Global Market Comments
March 18, 2010
Note to Subscribers: there will be no letter tomorrow as I am taking a research day.
Featured Trades: (SPX), (VIX), (MSFT),
(INTC), (ORCL), (CSCO), (IDX),
(NATIONAL IGNITION FACILITY)
2) The US is turning into Europe. Think high taxes, chronic 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 a year ago, levels not seen since 1996, and down 54% from the 2007 peak. Equity prices have to shrink to multiples, in line with permanently lower long term growth rates of maybe 2%-2.5%, a shadow of the 3.8% rate seen for much of the last decade. Hint: that's lower than here. 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 are really foreign stocks in disguise and 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, agricultural companies, and their 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.
3) 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 referring 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 BB sized 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, its original use. 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.
4) If you are looking for another emerging market to add to your list of things to buy on big dips, then take a look at Indonesia. The world's largest Muslim country offers a combination that I love, a population with great demographics that is also a major energy and commodities exporter. The archipelago is the biggest country in Southeast Asia and a huge exporter of oil and LPG to Japan on long term contracts. (An old friend of mine torched their Borneo fields at the beginning of WWII, and spent four years in a Japanese prison camp for his troubles.) Other big exports include marvelous textiles, rubber, and increasingly rare tropical hardwoods. The global financial crisis only knocked their growth rate from 6.1% to 4.5%, and now it is back above 6%. No doubt, $63 billion of direct foreign investment into the country last year helped. A series of tax reforms promise to keep the train moving, cutting the top corporate rate from 30% in 2008 to 28% in 2009, and 25% this year. Wisdom Tree had the 'wisdom' to launch the country's first ETF (IDX) a year ago (what timing!), which became one of the best performers of 2009, rocketing over 300% from the lows to $60. Islamic inspired terrorism is still a lingering concern. I keep Indonesia in the category of highly volatile, high risk, high return frontier markets that you only want to buy on a big dip. Keep it on your radar.
QUOTE OF THE DAY
'The people who have been bearish have been very frustrated. They see their neighbors out of work. They see the pain on people's faces. They have a hard time reconciling this with stocks that are going up,' said futures trader Peter Yastrow of Yastrow Origer.