Market Comments for May 8, 2008

1) New high for crude at $124.60. Who has been the best speculator in the market? George Bush. The strategic petroleum reserve hit an all time high of 727 million barrels, which equates to 58 days of US imports. Every one of these barrels could be sold now for a profit. Natural Gas, which I recommended in January at $7.75, has been the best energy play this year, up 41%. Crude is up only 26%.

2) Tom Thornhill of Vinum Capital is raising $250 million to invest in vineyards in California. There are 2,500 vineyards in the state, 80% of which are family owned and many lose money. Up to 50% of these are expected to change hands over the next 10 years and Thornhill hopes to provide an exit strategy for these owners. Thornhill, who employs eight full time wine professionals, will then add value by bringing in professional management, gaining economies of scale, and building a family of brands. In the meantime the demand side of the equation for premium wine is improving the increase in consumption by the boomer and millennial generations.

3) Toyota announced a Q1 net of $3 billion, down 28%, on sales of?? +3.8%. The company is getting hit with a double whammy of falling US sales and falling yen proceeds from those sales because of the weak dollar. Growth in emerging markets was gangbusters. The company expects global sales to rise only 1.6% in 2008. It has sold 1.4 million hybrids so far. This has always been a great company with a boring stock. Since they are virtually 100% internally financed they never raise outside equity, so the stock never gets promoted by brokers. It is still a nice 'tell' on the state of the global economy.

4) Colorado State University, which has one of the most sophisticated weather forecasting models out there, is predicting that there will be eight hurricanes this season, and that four of these will be major. The season runs from June 1 to November 30. There is a 69% chance that one of these will make landfall, compared to 52% for past years. Current energy prices are not factoring in these risks at all. Natural gas hit $15 during Katrina three years ago.

THOUGHT OF THE DAY

The next crisis facing the US will be the skyrocketing number of aging poor. Now that the baby boomers are starting to collect social security the number of retirees is expected to double to 72 million within the next 15 years. Only 18% of workers have corporate pensions compared to 60% in the sixties. In the meantime the median 401k account is only worth $31,000. Health care workers are currently the fastest growing job sector. No doubt the government will be asked to step in and pay for all of this.

Market Comments for May 7, 2008

1) Weekly crude inventories jumped 5.7 million barrels. Crude prices fell $1.50, then soared $3 to a new all time high of $123.80. Traders are gunning for $125 within the next week. This has become a one way bet. There is now so much excess oil in the system that storage facilities are running short. Tankers will soon have to start steaming in circles at sea because storage facilities at every part of the supply chain are full, as they have during past oil peaks. OPEC oil revenues are expected to increase from $664 billion in 2007 to $1 trillion this year.

2) Cisco came up with better than expected earnings. Their Asian sales came in hot, US sales eked out a small increase, while European sales came in very slow. It is becoming a predictable pattern. The stock rose to $27, up 10% from when I recommended it in March.

3) Toyota is bringing out the third generation Prius in 2009. The car will be four inches longer and the engine will grow from 1.5 to 1.8 liters. Thanks to a redesigned hybrid package it will also have better mileage. Incredibly, the car will keep the same base price of $21,000. Talk about giving the customer everything he wants! Toyota could get double that with gas on its way to $5/gallon. Clearly the hybrid market is something that Toyota wants to own. GM take note.

4) The National Association of Realtors says that March pending sales were down 20.1% YOY. They predict that prices will fall 2.4% this year. Don't tell that to home sellers in Stockton, California, the foreclosure capital of the US!

5) Sprint Nextel announced a joint venture with Comcast, Google, and Time Warner to build a Wimax network. Wimax will take your local hot spot at Starbucks and give it a 50 range. AT&T and Verizon are already building a competing network called LTE. This will be the Next Big Thing.

THOUGHT OF THE DAY

When we get a democratic president in January the war in Iraq will either be substantially wound down or ended. This will reduce what has been a major drag on the economy for the last six years. So far the war has burdened the US with $1 trillion in direct costs and another $1 trillion in indirect costs. This is one of the reasons that the US stock market has been the world's major under performer this decade. The S&P 500 index return since 2000 has been zero. Take the war away and US stocks will do better. Crude prices will also ease.

Market Comments for May 6, 2008

1) Fannie Mae (FNM) announced large losses and plans to raise $6 billion in new equity. They expect serious losses in real estate loans to continue through 2009. More than 8 million homes in the US now have negative equity. At the peak of the housing market in 2005 houses were selling at a 60% premium to their construction cost. The market will have to give all of that premium up before it bottoms. When prospective home buyers see headlines like this they only participate at the most severely distressed prices.

2) Goldman Sachs (GS) put out a report saying that crude may see a super spike to $150-$200 over the next 6-24 months. Crude rose to $122.50. Unbelievable. Six months ago Goldman was saying that only a major geopolitical event like a war would cause a brief spike in crude to $120. Natural Gas, the value play in the energy area, hit a new post Katrina high of $11.45.

3) Las Vegas has seen gambling revenues drop 4% YOY, the first decline since 9/11. The Tropicana filed for bankruptcy.

3) Homebuilder DR Horton announced huge losses, a sales drop of 25%, and $800 million in inventory write downs. The stock is up 31% from where I recommended it in March.

4) $200 billion in new money is expected to flow into hedge funds in 2008, bringing the total under management up to $2 trillion.

5) April car sales fell off a cliff: Chrysler -30%, GM -23%, Ford -19%, Toyota???? ??-5%. Some dealers are now offering a year of free gas with new sales.

THOUGHT OF THE DAY

The market may stall here as all of the major indexes bump up against their 200 day moving averages and the market digests the implications of crude over $120. It is a great time to sell out of the money short dated calls and take in some premium income. For example, you can sell a May S&P 500 May 1450 call at $5, or 35 bp, which expires in 8 trading days. This is currently $30 out of the money. You can also sell the Goldman Sachs May 210 calls at $1, giving you an 8 day return of 50 bp. These are currently $13 out of the money. This is a great way to bring in incremental income in a stalled market and boost returns.

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.

Market Comments for May 4, 2008

1) Non farm payrolls came in at -20,000 instead of the anticipated -75,000. The unemployment rate fell from 5.1% to 5.0%. Money poured into financials and technology stocks. The biggest job losses were in the construction area. Interestingly, the hot new job growth area is the retraining of auto workers in Michigan into health care workers. That next male nurse who attends to you may have calluses on his hands.

2) Unemployment in Poland has dropped from a high of 20% a few years ago to 11.1% in March. Wages are starting to climb, especially for skilled laborers. Wages in Poland are up 20% YOY, and are up 30% for construction workers.

3) $108 billion in stimulus checks are about to hit bank accounts. How long the assist will help the economy is anyone's guess.

4) The euro hit $1.53. I believe it can go to the old breakout level of $1.38 sometime this year. This will create a huge stimulus for the stock market.

5) The yield on two year Treasury notes hit 2.55%, 55 bp over the Fed funds rate, indicating an enhanced appetite for risk. This is up from -100 bp just six weeks ago. This has been an excellent indicator for calling the bottom of the market.

6) The Fed engineered a massive global liquidity injection early this morning. Lending at the Fed window to investment banks was increased from $100 billion to $150 billion. It announced it will start accepting AAA collateral backed by car loans, credit cards, and student loans. It increased swaps with European central banks from $20 billion to $50 billion. This will go a long ways towards stabilizing the credit system and shortening the recession.

7) Momentum traders have been flocking into technology stocks. Apple, which I recommended on March 12 at $126, hit $185. The next target is Intel, which gets 80% of its sales from overseas, could rise 50% from here. Helping is the fact that pc inventories are at 5 year lows and distributor inventories are at 10 year lows. Intel's $250 'Adam' chip, which is designed for sale in low cost computers in emerging markets and is expected to have huge demand, comes out in Q3.