May 27, 2008

Market Comments for May 27, 2008

1) Crude fell $5. The July 155 calls I strongly advised you to sell at $550 last Wednesday, fell to $260. In the meantime, natural gas hit a new high of $12.20. This is a gain of 57% from my recommended entry level of $7.75 last January.

2) Short sellers are gunning for Lehman Brothers again, taking the stock down from $52 to $35 in only a few weeks. Their claim is that Lehman only avoided bankruptcy last March by greatly overvaluing $6.5 billion in CDO's. The false accounting didn't become obvious until the 10Q was filed last week. Trading in the $25, $20, and $15 puts has skyrocketed. The company is doing a great imitation of going to zero.

3) The US money supply M3 is now growing at a 16% annual rate, and monetary growth is even greater overseas, presaging a surge in dollar denominated asset prices. There are now two euros outstanding for every one dollar. Sounds like a great short euro argument to me.

4) The S&P Case-Shiller home price index fell -14.1% in Q1 YOY. The biggest falls were in Las Vegas -25.9%, Miami -24.6%, and Phoenix -23.0%. Only one market rose, Charlotte, NC, +0.8%, coincidentally the headquarters of rapidly growing Bank of America (BAC). At the peak of the 1990-91 S&L crisis, the index fell only 2.8% YOY. In absolute terms, house prices nationally are now back to 2002 levels. The turnover in the housing market is now so low that it is impairing recruiting, because people can't sell homes to move to new jobs.

5) The cost of shipping a container from Shanghai to San Francisco has quadrupled from $2,000 to $8,000 in the past year. Hardest hit have been shippers of bulk commodities, especially unfinished steel.

6) The May consumer confidence index fell to the lowest level since 1992.

7) Residential real estate prices in Poland have started to fall. Interest rates have risen from 4% TO 6% in the past two years and the economy is now starting to slow. Poland has had the hottest real estate market in Europe, increasing at a 30% annualized rate since 2000.

8) A new term has entered the lexicon, the 'staycation'. This is when people take their vacation at home because they can't afford to go anywhere.

The last person to read this can be excused for slitting their wrists.


It's time to buy the airlines which have fallen so much they are down to option value. United has done a swan dive for $48 to $5. In fact the whole industry is a great put on crude, which at $134 looks like it is topping out. Buy United at $7 (UAUA), American at $10 (AAR) Delta at $5 (DAL), Jet Blue at $3.75 (JBLU) and Continental at $12 (CAL). Avoid best of breed Southwest (LUV), which has not cratered because of intelligent low cost hedging of fuel costs through long dated crude futures contracts.

UAUA0526.png picture by sbronte