Global Market Comments for June 17, 2008

1) Natural Gas hit a new high of $13.15. The Persian Gulf is now full of tankers carrying sour heavy crude that no one wants to buy. Deep water drilling rigs are now commanding $600,000/day, up from $100,000/day a year ago. The Saudis are arguing within OPEC for a long term crude price of $50, a price high enough for them to meet their development needs but low enough to discourage the exploration of new fields and alternative energy sources.

2) The New York Mercantile Exchange is introducing a steel contract at the end of the year. I covered steel for five years for the Australian Financial Review, so I should have a real advantage here.

3) More bashing of speculators by congress. The word 'speculator' comes from the Latin 'speculare' which means 'to look forward', something congress is unable to do.

4) Goldman Sachs' earnings came in at $4.58/share vs. an expected $3.42 on Q2 revenues of $9.4 billion. GS should continue to be at the core of any portfolio of US stocks. They continue to do everything perfectly.

5) According to the Labor Dept. the May Producer Price Index came in at 1.4%, or 7.2% YOY, the highest since November. This is probably the true inflation rate that most people are facing.

6) May housing starts came in at -3.3%, -36.3% YOY, a 17 year low. The market is 'worse than dead in the water' according to one industry leader.

7) 3 million acres of corn were lost in last week's flood. Prices soared to $7.98/bushel. See my earlier recommendation to buy corn at $5.80.

8) United Airlines' fuel bill this year will be $9.5 billion, up 58% from 2007.

TRADE OF THE DAY

It turns out that the US did not invade Iran after all, so the July crude $150 calls I recommended shorting Thursday for $500, expired worthless, generating a four day profit of $300,000 on capital of $3,000,000. This was my third recommendation to short these calls in three weeks, on?? May 20, June 2, and June 11 and the total profit was $624,000, or 21% of capital. In fact you could have made six round trips on these calls during this time, and they never got within $10 of going into the money. When volatility reaches these extremes, professionals are granted a license to print money.

Global Market Comments for June 16, 2008

1) Crude jumps to a new intraday high today of $139.89, up $6.60. A fire in the North Sea took 150,000 barrels/day of production off the market. Natural gas finally hit a new high of $13. Then crude dropped $7. The big fireworks this week are going to be in the crude options pits, where the options expire on Tuesday, and the futures expire on Friday. These dates could mark a top in crude prices.

2) Only 6% of the US work force is now going to work wearing a tie.

3) The dollar had its strongest week against the euro in three years last week, moving from $1.58 to $1.53. Clearly, the potential for lower euro interest rates caused by a rapidly weakening economy is the main driver now. Look for this to spill into the other markets. The two year Treasury note market had its worst week in history last week, while the 30 year bond market had its worst week in 25 years. Please see my earlier recommendation to sell 30 year bond futures at 120. They hit 111.

4) The California Supreme Court's recent decision to permit gay marriages is creating a 'gay boom' for the state's beleaguered economy. Over 100,000 happy couples are expected to tie the knot, generating a $684 million impact on the economy. The epicenter for all of this will be San Francisco. Local wedding planners are seeing a sudden tripling of business as long waiting couples are spending up to $15,000 per wedding.

5) Local Segway dealers are seeing business jump by 50% this year. People are buying the $5,000 two wheeled electric vehicles in order to save money on gas on short commutes.

6) The three highest paid executives in 2007 where John Thain at Merrill Lynch ($83.1 million), Leslie Moonves at CBS ($67.6 million), and Richard Adkerson at Freeport-McMoran ($65.3 million).

7) Last week's storms destroyed 10%-15% of the US corn crop. This is pulling up the prices of other foodstuffs.

Global Market Comments for June 13, 2008

1) Saudi Arabia is considering a 'substantial' increase in oil production to 10 million barrels/day from the current 9.45 million in an attempt to prick the bubble. Crude fell $2 to $134.80. The Saudis are terrified of crude at these prices, fearing that the bigger the rise now, the bigger the crash later. If crude falls back to $20 the country's current spending will drive it into bankruptcy and the government could fall in a coupe. Former leaders in the Middle East are not sent out to retirement homes, they are taken out and shot, so stable crude prices are a life or death issue for the Saudi leadership.

2) The number one city nationwide for web searches for home foreclosures is San Francisco.

3) May CPI came in at 0.60%, 4.2% YOY. Inflation is now at a two year high and rising.

4) US Air disclosed that they are paying $299/person per round trip flight for just the fuel versus $151 in 2007 and only $70 in 2006. No wonder they are charging for peanuts and luggage.

5) May consumer sentiment readings came in at the worst level in 28 years. McCain is a strong short.

6) You probably don't want to hear this, but Lehman stock (LEH) is a short term buy here. The stock double bottomed yesterday at $20.25 on enormous volume. This is down from $82 a year ago. You don't have to marry the stock, but you could get a 25% trading rally from here, or back to where it was on Monday. If this makes you feel queasy you could protect your downside by buying a $15 put for $1, limiting your loss to $5.

7) Bank repossessions in April were up 49%, the highest on record.

THOUGHT OF THE DAY

With rising oil prices and interest rates the stock market appears to be headed towards another climactic sell off. This will cause volatility to spike again, allowing you to sell puts at prices so high that they are mathematically impossible to go into the money without a major geopolitical event. And there is only one of these on the horizon, a US invasion of Iran. I am thinking of shorting the July 1200 or 1100 puts, 12.5% and 23% out of the money for 5 weeks. Watch this space.

Global Market Comments for June 12, 2008

1) The COO of Lehman, Joseph Gregory, was fired this morning. Also gone is CFO Erin Callan. The former tax attorney only had the job for 7 months. Dick Fuld may follow. The stock fell an immediate 10% to $21. People who bought the $6 billion equity deal on Monday, now down 25%, are going to be livid. They may try to walk away from the trade which settles today, claiming failure to disclose. Firing the CFO three days after you launch a very huge public issue doesn't exactly instill confidence. The shorts led by David Einhorn are vindicated. Rumors are now percolating that Lehman will be sold, possibly to private equity firm Black Rock, already a big investor in the firm. HSBC and Blackstone are also mentioned. Did securities fraud take place here?

2) Retail sales for May came in at 1.1%, much better than expected. Don?t pop the Champagne corks yet. Part of this is accounted for much higher gasoline sales. The tax refund checks are having their desired effect. 30 year Treasury bond futures plunged to 113. Please see my earlier recommendation to put on a leveraged short of the 30 year Treasury bond futures at 120. The euro visited the $1.53 handle.

3) Belgium's Inbev launched an unsolicited all cash takeover bid for Anheuser-Busch at $65/share, or $46 billion, a 12% premium. With the euro at $1.53 foreigners are coming in to buy up America's family jewels on the cheap. This is the third largest foreign takeover in US history.

4) Corn hit my target of $7.50/bushel today. The Midwest weather news doesn't get any worse than it is today, watching houses floating down rivers on TV. Time to bail on all long corn positions. The profit on a non leveraged position in corn would have been 30%, or $900,000 on a capital commitment of $3 million.

5) High fuel prices are accelerating the 'results only' work movement whereby employees are paid for results, regardless of how many hours they work or where they work. Managers see a 41% increase in productivity with such workers and voluntary turnover falls by 91%. Managers have to overcome entrenched concerns that if they can't see staff working at a desk in front of them they aren't working. See the newly published book 'Work Sucks' by Ressler and Thompson.

TRADE OF THE DAY

Your may recall that I advised selling S&P 500 1200-1450 strangle for the first five months of the year and walked away when the VIX fell below 18%. VIX is now back up to 23% so the time to revisit this strategy is approaching, ideally on a day when there is a major sell off in the stock market. Watch this space.

Global Market Comments for June 11, 2008

1) Crude inventories fell 4.6 million barrels for the week versus an expected rise of 1.1 million barrels. Crude rocketed from $132 to $138.50. It's time to go to the trough for the third time for the July $150 calls, which expire in four trading days. You could sell these today for $420, taking in $252,000 for 600 contracts. Crude would have to rise more than $3/day for you to lose money on this trade. This is essentially a bet that the US doesn't invade Iran by Tuesday. You will be paid enormously for being right.

2) More unintended consequences. Americans are flooding across the border to Mexico where they can buy Pemex subsidized gas for only $2.70/gallon. The crush is tying up border crossings at Tijuana and all along the Rio Grande.

3) Paul Tudor Jones, one of the largest hedge fund managers, has hired the entire distressed debt department of Bear Stearns with a view to buying up the sector. Other hedge funds are pouring into the area, where they can buy current, paying loans for 60 cents on the dollar.

4) GE is now the largest player in the wind market in the US, having bought the wind division of Enron six years ago. With current technology, wind is six times more efficient than solar in producing electricity.

5) The Lehman collapse continues, the stock falling to $23, putting the company into takeover territory. Lehman is now in talks to sell a major stake to the South Korean government. Lehman is trading substantially below tangible book value.

6) The two year-ten year Treasury spread has collapsed in a major way, falling to 100 basis points. I recommended shorting this spread on March 12 at 260 basis points with a leverage factor of five times. If you had done so, your profit now would be 8%, or $240,000 on $3 million.

7) The proverbial perfect storm has hit corn with continued flooding in the Midwest, driving prices to an all time high of $7.10/bushel. Please see my earlier recommendation to buy corn at $5.80. Now is a good time to take profits in corn and buy wheat at $8.60/bushel, which is now off 34% from its March $13.00 high. It is always nice to have one agricultural play on because they are totally uncorrelated with all of the financial positions in stocks, bonds, and currencies.

8) Fed funds futures are now discounting a 25 basis point rise in rates in each of the September, October, and December Fed meetings.