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.

Market Comments for May 8, 2008

1) New high for crude at $124.60. Who has been the best speculator in the market? George Bush. The strategic petroleum reserve hit an all time high of 727 million barrels, which equates to 58 days of US imports. Every one of these barrels could be sold now for a profit. Natural Gas, which I recommended in January at $7.75, has been the best energy play this year, up 41%. Crude is up only 26%.

2) Tom Thornhill of Vinum Capital is raising $250 million to invest in vineyards in California. There are 2,500 vineyards in the state, 80% of which are family owned and many lose money. Up to 50% of these are expected to change hands over the next 10 years and Thornhill hopes to provide an exit strategy for these owners. Thornhill, who employs eight full time wine professionals, will then add value by bringing in professional management, gaining economies of scale, and building a family of brands. In the meantime the demand side of the equation for premium wine is improving the increase in consumption by the boomer and millennial generations.

3) Toyota announced a Q1 net of $3 billion, down 28%, on sales of?? +3.8%. The company is getting hit with a double whammy of falling US sales and falling yen proceeds from those sales because of the weak dollar. Growth in emerging markets was gangbusters. The company expects global sales to rise only 1.6% in 2008. It has sold 1.4 million hybrids so far. This has always been a great company with a boring stock. Since they are virtually 100% internally financed they never raise outside equity, so the stock never gets promoted by brokers. It is still a nice 'tell' on the state of the global economy.

4) Colorado State University, which has one of the most sophisticated weather forecasting models out there, is predicting that there will be eight hurricanes this season, and that four of these will be major. The season runs from June 1 to November 30. There is a 69% chance that one of these will make landfall, compared to 52% for past years. Current energy prices are not factoring in these risks at all. Natural gas hit $15 during Katrina three years ago.

THOUGHT OF THE DAY

The next crisis facing the US will be the skyrocketing number of aging poor. Now that the baby boomers are starting to collect social security the number of retirees is expected to double to 72 million within the next 15 years. Only 18% of workers have corporate pensions compared to 60% in the sixties. In the meantime the median 401k account is only worth $31,000. Health care workers are currently the fastest growing job sector. No doubt the government will be asked to step in and pay for all of this.

Market Comments for May 7, 2008

1) Weekly crude inventories jumped 5.7 million barrels. Crude prices fell $1.50, then soared $3 to a new all time high of $123.80. Traders are gunning for $125 within the next week. This has become a one way bet. There is now so much excess oil in the system that storage facilities are running short. Tankers will soon have to start steaming in circles at sea because storage facilities at every part of the supply chain are full, as they have during past oil peaks. OPEC oil revenues are expected to increase from $664 billion in 2007 to $1 trillion this year.

2) Cisco came up with better than expected earnings. Their Asian sales came in hot, US sales eked out a small increase, while European sales came in very slow. It is becoming a predictable pattern. The stock rose to $27, up 10% from when I recommended it in March.

3) Toyota is bringing out the third generation Prius in 2009. The car will be four inches longer and the engine will grow from 1.5 to 1.8 liters. Thanks to a redesigned hybrid package it will also have better mileage. Incredibly, the car will keep the same base price of $21,000. Talk about giving the customer everything he wants! Toyota could get double that with gas on its way to $5/gallon. Clearly the hybrid market is something that Toyota wants to own. GM take note.

4) The National Association of Realtors says that March pending sales were down 20.1% YOY. They predict that prices will fall 2.4% this year. Don't tell that to home sellers in Stockton, California, the foreclosure capital of the US!

5) Sprint Nextel announced a joint venture with Comcast, Google, and Time Warner to build a Wimax network. Wimax will take your local hot spot at Starbucks and give it a 50 range. AT&T and Verizon are already building a competing network called LTE. This will be the Next Big Thing.

THOUGHT OF THE DAY

When we get a democratic president in January the war in Iraq will either be substantially wound down or ended. This will reduce what has been a major drag on the economy for the last six years. So far the war has burdened the US with $1 trillion in direct costs and another $1 trillion in indirect costs. This is one of the reasons that the US stock market has been the world's major under performer this decade. The S&P 500 index return since 2000 has been zero. Take the war away and US stocks will do better. Crude prices will also ease.

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.