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.

Market Comments for May 28, 2008

1) Crude plunged to $126? on rumors that Saudi Arabia is increasing production, then lept back up to $131.50. Another $6 range day. It was a great day to sell July 110 puts for $550 which expire in 13 trading days. More than 25% of global oil consumption is now subject to some form of government subsidy. As those subsidies come off (today Taiwan joined the club), we will start to see demand destruction for crude in earnest.

2) To produce one gallon of ethanol you need to consume 1,700 gallons of fresh water. The government is paying farmers 51 cents/gallon of ethanol to do this. One third of the US corn crop this year will go into ethanol production, while the poorest 10% of the world starves. This is why I hate ethanol, other than to drink it neat in its many forms.

3) UBS has banned employees of its private banking division from visiting the US for fear of prosecution by the IRS. One US citizen employed by the bank has already been arrested while home for a visit.

4) Durable goods for April came in at -0.5%, but ex transportation was up an amazing 2.5%. This shows how much of the economic slow down is being borne by the US car makers.

5) White House economic advisor Lazear predicts that the upsurge in oil price will cut 1.5% from US GDP growth this year.

6) Merrill Lynch predicts that Amazon will see 20% per year sales growth for the next 10 years. The company is the largest online seller, accounting for 6% of $135 billion of last year's total online sales.

7) Ford announced that it is cutting 10-12% of its workforce. The stock has traded between $5-$9 over the last three months and last traded at $6.75. This is a great short crude play. If crude falls and the company brings out its new generation of hybrids and electric cars on schedule, you could get a double out of the stock. Kirk Kerkorian certainly thinks so.

8) There was a huge sell off in the bond market today as owners finally start to feel the chill wind of inflation down the back of their necks. The 30 year yield hit 4.04%, a new high for the year. I fervently believe that long dated US Treasuries are the world's most overvalued asset.

Market Comments for May 27, 2008

1) Crude fell $5. The July 155 calls I strongly advised you to sell at $550 last Wednesday, fell to $260. In the meantime, natural gas hit a new high of $12.20. This is a gain of 57% from my recommended entry level of $7.75 last January.

2) Short sellers are gunning for Lehman Brothers again, taking the stock down from $52 to $35 in only a few weeks. Their claim is that Lehman only avoided bankruptcy last March by greatly overvaluing $6.5 billion in CDO's. The false accounting didn't become obvious until the 10Q was filed last week. Trading in the $25, $20, and $15 puts has skyrocketed. The company is doing a great imitation of going to zero.

3) The US money supply M3 is now growing at a 16% annual rate, and monetary growth is even greater overseas, presaging a surge in dollar denominated asset prices. There are now two euros outstanding for every one dollar. Sounds like a great short euro argument to me.

4) The S&P Case-Shiller home price index fell -14.1% in Q1 YOY. The biggest falls were in Las Vegas -25.9%, Miami -24.6%, and Phoenix -23.0%. Only one market rose, Charlotte, NC, +0.8%, coincidentally the headquarters of rapidly growing Bank of America (BAC). At the peak of the 1990-91 S&L crisis, the index fell only 2.8% YOY. In absolute terms, house prices nationally are now back to 2002 levels. The turnover in the housing market is now so low that it is impairing recruiting, because people can't sell homes to move to new jobs.

5) The cost of shipping a container from Shanghai to San Francisco has quadrupled from $2,000 to $8,000 in the past year. Hardest hit have been shippers of bulk commodities, especially unfinished steel.

6) The May consumer confidence index fell to the lowest level since 1992.

7) Residential real estate prices in Poland have started to fall. Interest rates have risen from 4% TO 6% in the past two years and the economy is now starting to slow. Poland has had the hottest real estate market in Europe, increasing at a 30% annualized rate since 2000.

8) A new term has entered the lexicon, the 'staycation'. This is when people take their vacation at home because they can't afford to go anywhere.

The last person to read this can be excused for slitting their wrists.

TRADE OF THE DAY

It's time to buy the airlines which have fallen so much they are down to option value. United has done a swan dive for $48 to $5. In fact the whole industry is a great put on crude, which at $134 looks like it is topping out. Buy United at $7 (UAUA), American at $10 (AAR) Delta at $5 (DAL), Jet Blue at $3.75 (JBLU) and Continental at $12 (CAL). Avoid best of breed Southwest (LUV), which has not cratered because of intelligent low cost hedging of fuel costs through long dated crude futures contracts.