May 1, 2009

Global Market Comments
May 1, 2009

Featured Trades: (COAL), (TBT), (SPX), (CRUDE), ($USB), (BAC)

1) OK guys, it's May. Go Away. I mean vamoose, andele, raus, ike nasai! You've just had the best two month run in 30 years. It's time to sit down and smell the roses. Go climb that Alpine peak you've always wanted to attempt, finish off that basement, or take the misses down to Cabo. Maybe your nine iron needs some work. Whatever. There are no decent risk/reward trades in the market right now. All of my long recommendations, like emerging markets, commodities, crude, and junk bonds, are through the roof. My shorts have cratered, with the 30 year Treasury bond futures down a whopping 20 points, from 142 to 122. All of my longs are way overbought, and my shorts are oversold. I can't in good conscience ask traders to just sit on big unrealized profits. Never slap a double in the face, especially in this environment. Nobody ever got fired for taking a profit. Always leave the last ten percent for the next guy. There is no law that says you have to trade every day of the year. Better to reestablish at better prices, like in August. If you strapped on any of these trades, the first four months of 2009 gave you a great year. If you didn't, don't break your back playing catch up. It's not worth it. As for me? I'm going down to Vegas to shop for condos at ten cents on the dollar and do some actual gambling.

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2) I wanted to get the low down on clean coal, a political hot potato in the energy sector, so I visited some friends at Lawrence Livermore National Laboratory. The modern day descendent of the Atomic Energy Commission, where I had a student job in the seventies, the leading researcher on laser induced nuclear fission, and the administrator of our atomic weapons stockpile, I figured they'd know. Dirty coal currently supplies us with 50% of our electricity, and total electricity demand is expected to go up by 30% by 2030. The industry is spewing out 32 billion tons of carbon dioxide (CO2) a year and the global warming it is causing will lead us to an environmental disaster within decades. Carbon Capture and Storage technology (CCS) locks up these emissions deep underground forever. The problem is that there is only one of these plants in operation in North Dakota, a legacy of the Carter administration, and they cost $4 billion each. The low estimate to replace the 250 existing coal plants in the US is $1 trillion, and this will produce electricity that costs 50% more than we now pay. And while we can build a wall to keep out immigrants, it won't keep out CO2. This is a big problem as China is currently completing one new coal fire plant a week. In fact, the Middle Kingdom is rushing to perfect cheaper CCS technologies, not only for their own use, but also to sell to us. Since it appears that Obama is not willing to wait on anything, expect to hear a lot of sturm und drang about CCS this year. For proof of this, look at the chart of coal prices below. While competing crude has had a good year so far, coal has been dead as a doorknob.

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3) With luxury spending in free fall, it is no surprise that the wine market has crashed. The Liv-ex 100 Fine Wine Index, which tracks the performance of 100 mostly premium Bordeaux wines less than 25 years old, has plunged by 22% since its 2007 high, and there is no support in sight. The market is coming off a spectacular run up which saw prices nearly triple in the previous five years. Gone missing from the market have been newly wealthy Chinese social climbers, hedge fund managers, and former corporate titans. Typical is Chesapeake Energy (CHK) CEO Aubrey McClendon, who resorted to a distress sale of his multimillion dollar wine cellar after a highly leveraged bet in his own company's shares went wrong. With the recession driving many wine wholesalers out of business, more inventory is being dumped on the market, driving prices lower. For the brave at heart there is the Cayman Islands based Vintage Wine Fund which invests in a portfolio of fine wines and charges hedge fund type 2%-20% fees with quarterly redemption. The fund has posted a 26.8% annualized return since its launch in 2003. As for me, I am happier as a wine consumer than a wine investor. See you at Costco.

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4) So many hedge funds are happy to bet against Bank of America (BAC) that prime brokers are reporting shortages of stock available for borrowers who want to short it. Those willing to bet that the financial crisis is anything but over will have to pay a premium to do so.  BAC quadrupled off its February low to $11.25, and even some of the most loyal shareholders don't mind taking some money off the table here.

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'The markets are in LALA Land at the moment, but soon John Wayne will kiss his costar and the lights will come on,' said John Brown, senior market strategist of Europacific Capital.

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