Market Comments for May 29, 2008
1) It was a day for the history books in crude. The day started out at $128. Weekly inventories had been anticipated to show an increase of 700,000 barrels, but instead, showed a decline of 8.8 million barrels, the biggest fall in 4 years! Crude lept to $133. Then the CFTC announced it had launched an investigation of oil price manipulation and crude fell $7 to $126. The July $150 calls I strongly recommended selling last week at $550 fell to $110. The hypothetical one week profit on this one trade would have been $490,000.
2) The collapse of the bond market this week has pushed the ten year Treasury note out of its one year trading range. Yields shot up from 4.03% to 4.15% overnight. The futures on the 30 year bond have fallen from 120 to 113.5 since March. I strongly recommended selling these then, and if you had done so, the profit would have been 32%. This is triggering a massive asset allocation trade out of bonds and commodities and into stocks and the dollar. The futures markets are now discounting a 60% chance of Fed interest rate increase by October.
3) I met with Richard Fisher last night, president of the Dallas Fed. He and I competed for an assistant secretary of the Treasury position during the Carter administration. He won, but wrote a nice review of my book. He is a well known inflation hawk and told me that interest rates will rise 'sooner than people expect'. The next day bond prices cratered to a nine month low. He also told my son, who is graduating from the University of Santa Clara, that the best thing he could do is to leave the country and backpack around Asia, accumulating experience on which he can build a career.
4) Steve Balmer played golf with Jerry Yang last weekend. Draw your own conclusions.
5) Hedge funds are seeking out regional banks with the highest ratio of construction loans and shorting the stocks as these have the highest default rate in a recession. The biggest targets have been BB&T of South Carolina and Zions Bank Corp. of Salt Lake City, with 21% of their loan portfolios in construction. This is making construction loans harder to obtain.
6) Q1 GDP was revised up from +0.6% to +0.9%. Where is the recession?
7) 90% of the new electric power plants under construction in the US will be fueled by natural gas. This is why I am a long term bull on natural gas.
Market Comments for May 28, 2008
1) Crude plunged to $126? on rumors that Saudi Arabia is increasing production, then lept back up to $131.50. Another $6 range day. It was a great day to sell July 110 puts for $550 which expire in 13 trading days. More than 25% of global oil consumption is now subject to some form of government subsidy. As those subsidies come off (today Taiwan joined the club), we will start to see demand destruction for crude in earnest.
2) To produce one gallon of ethanol you need to consume 1,700 gallons of fresh water. The government is paying farmers 51 cents/gallon of ethanol to do this. One third of the US corn crop this year will go into ethanol production, while the poorest 10% of the world starves. This is why I hate ethanol, other than to drink it neat in its many forms.
3) UBS has banned employees of its private banking division from visiting the US for fear of prosecution by the IRS. One US citizen employed by the bank has already been arrested while home for a visit.
4) Durable goods for April came in at -0.5%, but ex transportation was up an amazing 2.5%. This shows how much of the economic slow down is being borne by the US car makers.
5) White House economic advisor Lazear predicts that the upsurge in oil price will cut 1.5% from US GDP growth this year.
6) Merrill Lynch predicts that Amazon will see 20% per year sales growth for the next 10 years. The company is the largest online seller, accounting for 6% of $135 billion of last year's total online sales.
7) Ford announced that it is cutting 10-12% of its workforce. The stock has traded between $5-$9 over the last three months and last traded at $6.75. This is a great short crude play. If crude falls and the company brings out its new generation of hybrids and electric cars on schedule, you could get a double out of the stock. Kirk Kerkorian certainly thinks so.
8) There was a huge sell off in the bond market today as owners finally start to feel the chill wind of inflation down the back of their necks. The 30 year yield hit 4.04%, a new high for the year. I fervently believe that long dated US Treasuries are the world's most overvalued asset.
Market Comments for May 28, 2008
1) Crude plunged to $126? on rumors that Saudi Arabia is increasing production, then lept back up to $131.50. Another $6 range day. It was a great day to sell July 110 puts for $550 which expire in 13 trading days. More than 25% of global oil consumption is now subject to some form of government subsidy. As those subsidies come off (today Taiwan joined the club), we will start to see demand destruction for crude in earnest.
2) To produce one gallon of ethanol you need to consume 1,700 gallons of fresh water. The government is paying farmers 51 cents/gallon of ethanol to do this. One third of the US corn crop this year will go into ethanol production, while the poorest 10% of the world starves. This is why I hate ethanol, other than to drink it neat in its many forms.
3) UBS has banned employees of its private banking division from visiting the US for fear of prosecution by the IRS. One US citizen employed by the bank has already been arrested while home for a visit.
4) Durable goods for April came in at -0.5%, but ex transportation was up an amazing 2.5%. This shows how much of the economic slow down is being borne by the US car makers.
5) White House economic advisor Lazear predicts that the upsurge in oil price will cut 1.5% from US GDP growth this year.
6) Merrill Lynch predicts that Amazon will see 20% per year sales growth for the next 10 years. The company is the largest online seller, accounting for 6% of $135 billion of last year's total online sales.
7) Ford announced that it is cutting 10-12% of its workforce. The stock has traded between $5-$9 over the last three months and last traded at $6.75. This is a great short crude play. If crude falls and the company brings out its new generation of hybrids and electric cars on schedule, you could get a double out of the stock. Kirk Kerkorian certainly thinks so.
8) There was a huge sell off in the bond market today as owners finally start to feel the chill wind of inflation down the back of their necks. The 30 year yield hit 4.04%, a new high for the year. I fervently believe that long dated US Treasuries are the world's most overvalued asset.
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 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 23, 2008
1) The markets are now totally fixated by oil. Every financial instrument, from equities, to bonds, to currencies, are now being driven by the price of crude. Every technical service I subscribe to are saying that all oil related investments are sells, including crude, oil major equities, oil services, ETF's, and energy index funds. Alarm bells are ringing everywhere. The Dow had its worst week since February, falling from 13,100 to 12,400.
2) A record number of independent gas stations are going out of business as margins are crushed to record lows. About 10 cents/gallon for the price of gas is now going to credit card charges. Buy Master Card.
3) More than 50% of US government debt is now held by foreigners. Non US residents are now taking down 75% of each new bond issue floated by the government. This is a major factor in the continued weakness of the dollar.
4) The government says that miles driven by travelers in March declined by 4.3% YOY. This is the first March decline since 1979.
5) There are rumors that Belgian brewer Inbev is about to make a hostile takeover bid for Anhauser-Busch (BUD).
6) Existing home sales for April came in at -17.3%, the worst showing on record. The inventory of unsold homes rose from 11 to 11.2 months. Prices on the West coast fell 16.7% YOY.
7) GM stock hit a new 26 year low at $17.50. Gee, I wonder why?
8) Taiwan, Malaysia, and Indonesia announced that they are cutting domestic fuel subsidies in order to bring their gasoline prices in line with the world market.
TRADE OF THE DAY
The no brainer trade I recommended on Monday paid off. I suggested selling two of the June 118 bond calls for 32/64, or 1% of your capital. This position would have been profitable with a June futures expiration at all points below 118.5. Today those options expired worthless with the futures going out at 116 17/32.
Market Comments for May 23, 2008
1) The markets are now totally fixated by oil. Every financial instrument, from equities, to bonds, to currencies, are now being driven by the price of crude. Every technical service I subscribe to are saying that all oil related investments are sells, including crude, oil major equities, oil services, ETF's, and energy index funds. Alarm bells are ringing everywhere. The Dow had its worst week since February, falling from 13,100 to 12,400.
2) A record number of independent gas stations are going out of business as margins are crushed to record lows. About 10 cents/gallon for the price of gas is now going to credit card charges. Buy Master Card.
3) More than 50% of US government debt is now held by foreigners. Non US residents are now taking down 75% of each new bond issue floated by the government. This is a major factor in the continued weakness of the dollar.
4) The government says that miles driven by travelers in March declined by 4.3% YOY. This is the first March decline since 1979.
5) There are rumors that Belgian brewer Inbev is about to make a hostile takeover bid for Anhauser-Busch (BUD).
6) Existing home sales for April came in at -17.3%, the worst showing on record. The inventory of unsold homes rose from 11 to 11.2 months. Prices on the West coast fell 16.7% YOY.
7) GM stock hit a new 26 year low at $17.50. Gee, I wonder why?
8) Taiwan, Malaysia, and Indonesia announced that they are cutting domestic fuel subsidies in order to bring their gasoline prices in line with the world market.
TRADE OF THE DAY
The no brainer trade I recommended on Monday paid off. I suggested selling two of the June 118 bond calls for 32/64, or 1% of your capital. This position would have been profitable with a June futures expiration at all points below 118.5. Today those options expired worthless with the futures going out at 116 17/32.
Market Comments for May 22, 2008
1) Crude gave back yesterday's $5 melt up, falling from an overnight high of $135.50 to $130. The head of ??the New York Mercantile Exchange says that speculators account for only 20% of turnover in the energy contracts and that half of those are long, while the other half are short, leaving no net impact on prices. The price increases are coming from final demand.
2) The hot alternative play in China is Solarfun (SOLF), a Shanghai based manufacturer of photovoltaic cells. It has risen from $6 to $28 since March. It?s too hot to touch here. I never buy these alternative energy stocks because they are too small, and too overhyped, with too much money chasing them.
3) Coal prices have risen an astounding 100% since January, from $60 to $120/ton. Virginia based Alpha Natural Resources (ANR) is a leading producer of metallurgic and steam coal. Since January it has risen from $23 to $75. Walter Industries (WLT) has risen from $21 to $95. Boy, are we in a global commodities bubble.
4) My whole scenario for natural gas for the year is unfolding. It has run from $7.75/BTU, when I recommended it in January, to a high of $11.85 this week. Hurricane season begins next week and the National Oceanic and Atmospheric Administration (NOAA) is predicting 2-5 major hurricanes this year. One good hurricane could cause natural gas to spike to $15-$20, as it did during hurricane Katrina in 2005.
5) Beef is one of the most severely beaten up commodities this year, falling 60% from last year's peak. Farmers are rushing livestock to market to avoid high feed costs. This will inevitably set up a shortage of beef next year when prices could double. The average American eats 217 pounds of meat a year. Global meat consumption is expected to rise by 25% over the next 20 years as populations in newly wealthy BRIC countries improve their diets. The current beef production model is broken, as it was created when oil was only $15-$20/barrel.
TRADE OF THE DAY
I think it is now safe to say that equities are going to be a crummy place to be this summer as the market digests triple digit oil prices. The choice here is to sell all of your positions now, with a view to buying them back in the fall, or aggressively writing covered calls on your long positions. Best case we meander sideways for a few months. Worst case, we make new lows. Sell in May and go away sounds good to me.
Market Comments for May 22, 2008
1) Crude gave back yesterday's $5 melt up, falling from an overnight high of $135.50 to $130. The head of ??the New York Mercantile Exchange says that speculators account for only 20% of turnover in the energy contracts and that half of those are long, while the other half are short, leaving no net impact on prices. The price increases are coming from final demand.
2) The hot alternative play in China is Solarfun (SOLF), a Shanghai based manufacturer of photovoltaic cells. It has risen from $6 to $28 since March. It?s too hot to touch here. I never buy these alternative energy stocks because they are too small, and too overhyped, with too much money chasing them.
3) Coal prices have risen an astounding 100% since January, from $60 to $120/ton. Virginia based Alpha Natural Resources (ANR) is a leading producer of metallurgic and steam coal. Since January it has risen from $23 to $75. Walter Industries (WLT) has risen from $21 to $95. Boy, are we in a global commodities bubble.
4) My whole scenario for natural gas for the year is unfolding. It has run from $7.75/BTU, when I recommended it in January, to a high of $11.85 this week. Hurricane season begins next week and the National Oceanic and Atmospheric Administration (NOAA) is predicting 2-5 major hurricanes this year. One good hurricane could cause natural gas to spike to $15-$20, as it did during hurricane Katrina in 2005.
5) Beef is one of the most severely beaten up commodities this year, falling 60% from last year's peak. Farmers are rushing livestock to market to avoid high feed costs. This will inevitably set up a shortage of beef next year when prices could double. The average American eats 217 pounds of meat a year. Global meat consumption is expected to rise by 25% over the next 20 years as populations in newly wealthy BRIC countries improve their diets. The current beef production model is broken, as it was created when oil was only $15-$20/barrel.
TRADE OF THE DAY
I think it is now safe to say that equities are going to be a crummy place to be this summer as the market digests triple digit oil prices. The choice here is to sell all of your positions now, with a view to buying them back in the fall, or aggressively writing covered calls on your long positions. Best case we meander sideways for a few months. Worst case, we make new lows. Sell in May and go away sounds good to me.
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.