March 7, 2008

Market Comments for March 7, 2008

The stock market setting up for a big dump!

1) Crude made it to $106 today. The short term target is now $111. Natural gas also flew to $9.90, up 30% from my entry point of six weeks ago.

2) Carlyle Group in San Francisco failed to meet margin calls on fixed income positions this morning which could lead to more panic dumping. Oh, how the mighty have fallen!

3) Some REITs have fallen 45% from their 2007 peaks. They will get hit further when the credit crisis migrates to the commercial debt area. It is the next shoe to drop in all of this.

4) Sub prime loans constituted 7% of all home mortgages in 2007, but accounted for 42% of all foreclosures.

5) My old friend, Steve Roach at Morgan Stanley (MS), had an interesting piece in the New York Times this morning. He is now the chairman of Morgan Stanley Asia. When the last bubble burst, business investment collapsed, which accounted for only 13% of GDP. This time consumer spending and home building have collapsed which accounts for a combined 78% of the economy. With this much of the economy sick the bear market will be longer and deeper than anyone realizes. Morgan Stanley transferred Steve to Asia to get him away from New York where his perennially negative views depressed important clients.

6) The Swiss Franc has risen to 1.03 and will soon be at parity with the dollar.


There is a great low risk trade setting up. The spread between two year and ten year Treasuries over the last 20 years has been +250 basis point to -250 basis point. It is now at the top end of that range. The last time it was this high was during the S & L crisis in 1992. Short the two year and go long, then ten year  ten times on your back book and you could add another 50% return over the next three years.