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.


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.