May 28, 2009

Global Market Comments
May 28, 2009

Featured Trades: ($WTIC), ($NATGAS)

1) That great sucking sound you hear is the air going out of the housing recovery- punctured by the collapse of the bond market and the spike in interest rates. Interest rates on 30 year fixed rate mortgages gapped up from 5.03% to 5.29% in just one day, up from the 4.50% low two months ago. This underlines what a difficult position the government is now in. While all the stimulus spending is great, the need for epic financing is triggering a collapse of the dollar and the bond market. The resulting soaring interest rates are bound to snuff out any recovery. Obama is truly caught between the Scylla and the Charybdis. (non antiquities scholars see Homer's Ulysses).

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2) Those who missed the last 50% move in natural gas got a second chance to visit the trough this week, with the pull back to $3.50 from $4.59. Buying above an industry wide 'cap in' price of $3.50 seems a no brainer to me, but is controversial nonetheless. This is a fraction of the $13.50 peak seen last year. You can bet that every electric power utility in the country is scampering to acquire advance supplies, many mandated by new environmental regulations to use the clean burning fuel, taking advantage of a rare opportunity to buy at the cost of production. Natural gas is still a steal at these levels for the long term. They don't call this the widow maker for nothing, and if the volatility seems daunting, play in smaller size through the CME Emini contract, which only has $10,000 worth of underlying (2,500 MM  BTU).

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3)  With crude topping $63 yesterday, a near double from the low, the next super spike in prices may come sooner than you think. Despite a long history of lying and cheating, OPEC has managed to cut production by 3.3 million barrels a day from last year's peak, thanks largely to the heroic efforts of Saudi Arabia. The International Energy Agency says that thanks to collapsing prices and the disappearance of financing, investment in new production facilities fell 15-20% last year. That has taken the number of rigs in use globally down 32% to 2,055. OPEC countries have cancelled or delayed 35 large projects, taking a potential 5.5 million barrels a day of potential production off the market. One of America's largest suppliers, Mexico, will flip from an exporter to a net importer in the next five years. While Obama's new pronouncements about green energy are laudable, so far, it is just that, talk, without funding and any ability to generate a significant impact on the market for a decade. One speech doesn't slow down the five ultra large crude carriers headed our way every day. There hasn't been a whisper about conservation. Read the writing on the wall. If and when we do get a real economic recovery, watch out! $200, here we come!

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4) To highlight again the pitiful state of public education in the US, I learned that six out of the last ten winners of the Scripps National Spelling Bee were of Indian descent, and several of these were home schooled. Last year's winner was Sameer Mishra, who correctly spelled 'numnah', a sheepskin used to prevent chafing between horse and saddle. The word is not even in my Microsoft spell checker. To win these contests kids not only have to learn almost every word in the English language, they also have to be knowledgeable of the Greek and Latin root languages. A smattering of Arabic, Dutch, French, Swedish,  and Hindi helps too (the origin of 'numnah').When told the word, the nine year old Sameer said 'That's a relief.' See . This year the event will be disrupted by the demise of several of the sponsoring newspapers, such as the Rocky Mountain News.

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"When commodities are available for less than the cost of production, something good usually happens," said Wally Weitz of Wallace R. Weitz & Co. of the current natural gas market.

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