May 29, 2008

Market Comments for May 29, 2008

1) It was a day for the history books in crude. The day started out at $128. Weekly inventories had been anticipated to show an increase of 700,000 barrels, but instead, showed a decline of 8.8 million barrels, the biggest fall in 4 years! Crude lept to $133. Then the CFTC announced it had launched an investigation of oil price manipulation and crude fell $7 to $126. The July $150 calls I strongly recommended selling last week at $550 fell to $110. The hypothetical one week profit on this one trade would have been $490,000.

2) The collapse of the bond market this week has pushed the ten year Treasury note out of its one year trading range. Yields shot up from 4.03% to 4.15% overnight. The futures on the 30 year bond have fallen from 120 to 113.5 since March. I strongly recommended selling these then, and if you had done so, the profit would have been 32%. This is triggering a massive asset allocation trade out of bonds and commodities and into stocks and the dollar. The futures markets are now discounting a 60% chance of Fed interest rate increase by October.

3) I met with Richard Fisher last night, president of the Dallas Fed. He and I competed for an assistant secretary of the Treasury position during the Carter administration. He won, but wrote a nice review of my book. He is a well known inflation hawk and told me that interest rates will rise 'sooner than people expect'. The next day bond prices cratered to a nine month low. He also told my son, who is graduating from the University of Santa Clara, that the best thing he could do is to leave the country and backpack around Asia, accumulating experience on which he can build a career.

4) Steve Balmer played golf with Jerry Yang last weekend. Draw your own conclusions.

5) Hedge funds are seeking out regional banks with the highest ratio of construction loans and shorting the stocks as these have the highest default rate in a recession. The biggest targets have been BB&T of South Carolina and Zions Bank Corp. of Salt Lake City, with 21% of their loan portfolios in construction. This is making construction loans harder to obtain.

6) Q1 GDP was revised up from +0.6% to +0.9%. Where is the recession?

7) 90% of the new electric power plants under construction in the US will be fueled by natural gas. This is why I am a long term bull on natural gas.