Use Your Head.

Below is a view of the documents from Sam Israel's Bayou Management's funds:


Please take a look at Bayou's email address.

IF THIS ISN'T A RED-FLAG, YOU SHOULD STICK TO MUTUAL FUNDS!!

The Global Picture

When the housing crisis and credit crunch first gained momentum, the consensus was that the meltdown was relatively isolated within the U.S. and did not present itself to be a serious contagion.

The rest of the global economies and financial markets would decouple from the mess, especially those in emerging markets with double digits GDP growth and in countries awash in petrodollars.

Now, the rest of the world is taking a hit. Optimistically, this has led to the recent strengthening of the dollar as investors take flight from other currencies. However, it may also contribute to a decrease in exports and a lower demand across the globe for American goods; one of the few bright spots that still remains today.

Here We Go Again!

At 4:26 PM EST, Apollo Global Management LLC Filed an amended prospectus. Here we go again! Did we learn nothing from FIG/GLG/OZM?

Now You're In Trouble.

As of 6 AM EST, Longs Drug Stores (NYSE:LDG) is in serious, serious trouble. Bill Ackman's Pershing Square funds have filed a 13D disclosing a stake in LDG.
Good Luck LDG...You'll need it.

**CORRECTION: This post stated earlier that TP LLC had a stake in LDG. THIS WAS INCORRECT. We appologize for the error.
*DISCLOSURE: Through one of my holdings I have very limited exposure to Bill Ackman's Pershing Square.

Memories of a Time Before the Credit Crunch

While looking through a fund's debt holdings, I came upon the following bond issue:

ARE YOU KIDDING!? Yes, that's right...a THIRD lien unsecured bond with a PIK-TOGGLE with an 8.80% coupon. That's only a few hundred basis points above the FED FUNDS rate a few months ago! If this isn't the quintessential sign of a credit bubble, I don't know what is.

Trouble Ahead for the Orient Express

As of 6:15 AM EST this morning, the Board of Orient-Express Hotels Ltd (NYSE:OEH) has had a target placed on themselves. In a filing with the SEC, David E. Shaw's DE Shaw Group (including TWO client hedge funds and a prop fund) and Stevie Cohen's CR Intrinsic Investors have formed an investor group targeting the Board's continual approval of what the Group calls an illegal corporate structure. When two of the smartest guys on Wall Street send you a letter, don't respond with a four-line rebuttal saying, "We didn't do it". OEH - you're in big, big trouble.

Bank Consolidation

The financials have taken a huge hit thanks to the government takeover of IndyMac Bancorp. This marks the second largest bank failure in the history of the U.S. and is also causing much concern among the smaller regional banks putting downward pressure on their shares. Today on CNBC they showed images of a "modern" bank run with people lining up outside the IndyMac branches waiting to get their money. I thought bank failures were a thing of the past, but the credit crisis has struck down another victim and will continue without consolidation within the banking industry. The Federal Deposit Insurance Corporation which insures deposits up to $100,000 nationwide, has a watch list of 90 banks that could potentially fail, but the bad news is that IndyMac wasn't on that list. One can only speculate on which bank is next but there was a major scare that National City was going to be next until they halted trading and released a statement claiming that they had sufficient capital to back their deposits. The major problem for the banks is that all the money they receive in deposits is immediately thrown out of the door in loans, but with these loans not being paid on time the bank is left with no money to pay back their customers or finance anything else the company wishes to do. There is a solution to the problem though and that involves M&A activity in the banking sector. It could come in a number of ways... maybe a merger between two banks that would fail alone but survive together, maybe a large bank acquiring another small commercial bank that will broaden its portfolio among others. The 90 bank list doesn't include any investment banks, however they too are under pressure after the fallout of Bear Stearns. Look at Lehman Brothers for example. Shares have been blasted in the last week of trading and many experts say the only way to save the bank is for it to become part of another. The lack of liquidity and capital in the market is changing the game for banks. No longer can they just throw money around and be rewarded. Only the smart and lean banks will make it through the storm.

What Sectors Work Now?

The major stock averages in the United States have clearly entered into bear territory, but the question that remains is if anything in these markets work right now. After listening to many experts there seems to be a consensus that health care and energy are performing comparatively well right now, with financials dragging down the market.

Personally I'm not sold on health care since consumer's budgets are becoming tighter and health care related inflation is a main concern for the entire sector, however companies that produce supplies for health care related businesses will handle this bear market fairly well in my opinion.

Energy is a no brainer right now with oil reaching a new high of 147.27 today during trading. The recent rise in crude prices has been largely due to the tensions in Iran. We might see a slight pullback as tensions decrease however energy prices this high are going to create large profits for companies in the business. When they start reporting earnings in the next month these stocks should go even higher.

Some people, myself included, think that this downturn in the market has provided great opportunities for long term investing. Many sectors might not be yielding great returns for the 3rd quarter but in a year might appreciate in price. I think retail is getting hammered because of higher oil prices but as they decline their numbers should become better. However if oil falls $20 a bbl then we should see some relief in these stocks. The sector I like best for the long term (1-2 years) is industrials. Continued demand from overseas and a weak dollar is going to help generate better earnings for the future. Companies like Boeing (BA) and United Technologies (UTX) have fell recently offering great deals on quality stocks.

Oil Drives the Market

Over the last week market prices have been reacting very negatively to oil prices and we will likely see more today when trading begins. One thing that is starting to be mentioned more and more in the news is the effect this will have on inflation in our country. Higher oil prices don't always cause higher inflation, however at current levels this is a major concern. Consumers should be weary at the pump with gas over $4.00 per gallon but they should also be weary at the stores they visit whether it be the mall or a grocery store. Prices are on the rise because transportation costs are increasing and producers are beginning to transfer these higher costs to consumers. With the economy as it currently is this is potentially frightening news because people are already strapped for money as is and with higher prices something has got to give. Some are calling for stagflation which is when growth in GDP and employment is slow while prices are rising. Every time stagflation comes up the next thing that comes to mind is the Fed, since we assume that the Fed can control economic conditions limiting the chances of actual stagflation. This is very true for the most part, but the past will tell us that stagflation does occur in the U.S. (1970s -Oil Shocks)

When combating this problem the Fed needs to use current and reliable data, not predictions from analysts at investment banks and oil and gas companies. Two numbers that I have heard recently are $150/barrel in July 2008 and then $250/barrel by the end of 2009. Don't forget that there are a million other estimates out there some below current market prices and some above (the consensus is probably above). I'm sure both the companies that issued these target prices were wrong in their predictions about current prices, so why are people so quick to believe them now. The quick answer is that people want to believe that prices are predictable and that we have the knowledge and information to effectively pick out precise targets. Well I'm here to say that things aren't as easy as it seems. Prices could go anywhere from here because oil markets are not trading on purely fundamentals anymore which can be seen from the $10 move it made on Friday. Traders are putting in longs and shorts that may backfire if the smallest bit of news hits the wires. Plus now OPEC and Congress are in the mix which means things must be out of line and need "correcting." Knowing that oil doesn't trade/price fundamentally makes it even harder to target a price. I just advise caution before making conclusions from oil price targets.

The New iPhone

Apple released the details on its new iPhone that is scheduled to hit AT&T stores on July 11th. The look is very similar however it will run on a 3G network which is much faster than the normal EDGE market AT&T has currently. Other features will include a longer battery life and a different style keyboard. The biggest news on the iPhone is the price which is going to be around $200. Comparing this to the original iPhone price of $400 this seems to be a fantastic deal, but my concern is that this price is only for people who sign-up for a new 2 year contract. What about all the people who already have iPhones? For them to upgrade they will be paying a much higher price. There is definitely market share out there but not as much as people seem to think. Doubting Steve Jobs and Apple Inc is not the smartest thing to do, but many people believe the reason the stock price was down yesterday on the release was because this product is not going to be an instant success.

I know people in the past have made disclosures about stocks they own on this blog so I will keep it consistent here when offering opinions on products. I currently own a Blackberry Curve.