December 18, 2009

Global Market Comments
December 18, 2009

Featured Trades: (DBA), (MOO), (PHO), (FIW),

1) I spent an evening with Lester Brown, president of the Earth Policy Institute and a winner of the coveted MacArthur Prize, for some long term thinking about the environment and its investment implications.  Global warming is causing the melting of ice sheets in Greenland and Antarctica, glaciers in the Himalayas, and the Sierra snowpack. Water tables are falling and fossil aquifers are depleting. In the coming decades this will cause severe shortages of fresh water that could lead to crop failures in India, China, where one billion people depend on mountain runoff to irrigate crops, and even California, which delivers 80% of America's fresh vegetables. . The fresh water inputs in one person's food and materials consumption works out to some 2,000 liters a day. That is no typo. As a result, all food prices will rise. To head off the greatest threat to the global food supply in human history, we need to cut carbon emissions by 80% before 2020, not 2050, as is being discussed in Copenhagen. This can only be accomplished by redefining food and the environment as national security issues and launching a wartime mobilization. These difficult goals are achievable. Enough sunlight hits the earth in a day to power the global economy for a year. Texas alone has 20 gigawatts of wind power operating, under construction, or planned, enough to take 5% of our 250 coal fired power plants offline. Electricity demand could be cut by 90% purely through greater efficiencies, like switching from incandescent bulbs to LED's. Europe could get its entire 300 gigawatt power supply from solar plants in North Africa at current market prices. Cars powered by wind generated electricity would bring fuel costs down to an equivalent 75 cents a gallon, as electric motors are three times more efficient than internal combustion engines. While Brown's predictions are a little extreme for many, they mesh perfectly with my long term bullish cases for food and water plays. Take another look at the food sector ETF's, (DBA) and (MOO), and the water space ETF's (PHO) and (FIW).

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2) Is your bank giving you the cold shoulder on your last loan application, not retuning your phone calls, or asking for interminable documentation? Just bypass them. Try an online peer to peer bank, the Internet's answer to the financial crisis. With massively expensive branch networks, 19th century loan processing, inches of closing documents, and a boatload of regulation, banks are ripe for cannibalization by low cost predators. I had a chance to speak to several of these entrepreneurs in San Francisco. The simplest model matches a one page online loan application and FICO score with a single lender at interest rates of around 9%, plus a small fee. More advanced organizations pool borrowers and lenders, and offer secondary markets for loans, if you want to cash out before maturity. Prosper has been around the longest, and unfortunately was early enough to get sucked into the subprime debacle. They have since relaunched their product with tightened lending standards. Lending Club came next, followed by Pertuity Direct and National Retail Fund. People Capital is pursuing a niche market matching up student borrowers with lenders. We are not far off from the sector being viewed as a new alternative asset class, with the total loan book now exceeding several hundred million dollars. With online fixed overheads near zero, the potential to compete on margins is enormous. While this is purely a venture capital play at the moment, watch this space.

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3) My guest on Hedge Fund Radio this week is John Brady, senior vice president for interest rate products at MF Global.  You will know John well from his frequent appearances in the global business media. He will give us his surprisingly bullish views for 2010 for US and foreign stocks, bonds, commodities, and currencies. John comes to us via a career at Harris Futures, JP Morgan, and nine years as a strategist at MF Global. And no, John did not bump into Professor Barrack Obama when he was getting his MBA at the University of Chicago. Hedge Fund Radio is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For the online link to the live show, please go to or click here , then click on 'Listen Live!', and click on 'Houston 1110 AM KTEK.'  For archives of past Hedge Fund Radio shows, please go to my website by clicking here .

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'Food is the weak link in the global economy,' said Lester Brown, president of the Earth Policy Institute.

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