May 14, 2008

Market Comments for May 14, 2008

1) Natural Gas hit a new 3 year high of $11.80 on unexpected maintenance delays in the transmission system. Surprise, surprise! For natural gas to trade at the same BTU value as crude, it needs to rise to $25, or crude has to fall to $67/barrel. Crude has become so volatile, with $5 intraday ranges becoming common, that professional traders are pulling out of the market, reducing liquidity.

2) Bob Toll of Toll Brothers rates his company's current prospects as ranging from F+ to F-. He says the light at the end of the tunnel may be an oncoming train. He is asking for subsidies for home buyers from Washington. Interestingly, he is sold out of homes in Manhattan.

3) Wachovia Bank has reduced it's probability forecast of a recession from 90% to 50%. Expect more revisions like this. This may be the most forecast recession in history that never happened.

4) Home foreclosures in April came in at 243,000, up 65% YOY. There is now up to a six month wait to file foreclosure proceedings in some states because the courts have become so backlogged.

5) California's Riverside Country has ordered a reappraisal of all 174,000 homes sold there since 2004 in order to reduce property taxes to market values. The measure, which is mandated by law, will cost the county $17 billion/year in revenues.

6) The April CPI came in at +0.2%, less than expected. The US annual inflation rate is now 3.9%.


The crude market has become so volatile that it has driven calls to extortionate prices. A one month crude call 10% out of the money trades at $2.50, compared to 25 cents for the same strike in the S&P 500. This makes crude calls ten times more expensive than stock index calls. I strongly recommend selling the July $135 crude calls for $2.50 which expire in 20 trading days. This would give you a one month return on capital of 2%. Crude has risen by an average of $3.50 a month since January, 2007 so shorting a $10 out of the money strike for one month at the top end of the range looks like a good bet. Only a US surprise attack on Iran this month could make this trade go wrong.

Crude0514.png picture by sbronte