Market Comments for June 5, 2008

1) Natural gas has hit a new three year high every day this week, reaching $12.55. Demand destruction that is hurting crude doesn't apply to natural gas because cars or airplanes don't use it. A mid West heat wave is boosting air conditioner demand, and we are only five days into the hurricane season.

2) Leading the charge shorting Lehman stock has been David Einhorn of Greenlight Capital, who has just published a book panning the injured investment bank entitled Fooling Some of the People All of the Time. For an encyclopedic listing of Lehman's flaws go to www.greenlightcapital.com. His basic message is that Lehman has lied to cover up huge sub prime losses in order to protect upper management, thus overvaluing the stock. Lehman is alone among major banks in failing to disclose major losses and avoiding foreign capital fund raising efforts. Lehman was a major player in the sub prime arena and this business is never coming back. The bank has so far sold $100 billion in assets to reduce leverage.

3) United Airlines (UAUA) is grounding their 100 most fuel consuming planes, about one fifth of their fleet. They are laying off 1,600 staff, and canceling their least profitable flights. Airline stocks have rocketed for a second day powered by falling crude. Please recall my recommendation to buy airlines on May 27. United Airlines (UAUA) has risen 40% since then and American Airlines (AAR) is up 31%. These both represent cheap undated puts on crude.

4) The coal group, which is up 100% in a year, has so far been immune to the energy sell off. Large, out of the money call buying persists. Peabody (BTU) is my favorite, followed by Alpha (ANR), Massey (MEE), Consol, and International Coal (ICO). When crude turns, you can kiss this sector goodbye.

5) The dollar broke through to a new $1.53 handle against the euro, then gapped back to $1.55 when the ECB's Trichet said he may have to resort to interest rate raises to cope with high commodity prices.

6) The Mortgage Bankers Association released Q1 default data. 6.35% of all US home loans are delinquent, 2.47% are in foreclosure, and 0.99% just recently entered foreclosure.

THOUGHT OF THE DAY

It is remarkable how well the Dow stocks of ?08 are doing. I'm talking about 1908, not 2008. US Steel (X), the railroads, coal, oil, shipping, agricultural, and mining shares have had a fabulous year. It all looks like the personal portfolio of the original JP Morgan. The only stocks from that era that have disappointed are the banks.

Market Comments for June 4, 2008

1) Weekly Crude supplies increased and both India and Malaysia announced they are cutting gasoline subsidies, indicating that global demand destruction is accelerating. Crude fell from $125 to $121.80. Traders are now selling every rally. If this picks up momentum, we could see $100 in a few weeks. Airlines rocketed today, going up 5%-10% across the board.

2) General Motors announced that sales for May were down a staggering 30%. The company is closing four truck plants and laying off 10,000 people for a cost savings of $1 billion. It is also putting its Hummer division up for sale. The trouble is that no one wants to buy a single Hummer, let alone the entire division. The launch of the Chevy Volt has been pushed back to 2010. The stock has hit a 26 year low. GM's US market share fell below 20% for the first time in May. GM stock is acting like it is going to zero. I remember when this was America's preeminent company. Oh, how the mighty have fallen!

3) In May the number one selling car in the US was the Honda Civic, the first time since 1991. The car gets 35 miles/gallon, costs $20,000 new and comes with a 100,000 mile warranty. The hybrid costs $26,000.

4) Lehman has become the lead stock in the market. They said that they have no need to raise capital. The trouble is that no one believes them. The stock has plummeted from $50 to $29 in 5 weeks. Today the Lehman July $2.50 puts traded in huge size. Then Merrill Lynch put out a 'buy' recommendation and we got a rally back to $32. The company put on hedges against many of their lower rated debt positions at the bottom of the market in March. Since then the debt markets have improved, so now the hedges are costing them a fortune. The company is due to report its first loss in a few weeks since the company went public in 1992.

5) Talk about unintended consequences of high gasoline prices. Profits are surging at insurance companies because less driving, and slower fuel saving driving, means fewer car accidents. Buy Geico and Allstate. AAA members are deliberately running out of gas so they can get a free gallon that members in distress deserve.

6) The ultimate solution to the food crisis will be greater productivity through genetic engineering. In 1960 US farmers produced 16 bushels of corn per acre. They currently produce 156 bushels per acre. If only we could get the Europeans, who have a phobia about genetic engineering and call it ?frankenfood?, to eat the stuff!

Market Comments for June 3, 2008

1) There was massive liquidation of hedge fund longs in crude, with outstanding positions being reduced by 80%, according to CFTC statistics. Crude plunged today from $129 to $124.50. The crude July 150 calls you could have shorted yesterday at $280 could be bought back today for $70. The one day profit on this would have been $283,000. The combined profit on the two crude options trades I recommended so far would have been $773,000, or 25.8% of your $3 million capital. These kinds of profits can only be made in rare markets with extreme volatility and enormous divergences from traditional benchmarks, like we have now.

2) Lehman stock fell another 10% today as it led the charge to the downside for the financials. Bond insurance rates are now indicating a 60% chance of a default on Lehman debt. However, junk bond spreads, LIBOR spreads, credit default spreads for other companies, and volatility indexes, are indicating that the current financial meltdown won't be as severe as the one in March.

3) The US is facing an engineer crisis. Last year China graduated 644,000 engineers, India 350,000, and the US only 70,000. Although half of the Chinese and Indian engineers are only educated to the level of a US trade or technical college, half of all US engineering graduates are foreign born. The reasons given are the starvation of funds for the K-12 public education system over the last 30 years, bleeding off of the best students into higher paying professions in investment banking and law, and the fact that engineering is not 'cool' outside of the gaming community.

4) The publicly traded stock exchanges such as CME Group (CME) and NYSE-Euronext (NYX) have been beaten with the ugly stick this year. The stocks are off up to 45%. There are fears that government regulation will force them to turn off the printing presses. Since these are the guys who sell shovels to the gold miners, they bear watching on any upturn in trading volumes. Of the two, NYX is the better play.

5) In the last week, I have seen a number of bizarre reports of theft as the commodity boom wreaks its unintended consequences on the economy. Gone missing are used restaurant grease (for biodiesel), fertilizer, guano, manhole covers, copper rain gutters from luxury homes, crude oil taken directly from wells, and of course lots of gasoline. Local police departments are unequipped to deal with this crime wave. Can we expect a 'French Fry Grease Special Victims Unit'?

6) At the G-7 meeting in Barcelona, Fed chairman Ben Bernanke provided some verbal support for the dollar which jumped to $1.54/euro.

7) Emerging markets have had nothing less than a spectacular run. A booming global economy and torrid commodity prices have enabled them to run up huge current account surpluses and reserve for the first time in their histories. Many are now net creditors to the US. Talk about trading places! But things have run too far too fast and the charts are close to a double top. Go short the iShares MSCI Emerging Market ETF (EEM) at $50. If things go bad, emerging markets will drop twice as fast as developed markets. Don?t believe the decoupling theory for a nanosecond. Diversification often just means losing more money in more places, only with more exotic sounding names. You could also use a short emerging markets position to hedge a long US equity position.