Market Comments for April 17, 2008

1) There was a major sell off in the bond market today. Since Monday the 30 Treasury futures have fallen from 120 to 116. This is a huge move. A normal leverage ratio for this trade is 5:1, so a short on Monday would have yielded a 20% return. As you know, I have been pounding the table about shorting bonds for months.

2) Natural gas soared to $10.55/btu, a new high for the year, on fears of supply shortfalls this summer. Natural gas has been one of my core longs since the beginning of the year and is up 40%. My short term target is $13/btu.

3) Copper finally broke through $4/pound on massive Chinese buying. Yesterday's hot Chinese Q1 GDP figure encouraged traders to increase longs. I have been recommending longs in copper since $3/pound. Copper is now up 33% from there. China announced that its current account surplus rose by $150 billion to $1.67 trillion in Q1. This is the largest quarterly increase in world history. China now has enough reserves to pay for its infrastructure build out for the next ten years. This will lead to acceleration in the appreciation of the Chinese Yuan against the dollar.

4) Southwest Airlines (LUV) announced earnings much better than expected. In 2006 it hedged 70% of its 2008 fuel costs and 50% of its 2009 fuel costs at $50/barrel in the futures market. This means that its fuel costs are half of that of other airlines. This hedging profit totaled $1 billion last year. Brilliant. A classic example of a best of breed company.

5) Google (GOOG) reported spectacular earnings after the close today and the stock jumped 11% to $504 in aftermarket trading. They are seeing no slowdown in the global economy whatsoever. Google should be a core holding in any US stock portfolio. The stock has been up 15% during a time when the Dow was virtually unchanged. This is the kind of out performance that you are looking for in a well run hedge fund, known in the trade as 'Alpha'. Today's news augurs well for the stock market tomorrow.

THOUGHT OF THE DAY

A number of technical indicators started to flash 'all clear' this week. The spread between Fed funds and the two year Treasury note has declined from 100 bp to 15bp. The VIX volatility index has fallen from 31% to only 21% as fears of big stock market drops diminish.?? A big sell off in the Treasury market means investors are taking off their safety trade and moving into higher risk trades like commodities, especially crude, natural gas, and the other longs I have been recommending.

Market Comments for April 16, 2008

1) All of the economic news was bad today, but all people wanted to hear about was the upbeat guidance from Intel, and they took the Dow up 256 points. ??Intel is predicting gross margins this year of 53%, great if they can do it. Almost 80% of their earnings come from Asia. The CPI came in at a hot 2.4% YOY, and housing starts were down 11.9% in March, and the Fed's beige book came in overwhelmingly negative. This reconfirms my view that technology, with their global markets and clean hands in the credit crisis, will lead any recovery in the stock market.

2) On February 29 I recommended Petrobras (PTZ) at $11.5, the largest oil producer in Brazil. Yesterday they announced a major offshore oil find the size of Saudi Arabia. The stock shot up to $15. It is still a buy here as is Brazil in general, the only country that is a net exporter of energy, commodities, food, and capital.

3) China's Q1 GDP growth came in at an annualized 10.6%, much higher than expected. The Chinese central bank raised reserve requirements to help cool down the economy.

4) Bill Gross of Pimco argues that Treasury bonds are the world's most overpriced asset and are headed for a big fall. I agree. The current yields on long bonds assume that there will be no reoccurrence of inflation in our lifetimes, a view that I am willing to short.

5) The global food panic is spreading. Russia, Indonesia, Argentina, Egypt, Vietnam, India, Pakistan, and Cambodia have all banned food exports in some form, reinforcing a global hoarding trend. This is a problem that will continue for decades. The upshot of the Chinese wanting to eat better is that many people will not eat at all. Buy fertilizer (Mosaic), seed producers (Monsanto), farm equipment (John Deere), and food exporters (Brazil).

Market Comments for April 15, 2008

1) Crude hit an all time high today of $114 on the back of a storm which closed oil export ports in Mexico, a report of falling oil production in Russia and an exploding oil pipeline in Nigeria. There was big buying today of the August $140 calls!

2) March PPI came in at a hot 6.9% YOY. We are heading into a period of prolonged high inflation. Normally bonds would collapse on this news but they still have a flight to quality bid supporting them. I believe that once that is gone, long bond futures will drop from 120 to 80. If I am wrong they will rise first to 123, then collapse. This is becoming a core long term trade for every large hedge fund.

3) One aspect of the shortfall in GE's earnings last week was weakness in their medical divisions. Non profit hospitals finance much of their operations in short term money markets, which have effectively shut down. To meet payrolls they have shelved all capital expenditure programs. With machines like MRI's and CAT scans costing up to $10 million each, this can add up to a big impact on suppliers like GE.

4) The Northwest-Delta merger, which I predicted three months ago, finally came off, creating the world's largest airline. The combined entity will have $35 billion in revenues and employ 75,000 people. There is no equity trade here because the combined entity could still go bankrupt if crude prices keep rising, or if the recession is longer than expected. The airline industry has lost $40 billion over the last five years. Five carriers have declared bankruptcy over the last four weeks. Next is United-Continental and American-Alaska.

5) Fact of the day: The top 20% of income earners in the US account for 40% of consumer spending.

6) The European and Japanese economies are starting to slow down sharply as the recessionary spill over from the US begins in earnest. This could bring forward a 25% rebound in the dollar. The euro may go up to $1.62 first, then fall back to $1.20.

6) Median home prices in Los Angeles have dropped 24% YOY. In California one out of every 204 homes are in foreclosure.

7) Intel (INTC) reported earnings somewhat better than expected. The Dow will rally on this tomorrow.

Market Comments for April 14, 2008

1) Retail sales were up 0.2% in March, better than expected. Don't pop the champagne corks yet. Most of the increase was due to higher fuel sales due to higher prices. The market was on hold today due to the imminent release this week of earnings by Intel, IBM, Ebay, Google, and Merrill Lynch.

2) The Wachovia Bank bail out was announced today. Not as draconian as WAMU's, the stock still fell 10%, and pulled down the rest of the financials.

3) The average salary on Wall Street is $387,000. Wall Street accounts for 15% of the jobs in New York City, but 35% of the reported income.

4) Another lagging indicator for the economy: breast augmentations, which are used by the youngest, least earning, and most recession sensitive consumers in the market, are down. Botox treatments and hair replacement, which are used by the high earning, recession immune consumers are still increasing. It is a lagging indicator because these operations are typically booked three months in advance. There were 2.2 million breast augmentations last year.

5) Blockbuster has made a takeover bid for Circuit City at a 30% premium to Friday's close. The company has been decimated by competition from best of breed Best Buy, and the stock has fallen from $20 to $4 in the past year. Carl Icahn is a 10% owner of Circuit City as a takeover target.

6) REIT's are trading at levels indicating a further 10% fall in real estate prices. Real Estate prices have already fallen by 15%, so that indicates a top to bottom fall of 25%, which is normal for a recession. Thus, the recession is fully discounted by REIT's. Cash flows are holding up well because there has not been the degree of overbuilding seen in past recessions. They are also not facing the credit crunch of other industries since their debt has long maturities and their cost of money has fallen. It is, however, a bad time to negotiate a debt roll over.

THOUGHT OF THE DAY

Copper could soon have a major melt up as occurred with wheat in January. Chile accounts for 40% of the world's copper supply and much of the electric power there is hydroelectric. A severe draught will soon lead to power cut backs that will force mine closures. Something similar happened in South Africa recently which caused the precious metals to spike upward. I recommended a buy of copper earlier this year at $3/pound. It is now $3.90 and close to breaking out to an all time high.