June 1, 2009

Global Market Comments
June 1, 2009

Featured Trades: (CRB), (GOLD), (CRUDE), (SILVER), (MEE), (FCX), (MSFT), (ORCL), (INTC), (CSCO)

1) If you have been aggressively long commodities of every size, shape, color, and flavor, as I have been all year, then you just had one of the best trading months of your career. The CRB index rocketed by 17% in May, the best move since the early days of the first oil shock in 1974. That year I spent weekends driving my Volkswagen van from Los Angeles down to Mexico, where I filled it with jerry cans of gasoline because it was still selling for 25 cents a gallon there (an early attempt at arbitrage). I finally sold the vehicle and used the cash to buy a one way ticket to Japan (Remember that John E?). My favorites went up the most. Crude leapt 29%, Silver clocked in a 23% return, and gold was up 9%. The producing stocks also did spectacularly well. Coal producer Massey Energy (MEE) soared by 44%, dragged up by oil, while my beloved Freeport McMoran (FCX), with the world's largest gold and silver reserves, rose by 30%. While these things are all superheated on a short term basis, the ten year agreements are still good. You can find massive Chinese buying behind almost every one of these. Hmmmm, I wonder if those bell bottoms still fit.

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2) Expect to hear a lot about ignition in the next year. No, I don't mean the rebuilt ignition for the beat up '68 Cadillac El Dorado up on blocks in your front yard. I'm refering to the inauguration of the National Ignition Facility next door to me at Lawrence Livermore National Labs. The home of the hydrogen bomb was set up amid the vineyards and cow pastures of this bucolic California suburb so if someone accidently flipped the wrong switch, it wouldn't blow up San Francisco, or more importantly, Berkeley. The $5 billion project aims 192 lasers at a piece of frozen hydrogen, using fusion to convert it to helium and unlimited amounts of clean energy. The heat released by this process reaches 100 million degrees, hotter than the core of the sun, and will be used to fuel convention steam electric power plants. There is no need for a four foot thick reinforced concrete containment structure that accounts for half the construction cost of conventional nuclear plants. The entire facility is housed in a large warehouse. The raw material is seawater, and a byproduct is liquid hydrogen, which can be used to fuel cars, trucks, and aircraft. If this all sounds like it is out of Star Trek, you'd be right. I worked with these guys in the early seventies, back when math was used to make things, and before it was used to game financial markets, and I can tell you, there is not a smarter and more dedicated bunch of people on the planet.  If it works, we will get unlimited amounts of clean energy for low cost in about 20 years. Oil will only be used to make plastics and fertilizer, taking the price down to $10 for domestic production only. The crude left in the Middle East will become worthless.  Coal will only be found in museums, or in jewelry. If it doesn't work, it will melt the adjacent Mt. Diablo and take me with it. If you don't get your newsletter tomorrow, you'll know what happened.

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3) The US is turning into Europe. Think high taxes, chronic high unemployment, more government involvement in everything, less innovation, and much lower growth, in exchange for a social safety net and better coffee. That is the message the markets told us by retreating to the 6,000 handle in March, levels not seen since 1996, and down 54% from the 2007 peak. Equity prices are shrinking to multiples, in line with a permanently lower long term growth rates of maybe 1%-2%, a shadow of the 5% rate seen for much of this decade. Perhaps this is what mature economies are supposed to look like. If someone is holding a gun to your head and you must buy American stocks, only select names that get the bulk of their earnings from overseas. Microsoft (MSFT), Intel (INTC), Oracle, (ORCL), Cisco (CSCO) all get 60%-70% of their profits from overseas, where up to 90% of the real economic growth will come from for the next decade. Commodity and agricultural companies and ETF's also fit this picture. As for me, I think I'll move to Tahiti and live off of coconuts and freshly speared fish, wearing only a loin cloth. Anything is better than becoming French.

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4) It's another sign of the times when the weekend fruit picker population is doubled by people hard hit by the economy,  looking to save money on food costs. After driving through miles of undulating brown hills studded with oak trees, passing mile upon mile of horse ranches, rusted out cars, and abandoned mobile homes, you come to Brentwood, the fruit capital of Northern California. There, thousands of families harvested ripe bing cherries and peaches at the wholesale price of $1 a pound, fruit that normally costs $6 a pound at the supermarket. Anything you eat in the orchard is free. All a great deal if you don't mind having purple fingertips at the end of the day. Just watch out for the cars pulled over on the side of the road on the way home, their occupants puking out all their excess cherries. In a nod to the 21st century, growers in this Grapes of Wrath industry compile lists of email addresses, and notify their itinerant fruit pickers which crops are ready for harvest via the Internet. Also on the calendar this season are grapes, apples, apricots, plums, loquats, nectarines, mandarin oranges, and wheel chair accessible walnuts (?). At the end of each harvest, professional crews sweep through and pick up what's left, if the prices will bear it. If you wonder why we put up with the earthquakes, high taxes, gridlocked politics, and a non functioning state government, this is the reason. By the way, does anyone know what to do with 25 pounds of cherries? Send me your recipes.

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'You have to be very careful giving up analogue dollars for digital pennies,' Said Jeff Zuker, CEO of NBC.

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