September 2, 2008

Global Market Comments for September 2, 2008

1) Hurricane Gustav pulled its punch, so crude (USO) crashed $13 from the Friday high to the $105 handle. The market was discounting another Katrina and got a damp squib instead. Natural gas (NG) collapsed 74 cents to $7.20. They don't call this contract the widow maker for nothing. Expect to hear about more hedge funds going under, married to their longs. Please see last week's call not to buy this dip. The ninety dollar handle for crude may be only one weak storm away. Don't expect pump prices to fall much because 2.6 million barrels/day of refining capacity is still offline.

2) Stocks loved the crude fall, for a few hours anyway, rallying 200 points, then falling 300. The fact that these rallies have no shelf life is telling you a lot. To see the Dow up only 500 points from the July bottom on a $43 drop in the price of crude is disheartening, to say the least. The bond market isn't buying it for a nanosecond, with prices approaching new highs for the year. United Airlines (UAUA) rocketed with the other airlines, up 50% intraday, and has risen from $2.50 to a high of $16, up 600% in ten weeks. Please see my June recommendation to buy the airlines as a cheap undated put on crude. This trade is now gone.

3) I come back from vacation to find out that if McCain wins the election and then dies, the finger on the nuclear launch button will belong to the recent alpha female, lifetime NRA member mayor of Wasilla, Alaska, population 5,469. McCain just tossed out the inexperience issue he could use against Obama, along with the ever important pro caribou constituency. Check out her Miss Alaska photos. They're hot! The rest of the world must think we've gone mad. You're good at filling in small town pot holes? Great, please run the country for us. I guess anyone is an improvement over what we've got. The market sold off big on the news. I'm going back to the mountains and becoming a survivalist.

4) There were massive outright sellers of Lehman (LEH) puts last week, something few have had the guts to do so far. Someone is betting that Dick Fuld can pull off a “Hail Mary” before the earnings are due out later this month.

5) The dollar broke to a new high for the year to the $1.44/euro handle. It is becoming increasingly clear that the next moves in interest rates will be up in the US and down in Europe, with the UK leading the charge to the downside. Even the Australian central bank has cut interest rates for the first time in seven years. That makes sterling the best short out there. The move has been so massive, and so rapid, that multinationals are being forced to cover large scale hedges because of margin calls, adding fuel to the fire. Look for the euro going to the mid $1.30s and the pound at $1.50 at a minimum.