May 28, 2008

Market Comments for May 28, 2008

1) Crude plunged to $126  on rumors that Saudi Arabia is increasing production, then lept back up to $131.50. Another $6 range day. It was a great day to sell July 110 puts for $550 which expire in 13 trading days. More than 25% of global oil consumption is now subject to some form of government subsidy. As those subsidies come off (today Taiwan joined the club), we will start to see demand destruction for crude in earnest.

2) To produce one gallon of ethanol you need to consume 1,700 gallons of fresh water. The government is paying farmers 51 cents/gallon of ethanol to do this. One third of the US corn crop this year will go into ethanol production, while the poorest 10% of the world starves. This is why I hate ethanol, other than to drink it neat in its many forms.

3) UBS has banned employees of its private banking division from visiting the US for fear of prosecution by the IRS. One US citizen employed by the bank has already been arrested while home for a visit.

4) Durable goods for April came in at -0.5%, but ex transportation was up an amazing 2.5%. This shows how much of the economic slow down is being borne by the US car makers.

5) White House economic advisor Lazear predicts that the upsurge in oil price will cut 1.5% from US GDP growth this year.

6) Merrill Lynch predicts that Amazon will see 20% per year sales growth for the next 10 years. The company is the largest online seller, accounting for 6% of $135 billion of last year's total online sales.

7) Ford announced that it is cutting 10-12% of its workforce. The stock has traded between $5-$9 over the last three months and last traded at $6.75. This is a great short crude play. If crude falls and the company brings out its new generation of hybrids and electric cars on schedule, you could get a double out of the stock. Kirk Kerkorian certainly thinks so.

8) There was a huge sell off in the bond market today as owners finally start to feel the chill wind of inflation down the back of their necks. The 30 year yield hit 4.04%, a new high for the year. I fervently believe that long dated US Treasuries are the world's most overvalued asset.