Market Comments for March 20, 2008

1) The major story today was the continued melt down in the commodities markets triggered by the increase in margin requirements on Sunday night.?? Most commodities are down 10%-20% on the week, with silver down 20% in one day. This was long overdue and is opening up windows for late players. How were gasoline prices going up to record highs with storage at a 15 year high? The euro backing off from $1.59 to $1.54 is part of this. I protect against these kind of moves, which are inevitable in commodities, by keeping tight trailing sell stops.

2) Today was a quadruple witching day with the expiration of monthly stock index options. As I am sure you recall, a month ago I recommended the short sale of the S & P 500 March 1200-1450 strangle for a premium of 5.5%.?? Today the S & P 500 Index closed at 1329, so the short strangle closed out of the money and you would have kept all of the premium. Interestingly, this is only 22 points lower than the expiration a month ago, meaning that you are getting a lot of sturm und drang but very little net movement in the market. That is what this trade is all about. This is the third month in a row that this trade has worked. My logic behind these trades from the beginning has been that with half of the market doing great, and half doing terribly, you will get very little net movement in the broader indexes. Now I suggest you put on the April 1150-1450 short strangle and take in another 5% premium. Trades like this are as good as having a rich uncle who sends you a monthly support check.

3) Bear Stearns' research department staff are still coming into work and sending out reports to clients without a single reference to the fact that they are now out of business. Aside from that Mrs. Lincoln, how was the play? The bottom line message from the government on the whole Bear Sterns affair is 'you threaten the system and we are going to come kill you'. Something to give pause to shareholders when considering how much to leverage future positions. BSC bond holders are now buying up the stock to get the votes to push through the takeover so their holdings can get marked up from 70 to 100.

4) Merrill Lynch put out a survey indicating that fund managers' cash levels are at an all time high. This is usually a deep lagging indicator and is another sign of a market bottom. But don?t bet the ranch on this. I watched cash levels in Tokyo sit at all time highs for 15 years.

5) Morgan Stanley has marked down all of their sub prime securities to zero. This will pave the way for the surprise mark ups in a year. Buy MS!

6) Thanks to Fed's latest action, the rate for 30 year conventional mortgages has dropped from 6.1% to 5.6% since Friday.

Market Comments for March 19, 2008

1) As I suspected, the first sign of stock buying precipitated a major sell of in commodities. The moves down from the Sunday night highs have been breathtaking. Crude is down from $111 to $103. Natural gas dropped from $10.40 to $9.10. Gold has had its worst day in five years, cratering from $1,020 to $940. Trailing stops would have taken me out of all of these positions.

2) The government announced that it is loosening capital constraints on Fannie Mae and Freddie Mac. This will increase their combined mortgage lending capacity by $200 billion. This is kind of irrelevant since bank lending terms are now so tight that few people can qualify. (LTV's of 60%? Minimum credit scores of 740?). But the Dow popped 100 points on it anyway. With this it appears that the government is throwing in the kitchen sink to stop the crisis. Too bad they aren't buying houses in crappy neighborhoods. Yet.

3) A lot of people are watching Wachovia Bank which now has a 10% dividend.

4) Visa's IPO, at $17.9 billion the largest in history, was a blow out success. The IPO price was $44 and the opening trade was $59.5, making an instant $6.3 billion profit for the new shareholders. Good news for the leads, Morgan and Goldman.

5) My alma mater, Morgan Stanley, reported better than expected earnings. The stock is up 40% from the Monday low. Can't keep a good house down.

THOUGHT OF THE DAY

The Fed has made fundamental changes to the US financial system that will have long lasting effects. In a week they have done nothing less than drag the country's creaking financial structure from 1933 into the 21^st century. Investment banks can now access the Fed's discount window directly which was previously only open to commercial banks. It will accept mortgage backed securities as collateral. They have put together a series of agreements with foreign central banks to meet the liquidity demands of overseas banks, making it the real central bank to the world. They are formally recognizing de facto changes that the marketplace has recognized for decades, such as the rise of capital markets and the investment banks. The ultimate effect of all of this will be long term support of global asset prices.

Market Comments for March 18, 2008

1) The price action of Lehman Brothers these days is frighteningly similar to that of Bear Stearns just before it went bankrupt. In the last week Lehman's share price has dropped from $60 to $20. At the very least this has to be considered a near death experience. Today CEO Richard Fuld came out and said that there were no liquidity concerns at Lehman. Thanks to better than expected earnings announced today the stock is back up to $45. If they go under the way that Bear did they will get taken over the same way at a nominal price, say $1/ share, wiping out the equity holders but not actually going bankrupt. That effectively wipes out all of the shareholders but preserves the rights of bond holders, minimizing the impact on the financial community. Watch out for LEH!

2) The big news today was the Goldman Sachs earnings which came in at $3.23/ share vs. and expected $2.58/share. They disclosed that their leveraged loan book shrunk from $47 billion to $20 billion, a staggeringly rapid shrinkage of their balance sheet. This shows you how quickly the whole industry is downsizing.

3) The homebuilders most likely to go bust are those that have the highest reliance on revolving credit facilities. Those are WCI, and Hovnanian. The most liquid and financial strongest homebuilders are?? NVR Inc., MDC Holdings, KB Home, and Toll Brothers.

4) With the Fed rate cut from 3.0% to 2.25%, and the inflation rate now at 2.5% on its way to 3%, real interest rates are now officially negative.

5) Bear Stearns stock today traded up to $8, four times the bid from JP Morgan. This is not a cash deal but an exchange for JP Morgan stock which is up big today. There are also moves by Bear employees to sue to tie up the deal in court for a few years. In the meantime the sub prime market will recover and Bear will regain the $80/ share in book value the firm had a few months ago. Many shareholders also believe they will do better in a plain vanilla bankruptcy or that JPM will increase their bid. Another big payday for the lawyers.

Market Comments for March 17, 2008

1) Bear Stearns (BSC) was taken over by JP Morgan (JPM) at $2/share, about 5% of its breakup value of $7.7 billion. It is a virtual total wipe out for the BSC equity holders. JP Morgan stock jumped 10% on the windfall gain. They are getting about $20 billion of sub prime securities for free in the deal. The HQ building alone is worth $4 billion. Half of 14,000 employees will lose their jobs. Clients were pulling out money on Friday as fast as they could write the wire transfer orders. Some people knew this was coming. On Tuesday when the stock was still above $60, more than 90,000 $35 strike BSC puts were bought at 20 cents. They hit $33 today with an implied volatility of 700%, a gain of 165 times! The other big winners in the deal are Bear Stearns bond holders which now have a de facto JP Morgan guarantee. Next to be targeted by short sellers: Lehman Brothers, which has dropped 50% since Friday. It reports earnings on Tuesday which could spark a further sell off.

2) Crude dropped $7 on the Bear news for fear of margin calls on all other speculative products. All other commodities except gold also suffered big drops. Hedge funds are selling their good positions to meet margin calls on the bad.

3) The futures market is now discounting a high probability of a 100 basis point cut by the Fed tomorrow. Anything less than that and there could be another market sell off.

4) There has been a wholesale stampede into risk free assets. The 90 T-Bill rate got as low at 80 bp today, which is as low as it has been in Japan. The ten year bill hit 3.30%. After tomorrow the US dollar may become the new carry currency, replacing the yen. There are massive unwinds of short yen, long euro positions going on.

THOUGHT OF THE DAY

30 year Treasury bond futures hit 122 today, yielding 4.2%, the highest price since the big deflation scare of 2002. In the meantime the yield on Treasury Inflation Protected Securities (TIPS) are now trading at negative yields, indicating a strong resurgence of inflation by year end. This makes 30 year bond futures a screaming short, with my three year target at 85. Do this five times, a relatively low amount of leverage in the bond market, and you will get a three year return of 150%.

Market Comments for March 14, 2008

1) Put buying on Bear Stearns (BSC) increased tenfold yesterday and so did the stock volume. In every financial crisis it seems that one major institution has to be offered up to the market gods for sacrifice before it ends. Bear Stearns is the most likely candidate this time. Goldman Sachs (GS) and Morgan Stanley (MS) have already ceased dealing with Bear for fear of counter party risk. Alternating rumors of bailout and collapse caused an intraday range of 500 points in the Dow today. Look for something to happen over the weekend.

2) As a Latin scholar you will immediately recognize that tutefu valui means 'fair value'. That is what the tattoo says on 'Kristen's' stomach.

3) When the credit markets recover, one big play will be the publicly traded private equity firms. Fortress Investment Group has seen its share price drop from $32 to $11, while Blackstone has plummeted from $32 to $14. Collapse of the credit markets have shut these firms out of their most profitable business lines. To show you how desperate they are Fortress just arranged a $25 million private refinancing of Michael Jackson's Neverland property to head off foreclosure. Not exactly prime business.

4) The government's tax receipts are falling sharply indicating that the recession may be sharper than expected!

5) The consumer price index for February came in unchanged versus an expected rise of 0.2%. With inflation temporarily under control the Fed now has a green light to cut interest rate by 0.5% on March 18. Your cost of financing is about to drop further.

6) Cattle futures have collapsed as ranchers accelerate slaughters due to the high price of corn, which has doubled to $6.30/bushel in 9 months. This will lead to sharply higher beef prices and shortages by the beginning of next year.

7) Junk stocks are an area where you can run a small back book. Buy ten of these. If half go bankrupt and the survivors increase fivefold you get a return of?? 250%. These are firms that were taken private, loaded up with debt, and then refloated at the top of the market last year. A good example is Idearc (IAR), the yellow pages spin off of Verizon. The company kindly loaded up IAR with a bone crushing $9 billion in debt before the spin off. In the past year the stock has cratered from $34 to $3. The stock now has a PE multiple of 2 and a dividend yield of 25% (no typo here). But the company also has huge cash flow giving it an interest coverage ratio of 2:1. There are a dozen more of these out there.

TRADE IDEA

Google, last year's darling of the market, has nearly halved in four months. With a 70% market share in internet search, the company has basically become the toll taker for the internet. At $420 GOOG is now selling at a multiple under 20 times. The company is a cash machine almost as efficient as the US Treasury, and has almost as many reserves as Fort Knox. Even though economic conditions are dire, it is still increasing sales as advertisers accelerate their epochal shift away from traditional print and broadcast media to the Internet. Its only potential competitor is Microsoft (MSFT), which first ignored the Internet, then was hobbled by the Justice Department, then finally stumbled over its own big feet with a series of small and meaningless acquisitions. Its latest attempt to break the Google monopoly with a takeover of Yahoo (YHOO) came to naught. Although Google is excessively wasteful on things outside its core business, like space travel, it still offers a rare chance to get into a best of breed company on the cheap.