June 11, 2008

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.