May 22, 2008

Market Comments for May 22, 2008

1) Crude gave back yesterday's $5 melt up, falling from an overnight high of $135.50 to $130. The head of  the New York Mercantile Exchange says that speculators account for only 20% of turnover in the energy contracts and that half of those are long, while the other half are short, leaving no net impact on prices. The price increases are coming from final demand.

2) The hot alternative play in China is Solarfun (SOLF), a Shanghai based manufacturer of photovoltaic cells. It has risen from $6 to $28 since March. It's too hot to touch here. I never buy these alternative energy stocks because they are too small, and too overhyped, with too much money chasing them.

3) Coal prices have risen an astounding 100% since January, from $60 to $120/ton. Virginia based Alpha Natural Resources (ANR) is a leading producer of metallurgic and steam coal. Since January it has risen from $23 to $75. Walter Industries (WLT) has risen from $21 to $95. Boy, are we in a global commodities bubble.

4) My whole scenario for natural gas for the year is unfolding. It has run from $7.75/BTU, when I recommended it in January, to a high of $11.85 this week. Hurricane season begins next week and the National Oceanic and Atmospheric Administration (NOAA) is predicting 2-5 major hurricanes this year. One good hurricane could cause natural gas to spike to $15-$20, as it did during hurricane Katrina in 2005.

5) Beef is one of the most severely beaten up commodities this year, falling 60% from last year's peak. Farmers are rushing livestock to market to avoid high feed costs. This will inevitably set up a shortage of beef next year when prices could double. The average American eats 217 pounds of meat a year. Global meat consumption is expected to rise by 25% over the next 20 years as populations in newly wealthy BRIC countries improve their diets. The current beef production model is broken, as it was created when oil was only $15-$20/barrel.


I think it is now safe to say that equities are going to be a crummy place to be this summer as the market digests triple digit oil prices. The choice here is to sell all of your positions now, with a view to buying them back in the fall, or aggressively writing covered calls on your long positions. Best case we meander sideways for a few months. Worst case, we make new lows. Sell in May and go away sounds good to me.