Global Market Comments April 15, 2009 Featured Trades: (GM), (CHINA), (MSO)
1) Thanks, but no thanks! Goldman Sachs (GS) voted with a big thumbs down on the stock market today yesterday by issuing $5 billion in new equity at $123/share. Perhaps not coincidently, this gives the government a $1 profit on its holding in the venerated former investment bank. The move comes on top of the announcement of spectacular earnings of $3.39/share on revenues of $9.4 billion, double expectations, and a 150% rally in the stock since November. The deal was brought to market so fast it made your head spin. The money will be used as a down payment towards their $10 billion TARP repayment. Do you get the impression they are unloading this stock like it is a hot potato? Obviously they don't think the shares are going to rocket back up to last year's high of $200 anytime soon. Is it worth that much to get the Feds out of their hair? Those pay restrictions on senior executives have to be grating. And you can't imagine a greater culture clash than between the Masters of the Universe and the Treasury's white shirted, polyester suit wearing, bean counters. Or maybe GS thinks the market is peaking here and it's time to cash in their chips while they can. Windows these days are vanishingly small. Please pass the Vaseline.
2) Thanks to China's one child only policies of the past 50 years, and a cultural preference for children who grow up to become personal safety nets, there are now 32 million more boys under the age of 20 than girls. Large scale interference with the natural male: female ratio has been tracked with some fascination by demographers for years, and is constantly generating unintended consequences. Until early in this century, starving rural mothers abandoned unwanted female newborns in the hills to be taken away by 'spirits'. Today pregnant women resport to the modern day equivalent by getting ultrasounds and undergoing abortions when they learn they are carrying girls. The resulting shortage of women has led to an epidemic of 'bride kidnapping' in surrounding countries. Stealing of male children is common. Political scientists have long speculated that an excess of young men would lead to more bellicose foreign policies by the Middle Kingdom. But so far the choice has been for commerce, to the detriment of America's trade balance. Economists now wonder if the practice will also shave a few basis points off China's long term growth rate. Parents with boys tend to be bigger savers, so they can help sons with the initial big ticket items in life, like an education, homes, and even cars. It's not nice to fool with mother nature.
3) Martha Stewart picked up 350,000 followers in her first month on Twitter. Just telling her friends in less than 140 characters what she was having for Easter brunch generated a massive response. Too bad no one has yet figured out how to make money from this.
4) Sarah Palin, the possible future Presidential candidate, earned $125,000 last year as the Governor of Alaska. Tiny Fey earned $4.6 million convincingly imitating Sarah Palin on NBC's Saturday Night Live. Whoever thought laughs would be more profitable than campaign promises? Maybe Tina Fey is better at being Sarah Palin than Sarah Palin is? Go figure.
Featured Trades: (WFC), (WB), (JPM, (BAC), (C), (GM)
1) So there is life after near death! Wells Fargo (WFC) stunned the street with a surprise $3 billion profit in Q1, vastly better than expectations. The shocker was that charge offs from loan losses amounted to only $3.3 billion, a shadow of forecasts that ranged as high as $8 billion. Analysts suspect that some creative accounting was involved in consolidating the losses from recently acquired Wachovia Bank (WB). Short sellers were seriously squeezed and no doubt are now speaking in voices several octaves higher, pushing the stock up an amazing 40%. The news triggered an all out assault on bank haters, there are still plenty out there, taking JP Morgan up 24% and Bank of America up 42%. A share of Citigroup at $3will now buy you a cup of coffee at Starbucks, but only if you get the cheap stuff. With the Fed raining money down on the sector and the Treasury changing the rule book almost daily to make this work, how else was this going to play out? This puts WFC first in line to repay TARP money and get the Feds out of their hair. It also underlines the argument that I have been making all along that if you put mark to market and asset valuation issues aside (no easy task), the banking business in now the most outrageously profitable in its long history.
2) The latest off to the General Motors (GM) bond holders: zero cash, zero debt, and a 20% ownership in GM stock, which may become worthless if GM files for bankruptcy within 60 days. This is down from 8% cash, 16.5% of new debt, and 90% on GM stock that was on the table just a few weeks ago. Whoa! Harsh.?? Looks like the unions are going to take it on the nose too. I guess it's not a good idea to lend money to people who crank out crappy products to a disappearing market at higher prices than their competitors. If this isn't the Fat Lady clearing her throat and getting ready to sing, I don't know what is. The death watch continues.
3) Financial reporters are spending way too much time reporting about the pirate seizure of the American container ship Maersk Alabama off the Somali coast, despite the happy ending. CNBC has been playing pirate songs all week. One even referenced the Marine Corps. Hymn ('To the shores of Tripoli'). I guess you don't get to say 'arrrgh' too much in the floor of the New York Stock Exchange.
4) OK, enough is enough! Right here, at $3.60, is where you buy Natural Gas ($NATGAS)! After peaking at $13.50/btu last year, it has become the red headed step child of the energy complex, plunging a gut churning 74% to a low of $3.50. To see demand this weak coming out of a cold winter is nothing less than stunning. The credit crisis has forced US companies like Chesapeake Energy (CHK) and Devon Energy (DVN) to scale back exploration, so the US rig count has dropped by half. The price collapse is welcome news for consumers, as NG is an essential raw material for making naphtha, fertilizer, and plastics and accounts for 20% of US electric power generation. It also is a favored fuel of the green crowd, as the only products of its combustion are carbon dioxide and water. The industry was making the leap from a domestic industry to a global one just as the global recession punched it right between the eyes. The completion of six liquefaction plans in Qatar, Russia, Indonesia, and Yemen, costing $48 billion, is expected to boost global production by 25% this year, and more big plants are coming on stream in the near future. Below $3.50/btu the pick producers start shutting in supply, which will cause the glut to disappear rapidly. If I'm right, and those really are crocuses out there and not some florid hallucination, then it's time to load the boat with NG.
5) San Francisco's Golden Gate Park had an Easter egg hunt for the blind. The event, organized by the Blind Babies Foundation, enabled vision impaired children to seek plastic eggs with beepers, which they could exchange for prizes. I love it.
QUOTE OF THE DAY
'We are all going so fast, but where are we going?' said Larry Brilliant of Google's philanthropic arm, Google.org.
Many readers have asked me to review my recommendations of the last three months, so here is The Mad Hedge Fund Trader's Q1 report card. I have reprinted by January 4, 2009 Annual Asset Review and followed with comments in bold type.
Equities: UP
The collapse of the volatility index (VIX) is telling us that the horrific, gut churning, 10% daily moves are over. But equities are no longer a US play. Extracting the insane leverage of the last decade means chopping the US growth rate down from a booming 5% to an anemic 2%. This is not a strong argument to buy American companies, which is why most analysts only see the indexes recovering 10%-20% this year. You might just get tedious range trading after the late 2008 dead cat bounce. The real action will be in the BRIC countries, which will see upside returns double what you will get with the S&P 500. Buy Brazil's Bovespa ($BVSP), Russia's RSX (RSX), India's Bombay Sensex ($BSE), and China's FXI (FXI) or Hang Seng. And it may be time to spell BRIC with a 'K' by throwing in the Korean Kospi ($KOSPI) as a sweetener.
Grade: A After one more spike, the VIX collapsed from 50% to 36%, so a ton of money was made on short volatility and time decay plays. My call that the export sensitive BRICK's were a 'Buy' was a total home run, as they massively outperformed the US. Brazil is up 18%, Russia 29%, India 20%, China 18%, and Korea 20%. The S&P 500 is still down on the year by a miserable 3%. With 80%-90% of the world's economic growth expected to come from emerging markets over the next ten years, this trade has much, much further to run. If you want to be conservative and diversified, buy the iShares MSCI Emerging Market basket ETF (EEM), up 21% on the year.
Bonds: Treasuries Down, Private Debt Up.
As I have been vociferously arguing in these pages for months, US Treasury bonds are witnessing the final stages of an overinflated bubble, and you don't want to be anywhere near this asset class when it bursts. Take out the flight to quality and year end balance sheet window dressing bid from this market, and you have an accident begging to happen. Take in the long term inflationary impact of Obama's plans, and you have a 30 year contract which peaked at 142 last week that is really only worth 70. It's just a matter of time before massive government issuance buries largely foreign buyers. Throw in the 50:1 leverage offered by a long bond futures contract, and the profit potential of a short position is so enormous, there are not enough zeros on my calculator to total it up. Buy the Lehman 20 year plus ultrashort bond ETF (TBT). Unfreezing of the debt markets will move the prices for every other type of debt off of their current throw away levels. Buy corporates of every grade with a heavy weighting in junk, or fixed income securities backed by REIT's, emerging markets, credit cards, student loans, or subprime loans. A convenient way to do this is to buy the ETF's for the Lehman High Yield Bond Fund (JNK), the PS Corporate High Yield Bond Fund (PHB), and the iShares iBoxx Fund (HYG).
Grade: A+ My recommendation to short the Treasury's long bond was spot on, with the US Lehman 20 year 200% short ETF (TBT) soaring by 25%. With the government's printing presses running overtime, this is going to be your new free lunch. The junk bond ETF's PHB (up 6%) and HYG (up 1%) also were profitable, but did less well, as credit concerns linger.
Commodities: UP
After giving up almost all of their 21st century gains, virtually all commodities, including grains, softs, energies, and metals, are due for a recovery. A good part of the sell off resulted from the disappearance of financing, which is now slowly working its way back into the market. Now that newbie investors who never should have been involved, like pension funds, have bailed on this asset class, conditions are set for some serious base building. Commodities will be the principal beneficiaries of an epochal trend away from paper assets, towards hard assets, that will be the dominant investment theme for the next decade or two. Chinese and Indians still want to raise their standard of living faster than these substances can be grown, or ripped, or pumped out of the ground. Now Obama is adding America to the infrastructure build out story. A safe way to play this is through beaten down, dividend yielding, producing equities like Freeport McMoran (FCX) for copper, Chesapeake Energy (CHK) for natural gas, and US Steel (X) for steel and iron ore.?? But don't expect huge gains until we see signs of a global economic recovery by the middle of the year. Then watch out.
Grade A+ Commodities and their underlying stocks have been the place to be in 2009. You really couldn't miss, with grains, softs, energies, and metals all doing well. Freeport McMoran rocketed by 92% on a 45% move in copper.?? Oil is up 28%, and gold ran 17% before its current pullback. The only letdown has been natural gas, which due to supply and storage difficulties unique to this one energy source, has fallen by 30%. However, my stock pick in the area, Chesapeake Energy (CHK), jumped by a robust 23%. Again, this trade has a long way to run. While they stopped making almost everything in this recession, the world hasn't stopped making more people. They are all going to need to eat, travel on more roads, and live in more houses. The emerging market thirst for a higher standard of living is as strong as ever. Look for crude to move to $200/barrel on the next spike. Move your portfolio out of paper assets into hard ones.
Currencies: Dollar and Yen Down, Everything Else Up
Since we are smack dab in the middle of a six year trading range, I don't really have a handle on what the buck is going to do short term. Could we see $1.20 or $1.00 for the greenback in an event driven overshoot short term? You betcha! But longer term, the trend is still down. Obama's highly inflationary reflationary policies will eventually lead to an utter collapse in the dollar. If they are successful, the economy will recover, bringing Americans back to their old low saving, high consumption, high importing ways, adding fuel to the fire. Don't bet against the 45 year trend. No one ever got rich betting against the US consumer. Expect to pay $2.00 for a Euro in the years ahead. Take that European vacation now!
Grade: Pass Since I really didn't take a view, I don't deserve a grade. In fact, the euro is dead unchanged year to date at $1.33, keeping to a pretty boring range of $1.25 to $1.37. But the collapse of the dollar is a mathematical certainty resulting from current US government policies, and may be the trigger for the world's next big financial crisis.
Real Estate: Down
With markets still deleveraging, and the son of subprime, the Alt-A loans on our
doorstep, real estate is dead money at best. Although the cost of carry for home ownership is rapidly approaching equivalent rental costs on an after tax basis, fewer and fewer buyers are qualifying for loans. Add 1.2 million unsold homes from builders, to three million existing homes already on the market, and you have a staggering 4.2 million homes for sale in the US. There are at least another two million homes being held off the market waiting to smack down any recovery in prices. This is 7% of the total American housing stock. Probably 20% of US homeowners are underwater on their mortgages, and they're not buying anything anytime soon. We also have an impending crisis in commercial real estate generating lots of mall bankruptcies and empty retail space to deal with. Remember, 'debt' is a four letter word. I don't see a meaningful recovery in residential real estate for five years, and then it will be a slow claw back at best.
Grade: A+ Although we don't have the benefit of a daily closing price in the Wall Street Journal every day, I think it's safe to assume that all sectors of the real estate market have continued their death spiral this year. Stay away. Rent, don't buy.
Final Grade: A I am sticking to my guns on all of my core trades for 2009. Call me what you want. You can even call me 'Mad'. Is anyone looking for a new money manager or financial advisor?
Global Market Comments April 9, 2009 Featured Trades: (GOLD), (ABX), (GM), (TM)
1) 'There is room for bulls and bears, but pigs get slaughtered,' said Peter Munk, the legendary founder and CEO of Barrick Gold, the world's largest gold producer. This is his admonition to worshipers of the barbaric relic hoping for a quick super spike to $2,000 or $5,000 an ounce. Since 2003 gold has tripled from $300 to $1,000, outperforming every asset class in every currency, and he has no problem with it backing and filling here in a long term uptrend. The fundamentals look great, as the world is running out of the yellow metal. The industry used to be run by demand from the Indian wedding season. The current economic stress has made the country a net exporter of gold for the first time. Global jewelry demand is at a 20 year low. With the help of satellites, the world is pretty well mapped out, so there will be no more surprise Californias or Klondikes found. The only untapped reserves are in the Andes at 13,000 feet, or in countries too dangerous to visit. The cost of extraction has also doubled in ten years to $400/ounce, driven by labor, fuel, trucks, and environmental mitigation. Gold will only go down when the US government turns off its printing presses. With record stimulus packages in place, there is a fat chance of that happening in this lifetime. Ultimately, the price of gold is a barometer of fear, which will not be in short supply in the new era we are facing.
2) General Motors (GM) has 6,500 dealers in the US and Toyota Motors (TM) has 2,000, but Toyota sells more cars than GM. And you want to save this company? Don't mention the fact that their cars fall apart, miss the market by a mile, guzzle gas, and have destroyed over $300 billion in shareholder equity in the last ten years.?? The fact that this company still exists is a tribute to their advertising prowess with an older generation of buyers that is rapidly dying off.?? The Volt doesn't have a snowball's chance in hell of competing against the Toyota Prius, especially the plug in version that is coming out next year at little more than half the Volt's projected price. Just as only Nixon could go to China, only Obama can dispatch GM. The launch yesterday of its Segway-GM hybrid, the Puma Pod, just highlights how pitiful their efforts have been. The sooner GM goes to corporate Heaven (or Hell), the better.
3) Many hotel investors not only lost their hearts in San Francisco, they lost their wallets too. The New York Times highlighted the dire condition of the city's hotel market. The occupancy rate in February plunged to 57.7%, the lowest since 9-11, with many luxury rooms going for less than $100 a night. The collapse in pricing has been exacerbated by the Internet, and first and foremost by the William Shatner inspired www.priceline.com, whose competitive offering system unleashes avalanches of cheap rooms on the market at the first sign of weakness. As a result, the average price of a room has dropped in a year from $156.16 to $127.59. Many hotels acquired at the market top in 2004 and 2005 have cash burn rates so severe that they are in imminent threat of defaulting on loans.
4) Michelle Obama was seen wearing a J. Crew outfit on her current European tour, which then immediately sold out. Now, if we could only get her to drive a Chrysler!
QUOTE OF THE DAY
'I'm not an actor playing a money manager. I'm a money manager, so my clients are listening to what I'm saying,' said Robert Weiner, CIO at RDM Financial Group, in an admonishment to a CNBC reporter.
Global Market Comments April 8, 2009 Featured Trades: (PLD), (TBT), (PHM), (CTX)
1) I bumped into Jim Lehrer last night, the legendary anchor of 'The News Hour With Jim Lehrer' on PBS, as he breezed through the San Francisco Bay Area promoting his 22nd novel, 'Oh, Johnny'. The ex-Marine, whose first big story was covering the Kennedy assassination in Dallas, had some cogent observations on the current demise of the US newspaper industry.?? Print media have traditionally been the originators of the news, the guys who went to the city council meeting and took copious, accurate, notes. For this, the paper got full page ads from the local car dealers and every other retail business. Now the car dealers are going under. The proliferation of new media, from radio to TV, the Internet, and smart phones means that the monetization of this content has moved downstream to be reaped by others. Talk radio, weekend news programs, comedy shows, even congressional debates, and yes, blogs (guilty), are feeding off of this news cornucopia for free. The originating newspaper maybe gets a penny of each dollar of revenue spawned by their stories. Newspapers now have no choice but to cut costs by firing journalists and moving online. Thomas Jefferson said that 'an informed electorate is essential for a democracy'. The big question is, when all the journalists are gone, where will the news come from? I have suspected all along that Truth, Accuracy, and Neutrality will be the big casualties of all of this. They will go the way of the full service gas station, free check in luggage on airlines, and home delivery of newspapers by teenage boys on bicycles.
2) Pulte Homes (PHM) is buying Centex (CTX) for $1.3 billion, net of all the debt they are acquiring in a stock only deal. Centex stock is up 33% on the news. This is a bold move in that it creates the nation's largest home builder.?? I wonder how many finished, but unsold houses they are getting? And undeveloped land? A spate of takeovers like this, where the strong take over weak, overleveraged players, consolidating the industry, is a classic sign of a market bottom.
3)?? If stocks sell off from here you should get a rally in Treasuries that will be ripe for selling into. There is no way that investors are being compensated for their risk with yields at these levels, especially with massive global government reflationary efforts guaranteed to bring a resurgence of inflation. I think the futures contract on the long bond will collapse from 127 now to inder 70 in three years, once hyperinflation hits. With the leverage offered by a futures contract, the returns will be huge. However, this is not a riskless trade. There have already been several rounds of stop loss buying by traders who jumped into this strategy too early, as unimaginable buying kicked in at 120, 125, 131, 136 and finally 141. In Japan the ten year bond eventually hit a low of 0.46%, making our ten year at 2.85% look incredibly expensive. That works out to a futures price of 200 or more. Of course we are not Japan. The Treasury has done more to repair things in 60 days than Japan did in 15 years, and Japan has still not adopted full mark to mark accounting. Some 19 years after their bubble burst, the country is still seeing subpar growth, and ten year yields have made it back up to only a measly 1.25%. There are also constant games going on in the bond futures markets like expiration plays, engineered short squeezes in the underlying, and bogus news leaks. PIMCO, the Newport Beach based Pacific Investment Management Company, the world's largest private bond investor, plays this market like a violin. Still, I think it's worth a shot. Take another look at the Power Shares Lehman 20 year plus ETF (TBT), which gives you a 200% short on the sector. This will be the last bubble we can short into for a long time.
4) Jeffrey Schwartz, for the former CEO of the global logistics and warehouse firm Prologis (PLD) is not looking for a quick recovery of the economy, and sees a lot more pain for his industry. The firm suffered a near death experience last year and was only able to extricate itself with the sale of some Asian assets.?? Prologis is the world's largest developer of commercial warehouse space, and a leading manager of REIT's. The Denver based company employs 1,500, managing 2,898 properties, totaling 548 million square feet in 115 countries. It had been a highly leveraged call on the growth of international trade, which is now imploding with unprecedented speed. PLD's growth focus is still on China, where it has 38 million square feet of space, and land commitments to double that. It is investing $1 billion there over the next two years, counting on a government commitment to support the logistics sector. Investors certainly believe it. The stock has roared 57% in the last ten days. The company has announced that it is using the rally to issue new shares to wisely reduce its insanely high levels of debt. This will dilute existing shareholders by 50%, but hey, half of something is better than nothing, isn't it?
QUOTE OF THE DAY
'You can't swing a cat in the US without hitting a barrel of oil,' said Stephen Schork of the Schork Report, an energy newsletter.
Global Market Comments April 7, 2009 Featured Trades: (VIX), (SPX)
1) Today I spoke to my old Morgan Stanley boss , Barton Biggs, who is so bullish that he believes we are only one third to one half of the way through the current stock market rally. Barton, voted best international strategist for seven years, and one of the founding fathers of investment in emerging markets (with some pushing from me), now runs Traxis Partners, a major global macro hedge fund. This earnings season will be a disaster, with forecast S&P 500 earnings at $40-$55 or lower. But hedge funds are still net sellers of assets, according to well placed prime brokers, and most still expect a retest of the lows at 666 in the S&P, or new lows in the 400's. The capacity for the industry to take on new risk is therefore huge. Also encouraging is three consecutive monthly improvements in the Purchasing Managers Index (PMI). He sees this year as a replay of 1938, when a huge rally ensued after a long bear market, with 1938 valuations to boot.
2) This G-20 meeting certainly has been different from past ones, where the collective promises to stimulate the economy amounted to $1 trillion. Obama gave the Queen an IPod. Chinese president Hu Jintao gave Obama a gift made in China, while Obama gave him an American gift made in China. When George Bush first heard the term G-20 he shouted 'Bingo.'
3) The recession has gotten so bad that women in Beverly Hills are resorting to diet and exercise to lose weight. ?
4) There is a great debate raging in the markets right now over the stubborn persistence of the volatility index (VIX) remaining over 40%. Is it still too risky to go back into the market? Are we going to new lows? Is the next big move an updraft or a downdraft? Part of the confusion springs from a misunderstanding of what the VIX is. It is just a mathematical guess about how big the next move in the market will be.?? A 40% VIX implies that one out of three days will see a 2.25% palpitation, and once a month we will suffer a 4.5% gyration. You can have the market drop 10%, rise 11.1%, remaining unchanged, but still generate a tremendously high VIX. The equation doesn't care what the direction is. VIX unfairly picked up a bearish connotation because of the panicked rush by long side only investors to buy downside protection in falling markets, driving put implied volatilities through the roof. This is why investors associate a high VIX with falling markets. In the end, this debate can only be resolved in one way, and that is to the downside. Smart hedge funds are now shorting out of the money calls on VIX. VIX will crash when markets go to sleep, as they inevitably will. Be careful what you wish for. Traders don't pull down million dollar salaries playing 'Solitaire' on their computers.
QUOTE OF THE DAY
'Making money went out the door two years ago. We're just contributing to cash flow now,' said CEO Joe Anfuso of Florsheim Homes, a Stockton area residential home developer.
Global Market Comments April 6, 2006 Featured Trades: (CHINA), (CRUDE), ($WTIC)
1) Deutsche Bank's former banking analyst Michael Mayo sucker punched the market today, putting out a report ominously entitled 'The Seven Deadly Sins of Banking' listing all 11 major banks as 'underperforms' or 'sells'.?? Talk about closing the gate after the horses have bolted. At one point the Dow was down 150. Mayo says that banks are carrying loans on their books at a wildly optimistic 98 cents on the dollar, and that real losses will exceed those seen in the Great Depression. We have only seen the tip of the iceberg of losses from credit cards, commercial real estate, and corporate loans. The report tells you how much the landscape has changed. New, independent research boutiques used to suck up to clients to garner fee business. Now they take them out behind the woodshed and beat them senseless. If true, you can forget about buying stocks. Instead you should be loading up on canned food, bottled water, and lots of ammo.
2) The Manhattan residential market is now in free fall, after holding up better than every major market in the country for years. Rents have fallen up to 25% since the Lehman bankruptcy in September, dragging down condominium and co-op prices almost as fast. Hardest hit have been units priced in the $1-$2 million range that appealed to up and coming Wall Street traders. This class of newly unemployed former owners is now fleeing the Big Apple en masse. The stratospheric end of the market, the mega mansions and penthouses with those fabulous Central Park views and live-in nanny suites in the $30 million on up range, are still holding up. With industry job losses this year expected to exceed 100,000, expect this downtrend to continue.
3) Will people pleeease stop incessantly talking about the possibility of China dropping the dollar as a reserve currency? What else are they going to use? Monopoly money? Taiwanese dollars? Collectable postage stamps? At nearly $2 trillion, the Middle Kingdom's reserves are so enormous that no other currency in the world could accommodate the switch, and no other security offers the necessary depth and liquidity but Treasury bills. Chinese attempts to buy anything in size causes its price to immediately skyrocket, such as we saw in the relatively Lilliputian commodity markets last year. And really, how like is it that China embarks on policies that quickly halve the earnings of?? the country's exporters, as well as its 30 year hoard of accumulated savings? The demise of the dollar has been predicted more often than the ditching of Microsoft's Windows as the global PC operating system, and is just as likely.?? Hate the greenback as much as you like, but there just isn't any other alternative. I have been hearing these arguments ever since the US went off the gold standard in 1973. First there was a perennial Arab threat to price crude in a basket of currencies. Gee, they never seem to complain when the buck is going up. Then there was the speculated emergence of the 'Yen Block', in the eighties, back when Japan was dominating international trade and the yen was bumping up against ??80 to the dollar. Remember the book 'Japan as Number One? Ha! Double Ha! Then we got all that European whining after the launch of the euro when the weak dollar was everyone's one way trade. Let's face it, Europeans hate using someone else's currency as the primary reserve instrument. Before the dollar, sterling was in widespread use and was equally despised. So rather than waste time discussing this issue anymore, let's talk about something more important, like which of those two flies over there will jump off the wall first.
4) Daniel Yergin of Cambridge Energy Partners says that crude prices will stay in a $40 to $60 range for the foreseeable future. The author of the Pulitzer Prize winning 'The Prize', the best business book I have ever read, believes the recent 26% rally in the stock market is what dragged crude up from $35 to $54. Another downdraft in stocks, or a realization that the recession will be longer than expected, could take crude back to $40 in a heartbeat. Inventories are at a 16 year high, with possibly 80 million barrels at sea, as demand has shrunk from 86 to 83.5 million barrels a day over the last two years.?? Spare capacity is now huge. Don't expect to break out of this range until a recovering economy eats into these supplies, and inflation makes its inevitable return. Then all commodities will roar, not just crude.
QUOTE OF THE DAY
'You can observe a lot just by watching,' said baseball great Yogi Berra.
Global Market Comments for April 2, 2009 Featured Trades: (LITHIUM), (SQM), (AMTD), (SCHW), (SWIM)
1) See? All it takes was a little accounting rule change, and Great Depression II will go away. At least that's what the stock market thought today, surging 300 points and blasting through 8,000 in the Dow, up 26% from its March 9 low. The only problem with this is that it was an absence of market to market rules that allowed Japan to lose a decade of economic growth. Investors and auditors will always assume the worst about asset valuations, unless proven otherwise. That's what happened in Japan. Once the kneejerk short covering finishes, look out below, at least for the banks.
2) If we do move from a carbon to a lithium based economy, what are the implications? Will we all become mellow? Politicians, industrialists, and environmentalists who see battery powered vehicles as the wave of the future are overlooking the fact that 50% of the world reserves of lithium are found in impoverished, landlocked Bolivia. This is a country that until now was best known for killing off famous foreigners (Che Guevara, Butch Cassidy and the Sundance Kid), and being the source of a new form a venereal disease. Lithium ion batteries are four times more efficient than the current generation of nickel cadmium batteries, and are essential for electric cars to finally become economically viable. But now that the country finally has something the world wants, nationalism is rearing its ugly head. Local politicians see their country as the Saudi Arabia of the highly corrosive, toxic, reactive metal, and are already discussing ways to restrict access. Will La Paz become the headquarters of OLEC, the Organization of Lithium Exporting Countries? The only other supplies are to be found in Chile, Argentina, Australia, China, and Nevada.?? Will American oil company executives be programming their cell phones with the 591 country code? Should the US invade to insure supplies? Iraq worked didn't it? The best way for opportunistic investors to play this is to buy Sociedad Quimica Y Minera (SQM), Chile?s largest producer of lithium.
3) The real estate disaster once known as Las Vegas, where 27,000 homes are for sale, continues to probe new lows. Hotel vacancy rates have hit 20%, and you can now get a four day weekend at a top hotel there, including flights from San Francisco, for $150! Construction has halted on the $5 billion Echelon Resorts for lack of financing, leaving a major eyesore on the city's skyline. MGM Mirage's massive City Center complex continues, butting is being sued by its partner Dubai, and is teetering on the edge of bankruptcy.?? Sitting pretty is the Palms, which is just being completed, and pre sold all of its condos two years ago when the market fever was still alive. While 10% of the buyers have walked away from their deposits, the owners are converting these to luxury hotel rooms.
4) Online brokerage houses are perfectly positioned to sift through the wreckage of their industry and pick up a bigger market share. One of the few safe havens in the financial sector, they dodged the bullet because they are pure fee collectors, don't have proprietary trading desks, don't take risk, and didn't use leverage to invest dubious high yield paper to artificially boost earnings. This approach is highlighted?? by TD Ameritrade's (AMTD) takeover of competitor Thinkorswim Group (SWIM) for $600 million. The move gives AMTD access to a first class online trading platform in options and an expanded customer base. Another good pick in this area is Charles Schwab (SCHW). Certainly the market thinks so, with the stock up 48% since March 9.
5) After last year's carnage, you can expect the remnants of the hedge fund industry to split in two. One group will inherit large, illiquid fixed income positions, like convertible bonds and subprime CDO's, and evolve into private equity funds, which they should have been all along. The rest will retreat to trading large liquid global positions that did well during the nineties, offering investors quarterly redemptions they now demand. Fees will fall across the board. This is how hedge funds will cope with a new world that is transitioning from excess capital to a capital shortage.
6) High economic growth rates and a soaring stock market during the eighties were driven by the enormous productivity gains made possible by the personal computer. The nineties boom was driven by the miracle of the Internet. A big chunk of the growth this decade sprang from artificial and ephemeral real estate gains, which have since gone, poof! There is nothing to replace it until we invent something new. Make energy a national defense issue. After all, the PC (or the microprocessor that drove it) and the Net (or Darpanet, as it was then known) were both the stepchildren of taxpayer funded defense research. Launching a Manhattan Project for alternative energy and transportation could well give us the next decade's economic driver we are searching for. The building of a cleantech industry and a smart transmission grid could deliver the millions of jobs the new president has been promising. That would move the engine of US growth out of poorly managed Detroit, foreign crude dependent Houston, and Heaven help us, bureaucratic and connection ridden Washington, to entrepreneurial Silicon Valley. It certainly would be a better use of money than rescuing bad stock and bond investments. Obama says that energy is a priority, but will he make it the top priority? He needs to take the great leap to make us a carbon free economy. I hope someone close is telling him this.
QUOTE OF THE DAY
'It's tough to make predictions, especially about the future,' said former New York Yankees baseball coach Yogi Berra.
Global Market Comments for April 1, 2009 Featured Trades: (COPPER), (GOLD), (TM), (YEN)
1) The March ADP private sector employment report was diabolical once again, showing a loss of 742,000 jobs, the worst monthly showing in history. Boy, am I getting sick of saying 'worse than expected'. To add insult to injury, February was revised up from -675,000 to -702,000. Manufacturing has lost jobs for 37 consecutive months, while services have shed jobs for 27 months, but services are now losing at a faster rate. Some 1.15 million construction jobs have been lost in two years. There is no way to sugar coat these numbers. We will easily top a 10% unemployment rate in the next few months.?? Watch out for Friday's nonfarm payroll report, which will be a complete disaster. But I believe the numbers this month, or for April or May, will prove to be the absolute trough of this recession.
2) Yuba County, California, a semi rural area in the Sierra foothills commuting distance from Sacramento, has the highest underwater rate in the nation. There, 78% of all homes have larger mortgages than the houses are worth, and the numbers are rising. Four out of the five highest negative equity counties in the US are in the Golden State's Central Valley.
3) Japan's closely watched tankan report was released today, a quarterly report of business sentiment, showing its sharpest drop in history, cliff diving from -24 to?????????? -58. Japan is the one nation that has profited the most from globalization, and is therefore the most severely punished now that it is in retreat. Exports have dropped by half, industrial production plunged 9% in a month, and unemployment is soaring. Q4 GDP shrunk an unimaginable 3.2%, double the fall seen in the US. The last time the numbers were this bad, two atomic bombs had just been dropped on Japan and it lost WWII. Prime Minister Taro Aso's government is embroiled in multiple scandals, taking his approval rating down to 23%, so the ruling Liberal Democratic Party's half century long hold on power is in doubt. Elections are due in September. Perversely, a hurried unwind of a decade long accumulation of yen carry trades has pushed the yen up just short of a 20 year high of?? ??87 in January, making the country's essential exports even less competitive, and vaporizing the foreign earnings of Japanese companies. Toyota Motors (TM) has been reduced to begging for bail out money from the government, GM style. The government has passed four bailout packages in the past year totaling 13% of GPD, none of which have so far been spent. Japan has little choice but to wait for a US economic recovery, and then grab hold of its coat tails for dear life.
4) More than $19 billion has poured into commodity funds since January 1, $4 billion more than was seen during all of last year. This explains why my beloved copper soared 35%, while gold jumped 9%. Buy hard assets, sell paper ones.
5) If you want to finance any new business ventures in the San Francisco Bay Area, go to the Bank of Marin. They were one of the first four banks to repay TARP money to the Treasury today. Apparently they didn't want to undergo the full proctologic exam the Feds were threatening.
QUOTE OF THE DAY
'Chance favors the prepared,' said the great French chemist Louis Pasteur.
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