Market Comments for May 27, 2008

1) Crude fell $5. The July 155 calls I strongly advised you to sell at $550 last Wednesday, fell to $260. In the meantime, natural gas hit a new high of $12.20. This is a gain of 57% from my recommended entry level of $7.75 last January.

2) Short sellers are gunning for Lehman Brothers again, taking the stock down from $52 to $35 in only a few weeks. Their claim is that Lehman only avoided bankruptcy last March by greatly overvaluing $6.5 billion in CDO's. The false accounting didn't become obvious until the 10Q was filed last week. Trading in the $25, $20, and $15 puts has skyrocketed. The company is doing a great imitation of going to zero.

3) The US money supply M3 is now growing at a 16% annual rate, and monetary growth is even greater overseas, presaging a surge in dollar denominated asset prices. There are now two euros outstanding for every one dollar. Sounds like a great short euro argument to me.

4) The S&P Case-Shiller home price index fell -14.1% in Q1 YOY. The biggest falls were in Las Vegas -25.9%, Miami -24.6%, and Phoenix -23.0%. Only one market rose, Charlotte, NC, +0.8%, coincidentally the headquarters of rapidly growing Bank of America (BAC). At the peak of the 1990-91 S&L crisis, the index fell only 2.8% YOY. In absolute terms, house prices nationally are now back to 2002 levels. The turnover in the housing market is now so low that it is impairing recruiting, because people can't sell homes to move to new jobs.

5) The cost of shipping a container from Shanghai to San Francisco has quadrupled from $2,000 to $8,000 in the past year. Hardest hit have been shippers of bulk commodities, especially unfinished steel.

6) The May consumer confidence index fell to the lowest level since 1992.

7) Residential real estate prices in Poland have started to fall. Interest rates have risen from 4% TO 6% in the past two years and the economy is now starting to slow. Poland has had the hottest real estate market in Europe, increasing at a 30% annualized rate since 2000.

8) A new term has entered the lexicon, the 'staycation'. This is when people take their vacation at home because they can't afford to go anywhere.

The last person to read this can be excused for slitting their wrists.

TRADE OF THE DAY

It's time to buy the airlines which have fallen so much they are down to option value. United has done a swan dive for $48 to $5. In fact the whole industry is a great put on crude, which at $134 looks like it is topping out. Buy United at $7 (UAUA), American at $10 (AAR) Delta at $5 (DAL), Jet Blue at $3.75 (JBLU) and Continental at $12 (CAL). Avoid best of breed Southwest (LUV), which has not cratered because of intelligent low cost hedging of fuel costs through long dated crude futures contracts.

Market Comments for May 21, 2008-Special Energy Issue

1) Crude hit an all time high of $133.85 on the back of an unexpectedly large drop of 5 million barrels in inventories. A build had been expected. This is a big miss. The stock market had discounted a crude spike to $130. It is now discounting $150.

2) The US consumes 21.7 million barrels a day of crude, 25.5% of world production, compared to 7.2 mb/d for China, 5.2 mb/d for Japan, 2.8 mb/d for Russia, and 2.7 mb/d for Germany.

2) The hottest stock for the past month has been Dallas based Trinity Industries (TRN), the leading manufacturer of wind farm towers. The stock has risen from $24 to $38.5, a gain of 60% in the past month.

3) The strategic Petroleum Reserve now has 703 million barrels, the equivalent of 58 days of crude imports. The maximum capacity is 727 million barrels.

4) In 18 months GM will launch the Volt, priced at $30-$45,000. The hybrid will run on electric power only for the first 40 miles, then as a gasoline hybrid for up to 600 miles, getting 100 mpg. The annual cost of the power charge will be only $150-$300. A full charge takes 6 hours. This could be interesting if they actually deliver.

5) The reason that high oil prices are less painful for the economy than in past spikes is that we are using 45% less oil per unit of GDP than in 1980. To reach the old high on GDP adjusted basis, oil needs to go to $190

6) British Airways just announced profits of $1.5 billion. Its jet fuel bill this year will rise from $4 billion to $6 billion. The company hedged 65% of its fuel bill for 2008 at $85/barrel, and 30% of its fuel needs in 2009 at the same price. Many airlines have not hedged their fuel costs at all and these will inevitably have to go out of business.

7) According to Kelly Blue Book the prices of used large SUV's has collapsed, from $23,566 in September to $20,122 today. The price differential equates to 860 gallons or 15,000 miles. Used cars are now selling for 47% the price of new cars. Sales of new vehicles are down 23%. Many dealers are now refusing to take trade ins of these behemoths. Many owners who bought their cars on credit last year, now have negative equity in their cars.

8) Another great wind power play has been Stamford, CT based Hexcel (HXL) which has leapt 35% from $18 to $24 in the past month. The company makes cutting edge carbon fiber blades for wind mills. You could also buy Kaydon Corp (KDN), a leading maker of ball bearings for windmills from Anne Arbor, MI. The stock has doubled since March.

9) Pacific Ethanol (PEIX) has been on fire the past month. The stock has more than doubled from $3 to $6.75. When crude turns, which it has to soon, you don?t want to be anywhere near this stock. It also may not survive a democratic administration which is likely to axe subsidies for this industry.

10) Over the last five years the amount of money dedicated to long only oil ETFs and energy index funds has increased from $13 billion to $260 billion. This is about the same amount of oil that China has bought over the same time period. This tells you how hot the money is in this sector, and how big the inevitable fall will be.

Market Comments for May 20, 2008

1) Crude hit a new high of $129.70 on Boone Pickens' forecast of $150/barrel this year. The Dow plunged 202 points. Global oil production is 85 million barrels/day and demand is 87 million barrels/day. End of story. Until the two align, prices will go up.?? At that price the US will spend $900 billion/year on oil imports. While the US has seen consumption drop by 400,000 barrels/day this year, any savings is immediately snapped up by China. Only a global recession can reverse this. The US uses 200,000 megawatts of power a day and in ten years wind could account for 20% of this. Ethanol is a joke.

2) More than 6 million American adjustable rate mortgages are tied to LIBOR, the London Interbank Offered Rate. LIBOR has stayed stubbornly high despite all of the interest rate cuts since August, preventing interest rates on these mortgages from floating down. One month LIBOR is now at 2.49% vs. 2.0% for Fed funds. This is because the major European banks that fix LIBOR do not believe that all sub prime and credit crisis losses have been disclosed yet, so they are reluctant to lend to each other. $300 billion in Fed credit lines have been extended by the Fed to help address this, but so far the effect has been limited. Expect the LIBOR and US overnight rates to come back in line only slowly over the next several months.

3) Boeing (BA) now has 846 orders for the 787 Dreamliner. New customers will face a 6 year waiting list.

4) The Producer Price Index for April was up 0.2% showing a YOY increase of 6.5%. Inflation is clearly on the way.

TRADE OF THE DAY

Today's surge in crude oil prices sent call premiums through the roof as public utilities and airlines resort to panic buying. The July $150 calls, which expire in 20 trading days, were selling for $0.55. A $3 million margin commitment would yield a one month return of $600,000 or 20%. Crude could go up $1/day for the next 20 days and you would still make money on this. The rise in crude over the last 18 months has averaged 15 cents per trading day.