May 5, 2008

Market Comments for May 5, 2008

1) Today it was all about Yahoo. Microsoft raised their bid from $31 to $33 while Yahoo dropped their offer from $40 to $37, but there was no deal. Jerry Yang was asking for a 67 times multiple of expected 2009 earnings. 2000 levels of hubris don't work in a 2008 market, Jerry! By walking away from this deal he is destroying $16 billion in shareholder value. Jerry's share of the loss was $214 million. The stock dropped immediately 20% to $23.

2) Crude rocketed from the Thursday low of $110 to $120 on rebel attacks on a Nigerian pipeline. Shorts scrambled to cover positions set up only last week.

3) Agricultural land prices are booming in the Midwest as farmers look to expand acreage to take advantage of record corn and soybean prices. Others are foregoing government subsidies to keep land fallow because for the first time in many years it is more profitable to plant than not.

4) Camel prices are soaring in South Asia. With crude at $120 many farmers are switching from diesel powered tractors to dromedaries which cost far less to feed. In the last three years the price of a mature male, which can live 60-80 years, had risen from $150 to $1,000. Conversions are being limited by the animals' slow breeding cycle.

5) $180 billion has been raised so far this year by a new breed of specialized hedge funds to buy the distressed assets. Much of this is going to buy credit assets of other hedged funds that bet too early that spreads had peaked.

6) There is a double edged sword to the strength of the dollar. A 10% rise in the dollar is expected to cause a 2-3% decline in S&P 500 earnings.

7) The ISM non-manufacturing index in March rose from 49.6 to 52, indicating unexpected strength in the services sector.

THOUGHT OF THE DAY

After analyzing data of the last 70 years, whenever the Fed funds rate drops 60% a 3-5 year bull market in stocks ensues. Since August, Fed funds have dropped 62%. This is another useful quantitative indicator.