April 2009

April 30, 2009

The Mad Hedge Fund Trader
Global Market Comments
April 30, 2009

Featured Trades: (TBT), (EUROYEN)

1) The whir of the printing presses again spooked the bond market, taking ten year Treasury bond yields up to 3.14%, and the 30 year to 4.10%, a one year high. This is going to be a recurring event over the next several years, and a short in long term Treasury bonds should be a core position in any portfolio. My favorite play here, the Power Shares Lehman 20+ ETF (TBT), a 200% short play on the sector, has been on an absolute tear, up 40% since January. We are early days into this trade, and once inflation hits, the TBT could see a spike to $200 in its lifetime.

TBT-5.png picture by sbronte

printingpress1.jpg picture by sbronte

2) If you are looking for a great leading barometer of risk taking by hedge funds, take a look at the euro/yen cross rate. After trading as high as ??170 in 2007, it plummeted to a low of ??114 earlier this year. It then took off like a scalded chip three weeks before the S&P 500 made its prophetic 666 low on March 9. This is a valuable cross rate to track because traders can finance their positions for free by borrowing in yen and investing in other currency denominations. Although the chart below looks remarkably like that of the Dow, my bet is that hedge fund money is pouring into commodities and emerging markets and their corresponding stocks in the US. Think commodity producers and technology. Watch the euro/yen.

Euroyen.png picture by sbronte

chimpanzee2.jpg picture by sbronte

3) I met with one of my old college professors last night, Dr, Robert Heller, former CEO of Visa and governor of the Federal Reserve Board. Dr. Heller thinks that the next crisis to hit the financial markets will be a spike in interest rates similar to one that took the prime rate up to 20% in the early eighties. Obama is running the printing presses at such a furious rate that an explosion in inflation in 2011 or 2012 is virtually guaranteed. Treasury bond markets will get decimated. The only way to protect portfolios from this deluge is to buy low yielding Treasury inflation protected securities (TIPS). The US needs large banks with a global presence to stay internationally competitive. Dr. Heller argued that the only regulatory solution to the current melt down of the financial sector is to fence off the risk and deposit taking operations of the big institutions. The extreme volatility caused by hedge funds is keeping the 'real' long term investors, individuals and pension funds, away in droves. I think this means that Morgan Stanley (MS) and Goldman Sachs (GS) will have to stop pretending to be banks and 'come out' as the mega hedge funds they really are. The only professor to ever give me an 'A' in an economics class, Dr. Heller still has the same fire he possessed at UCLA 35 years ago.

4) If you can't find jobs for your workers, just deport them. That seems to be Japan's answer to the soaring unemployment rate brought on by a collapse in the country's exports, down 45.6% YOY. During the late eighties, when companies were wringing their hands over labor shortages, the government launched a program to import workers from Brazil and Peru. Thousands of decedents of Japanese plantation workers who emigrated there a century ago applied, with names like Juan Suzuki and Pedro Tanaka. Today there are thought to be as many as 366,000 in the Japanese-Latin American community. The government has offered free air fares and moving subsidies. The move is reminiscent of the mass deportation of Turkish workers by Switzerland, the 'gastarbeiters', during the eighties, also for economic reasons. The policy is especially puzzling, given that with the world's lowest fertility rate, a labor shortage is believed by many to be the greatest challenge to the country's long term economic viability. But ethnic purity has always been a priority of many conservative Japanese politicians who found the move towards a multiethnic society unsettling.

QUOTE OF THE DAY

'We may be in the seventh inning, but unfortunately it's a double header', said Jack Dunne of FTI consulting, a restructuring specialist.

April 29, 2009

Diary

Global Market Comments
April 29, 2009

Featured Trades: (JNK)

1) Q1 GDP came in at minus 6.1%, much worse than expected, hitting the economy's green shoots with a fatal dose of herbicide. There will no doubt be some at the Fed who are green around the gills over this one. There was a surprise fall in government spending, while consumer spending did better. With a good chunk of US industry either shut down or running on shortened hours, inventories are shrinking at a tremendous rate.?? Still, the market decided to look at the glass that is half full, and leapt 168 points.

2) I attended the FinovateStartup09 conference in San Francisco yesterday to get a sense of what technologies are headed our way in the financial sector. The techfest, which drew 350 attendees, was sponsored by the leading financial blog aggregator Seeking Alpha. The one liner is that I was awed, and a little frightened. It is safe to say that there is no corner of the financial industry that is not about to come under attack by disruptive, minimal overhead encumbered, Internet based business models. Peer to peer online banks, like LendingKarma, LendingClub, Pertuity, and People Capital, were in abundance, where borrowers and lending are brought together in a totally transparent fashion in amounts as small as $50. KaChing is a virtual investing environment that tracks 375,000 portfolios. Investors can hook any of these up to a real brokerage account, which then replicates the trades by any star managers. For $125, LowerMyAssessment.com will appraise your house and then file an appeal with state authorities to get your property taxes lowered. Secondmarket matches buyers and sellers of illiquid securities like CDO's, auction rate securities, bankruptcy claims, limited partnership interests, mortgage backed securities, and restricted stock. Valuecruncher allows researchers to go into the spreadsheets of analysts' company reports and change their underlying assumptions. I have to confess that I felt like a dummy after listening to eight hours of jargon like 'logic abuse', 'bolt on software', and 'man in the browser' worms. It is amazing how many entrepreneurs and their backers are taking the plunge with times so dire.

3) High yield bonds, less politely known as 'junk', have seen a dramatic improvement in the past month, making it the best performing fixed income asset class this year. With junk default rates expected to skyrocket this year, and a huge backlog of new supply overhanging the market, investors have been staying away in droves. Last year yields shot up as high as 25%, implying improbable future default rates of over 75%. The actual Q1 default rate came in at only 7.0%, up from 1.5% a year earlier, and rating agency Moody's sees a worst case scenario of 14.6% this year. But a strong stock market and the opportunity cost of zero short term interest rates was enough to entice players off of the sidelines, who snapped up $7 billion in securities in April. The improvement in conditions is a welcome blast of fresh air to companies in debt heavy industries like REIT's, hotels, and property developers. At the end of 2008, I recommended the SPDR Lehman High Yield ETF (JNK) which has since jumped by 27%. Take a look. There are more gains to come.

4) Another sign of the times. The New York Yankees announced that it is drastically slashing prices for its premium seats behind home plate at its new $1.5 billion stadium. The $2,500 seats were chopped down to $1,250 and the $1,000 seats were pared to $650.?? Season ticket holders are being showered with new free seats. The team's legendary retired manager, Yogi Berra, who threw the season opening pitch in April, once said, 'When you come to a fork in the road, take it.'

5) You would think that dentistry is a nice recession proof profession to hide out in, but you would be wrong. My dentist is a crotchety old 70 year old who delights in telling you an 'X' rated joke while giving you a root canal. It turns out that many people view dental care as the first luxury to cut when times are tough. Many patients have lost jobs and health care insurance and will only come in when something is broken or hurts, and then ask for big cash discounts. His new visits are off 70%. He's tried to make ends meet by cutting staff salaries by 20%, but it is not enough. So he will try to negotiate down his office rent when his lease comes due. It seems there is no corner of the economy that hasn't been affected by the recession.

QUOTE OF THE DAY

'Congratulations, you're going to Detroit', is not something you hear very often these days. That is what number one NFL draft pick and University of Georgia drop out Matthew Stafford was told when handed a six year, $41 million contract by the Detroit Lions.

April 28, 2009

Diary

Global Market Comments
April 28, 2009

Featured Trades: (HANG SENG), (IBM), (LUMBER)

1) There is something wrong with this picture.?? The Chinese stock market is shouting at us that the bull market is back, while the price of crude is telling us in more surreptitious tones that this is a bear market rally that will fail. If we were in a true economic recovery, crude would have run back up to the $70-$90 range by now. Who is right? Certainly large scale Chinese buying of economically sensitive commodities like crude and copper has been the hallmark this seven week move in global equity markets, which have brought a welcome $7 trillion boost in valuations. But how much of the move has been mere short covering? What is the extent of the dead can bounce? Until a recovery in corporate earnings signals the 'all clear' we could be stuck in a trading range here, possibly until the end of the year, and maybe for years. 'Sell in May and go away' is looking better by the day. Sell a few short dated calls above the market against your long positions. Pass the sunscreen?

2) Here are a few statistics about SARS (severe acute respiratory syndrome), also known as 'yellow pneumonia', the last pandemic fear that jolted the markets. In 2003, some 800 died in 25 countries, with an economic impact of $40 billion on the world economy. Then, like now, the press heralded this as the next Spanish flu. Instead it petered out in a few months. The market nearest epicenter of the crisis in China's Guangdong province, the Hang Seng, fell 25% to 9,000. I doubt this bug is going to be anywhere near as severe.

3) IBM has made public an excellent report on the long term future of the financial industry, one of its largest customers. The survey of 2,750 firms concludes that the age of extreme risk taking and huge bonuses is over. The high returns of the past, which thrived on the opacity of financial products, are history. Their guess is that profit margins will drop from an average 26% to 14%. Lower margins will be more sustainable. Long term compensation will be linked to long term gains, not short term profits. The government is going to mandate capital and liquidity cushions. Product sophistication outstripped investors' ability to manage, or even understand inherent risks. Up to 88% of past profits came from off exchange, over the counter trades that never saw the light of day. The easy money will be commoditized as the business is moved on to listed exchanges. Large hedge funds with easily replicated strategies will be under extreme pressure. It's an insightful report with more than a ring of truth which you should get your hands on.

4) With the lumber industry approaching its fifth year of what is nothing less than the Great Depression II, you'd think that this is the last place that futures traders would want to play. Prices for this commodity are driven primarily by housing starts, which have been in a death since 2006. No surprise then that lumber futures have plummeted from 70%, from $4.60 to $1.38 a contract, the lowest in 30 years. By the time you add up inventories of developers like Centex (CTX), Lennar (LEN), and Pulte (PHM), bank repossessions, and a gigantic overhang of anxious sellers desperately trying to get out of homes they can no longer afford, the number of houses for sale probably exceeds 5 million, or 8% of the total housing stock in the US, the most in 70 years. But the market thinks otherwise. The lumber industry has been downsized down to the bone through bankruptcies, mill closures, and distress inventory sales. So guess what happened in February when the trade never thought anyone would ever buy a stick of wood again? The Chinese showed up out of the blue as major buyers, triggering the ritual short covering rally, and chalking up two back to back limit up days in the futures market. Russia provided an assist by raising the tax on its lumber exports from 25% to 90%. Prices have recently settled at $1.85. I'm not by any means calling an end to the real estate crisis here, but lumber has suffered enough, and is a bargain. Smaller funds might consider using dips to accumulate longs. One futures contract get's you 110,000 board feet of 2' X 4' soft spruce, fir, and pine in mixed 8' to 20' lengths, worth $20,350, about two thirds of a rail car full. With a maintenance margin requirement of only $1,650, the contract gives you 12:1 leverage. It's a way to play the global demand for lumber without being held back by the continuing stress in American housing. If you don't need the leverage, look at the biggest producers, Weyerhaeuser (WY), Rayonier (RYN), or Louisiana Pacific (LPX) which have already had huge moves. After seeing similar Chinese moves in copper, crude, and coal, this could be further proof of the beginning of a much broader, long term bull market in commodities.

QUOTE OF THE DAY

When comparing working with Presidents Obama and Bush, House Speaker Nancy Pelosi said 'having a great intellect saves a lot of time.'

April 27, 2009

Diary

Global Market Comments
April 27, 2009

Featured Trades: (HANG SENG), (AA), (CCL), (RCL), (GILD), (RAD), (GSK), (GM), (F)

1) A few bad tacos in Mexico, and all of a sudden the world has gone apoplectic about another Spanish flu epidemic, when 5% of the global population died, or 50 million. The State Department banned non essential travel to Mexico, cratering that economy, while the EC recommended against travel to the US. With visions of SARS in their minds, which sent markets in Asia tumbling a few years ago, traders sold off the Mexican Bolsa by 4% and the Hang Seng by 2.7%, American Airlines (AA) 10%, Carnival (CCL) 10%, and Royal Caribbean (RCL) 15%. The Mexican peso got slammed in the FX markets, and commodities tanked across the board. Tamiflu makers Gilead Sciences (GILD) and GlaxoSmithKline (GSK), as well as drugstores like Rite Aid (RAD) got a nice bump. Epidemiologists say the world is long overdue for a reoccurrence of a severe pandemic, with the explosion of international trade and an exponential growth in populations. But it is highly unlikely this is the Big One. Mexico's public health infrastructure is primitive at best, and there is no biological evidence that this is anything remotely like the H5 N1 virus that caused the 1918 epidemic. With 25 million living in Mexico City in close quarters on a former swamp and a dubious water supply, this could be anything, even just the tail end of last year's flu season. Almost all of these viruses originate in China, where they make the leap from pigs to humans, and then globally. But, still, try and buy a face mask at Longs Drug Store today.

2) Over the weekend, the Financial Times published an editorial by the outspoken London School of Economics professor and former Bank of England policy board member, William Buiter, arguing that the green shoots we are seeing in the world economy are really weeds. He argued that the slowdown in the rate of decline is anything but a recovery. A real recovery won't come until late 2010 at the earliest. First, we must destroy the zombie banks by wiping out both the current equity and debt holders. Once the giant holes in the balance sheets in these institutions become obvious, there will be a second leg down in the financial crisis, and taxpayers aren't going to brook another bail out. The government's incrementalist approach to rescuing the banks and ignoring the borrowers is only prolonging the crisis. For those who believe the financials are now the new one way trade, this is all sobering food for thought.

3) A giant collective sigh of relief could be heard across California as the embattled state managed to sell $6.85 billion in general obligation tax exempt bonds. The deal is the second successful fund raising effort since a similar $6.5 billion issue was floated three weeks ago. The spigot has been turned back on for over 5,000 construction projects that were halted last December as the Golden State's coffers were about to run dry. Now construction crews are mobilizing to add new wings to hospitals, repair decrepit school buildings, add car pool lanes to freeways, and start the reconstruction of key bridges. California and its 55 electoral votes will also be the beneficiary of big government spending in alternative energy and stem cell research. The icing on the cake will be a further $97 million the federal government has committed to spend on 22 national park projects at Yosemite, Kings Canyon, and elsewhere. Economists expect the money will make a dent in a state unemployment rate that has exploded to depression levels of 11.2%, and is probably over 16% when discouraged job seekers and expired benefit recipients are added in. California is not out of the woods yet. It still has the opportunity to commit financial suicide if voters fail to approve any one of the six crucial measures in a May 19 statewide election.

4) General Motors (GM) CEO Fritz Henderson made known his final, final, last ditch offer to avoid bankruptcy. Owners of $27 billion of bonds will get 10% of the company. The unions will get 39% of the company. Pontiac will be axed. Six more plants will be closed, laying off 21,000 workers. What will happen to 3,900 dealers is still up in the air. With the stock now at $2, Fritz has very little to bargain with. Whatever car business survives this won't look anything like the GM we know. Why do I think we are headed towards a Ford (F) only nation?

QUOTE OF THE DAY

'The green shoots are weeds growing through the rubble of the ruins of the global economy,' said William Buiter, professor at the London School of Economics, and former policy board member at the Bank of England.

April 24, 2009

Diary

Global Market Comments
April 24, 2009

Featured Trades: (MS), (REIT), (PLD), (KIM), (VNO), (AMB), (CIM), (SOYBEANS)

1) The big listed REIT's are grasping for a life raft, a life preserver, or a flotation device of any description they can get their hands on. Even Pamela Anderson will do! They have used this month's ferocious short covering rally to engage in some prodigious equity fund raising, nearly $4 billion in total. Only companies drowning in debt would be raising equity at these subterranean prices. Prologis (PLD) lifted $1.15 billion, followed by Chimera (CIM) $810 million, Kimco Realty (KIM) $747 million, Vornado (VNO) $645 million, and AMB Property (AMB) $576 million. I guess management isn't sleeping too well at night. Existing shareholders are being diluted up to the gills. But half an asset is better than nothing. Many bought commercial properties with cap rates as low as 3% at the top of the market, betting that rents inflated by an endless retail boom would drag them up to 7-8% over time. The opposite happened, and some properties now have negative yields in extreme cases, with massive debt, and irate tenants pounding on the table demanding lower lease rates. Bankers are taking their pound of flesh, rolling over short term debt with only the most draconian terms, merrily widening spreads, adding covenants, and chopping loans to value along the way. I wonder if this orgy of recapitalization is simply an effort to bail water out of a sinking craft, or a battening down of the hatches for the tidal wave that is about to hit them. Women and children first!

2) Interesting tidbit of the day. The number of people changing residence is at the lowest level since 1962. Unemployed are unable to move to healthier job markets because they can't sell houses that have negative equity. These conditions are playing hell with multinationals unable to move personnel around the world, or even within the country. A lucky few are renting out homes at a negative carry, and passing the bill to their companies as a cost of doing business. I have to admit that I was caught in this trap when Morgan Stanley (MS) transferred me from New York to London in 1984. The city was still recovering from its flirtation with bankruptcy, crime rates were sky high, and interest rates were backing off from an 18% peak. The market was dead. Fortunately, the firm took me out of my co-op at a decent profit, sat on the property for a year, and then sold it for a $100,000 hit, knowing I could make the money back for them with the right phone call. That was back when the firm was still private,?? had a Rolls Royce, cradle to grave benefits plan, and went to incredible lengths to keep key revenue producers happy. I wouldn't want to try that now.

3)?? Highlighting my bullish positions on the soft commodities is soybean's 20 cent push yesterday to $10.65/bushel, a six month high. Massive Chinese buying was again the culprit, with the Middle Kingdom lifting 404,000 tonnes from the US in the latest report. There is a real risk that American stockpiles will drop below 100,000 bushels by the summer, creating domestic shortages and bringing a return of the food inflation we saw last year. Better buy that tofu dinner now! Poor weather is expected to shrink the domestic Chinese grain crop this year by 8 million tonnes to 220 million tonnes, and there is little option for them, but to accelerate imports. In the meantime, the Buenos Aires Cereal Exchange has cut its forecast of that country's production by 19.9% to 37 million tonnes YOY. More demand and shrinking supplies can only mean one thing for prices, and the charts look very positive. Several big hedge funds have jumped in with long positions, boosting the open interest in the futures market. Never bet against a big trader that can eat their long positions. Pray for rain, my Argentina.

QUOTE OF THE DAY

'When you have a 100 year storm, all correlations go to one,' said Carter Worth, chief technical analyst at Oppenheimer Asset Management.

April 23, 2009

Diary

Global Market Comments
April 23, 2009

Featured Trades: (MS), (GS), (EEM), (RST), (GM)

1)?? I have to confess that when my alma mater, Morgan Stanley (MS), announces earnings, it still tugs at the heart strings. We endlessly outperformed expectations, but laughed because we knew there were tons of latent profits sitting on the back books. The stock would rocket to trade at a luxurious five times book. We were the invincible Masters of the Universe. Things have changed a little bit since the eighties. Today the company said it lost $190 million in Q1, and that revenues plunged from $7.92 billion to $3.04 billion. The dividend was cut 82% to a paltry five cents a share, and the stock backed off?? 9%. Those coupon clipping retired Morgan MD's have got to be pissed. I have to confess that 'risk adjusted returns' is a term that is new to me when applied to corporate earnings. The venerable white shoe company disclosed so many special onetime only provisions it almost earned a place in the Guinness Book of Records. Bizarrely, it lost money on marks because its own debt is now trading higher than three months ago, wiping out unrealized gains on the theoretical short. Mark to market can be a bitch. Guess what? Lower risk taking means fewer profits. Thank goodness I'm not there anymore, now that the salad days are a distant memory. CEO John Mack should have stayed at hedge fund Pequot Capital, where he would no doubt now be reaping an astronomical bonus. But those of us who know John will tell you it was never about the money with him. He had to be the biggest, baddest boy on the block, the Master of the Masters of the Universe. If you had to name two firms that are going to survive this mess they are MS and Goldman Sachs (GS). They are, after all, still the smartest people in the room. Do I need to point out that the stock is up 430% from the October low?

2) CEO Mike Jackson of Autonation, the world's largest car seller, has the best read on this market of anyone. Annualized sales are now at 9.5 million, a 60 year low on a per capita basis, and down from a high of 20 million a few years ago. A six month shut down of the car loan securitization market is to blame. Today General Motors (GM) announced a nine week total shut down of its plants this summer to deal with backbreaking inventories, and also possibly to anticipate a chapter 11 filing. But ultimately, we are creating enormous pent up demand. Some 13 million cars are scrapped each year, and another million new households are established, creating a 'natural' market for 14 million cars a year. The bigger question is who will be left standing to capitalize on this. The US car market could be owned by foreign manufacturers by the time a recovery comes around.

3) Anyone who had doubts about where the future of equity investment lies, should check out international index moves since March 9. Although the US enjoyed a 26% leap, the best in 70 years, it ranked only 25th globally. The top performers list is dominated by emerging markets. The Ukrainian stock market was up 67%, followed by Puerto Rico, 53%, Romania, 49% and Peru, 49%. Next are Russia, Vietnam, Hong Kong, Pakistan, Egypt, Greece, India, the Czech Republic, Saudi Arabia, Spain, Singapore, Taiwan, Argentina, Mexico, Turkey, Israel, and Croatia. Granted, many of these markets moved so much because they are illiquid. But looking at the list, I get a strong whiff of commodities, energy, and international trade, themes I believe will dominate for the next decade. The new big trend has shown its hand. Do you want to own stock in a country that is growing 1%-2% a year, or 8%-10%? Smart investors will use this rally to lighten up on the US and increase holdings in higher growth emerging markets. Or you can buy the iShares MSCI Emerging Markets ETF (EEM). I wonder if Rosetta Stone (RST) offers a language program in Ukrainian?

4) The transportation market is in the process of getting fragmented beyond all recognition. There are at least a half dozen different technologies to power cars with electricity under construction.?? Better Place is building stations in San Francisco, Hawaii, Israel, and Denmark to swap out 1,000 pound batteries in a car wash type set up. The Renault-Nissan Alliance is building fleet charging stations in Portland and Phoenix. The Chevy Volt is going to count on an overnight charge from a standard wall outlet. There are choices for 110 volt versus 220 volt, slow versus quick charges, and solar options. Massive government subsidies are upending commercial considerations. It is reminiscent of the early 1900's, when steam, electric, diesel, biomass, and gasoline power options competed on a level playing field for consumers' attention. In the end, gasoline won out because it was the cheapest and delivered the most energy per unit, but it took 20 years to sort out. I wonder how the hapless car buyers without the PhD's in engineering are going to deal with all of this? This is a much bigger call than choosing VHS over Betamax, because owning a dead end technology could cost you $50,000. I bet a used Stanley Steamer didn't fetch much in 1925 when gas stations made it to every street corner. Are we all going to have to haul around a trunk load of power adapters like we already do for cell phones, Blackberries, and laptops? Are we even going to need cars, or will they end up as toys of the idle rich and hedge fund managers?

QUOTE OF THE DAY

'Consumers are not going to buy a $40,000 electric car when they can buy a comparable car for $15,000 to $20,000 with some oil consumption,' said Nissan CEO Carlos Ghosn, dismissing the competitive threat posed by the General Motors (GM) Volt.

April 22, 2009

Diary

Global Market Comments
April 22, 2009

Featured Trades: (UNP), (PWR), (YHOO)

1) I took some time off yesterday to watch a piece of economic history roll through town. The Union Pacific Railway's (UNP) engine no. 844 roared past, hauling a trainload of retired union members and railroad buffs in its trademark yellow observation cars. The 4-8-4 steam engine was built in 1944 to haul the massive freight trains demanded by a wartime economy. The company has since spent a fortune maintaining the crown jewel of the great age of steam in perfect operating condition. Normally based in Cheyenne, Wyoming, it hurtled over the Rockies and the Sierras to visit us on a heritage tour. Progress of the belching 500 ton behemoth was updated every ten minutes through Twitter's tweets, which garnered 481 followers by the time it made it to the San Francisco Bay Area. It barreled through the station like a freight train, blasting its whistle, and singing with heat the faces of the enthralled kids. To see this piece of romantic transportation history, please click on the video above.

Sure, I know the train was videoed every 100 feet all the way from Wyoming to here, including by the four guys standing next to me who posted their work on YouTube. Some even chased the train over the Sierras to get multiple shots and put up montages. This is a community of over the top fanatics. But what the hell, it was fun anyway. By the way, UNP is a great long term buy as an indirect commodities play, and a call on the recovery of the US economy.

2) For those out there still looking for a 'smart grid' play, take a look at Quanta Services (PWR). The Houston based company offers design, construction, and maintenance of power infrastructure networks. At a 17 multiple of next year's earnings, it is not cheap, and the shares have already posted a double since the March 9 low, so the action is definitely there. But when the full force of Obama's stimulus plan hits, the 30% earnings growth that is the current consensus forecast may look a tad low. The Federal Energy Regulatory Commission (FERC) has already announced $10 billion in programs, and 'smart grids' are one of the few places in the energy space where the government can spend money and generate an immediate result. Up to 10% of America's electric power supply is thought to be lost through resistance from decrepit power lines and inefficient distribution. That works out to a lot of tankers from the Middle East or train loads of coal from Appalachia. Never underestimate the power of a buzz word to boost earnings. Buy on the inevitable dip.

3)?? The paint peeled off the walls while Yahoo (YHOO) CEO Carol Bartz laid out her assessment of the firm's many challenges at yesterday's conference call in language that would make a Marine drill sergeant blush. I knew Carol when she was at Autodesk in Marin, and believe me, she is no shrinking violet. She said that the engineering focus had scattered to the wind, with engineers in almost every country. There was one product manager for every three engineers. No surprise then, that she announced 700 layoffs after the 2,400 that were axed last year. YHOO's Q1 earnings actually came in line, with a $117.6 million net on $1.58 billion in revenues, thanks in large part to a $401million gain on a Chinese Internet company. No comment on the Microsoft negotiations. Is it any revelation that enormous bloat accumulated under the leadership of Jerry Yang, the world's worst manager, and the guy who infamously turned down the $35/share bid from Microsoft? Time to put the grownups in charge.

QUOTE OF THE DAY

'Stop your sinning, do more good, and give more money,' said PIMCO managing director, Paul McCulley, quoting his preacher father in an admonition to the government. He added, 'Valuation metrics have to find the new normal, and we haven't found the new normal yet.'

April 21, 2009

Diary

Global Market Comments
April 21, 2009

Featured Trades: (COPPER), (FCX)

1) Those who followed my recommendation to buy copper on January 5 are the happy participants in the first bubble of the year. The red metal has rocketed from $1.28 to $2.26, while producer Freeport McMoran (FCX) soared 88% from $25 to $47. Heavy and secretive stockpiling of the red metal by China, which accounted for a third of the world's 18 million tons of consumption last year, has been a main driver. Heavy buying by commodities based ETF's provided the turbocharger. It is time to take some money off the table. Asset markets everywhere have suddenly gotten way too healthy, with global equity markets alone tacking on $7 trillion in value in six weeks. No one ever got fired for taking a profit, especially in this angst ridden environment. Of course, longer term, I expect copper to rise past its all time high of $4.10, and for FCX to vault above its old high of $122, as we make the irresistible shift from a paper to a hard asset backed world.?? But it's going to take more than a short covering rally in financial markets to get back up there. Better to buy it back lower.

2) Last year was truly the annus horriblus for the Fortune 500, which saw profits plunge from $645 billion to $99 billion, the worst performance in the tabulation's 55 year history. AIG alone lost $99.3 billion, taking it from number 13 on the list to no. 294, made possible I'm sure only through some spectacular accounting fiction. Many once mighty names were struck from the venerable list, including Lehman Brothers (LEH), Bear Stearns (BS), and Anheuser Busch (BUD), to be replaced my new risers and IPO's like Polo-Ralph Lauren (RL), Master Card (MA), and Visa (V). Only three companies have shared the number one spot since 1955: Exxon Mobile (XOM), Walmart (WMT), and General Motors (GM). Guess which one made the top this year? It is clear that this Depression is causing a great winnowing out of the US economy. The strong are getting stronger and the weak are getting wiped out.

3) Japan will soon hit its bond market with a near record $110 billion of new paper to finance its emergency economic stimulus program. Anticipation of the program has already pushed yields on the JGB to 1.46%, a high for the year, up from 1.21% in January. With short term interest rates at zero and the world's lowest long bond yields, there is little doubt the government will pull this off, according to Sean Maloney, interest rate strategist at Nomura Securities. Nearly twenty years of weak domestic growth and a decently growing money supply have created a structural oversupply of capital in Japan, an endless cash glut, and a shortage of high grade, low risk investments. The bigger question is whether this splurge will make any difference. After building 1,000 'bridges to nowhere' during the nineties to cope with a 'lost decade', no country has more conclusively proven the futility of government stimulus spending on public works than Japan. Is Obama about to make the same mistakes in the US?

4) Lehman Brother's (LEH) $200 billion worth of unsecured creditors should be careful what they wish for. Their payoff might be radioactive. The bankrupt former investment bank is holding 500,000 pounds of yellow cake, a form of refined?? uranium used to make fuel rods for nuclear power plants. Lehman took delivery of the uranium oxide as the result of an expiring futures contract. The price of yellow cake recently plunged from $140 to $40 as part of the general rout in the prices of all energy supplies, and the postponement of the construction on new power nuclear plants in China and India.?? Fears the creditors would force the Lehman position to be dumped on the market also aren't helping prices.

5) China has surpassed the US for the first time as the largest buyer of cars from Japan. Nissan reported a leap in sales in March to the Middle Kingdom of 29% YOY. The cause is a $550 billion Chinese emergency economic stimulus package that among other things cut taxes on new car purchases by 50%. China is facing the same dilemma as the US in its recovery efforts. When you spend this much money, the beneficial effects spill outside your own borders, inundating the world.

QUOTE OF THE DAY

'Trading is now the new asset choice,' said Scott Jacobson of Capstone Sales Advisors.

April 17, 2009

Diary

Global Market Comments
April 17, 2009

Featured Trades: (PHM), (CTX), (POT), (MOS), (AGU), (WHEAT), (CORN), (SOYBEANS), (RICE)

1) March Housing Starts came in at 510,000, down 10.8% from February, and short of the 540,000 consensus. Permits fell 9% to 513,000. Completions were down 3.5% to 796,000.?? The estimated five million houses for sale, in foreclosure, or sitting in bank portfolios waiting to be dumped are sitting on this industry like an 800 pound gorilla. Pulte Homes (PHM)-Centex (CTX) combination will have to swim upstream against Niagara Falls in order to survive. Will someone please fire the plunge protection team? They're doing a lousy job.

2) Pack your portfolios with agricultural plays like Potash (POT), Mosaic (MOS), and Agrium (AGU) if Dr. Paul Ehrlich is just partially right about the impending collapse in the world's food supply. You might even throw in long positions in wheat, corn, soybeans, and rice. The never dull, and often controversial Stanford biology professor told me he expects that global warming is leading to significant changes in world weather patterns that will cause droughts in some of the largest food producing areas, causing massive famines. Food prices will skyrocket, and billions could die. At greatest risk are the big rice producing areas in South Asia, which depend on glacial run off from the Himalayas. If the glaciers melt, this will be gone. California faces a similar problem if the Sierra snowpack disappears. Rising sea levels displacing 500 million people in low lying coastal areas is another big problem. One of the 77 year old professor's early books 'The Population Bomb' was required reading for me in college in 1970, and I used to drive up from Los Angeles to hear his lectures (followed by the obligatory side trip to the Haight-Ashbury). Other big risks to the economy are the threat of a third world nuclear war caused by population pressures, and global plagues facilitated by a widespread growth of intercontinental transportation and globalization. And I won't get into the threat of a giant solar flare frying our electrical grid. 'Super consumption' in the US needs to be reined in where the population is growing the fastest.?? If the world adopts an American standard of living, we need four more Earths to supply the needed natural resources. We need to raise the price of all forms of carbon, preferably through taxes, but cap and trade will work too. Population control is the answer to all of these problems, which is best achieved by giving women an education, jobs, and rights, and has already worked well in Europe and Japan. All sobering food for thought.

3) Will someone please help me out here? Q1 is widely expected to be the quarter from hell, with earnings expected to plummet by 38%, and the market rockets 26%, the biggest hyperbolic move since 1930. Is there a disconnect here? I know I only got a magna cum laude in math in college, not the summa cum laude I deserved (my professor didn't understand his subject and hated me for it). But is it possible that the market has gotten ahead of itself? Just a tad? Is the economy really going to have the massive bungee cord type recovery that the market is discounting here? Could we be setting up for the perfect sell in May and go away scenario, like we saw last year? I don't get this. I await your comments in earnest.

QUOTE OF THE DAY

'We will all starve to death in our SUV's' warned Professor Paul Ehrlich about the threat to the world's food supply posed by global warming.

April 16, 2009

Diary

Global Market Comments
April 16, 2009

1) I chatted with Speaker of the House Nancy Pelosi yesterday as she was passing through the San Francisco Bay Area. I have known Nancy for 15 years, and she was breathing fire and spitting nails as usual. With the public fuming over banksters' bonuses and bail outs, Wall Street can pretty much count on a Congressional investigation of the causes of the crash, much like the Pecora Commission did in 1932. Health care, essentially a global competitiveness issue, isn't going to wait for better times either. A bill for a combined public-private national insurance system will reign in the runaway cost of Medicare and Medicaid, the most rapidly growing entitlements. Expect the fireworks to start soon. Investment in education yields the largest source of tax revenues for the Treasury, so expect more spending there too. Obama plans to cut his $1 trillion budget deficit by a third before the end of his first term, and two thirds by the end of the second. If Congress can't do this, inflation will rear its ugly head. No kidding. Debt service already exceeds $250 billion a year, or 8% of the total budget. Only 'pay as you go' programs will pass to control the deficit. The Feds are also going to go after $300 billion in uncollected taxes. Earmarks, which rose by 400% under the Republicans, will be cut in half, and the remainder published on the Internet. Growing up in an Italian American political dynasty that produced two mayors of Baltimore, the petite Nancy used a seat on the San Francisco Library Committee as a springboard to become the most powerful woman in the world in a mere 22 years. She has moved from the kitchen to the kitchen cabinet on the coattails of Obamaphoria. Now the Republican Party's worst nightmare, she has the power to get a lot of what she wants done.

2) Mall giant General Growth Properties (GGP) filed for bankruptcy protection early this morning, marking one of the largest-ever real estate failures in U.S. history. Analysts say General Growth will likely survive the long-anticipated Chapter 11 filing intact, but could emerge as a much smaller company after distressed sales of assets. The filing marked the unhappy end of a months-long effort to restructure an impossible $27B debt load, and will leave equity investors with nothing. Expect more giants like this to fall.

3) Walking around San Francisco's financial district the other day, I couldn't help but notice the colorful, but huge 'for lease' and 'space available' signs wrapped around whole buildings. The San Francisco Chronicle produced some current market figures for the wasteland that is now the commercial real estate market. Rents have crashed 24% in a year, with Class 'A' office space plunging from $50.92 to $38.80 a square foot, the biggest drop since the dot com bust in 2001. Tenants are downsizing, consolidating, or disappearing altogether.?? Macy's and Charles Schwab together are vacating 500,000 square feet this year, with more than half of all Bay Area companies expected to shed staff in the next six months. Purchases of office building have ground to a complete halt because of the absence of financing. Not helping are the city's notoriously high operating costs, labor rules that would make Bolsheviks blush, and a tax rate that is about to jump from 8.75% to 9.75% to help bail out the state. It's a lot to pay for a great view. Will the last one leaving please turn out the lights?

4) I went to www.foreclosureradar.com to see which of my neighbors were about to lose their houses. One bank auction is listed at Cassandra Court. Well, duhhh. You'd think if someone were at risk of losing their home, they wouldn't buy on Cassandra Court. Cassandra was the Trojan princess condemned by Apollo to a lifetime of predicting a dire future which no one would ever believe.

Foreclosure1190182708a3v6pi.jpg picture by sbronte

5) Because of the crash in asset prices last year the government is considering renaming 401k's to 201k's. ?

QUOTE OF THE DAY

'When I was on the reviewing stand at the Presidential inauguration, I suddenly was visited by the ghosts of every female activist on whose shoulders I now stand, from Susan B. Anthony onward. They said '?Now we have a seat at the table.' Then they left,' said House Speaker Nancy Pelosi.