May 6, 2008

Market Comments for May 6, 2008

1) Fannie Mae (FNM) announced large losses and plans to raise $6 billion in new equity. They expect serious losses in real estate loans to continue through 2009. More than 8 million homes in the US now have negative equity. At the peak of the housing market in 2005 houses were selling at a 60% premium to their construction cost. The market will have to give all of that premium up before it bottoms. When prospective home buyers see headlines like this they only participate at the most severely distressed prices.

2) Goldman Sachs (GS) put out a report saying that crude may see a super spike to $150-$200 over the next 6-24 months. Crude rose to $122.50. Unbelievable. Six months ago Goldman was saying that only a major geopolitical event like a war would cause a brief spike in crude to $120. Natural Gas, the value play in the energy area, hit a new post Katrina high of $11.45.

3) Las Vegas has seen gambling revenues drop 4% YOY, the first decline since 9/11. The Tropicana filed for bankruptcy.

3) Homebuilder DR Horton announced huge losses, a sales drop of 25%, and $800 million in inventory write downs. The stock is up 31% from where I recommended it in March.

4) $200 billion in new money is expected to flow into hedge funds in 2008, bringing the total under management up to $2 trillion.

5) April car sales fell off a cliff: Chrysler -30%, GM -23%, Ford -19%, Toyota    -5%. Some dealers are now offering a year of free gas with new sales.


The market may stall here as all of the major indexes bump up against their 200 day moving averages and the market digests the implications of crude over $120. It is a great time to sell out of the money short dated calls and take in some premium income. For example, you can sell a May S&P 500 May 1450 call at $5, or 35 bp, which expires in 8 trading days. This is currently $30 out of the money. You can also sell the Goldman Sachs May 210 calls at $1, giving you an 8 day return of 50 bp. These are currently $13 out of the money. This is a great way to bring in incremental income in a stalled market and boost returns.