in trouble, prices hitting an all time high of $6.50/bushel. The Midwest has had unusually cool weather this summer and huge storms have destroyed crops in Iowa. This is driving down yields/acre nationally which are now expected to fall 7% YOY. With the relentless demand for ethanol prices could hit $7.50/bushel this summer. Please recall my April 13 recommendation to buy corn at $5.80.

3) McDonalds saw a 7.7% increase in same store sales in May. People are clearly moving down market in their eating habits to save money.

4) Friday's $11 price increase in crude alone will add $4 billion to US airlines' annual fuel bill.

5) Pending home sales for April rose an unexpected 6.3%, but still fell 13.1% YOY. The largest gain was in the West, where the biggest price falls have occurred. The bargain hunters are out!

THOUGHT OF THE DAY

There is increasing talk of a 'W' shaped recession. Although only half of the stimulus checks have been sent, all have been spent. To refresh your knowledge of the recessionary alphabet:

V- is a sharp contraction of the economy followed by a sharp recovery.
W- is a double dip recession where the economy bounces along a bottom.
U-is a long deep recession followed by a slow recovery.
L-Is a sharp contraction followed by no recovery. Think Japan in the nineties. There are people out there arguing the 'L' case for the US.