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.
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.
Market Comments for May 13, 2008
1) New high in crude at $127. Natural Gas hit $11.70, and is now selling at a 47% discount to crude on a BTU basis.
2) You can now buy a home ethanol distiller for $7,000 after rebates. The EFuel 100 Microfueler will convert 70 pounds of sugar into 5 gallons of ethanol per day at a cost of $1/gallon. For details go to www.efuel100.com. This will enable thousands of consumers to become bootleg rum distillers, driving the ATF nuts.
3) Fluor announced stellar earnings, with 60% coming from overseas. They are doing a huge business converting US refineries to take heavy crude from Canadian tar sands. Customers are making capital investment budgets based on crude permanently staying above $40-$50/barrel.
4) According to long term Kondratieff charts, interest rates are going to rise for the next 30 years. When we are in the assisted living facility we will be able to thrill the youngsters with tales of 4.75% 30 year fixed rate mortgages and 1% teaser rates.
5) China has become a net importer of coal for the first time in 5 years, due to snow storms and rising crude prices.
6) The National Association of Realtors said the median home sold for $196,000 in April, down 7.7% YOY. The biggest hit nationally was in Sacramento, down 29.2%.?? The numbers are artificially low because of the almost complete absence of jumbo loans for more expensive homes.
7) US coal exports are expected to rise to 79 million tons this year from 59 million tons last year, thanks to the weak dollar and rising energy prices. The US is the Saudi Arabia of coal with a 250 year supply in the ground.
THOUGHT OF THE DAY
Down 23% from its high last year, BRIC country India is worth a good look. Earnings are expected to grow 20%/ year for the next 3-5 years and can be bought for 12 X earnings. India will soon have the world's largest population. The interesting plays there are in IT and financials. Among the negatives: persistent terrorism, poor infrastructure, and the lack of domestic energy supplies. The Bombay India Sensex 30 index futures just started trading in Chicago creating an easy entry vehicle for hedge funds. See $BSN.
Market Comments for May 13, 2008
1) New high in crude at $127. Natural Gas hit $11.70, and is now selling at a 47% discount to crude on a BTU basis.
2) You can now buy a home ethanol distiller for $7,000 after rebates. The EFuel 100 Microfueler will convert 70 pounds of sugar into 5 gallons of ethanol per day at a cost of $1/gallon. For details go to www.efuel100.com. This will enable thousands of consumers to become bootleg rum distillers, driving the ATF nuts.
3) Fluor announced stellar earnings, with 60% coming from overseas. They are doing a huge business converting US refineries to take heavy crude from Canadian tar sands. Customers are making capital investment budgets based on crude permanently staying above $40-$50/barrel.
4) According to long term Kondratieff charts, interest rates are going to rise for the next 30 years. When we are in the assisted living facility we will be able to thrill the youngsters with tales of 4.75% 30 year fixed rate mortgages and 1% teaser rates.
5) China has become a net importer of coal for the first time in 5 years, due to snow storms and rising crude prices.
6) The National Association of Realtors said the median home sold for $196,000 in April, down 7.7% YOY. The biggest hit nationally was in Sacramento, down 29.2%.?? The numbers are artificially low because of the almost complete absence of jumbo loans for more expensive homes.
7) US coal exports are expected to rise to 79 million tons this year from 59 million tons last year, thanks to the weak dollar and rising energy prices. The US is the Saudi Arabia of coal with a 250 year supply in the ground.
THOUGHT OF THE DAY
Down 23% from its high last year, BRIC country India is worth a good look. Earnings are expected to grow 20%/ year for the next 3-5 years and can be bought for 12 X earnings. India will soon have the world's largest population. The interesting plays there are in IT and financials. Among the negatives: persistent terrorism, poor infrastructure, and the lack of domestic energy supplies. The Bombay India Sensex 30 index futures just started trading in Chicago creating an easy entry vehicle for hedge funds. See $BSN.
Market Comments for May 12, 2008
1) The US now accounts for 24% of world GDP and the emerging markets 30%. Expect the US to shrink and emerging markets to grow substantially from here.
2) The USDA put out a very negative crop report due to poor weather during the planting season. Next year's corn harvest will hit a 13 year low. Corn hit a new high for the year of $6.30 and is probably on its way to $7.50 in the next few months. In the meantime, major producer Argentina has held up exports with a new punitive export tax. Also, expect soybeans to climb from $13.50 back to the year's high of $16.50 and maybe beyond.
3) A lot of talk about RIM's announcement of its IPhone buster, the 'Bold 9000'. This 3G Blackberry has double the resolution of the old model, will cost $399, and will only be available through AT&T. Sign me up! Apple is expected to announce its 3G IPhone in the next few weeks.
4) According to the senior loan officer survey, a lagging indicator, credit continues to tighten. According to credit spreads, a leading indicator, it is easing.
5) Arson always goes up in recessions as people try to burn their way out of bad investments. This time there is a new wrinkle. People are torching their large SUV's because they can't afford the payments or gas and can?t sell the vehicles. This is especially prevalent in California.
6) Fueling global oil demand is the fact that gas is still subsidized in many countries. Gas is $3.97/gal in India, $2.40/gal in China, and $0.19/gal in Venezuela. China?s Sinopet alone lost $3 billion on the subsidy last year. This is why oil imports rose 16% in China last year, but fell 8% YOY in January in California. Last month, energy demand in China and India combined, exceeded that in the US for the first time.
THOUGHT OF THE DAY
With crude at $126 and the Bush administration having shot its wad with the stimulus package, we now have to consider a double dip or 'W' scenario for the economy. This is why the rally failed at substantial technical resistance at the 200 day moving average of 1,430 in the S&P 500, which was also the 50% retracement level from the fall high. This is why I recommended selling all of your global stocks last week, or at the very lieast aggressively writing covered calls. The choice here is to sell all your stocks and book your substantial profits from the March 17 low, or to soften the blow with options strategies, including more call writing and index options. Sell in May and go away is sounding better every day.
Market Comments for May 12, 2008
1) The US now accounts for 24% of world GDP and the emerging markets 30%. Expect the US to shrink and emerging markets to grow substantially from here.
2) The USDA put out a very negative crop report due to poor weather during the planting season. Next year's corn harvest will hit a 13 year low. Corn hit a new high for the year of $6.30 and is probably on its way to $7.50 in the next few months. In the meantime, major producer Argentina has held up exports with a new punitive export tax. Also, expect soybeans to climb from $13.50 back to the year's high of $16.50 and maybe beyond.
3) A lot of talk about RIM's announcement of its IPhone buster, the 'Bold 9000'. This 3G Blackberry has double the resolution of the old model, will cost $399, and will only be available through AT&T. Sign me up! Apple is expected to announce its 3G IPhone in the next few weeks.
4) According to the senior loan officer survey, a lagging indicator, credit continues to tighten. According to credit spreads, a leading indicator, it is easing.
5) Arson always goes up in recessions as people try to burn their way out of bad investments. This time there is a new wrinkle. People are torching their large SUV's because they can't afford the payments or gas and can?t sell the vehicles. This is especially prevalent in California.
6) Fueling global oil demand is the fact that gas is still subsidized in many countries. Gas is $3.97/gal in India, $2.40/gal in China, and $0.19/gal in Venezuela. China?s Sinopet alone lost $3 billion on the subsidy last year. This is why oil imports rose 16% in China last year, but fell 8% YOY in January in California. Last month, energy demand in China and India combined, exceeded that in the US for the first time.
THOUGHT OF THE DAY
With crude at $126 and the Bush administration having shot its wad with the stimulus package, we now have to consider a double dip or 'W' scenario for the economy. This is why the rally failed at substantial technical resistance at the 200 day moving average of 1,430 in the S&P 500, which was also the 50% retracement level from the fall high. This is why I recommended selling all of your global stocks last week, or at the very lieast aggressively writing covered calls. The choice here is to sell all your stocks and book your substantial profits from the March 17 low, or to soften the blow with options strategies, including more call writing and index options. Sell in May and go away is sounding better every day.
Market Comments for May 9, 2008
1) Crude hits $126. Fact of the day: The US uses 25 barrels of crude per person per day, Europe 12, Japan 6, and China 1. Natural Gas hit $11.60, which I expected.
2) Google has become the oxygen of the Internet and is going from strength to strength. It has 70% of the US search market, but so far only 7% of the US advertising budget is being spent on the Internet, leaving plenty of room for growth. Its YouTube asset, which gets 130 million viewers a day, more than on a Super Bowl Sunday, hasn't even been integrated into its business model yet and has huge potential. I recommended the stock at $420 earlier this year and believe it could eventually hit $800.
3) According to the Fed outstanding commercial paper stands at $1.75 trillion, a two year low, indicating continuing credit concerns.
3) Bankruptcies in the US are up 49% YOY to 235/day.
4) Walmart earnings came in better than expected as consumers flock to low cost retailers at the expense of middle and upper tier ones. I recommended the stock at $46 in January. It is now up 24% and is approaching a four year high.
5) Both the ECB and the Bank of England left rates unchanged. While the ECB's Trichet may remain stubborn, the BOE is expected to cut rates by 25 bp, every other meeting, for the rest of the year for a total of 75 bp. Buy yen and sell the pound.
6) According to Business Week this recession is being borne entirely by men. Since November 700,000 men have lost jobs while 300,000 women have gained jobs. This may be because women work harder than men for less money and are generally nicer to be around.
7) China has just surpassed the US as the world's largest Internet user.
THOUGHT OF THE DAY
Ford may be the first US carmaker to emerge from the graveyard. They are taking the lead in introducing new hybrid models like the Escape SUV. In August it will introduce a version of its famed F-150 pick up truck that gets 60 mpg. They are doing what they can to pare legacy costs by cutting back the participation of unions and spinning off the health care liabilities of retirees. There may be a 50% move in the stock from here at $8. Raider Kirk Kirkorian thinks so, who has been a steady accumulator of the stock the last few months.