June 9, 2008

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.

June 9, 2008

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.

June 6, 2008

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.

June 6, 2008

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.

June 5, 2008

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.

June 5, 2008

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.

June 4, 2008

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!

June 4, 2008

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!

June 3, 2008

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.

EEM0602.png picture by sbronte

June 3, 2008

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.

EEM0602.png picture by sbronte