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.

Market Comments for May 1, 2008

1) The rout in commodities is continuing. Crude hit $110. Gold is getting crushed, off 15% from its high. The euro hit $1.54. The ?buy the dollar and sell commodities? trade is accelerating. In the stock market money poured out of energy and commodity names, and into banks and technology. Goldman Sachs, which I recommended at $163, hit $200 today, up 23%. Please see my earlier comments about how the commodity bubble has burst.

2) The Brazilian stock market, the Bovespa, hit an all time high overnight of 66,000. Some individual stocks were up 20% on the day. I recommended Brazil earlier this year. The BRIC countries should be at the core of any long term equity position, but will also have the biggest drops in any correction.

3) Centex, the nation's largest homebuilder, announced massive Q1 losses of $7.50/share, about ?? of its equity. This included $362 million in write downs on unsold homes.

4) Weekly jobless claims jumped by 35,000 to 380,000. The non-farm payroll, the biggest economic release of the month, comes out tomorrow. It is expected to show a loss of 75,000 jobs.

5) Global chip sales are up 3.4% YOY according to the Semiconductor Industry Association. Stripping out DRAM's, which are mostly sold by the Japanese and always subject to severe price competition, they are up 11%. PC's account for 40% of demand, followed by 20% by cell phones, then MP3 players and Ipods. More than $25 billion in chips were exported by the US last year, making it the second largest export after aircraft. I recommended a buy on Intel at $21. It is now at $23.5, up 12%.

6) GM's auto sales are down 22% in April, a breathtaking decline. I can't imagine why people aren't buying Hummers with gas at $4/gallon. It costs $128 to fill an H2 gas tank and at 8 miles/gallon that will only get you 250 miles. It?s like driving around with a big sign on your car saying ?I am a dummy.?

THOUGHT OF THE DAY

When planning your financing needs for the next year I think you can count on the Fed raising rates by December. With current spreads the financial system is reliquifying its collective balance sheet at a phenomenal rate. Banks and brokers will be approaching something resembling health by year end. Once the Fed starts you can expect it to raise rates very quickly to head off inflation brought on by high commodities and the weak dollar.

Market Comments for April 30, 2008

1) The Fed cut the discount rate by 0.25% to 2%. Crude sold off $5, and most other commodities had substantial falls.

2) The Bank of Japan held rates steady at 0.5% where it has been for 13 years. This is why the yen is the world's major carry currency. It also shows the futility of today?s Fed action. Bernanke is taking lessons on how to push on a string.

3) Follow the money. Marriott is increasing the number of hotels it manages in the Middle East from 26 to 65 over the next three years.

4) Spain has had its worst reading for consumer sentiment in 26 years. Spain and England are leading the EC into recession. Interest rate cuts to follow. Someday.

5) General Motors (GM) lost only $600 million in Q1, exceeding analysts' forecasts. Whoopee! The stock leapt an impressive 13% on the news. Go buy that Hummer!

6) On April 4 I sent you a Special Report strongly advising you that it was time to buy stocks. April, 2008 has been the best month for the S&P 500 since April, 2003.

7) Citibank (C) announced that it is raising an additional $4.5 billion in equity. That brings the total capital raised to a staggering $40.5 billion since the sub prime crisis began. Talk about throwing more good money after bad. The buyers of this paper will live to regret it.

8) GDP growth for Q1 came in at +0.6%, better than expected. Only the strong performance of the large multinationals kept the economy out of recession. However, this number lies in that the economy was probably still growing at the beginning of January, but was definitely shrinking by the end of March and on a downtrend.

9) Exxon (XOM) reported earnings up 50% in Q1. No surprise there. But at eight times earnings, the stock is trading as if crude were still at $50. Equity investors apparently do not believe that crude will stay at this level for long.

TRADE OF THE DAY

The commodity bubble has at last been pricked by the strong dollar. There have been major sell offs in wheat, gold, energies, and rice. Bonds and the euro will follow. This area is long overdue for a major correction. As we saw last year, there will be short side opportunities in commodities for the next 3-6 months. Crude should make it back down at least to the sixties. However, the long term bull case is still valid.