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.
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.
Market Comments for May 19, 2008
1) Crude futures are moving towards contango, indicating a near term easing of supply fears. Contango exists when the far dated futures contracts are selling for more than front month futures, the normal condition in commodity futures markets (because your have to pay interest to maintain a long position). Please see my earlier recommendation to sell out of the money crude calls. In the meantime the president of OPEC said there would be no meeting until September, and no increase in production quotas until then.
2) A sign of the rise of emerging markets: India's top paid cricket player has signed a three year contract for $40 million. India now has 53 billionaires. Economic growth came in at 9% in 2007 and will fall back to 8% this year. BUY.
3) Singapore Airlines has launched the world's longest flight, non stop from Newark to Singapore. The 10,371 mile flight takes 18 hours and costs $10,000 round trip.
4) 15 year old Jennifer Sharpe sold 17,300 boxes of Girl Scout cookies this year, a new record. And she sold them in Detroit no less! Hire that girl!
5) The index of leading economic indicators for April came in at +0.1%, in line with expectations. The Dow rose 41, and saw a new four month high.
6) Merrill Lynch put out a report predicting that natural gas will hit $13 due to increased demand for fertilizer and ethanol.
7) Brazil hits another new high. One good way to play this market is through the i Shares Brazil ETF, ticker symbol OWZ, which has soared from $72 to $102 since March 17.
TRADE OF THE DAY
There is a no brainer trade you can do here in the bond futures which closed today at 117, rallying from a 115 low on May 16. The June 118 calls, which expire this coming Friday, are trading at 32/64. If you sell two of these, your four day return on capital would be 1%. You would be profitable at all points up to 118.5. With the Fed having done so much to stabilize markets in the last few months, and inflation looming on the horizon, you are not going to get a 3 ?? point rally in Treasuries by Friday.
Market Comments for May 19, 2008
1) Crude futures are moving towards contango, indicating a near term easing of supply fears. Contango exists when the far dated futures contracts are selling for more than front month futures, the normal condition in commodity futures markets (because your have to pay interest to maintain a long position). Please see my earlier recommendation to sell out of the money crude calls. In the meantime the president of OPEC said there would be no meeting until September, and no increase in production quotas until then.
2) A sign of the rise of emerging markets: India's top paid cricket player has signed a three year contract for $40 million. India now has 53 billionaires. Economic growth came in at 9% in 2007 and will fall back to 8% this year. BUY.
3) Singapore Airlines has launched the world's longest flight, non stop from Newark to Singapore. The 10,371 mile flight takes 18 hours and costs $10,000 round trip.
4) 15 year old Jennifer Sharpe sold 17,300 boxes of Girl Scout cookies this year, a new record. And she sold them in Detroit no less! Hire that girl!
5) The index of leading economic indicators for April came in at +0.1%, in line with expectations. The Dow rose 41, and saw a new four month high.
6) Merrill Lynch put out a report predicting that natural gas will hit $13 due to increased demand for fertilizer and ethanol.
7) Brazil hits another new high. One good way to play this market is through the i Shares Brazil ETF, ticker symbol OWZ, which has soared from $72 to $102 since March 17.
TRADE OF THE DAY
There is a no brainer trade you can do here in the bond futures which closed today at 117, rallying from a 115 low on May 16. The June 118 calls, which expire this coming Friday, are trading at 32/64. If you sell two of these, your four day return on capital would be 1%. You would be profitable at all points up to 118.5. With the Fed having done so much to stabilize markets in the last few months, and inflation looming on the horizon, you are not going to get a 3 ?? point rally in Treasuries by Friday.
Market Comments for May 16, 2008
1) Goldman Sachs (GS) put out a report predicting that the price of crude will average $141 during the second half of the year. Crude soared from yesterday's low of $120 to $127.80. I don?t buy it. The Saudi oil minister said that his country would increase production to meet customer demand and that they had already increased production by 300,000 barrels/day on May 10.
2) Lehman Brothers is expected to announce layoffs of 5% of its workforce on Monday, about 1,400 people. This is their second 5% layoff in six months. This year they have reduced the leverage on their balance sheet from 20:1 to 12:1. Bear Stearns went under at 32:1.
3) April housing starts came in at 8.2% and housing permits were up 4.9%, much better than expected. These statistics lie because a sharp cut in single family home permits was offset by a surge in apartment permits. Some senior bankers are predicting we won't see a bottom in housing until inventories rise from the current 11 months to 18 months.
4) The University of Michigan consumer sentiment index plunged to 59.5, the lowest reading since 1980. The Dow fell 100 points on the release.
5) How high can gas prices rise and still allow a functioning economy? Gas is $10.09/gal in Norway and $7.18/gal in Spain. If crude rises to $200, gas in the US will cost $6.50/gal.
TRADE OF THE DAY
The short S&P 500 1200-1450 May strangle I recommended expired out of the money today for a total return for the month of 5%. The Index closed at 1,425. This is the fifth consecutive month this strategy worked for a total return this year of 27%. This trade is now gone. With stability back in the market, implied volatilities have collapsed, the VIX Index having dropped from 32% to 16%. There is no longer an attractive risk/reward ratio in putting on these kind of short volatility trades from here on. I may revisit this strategy if we get another sharp sell off in the market and volatilities spike up. Please also note that the Goldman Sachs short May 210 call I suggested also expired worthless today. Covered out of the money call writing of your entire US stock portfolio would have yielded an additional 1% return over the last ten trading days.
Market Comments for May 16, 2008
1) Goldman Sachs (GS) put out a report predicting that the price of crude will average $141 during the second half of the year. Crude soared from yesterday's low of $120 to $127.80. I don?t buy it. The Saudi oil minister said that his country would increase production to meet customer demand and that they had already increased production by 300,000 barrels/day on May 10.
2) Lehman Brothers is expected to announce layoffs of 5% of its workforce on Monday, about 1,400 people. This is their second 5% layoff in six months. This year they have reduced the leverage on their balance sheet from 20:1 to 12:1. Bear Stearns went under at 32:1.
3) April housing starts came in at 8.2% and housing permits were up 4.9%, much better than expected. These statistics lie because a sharp cut in single family home permits was offset by a surge in apartment permits. Some senior bankers are predicting we won't see a bottom in housing until inventories rise from the current 11 months to 18 months.
4) The University of Michigan consumer sentiment index plunged to 59.5, the lowest reading since 1980. The Dow fell 100 points on the release.
5) How high can gas prices rise and still allow a functioning economy? Gas is $10.09/gal in Norway and $7.18/gal in Spain. If crude rises to $200, gas in the US will cost $6.50/gal.
TRADE OF THE DAY
The short S&P 500 1200-1450 May strangle I recommended expired out of the money today for a total return for the month of 5%. The Index closed at 1,425. This is the fifth consecutive month this strategy worked for a total return this year of 27%. This trade is now gone. With stability back in the market, implied volatilities have collapsed, the VIX Index having dropped from 32% to 16%. There is no longer an attractive risk/reward ratio in putting on these kind of short volatility trades from here on. I may revisit this strategy if we get another sharp sell off in the market and volatilities spike up. Please also note that the Goldman Sachs short May 210 call I suggested also expired worthless today. Covered out of the money call writing of your entire US stock portfolio would have yielded an additional 1% return over the last ten trading days.
Market Comments for May 15, 2008
1) Wild swings in crude today related to the options expiration. There was a proposal from congress that margin trading in crude be eliminated. This would force about one third of the longs in the market to liquidate their positions. Saudi Arabia is sending 16 million barrels of crude to the US in June. Prices fell from $126 to $120. Please see my note yesterday to sell crude calls. The US stock market liked it, closing as a new 3 month high of 12,992.
2) There is a global upside breakout going on in emerging market stock indexes. Both Brazil and Russia hit new all time highs last night. I have been recommending Brazil since February, a country where everything is going right.
3) A power failure shut down the Intercontinental Futures Exchange in Chicago today. Volatility went right out of the market.
4) More data on the impending retirement crisis. The average head of household IRA is now worth only $60,000. More than 45% of workers are facing a cut in living standards when they retire. This is because people are living longer, interest rates are lower, and people have less equity in their homes because of the housing crisis.
5) In a continuation of the IPhone wars, Blackberry is introducing a touch screen model in the fall.
6) April industrial production came in less than expected.
TRADE OF THE DAY
There is a nice long opportunity setting up here in wheat, which is now down 45% from its $14.50 intraday high in January (remember both limit up and limit down in the same day?). It is now down to $7.50/bushel, having fallen more than any agricultural commodity this year. Record corn and soybean prices are encouraging farmers to switch acreage away from wheat which will create a wheat shortage later in the year. In the meantime people are still getting hungrier and natural disasters in China and Burma will further exacerbate the global food shortage. Expect prices to rise 46% to $11 in the next six months.
Market Comments for May 15, 2008
1) Wild swings in crude today related to the options expiration. There was a proposal from congress that margin trading in crude be eliminated. This would force about one third of the longs in the market to liquidate their positions. Saudi Arabia is sending 16 million barrels of crude to the US in June. Prices fell from $126 to $120. Please see my note yesterday to sell crude calls. The US stock market liked it, closing as a new 3 month high of 12,992.
2) There is a global upside breakout going on in emerging market stock indexes. Both Brazil and Russia hit new all time highs last night. I have been recommending Brazil since February, a country where everything is going right.
3) A power failure shut down the Intercontinental Futures Exchange in Chicago today. Volatility went right out of the market.
4) More data on the impending retirement crisis. The average head of household IRA is now worth only $60,000. More than 45% of workers are facing a cut in living standards when they retire. This is because people are living longer, interest rates are lower, and people have less equity in their homes because of the housing crisis.
5) In a continuation of the IPhone wars, Blackberry is introducing a touch screen model in the fall.
6) April industrial production came in less than expected.
TRADE OF THE DAY
There is a nice long opportunity setting up here in wheat, which is now down 45% from its $14.50 intraday high in January (remember both limit up and limit down in the same day?). It is now down to $7.50/bushel, having fallen more than any agricultural commodity this year. Record corn and soybean prices are encouraging farmers to switch acreage away from wheat which will create a wheat shortage later in the year. In the meantime people are still getting hungrier and natural disasters in China and Burma will further exacerbate the global food shortage. Expect prices to rise 46% to $11 in the next six months.
Market Comments for May 14, 2008
1) Natural Gas hit a new 3 year high of $11.80 on unexpected maintenance delays in the transmission system. Surprise, surprise! For natural gas to trade at the same BTU value as crude, it needs to rise to $25, or crude has to fall to $67/barrel. Crude has become so volatile, with $5 intraday ranges becoming common, that professional traders are pulling out of the market, reducing liquidity.
2) Bob Toll of Toll Brothers rates his company's current prospects as ranging from F+ to F-. He says the light at the end of the tunnel may be an oncoming train. He is asking for subsidies for home buyers from Washington. Interestingly, he is sold out of homes in Manhattan.
3) Wachovia Bank has reduced it?s probability forecast of a recession from 90% to 50%. Expect more revisions like this. This may be the most forecast recession in history that never happened.
4) Home foreclosures in April came in at 243,000, up 65% YOY. There is now up to a six month wait to file foreclosure proceedings in some states because the courts have become so backlogged.
5) California's Riverside Country has ordered a reappraisal of all 174,000 homes sold there since 2004 in order to reduce property taxes to market values. The measure, which is mandated by law, will cost the county $17 billion/year in revenues.
6) The April CPI came in at +0.2%, less than expected. The US annual inflation rate is now 3.9%.
TRADE OF THE DAY
The crude market has become so volatile that it has driven calls to extortionate prices. A one month crude call 10% out of the money trades at $2.50, compared to 25 cents for the same strike in the S&P 500. This makes crude calls ten times more expensive than stock index calls. I strongly recommend selling the July $135 crude calls for $2.50 which expire in 20 trading days. This would give you a one month return on capital of 2%. Crude has risen by an average of $3.50 a month since January, 2007 so shorting a $10 out of the money strike for one month at the top end of the range looks like a good bet. Only a US surprise attack on Iran this month could make this trade go wrong.
