Global Market Comments for June 12, 2008

1) The COO of Lehman, Joseph Gregory, was fired this morning. Also gone is CFO Erin Callan. The former tax attorney only had the job for 7 months. Dick Fuld may follow. The stock fell an immediate 10% to $21. People who bought the $6 billion equity deal on Monday, now down 25%, are going to be livid. They may try to walk away from the trade which settles today, claiming failure to disclose. Firing the CFO three days after you launch a very huge public issue doesn't exactly instill confidence. The shorts led by David Einhorn are vindicated. Rumors are now percolating that Lehman will be sold, possibly to private equity firm Black Rock, already a big investor in the firm. HSBC and Blackstone are also mentioned. Did securities fraud take place here?

2) Retail sales for May came in at 1.1%, much better than expected. Don?t pop the Champagne corks yet. Part of this is accounted for much higher gasoline sales. The tax refund checks are having their desired effect. 30 year Treasury bond futures plunged to 113. Please see my earlier recommendation to put on a leveraged short of the 30 year Treasury bond futures at 120. The euro visited the $1.53 handle.

3) Belgium's Inbev launched an unsolicited all cash takeover bid for Anheuser-Busch at $65/share, or $46 billion, a 12% premium. With the euro at $1.53 foreigners are coming in to buy up America's family jewels on the cheap. This is the third largest foreign takeover in US history.

4) Corn hit my target of $7.50/bushel today. The Midwest weather news doesn't get any worse than it is today, watching houses floating down rivers on TV. Time to bail on all long corn positions. The profit on a non leveraged position in corn would have been 30%, or $900,000 on a capital commitment of $3 million.

5) High fuel prices are accelerating the 'results only' work movement whereby employees are paid for results, regardless of how many hours they work or where they work. Managers see a 41% increase in productivity with such workers and voluntary turnover falls by 91%. Managers have to overcome entrenched concerns that if they can't see staff working at a desk in front of them they aren't working. See the newly published book 'Work Sucks' by Ressler and Thompson.

TRADE OF THE DAY

Your may recall that I advised selling S&P 500 1200-1450 strangle for the first five months of the year and walked away when the VIX fell below 18%. VIX is now back up to 23% so the time to revisit this strategy is approaching, ideally on a day when there is a major sell off in the stock market. Watch this space.

Global Market Comments for June 11, 2008

1) Crude inventories fell 4.6 million barrels for the week versus an expected rise of 1.1 million barrels. Crude rocketed from $132 to $138.50. It's time to go to the trough for the third time for the July $150 calls, which expire in four trading days. You could sell these today for $420, taking in $252,000 for 600 contracts. Crude would have to rise more than $3/day for you to lose money on this trade. This is essentially a bet that the US doesn't invade Iran by Tuesday. You will be paid enormously for being right.

2) More unintended consequences. Americans are flooding across the border to Mexico where they can buy Pemex subsidized gas for only $2.70/gallon. The crush is tying up border crossings at Tijuana and all along the Rio Grande.

3) Paul Tudor Jones, one of the largest hedge fund managers, has hired the entire distressed debt department of Bear Stearns with a view to buying up the sector. Other hedge funds are pouring into the area, where they can buy current, paying loans for 60 cents on the dollar.

4) GE is now the largest player in the wind market in the US, having bought the wind division of Enron six years ago. With current technology, wind is six times more efficient than solar in producing electricity.

5) The Lehman collapse continues, the stock falling to $23, putting the company into takeover territory. Lehman is now in talks to sell a major stake to the South Korean government. Lehman is trading substantially below tangible book value.

6) The two year-ten year Treasury spread has collapsed in a major way, falling to 100 basis points. I recommended shorting this spread on March 12 at 260 basis points with a leverage factor of five times. If you had done so, your profit now would be 8%, or $240,000 on $3 million.

7) The proverbial perfect storm has hit corn with continued flooding in the Midwest, driving prices to an all time high of $7.10/bushel. Please see my earlier recommendation to buy corn at $5.80. Now is a good time to take profits in corn and buy wheat at $8.60/bushel, which is now off 34% from its March $13.00 high. It is always nice to have one agricultural play on because they are totally uncorrelated with all of the financial positions in stocks, bonds, and currencies.

8) Fed funds futures are now discounting a 25 basis point rise in rates in each of the September, October, and December Fed meetings.

Global Market Comments for June 10, 2008

1) There was coordinated verbal intervention by the Fed, the Treasury, and the president, to support the dollar, emphasizing the risk of inflation, which would lead to higher interest rates. The dollar gapped from the $1.58 handle to $1.54, and the thirty year bond futures dropped a full point to 113.50. In two days, two year Treasury note yields leapt from 2.30% to 2.90%, one of the most rapid moves in history. Crude fell $7 and gold was off $28.

2) I spoke to the head of research at Nomura Securities in Tokyo last night. He believes that the Nikkei is poised for a 20% move up in the next few months. Japanese companies have amassed a huge war chest for buying back their own stock. Individuals are sick of earning zero interest rates. The yen has already backed off from its ??96 high to ??107, and further weakness will enhance the competitiveness of Japanese companies. Foreign equity weightings in Japan are historically low and the return of gaijin will add fuel to the fire. Japanese companies currently own the global hybrid car market. The only thing missing is a trigger to unleash all of this buying, such as a turn in oil prices. There is a very nice long side trade setting up here. The Nikkei closed at ??14,021 last night.

3) There was an unprecedented reduction in the open interest in crude contracts last Friday, falling by a record 10,932 contracts, indicating that traders are pulling out of the market. Many traders were wiped out by Friday's moves and the volatility has scared away many professionals. Better to fight another day. The reduction in capital will make crude prices even more volatile.

5) Lehman hit a new five year low of $27.

6) Corn hit a new all time high of $6.75/bushel.

7) Vietnam has hit a new two year low of 373, off 66% from its high only eight months ago. The inflation rate there has soared from 8% to 25% driven by higher crude and food prices.

THOUGHT OF THE DAY

If crude keeps going up here is how it will end. The Fed will organize a massive and coordinated central bank intervention to gap the dollar up, Saudi Arabia will announce a major OPEC effort to increase production, and the president will announce an emergency release of oil from the Strategic Petroleum Reserve. This will send crude back below $100 in short order where it will stabilize until alternatives come on stream. Today's verbal action was a preview of such a scenario, sending a warning shot across the bows of speculators.

Market Comments for June 9, 2008

1) Lehman announced a Q2 loss of $2.8 billion, far worse than expected, and a highly dilutive common and preferred fund raising of $6 billion. ??This is Lehman's second $6 billion fund raising in two months. The stock dropped an immediate 12%. Moody's downgraded the company yet again. The company is raising money they said they didn't need as recently as last week to cover losses they said they didn't have. At this point chairman Dick Fuld and CFO Erin Callan have lost all credibility. Even if they survive in their present form, the reduced leverage means they will be making a lot fewer profits in the future. One of the biggest buyers of the new issue was the New Jersey state pension fund, where Governor John Corzine is the former head of Goldman Sachs.

2) The corn crop is in trouble, prices hitting an all time high of $6.50/bushel. The Midwest has had unusually cool weather this summer and huge storms have destroyed crops in Iowa. This is driving down yields/acre nationally which are now expected to fall 7% YOY. With the relentless demand for ethanol prices could hit $7.50/bushel this summer. Please recall my April 13 recommendation to buy corn at $5.80.

3) McDonalds saw a 7.7% increase in same store sales in May. People are clearly moving down market in their eating habits to save money.

4) Friday's $11 price increase in crude alone will add $4 billion to US airlines' annual fuel bill.

5) Pending home sales for April rose an unexpected 6.3%, but still fell 13.1% YOY. The largest gain was in the West, where the biggest price falls have occurred. The bargain hunters are out!

THOUGHT OF THE DAY

There is increasing talk of a 'W' shaped recession. Although only half of the stimulus checks have been sent, all have been spent. To refresh your knowledge of the recessionary alphabet:

V- is a sharp contraction of the economy followed by a sharp recovery.
W- is a double dip recession where the economy bounces along a bottom.
U-is a long deep recession followed by a slow recovery.
L-Is a sharp contraction followed by no recovery. Think Japan in the nineties. There are people out there arguing the 'L' case for the US.

Market Comments for June 6, 2008

1) Crude has made the biggest move in the history of the market, soaring $18 from yesterday's low to $139. Futures ended limit up today for the first time since the 1991 Gulf War. The initial trigger was provided by the ECB's Trichet who said he may raise euro interest rates. This caused a collapse of the dollar which fed straight into crude and other commodities. The second leg was provided by an Israeli deputy cabinet minister of transportation who said that an attack on Iran's nuclear facilities was 'unavoidable.' Then Morgan Stanley said that crude will hit $150 by July 7. Natural gas hit a new high of $12.85. As the markets are clearly going nuts here there is nothing to do here but stand aside and watch, in awe, with jaws dropped.

2) The unemployment rate for May rocketed 0.5% to 5.5%, the largest increase since 1986. Big losers were construction, while one of the only hirers was the government. This threw the stock market into a tailspin, dropping 394 points, the largest drop since 2007. We have now had five consecutive months of rising unemployment. There has never been a run of data like this without a recession. This is not good for McCain.

3) There is a flurry of rumors that Apple is going to announce the 3G IPhone at the Mac World developer's conference on Monday. The new phone is thought to be thinner, have a longer battery life, have more features, better internet access, better screen resolution, and will offer an upgrade option to existing IPhone users. AT&T has cancelled June vacations for employees so they can handle the expected deluge of orders.

4) China has spent $20 billion on the Olympics. To cut traffic in half they are resorting to an odd/even license plate system.

5) Ed McMahon's house is going into foreclosure after he defaulted on a $4.6 million loan.

6) The fuel bill for a Gulfstream has risen from $2,000 to $6,000 an hour over the last two years. Heartbreaking.

7) Steel is going from strength to strength. US steel demand is expected to reach 130 million tons this year against domestic production of 105 million tons. The shortfall is met from imports, formerly from China. US steel plants are operating at 100% capacity and running 24 hours a day.