May 20, 2008

Market Comments for May 20, 2008

1) Crude hit a new high of $129.70 on Boone Pickens' forecast of $150/barrel this year. The Dow plunged 202 points. Global oil production is 85 million barrels/day and demand is 87 million barrels/day. End of story. Until the two align, prices will go up.  At that price the US will spend $900 billion/year on oil imports. While the US has seen consumption drop by 400,000 barrels/day this year, any savings is immediately snapped up by China. Only a global recession can reverse this. The US uses 200,000 megawatts of power a day and in ten years wind could account for 20% of this. Ethanol is a joke.

2) More than 6 million American adjustable rate mortgages are tied to LIBOR, the London Interbank Offered Rate. LIBOR has stayed stubbornly high despite all of the interest rate cuts since August, preventing interest rates on these mortgages from floating down. One month LIBOR is now at 2.49% vs. 2.0% for Fed funds. This is because the major European banks that fix LIBOR do not believe that all sub prime and credit crisis losses have been disclosed yet, so they are reluctant to lend to each other. $300 billion in Fed credit lines have been extended by the Fed to help address this, but so far the effect has been limited. Expect the LIBOR and US overnight rates to come back in line only slowly over the next several months.

3) Boeing (BA) now has 846 orders for the 787 Dreamliner. New customers will face a 6 year waiting list.

4) The Producer Price Index for April was up 0.2% showing a YOY increase of 6.5%. Inflation is clearly on the way.

TRADE OF THE DAY

Today's surge in crude oil prices sent call premiums through the roof as public utilities and airlines resort to panic buying. The July $150 calls, which expire in 20 trading days, were selling for $0.55. A $3 million margin commitment would yield a one month return of $600,000 or 20%. Crude could go up $1/day for the next 20 days and you would still make money on this. The rise in crude over the last 18 months has averaged 15 cents per trading day.

Crude0520.png picture by sbronte

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