Hedge Fund Manager's Notebook: Oil and Financials in Play

1) Weekly crude (USO) inventories soared by a record 9.4 million barrels as demand destruction accelerates, knocking the price down $5 to $12.50. The world is clearly producing more crude than it is using, but there is still no margin for error on the supply side. Several big hedge funds are now targeting a move to $86 before year end.

2) Maudie Hopkins, one of the last surviving confederate army widows, died at 93. In 1934, at age 19, she married an 86 year old veteran of the Civil War who died shortly thereafter. She has been collecting a government pension ever since. The Veterans Administration is still paying pensions to a half dozen similar widows from both sides of the civil war, which ended 143 years ago. One is collecting a pension from a late Civil War veteran and a WWII veteran.

3) The US share of world GDP has fallen from 50% at the end of WWII to 21% today, and is expected to fall to only 18% in the next ten years. It won’t be the end of the world. Holland’s world GDP share peaked in 1617, and things are not so bad there.

4) Lehman (LEH) stock collapsed again, by 15% yesterday to $12 as the incredible shrinking Lehman story continues. One report predicted that LEH will soon write off another $4 billion in assets. If they sell their $40 billion real estate portfolio and their money management division the firm will be back where it was strategically in 1995, a much smaller, less profitable entity. Most senior staff have seen the value of their stock options wiped out and are expected to bail soon, including CEO Richard Fuld.

5) Fears that the next wave of defaults will come from the commercial real estate sector have driven listed developers down to absurd levels. Stocks are now discounting a doomsday scenario which may of may not happen. Best of breed here are the Westfield Group (HQR.BE), developer of malls in the US, Australia, and New Zealand, and Japan’s Mistubishi Estate (8802.TO), the largest owner of space in Tokyo’s Marunouchi business district.

6) Fannie Mae (FNM) and Freddie Mac (FRE) hit new lows on concerns that a Fed bailout may not come. With FNM at $4 and FRE at $3 they are now trading at the value of a perpetual option with a zero strike price and an incredibly low implied volatility. Cheap. The two together own half the mortgages sold in the US. If they do go under China and Russia will declare war on the US because they hold so much of their paper. If these two don’t go bankrupt they will generate stock returns of several hundred percent. These look like the airline stocks that I recommended two months ago that brought in an immediate fourfold return.

Full disclosure: no long or short positions in any stocks mentioned.

Comments

[Lisa:]

"Fannie Mae (FNM) and Freddie Mac (FRE) hit new lows on concerns that a Fed bailout may not come. With FNM at $4 and FRE at $3 they are now trading at the value of a perpetual option with a zero strike price and an incredibly low implied volatility. Cheap. The two together own half the mortgages sold in the US. If they do go under China and Russia will declare war on the US because they hold so much of their paper. If these two don’t go bankrupt they will generate stock returns of several hundred percent. These look like the airline stocks that I recommended two months ago that brought in an immediate fourfold return."

I'd be interested to hear: What's stopping you from buying them?

2008 Aug 21 03:14 PM

[Fish Gone Bad:]

1) Weekly crude (USO) inventories soared by a record 9.4 million barrels as demand destruction accelerates, knocking the price down $5 to $12.50. The world is clearly producing more crude than it is using, but there is still no margin for error on the supply side. Several big hedge funds are now targeting a move to $86 before year end.

>Oil is currently going up. T Boone Pickens was indeed right, the bottom was around $110. Until the fear of conflict is resolved, oil should continue to increase. There is still plenty of time to buy oil stocks or the ETF: DIG, and make some money on the way up.

6) Fannie Mae (FNM) and Freddie Mac (FRE) hit new lows on concerns that a Fed bailout may not come. With FNM at $4 and FRE at $3 they are now trading at the value of a perpetual option with a zero strike price and an incredibly low implied volatility. Cheap. The two together own half the mortgages sold in the US. If they do go under China and Russia will declare war on the US because they hold so much of their paper. If these two don’t go bankrupt they will generate stock returns of several hundred percent. These look like the airline stocks that I recommended two months ago that brought in an immediate fourfold return.

>It is not a good idea to compare airlines with corrupt financials. There are certain things airlines can do, that people can not do without. The same can not be said for Fannie and Freddie. The financials were run up today before Bernanke's speech on Friday in anticipation of good news. As there is no good news, there is still little reason to own these two companies. People keep trying to predict the bottom of the financial crisis. Being ignorant of the current financial crisis does not make it go away.

Clark Jenkins
FishGoneBad.com

2008 Aug 21 08:45 PM