Market Comments for March 6, 2008

1) Oil jumped $5 to $104.65 and Natural Gas to $9.90 on an unexpected drop in weekly inventory figures. The chairman of Exxon (XOM) made an interesting comment today. He said that 85% of the growth of oil demand last year was in countries that have artificial price controls and subsidies on oil like China. Demand will fall off a lot if these countries start making consumers pay market prices.

2) There is a rumor that Lennar Homes is in trouble because they have the worst debt/equity ratio of the listed home builders and also carry large off balance sheet items. If they don't, then they will be the best performing stock. You always want to buy the most leveraged player in a rebound.

3) The futures market is saying that there is a 50% chance that the Fed will cut interest rates 0.75% in two weeks and 100% chance that they will cut 0.50%.?? I personally think that inflation fears will limit the Fed to a 0.25% and that the market will tank.

4) 5% of al of the home mortgages in the US are now either late on their payments or in foreclosure.

5) Citibank (C) stock has dropped to a new low of $22 and they are now asking Abu Dhabi for another chunk of money which last bought at $30/share. C is rumored to be planning 37,000 lay offs this year, 10% of its total work force.

THOUGHT OF THE DAY

Once the credit write downs and the share price melt downs finish they will be followed by write ups and melt ups as the credit markets reopen. There may even be an overlap. You want to be long there.

Market Comments for March 3, 2008

1) Natural Gas soared again to a new two year high of $9.61 in its race to catch up with crude. Gold flew to $991, just short of my short term target of $1,000. More concerns about power outages in South Africa.

2) The Sage of Omaha, Warren Buffet, released his annual letter to investors, a must read for all students of the market. A $10,000 investment in his Berkshire Hathaway shares in 1965 would be worth $31 million today. I have been following him for 20 years and have always admired his discipline and his wit.

3) The next shoe to fall in the financial crisis will be the bankruptcy of several large fixed income oriented hedge funds. These funds have earned outsized returns of 30%-40% per annum shorting Treasuries and buying every piece of high yield junk out there on a highly leveraged basis, from credit default swaps to collateralized debt obligations to Icelandic long term bonds. Now Treasuries are gong up and there are no bids for these long positions. Vulture investors like Buffet are being shown $5 billion portfolios of these distressed securities on a daily basis.

4) Many hedge funds invest purely on mindless statistical reversions to a mean strategy. When prices are two standard deviations above a mean, they sell, and when prices are two standard deviations below a mean, they buy. Not too much thought there! The problem is that we are now at 6 standard deviations for almost all fixed income securities which equates to a once in 2,000 years event. The aggregate size of the long positions run by these strategies is in the trillions of dollars. There are now cascading margin calls flooding throughout the industry. That is why these funds always eventually go bust. It seems these days that the 100 year floods are happening every two years. It is a basic flaw in the Black-Schoales equation. Models are great as long as you know when to toss them out. These are just tools, not the Gospel Truth.

5) The big hit today was in securities backed by commercial mortgages. Watch out. Terms are tightening by leaps and bounds.

1) Natural Gas went ballistic today, up 5% to $9.46. Crude closed at $102.20. Fed governor Bernanke is driving prices, not OPEC.

2) Thoroughbred horse sales at Keeneland have fallen off a cliff, another leading economic indicator.

3) Incredible stat of the day: Triple 'B' rated bonds a year ago traded 200 basis points over Treasuries. Now they are 800-1,000 basis points over Treasuries, an all time high.

4) Michael Jackson's palatial fantasy estate in Southern California, Neverland, complete with its own merry-go-round and Ferris wheel, is going into foreclosure unless he can come up with $24 million by March 14. It almost certainly has negative equity and the bank will take it back. Weren't you looking for a weekend place?

5) China is raising its minimum wage by 17% to $120 a month. Of the last 50 centuries, China had the world's dominant economy for 48. The rise of China today is just a reversion to the mean.

6) There was massive buying of long dated calls in Toll Brothers and Pulte Homes which are among the best performing stocks in the market this year.

7) US labor costs are now 30% cheaper than in Europe. This will lead to more factory construction in the US.

8) The California state pension fund (Calpers) is raising its allocation to commodities 16 times to $7 billion. A sign that a top in this torrid asset class is not far off.

THOUGHT OF THE DAY

What has been driving the euro up against the dollar for the last 8 months has been stubbornly high euro interest rates and the most rapid decline in dollar interest rates in history, causing the euro/dollar interest rate differential to widen to a record 300 basis points. What happens next? The Fed will carry out its last 50 basis point rate cut at its March meeting. After that the next Fed rate move will be a rate increase to head off inflation, possibly quickly. The European central bank will be forced to cut its rates as the effects of the US recession spill over there. This will cause the dollar/euro interest rate differential to shrink dramatically. This scenario has the euro peaking at the $1.55 to $1.60 range sometime in Q2 2008. After that it could retrace as far back as $1.25 over the following year. Q2 could be a good time to take profits in an any euro based assets you may have.

TRADE RECOMMENDATION

Copper could be the next metal to move. It is at the top of a two year trading range at $3.60 and is clearly breaking out to the upside. You could get a big rotational move into copper as traders move out of gold,?? which is rapidly approach $1,000 an oz, the target for many for the year. Chinese demand has been voracious in the massive construction build out for the Olympics. Electrical cars, the most immediate short term solution to high oil prices, use a lot of the red metal. And there are no major new mines coming on stream in the foreseeable future. A classic supply demand squeeze.

1) The big development today was the Euro which finally blasted through $1.50, which had capped it for the last three months. Short covering took it all the way up to $1.51. All of the other weak dollar plays, like gold and silver, soared to new highs. Next stop $1.55.

2) The EU hit Microsoft with a $1.35 billion fine. MSFT is the most fined company in history. The stock was unchanged. This amount is only two weeks of free cash flow for Mr. Softy. It's just another cost of doing business for them. I think the stock is a strong buy here at $28.

3) Fannie Mae and Freddie Mac said they would eliminate caps on jumbo loans on March 1. This means that these loans can be securitized for the first time. It will be helpful when people start buying securitized mortgages again, which may be by year end. This will be big news for sellers of luxury homes in New York, California and Florida.

4) The Hang Seng soared 769 points last night. It is up 15% since I showed you that chart and is on its way back to HK$31,000.

5) With Google stock plummeting from $750 to $449 Sergei Brin and Larry Page have each lost $8 billion in net worth since November. Their holdings have dropped from $21 billion to $13 billion each, some 40%. This is the sector you want to be in when the market recovers.

6) Toll Brother announced a record loss and said they see no recovery on the horizon. The stock was unchanged. These stocks are totally sold out, and in fact are the best performing sector of the market this year.

9) New home sales in January came in at an annual rate of 533,000, a 13 year low. At least 1.2 million homes a year are needed to meet the demands for population growth.