March 20, 2008

Market Comments for March 20, 2008

1) The major story today was the continued melt down in the commodities markets triggered by the increase in margin requirements on Sunday night.  Most commodities are down 10%-20% on the week, with silver down 20% in one day. This was long overdue and is opening up windows for late players. How were gasoline prices going up to record highs with storage at a 15 year high? The euro backing off from $1.59 to $1.54 is part of this. I protect against these kind of moves, which are inevitable in commodities, by keeping tight trailing sell stops.

2) Today was a quadruple witching day with the expiration of monthly stock index options. As I am sure you recall, a month ago I recommended the short sale of the S & P 500 March 1200-1450 strangle for a premium of 5.5%.  Today the S & P 500 Index closed at 1329, so the short strangle closed out of the money and you would have kept all of the premium. Interestingly, this is only 22 points lower than the expiration a month ago, meaning that you are getting a lot of sturm und drang but very little net movement in the market. That is what this trade is all about. This is the third month in a row that this trade has worked. My logic behind these trades from the beginning has been that with half of the market doing great, and half doing terribly, you will get very little net movement in the broader indexes. Now I suggest you put on the April 1150-1450 short strangle and take in another 5% premium. Trades like this are as good as having a rich uncle who sends you a monthly support check.

3) Bear Stearns' research department staff are still coming into work and sending out reports to clients without a single reference to the fact that they are now out of business. Aside from that Mrs. Lincoln, how was the play? The bottom line message from the government on the whole Bear Sterns affair is 'you threaten the system and we are going to come kill you'. Something to give pause to shareholders when considering how much to leverage future positions. BSC bond holders are now buying up the stock to get the votes to push through the takeover so their holdings can get marked up from 70 to 100.

4) Merrill Lynch put out a survey indicating that fund managers' cash levels are at an all time high. This is usually a deep lagging indicator and is another sign of a market bottom. But don’t bet the ranch on this. I watched cash levels in Tokyo sit at all time highs for 15 years.

5) Morgan Stanley has marked down all of their sub prime securities to zero. This will pave the way for the surprise mark ups in a year. Buy MS!

6) Thanks to Fed's latest action, the rate for 30 year conventional mortgages has dropped from 6.1% to 5.6% since Friday.

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