January 22, 2010

Global Market Comments
January 22, 2010

Featured Trades: (FXI), (GOOG), (WFC), (EL NINO)


1) After getting the FBI’s take on the Google brouhaha, I thought I get the other side of the story over dinner with Zhou Wenzhong, China’s ambassador to the United States, and the former vice minister for international affairs. Google gives us a crucial lead in the global technology race, and we should not view tampering with it lightly.  Zhou said that his country hopes that Google stays, but will continue to block access to websites, as other countries do. That’s all I could get out of him. He is a diplomat, after all. I didn’t want to risk pushing him further without getting a piece of Peking duck thrown in my face, or worst, have a more intimate relationship with his body guard thrust upon me, who was built like a giant brick with legs. The best way to reduce China’s gigantic trade surplus with the US, which zoomed up to a staggering $230 billion last year, the largest imbalance in world history, is to invest in America directly. That is easier said than done, as Sinopec’s failed bid for California oil company Unocal showed. However, they did succeed with GM’s Hummer division. If America wants to stay on the Middle Kingdom’s good side, it should quit selling arms to Taiwan, and cease encouraging independence movements in the Republic of China and Tibet. In exchange, China will oppose nuclear programs in North Korea, Iran, and Pakistan. The US should dump the old ‘cold war’ mentality, as the country’s miniscule defense budget is aimed solely at defending its very long borders against potentially hostile neighbors (How well would you sleep if you lived next door to Russia and India?). With China ranked 100th in per capita GDP, there is much the two countries can learn from each other, and there are 90,000 Chinese students in the US and 19,000 American students in China doing precisely that. The US and China are now celebrating 30 years of diplomatic relations, and Zhou himself, who’s English is nearly perfect,  has played no small part in bringing the two former enemies together. After dinner I wanted to invite Zhou’s bodyguard to spar at my dojo. But I wimped out, figuring that while his hands spoke of decades of practice in karate, judo, and kung fu and I would learn a lot, it would probably be at the expense of several broken bones. On the way out I saw him sizing me up and he winked at me, so I knew I had made the right decision.

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2)I caught an interesting interview with Howard Atkins yesterday, the CFO of Wells Fargo (WFC), gaining some insight into what is probably the best run big bank in the US. Profits soared to a record $12.9 billion in 2009, thanks to top line  revenue growth across the board in an incredibly well diversified portfolio of businesses, including insurance, brokerage, investment banking asset management, credit cards, consumer lending, and of course, home mortgages. The bank originated a breathtaking $94 billion in mortgages in Q4 alone, giving it a 25% share of the total US market. It basically stole Wachovia Bank at the height of the financial crisis, and immediately wrote down its loan book to a fraction of its face value. Loan losses in Q4 jumped from $2.9 billon to $5.4 billion, and that number will taper in 2010. But the bank is fortunately making money fast enough across all its businesses to healthily write off future losses. That eliminates the need for any further capital raises in the foreseeable future, with key ratios stronger that pre crisis levels. I am avoiding the financial sector for all of the abundantly obvious reasons. But if I had to own one big American bank, WFC would be it. I also like the cute little stage coaches they have on their checks, and a TV add program that rides out of a Louis L’Amour novel.

WFC2.png picture  by madhedge


StageCoach.jpg picture by madhedge

3) You’ll have to excuse me, but I’m sending my letter out early today so I can go over to my kids’ elementary school and help fill sandbags to keep at bay the flooding brought on by California’s torrential rains this week. This morning I checked in with some old friends at the National Oceanic and Atmospheric Administration (NOAA) in Tiburon, California, located at the abandoned Navy base that was home to the Golden Gate Bridge’s antisubmarine net during WWII.  They warned me that our El Niño winter (check their site ) could deliver a drenching 10 inches of rain this week, in a state that normally sees 20 inches a year. So named because all of the fish disappeared off the coast of Chile one Christmas years ago, El Niño’s are caused by a sudden warming of ocean temperatures in the Central and Eastern Pacific, which lead to unusual weather patterns here. During the last El Niño in 1998, the rainfall in San Francisco soared from 20 inches to 100 inches, the American River dykes broke, railroads were destroyed beyond repair, the Sierras got pelted with 40 feet of snow, and species of fish like mahi mahi normally found in Hawaii suddenly hit the hooks of delirious fishermen in San Francisco Bay. Australia endured a terrible drought. This could all be great for wheat prices and bad for insurance companies, and no doubt this is one of the painful dividends of global warming.

ElNino-1-1.jpg picture by madhedge


Sandbag.jpg picture by madhedge


‘Easy money is the mother’s milk of speculation,’ said ‘Trader Mark,’ publisher of the hugely successful investment website www.fundmymutualfund.com

Breastfeeding.jpg picture by madhedge


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