March 10, 2008

Market Comments for March 10, 2008

1) Lehman Brothers (LEH) will imminently announce a lay off of 5% of its global work force. The stock hit a new 52 week low, down 52% in a year.

2) The futures market is now discounting a 100% chance of a 75 bp Fed funds rate cut next week. I now think they will cut only 50 bp and disappoint the market. This will take the fed funds rate down to 1.75% giving you negative real interest rates of 2%.

3) The closing of the auction rate facility market has locked up the short term cash of many wealthy individuals just when April 15 tax payments are coming due, forcing them to sell other instruments , like stocks. In this environment you don't sell what you want to, you sell what you can.

4) Crude hit an intra day high of $108.20 today, and Natural Gas $10.04. Goldman Sachs (GS) put out a report saying that if we get a sudden geopolitical event like a war or a major supply disruption it could shoot up to $150-$200.

5) Bear Stearns (BSC) fell 13% on liquidity concerns and relevance concerns now that its core bond business is gone forever.

6) Of course you know all about Eliot Spitzer now, who hasn't yet resigned. Her name was Kristen and she charged $4,300 for the evening. Further proof of rising inflation.

THOUGHT OF THE DAY

An opportunity will soon present itself to make a quick 10% profit. The S&P is now at 1,270. When it hits 1,225 the volatility index will rocket from 28% now to the high thirties. This will cause a hyperbolic expansion in the prices of deep out of the money puts. At this point you will be able to sell the April 1,140 puts, which expire on April 21, for $25. This S & P level is below the 2005 low. Leverage up on these three times and you will make 10% over  20 trading days, or a $300,000 profit on $3 million in capital. If the market then bounces, which is likely, you could realize this profit in days. These sorts of opportunities come up only once every 5-7 years.

SPX0310.png picture by sbronte