May 2009

May 29, 2009

Global Market Comments
May 29, 2009

Featured Trades: (GM), ($BDI), (DRYS)
Special Shipping Issue

1)The imminent demise of General Motors (GM) will be a nail in the coffin for the commercial real estate market, which I believe will be the financial crisis of 2009. Some 2,000 dealers are being axed, dumping hundreds of millions of square feet on to a market that least wants it. These were the guys who sponsored the local baseball team and Girl Scout cookie sales, and their absence will rip the hearts out of hundreds of American communities. Much of this is prime space, near dense populations, with great frontage, adjacent retail space, completed site work, mitigated environmental work, and already zoned for commercial use. Some might get turned into mini malls, but I'm afraid more will end up as indoor climbing walls and paintball battlefields. Commercial real estate sales are off 73% this year, while vacancies have catapulted to 16.7%. Banks have seized 464 properties so far in 2009, including $7 billion worth in March alone, and thousands more are on the brink.

building2.jpg picture by sbronte

2) If you are not a captain on a bridge somewhere, ready with orders to repel boarding pirates with fire hoses, you might be forgiven for being unaware that the Baltic Dry Shipping Index ($BDI) has gone up an unbelievable 20 days in a row. This market for bulk cargo charter rates made investors seasick last year when the near complete shutdown of international trade and a cessation of credit took the index down a mind boggling 94%, from 12,000 to 650. At that level, the market was pricing in a probability that no ship would ever sail anywhere again, and that the global fleet would permanently rust at anchor. A slow thawing of credit has drawn in some hot money that has taken the BDI back up to 3,400, a handy 560% gain in six months. It has also been matching the revival of commodity markets tick for tick. The chart below looks like crude with a turbocharger. In additional to being a favorite topic to impress friends with at dinner parties, the BDI has also become a favorite of the 'green shoots' crowd as proof that the world is not going to end after all. After so many things have had great runs, there are a lot of charts that look like this now (Crude, FXI, etc.). This one is just the most extreme.

BDI-2.png picture by sbronte

3) The Athens based, Dry Ships Inc (DRYS), which operates a fleet of 40 coal and iron ore carriers, has done almost as well. After my call to buy it in December at $4, after a crash from $110, it popped to $18, and currently is churning around $7. The company launched three equity fund raisings since then, bringing in over $1 billion to pay off debt. It slashed operating expenses, cancelled orders for new ships, and wrote off defaulted charter contracts.?? The always colorful CEO George Economou, says he now has $1.67 billion in cash and is prowling for takeover targets. Keep this great trading vehicle on your radar screen as a supper leveraged call on the recovery of the global economy.

4) I met with my congresswoman last night, Ellen Tauscher of the 10th district, on her way to Senate hearings for her appointment as Undersecretary of State for rms Control and International Security. Helen started out life on Wall Street at the old Bache & Co. as one of the first female members of the NYSE, became an entrepreneur, and spent the last 13 years in congress overseeing all things nuclear ('If I told you the details I'd have to kill you').?? It looks like Obama is going to adopt Teddy Roosevelt's approach to foreign affairs of 'walk softly, but carry a big stick.' 'There's a better way to do it than just offering up our military,' she said. 'We want to go back to the high ground on the nuclear issue,' she continued, which meant restarting the destruction of some of our stock of 5,000 weapons already agreed to by treaty with the Russians. Her new responsibilities will include nuclear, biological, and chemical weapons control, the monitoring of nuclear power plants, treaty compliance, and the reigning in of Iran and North Korea's nuclear ambitions. On the financial bailout bill, for which she voted, she opined, 'If your neighbor's house is on fire, it's in your self interest to do something about it.' She thinks that California has a nonworking government model that needs a constitutional convention to fix. The Republican Party has marginalized itself by sacrificing its moderates for the sake of ideological purity. That is what prompted Senator Arlen Specter to change parties. Good luck working for Hillary at Foggy Bottom.

QUOTE OF THE DAY

'Cheap is not a sufficient condition in which to invest in these times. It has to be combined with credit worthiness,' said Marty Whitman of the Third Avenue Funds

May 28, 2009

Diary

Global Market Comments
May 28, 2009

Featured Trades: ($WTIC), ($NATGAS)

1) That great sucking sound you hear is the air going out of the housing recovery- punctured by the collapse of the bond market and the spike in interest rates. Interest rates on 30 year fixed rate mortgages gapped up from 5.03% to 5.29% in just one day, up from the 4.50% low two months ago. This underlines what a difficult position the government is now in. While all the stimulus spending is great, the need for epic financing is triggering a collapse of the dollar and the bond market. The resulting soaring interest rates are bound to snuff out any recovery. Obama is truly caught between the Scylla and the Charybdis. (non antiquities scholars see Homer's Ulysses).

2) Those who missed the last 50% move in natural gas got a second chance to visit the trough this week, with the pull back to $3.50 from $4.59. Buying above an industry wide 'cap in' price of $3.50 seems a no brainer to me, but is controversial nonetheless. This is a fraction of the $13.50 peak seen last year. You can bet that every electric power utility in the country is scampering to acquire advance supplies, many mandated by new environmental regulations to use the clean burning fuel, taking advantage of a rare opportunity to buy at the cost of production. Natural gas is still a steal at these levels for the long term. They don't call this the widow maker for nothing, and if the volatility seems daunting, play in smaller size through the CME Emini contract, which only has $10,000 worth of underlying (2,500 MM?? BTU).

3)?? With crude topping $63 yesterday, a near double from the low, the next super spike in prices may come sooner than you think. Despite a long history of lying and cheating, OPEC has managed to cut production by 3.3 million barrels a day from last year's peak, thanks largely to the heroic efforts of Saudi Arabia. The International Energy Agency says that thanks to collapsing prices and the disappearance of financing, investment in new production facilities fell 15-20% last year. That has taken the number of rigs in use globally down 32% to 2,055. OPEC countries have cancelled or delayed 35 large projects, taking a potential 5.5 million barrels a day of potential production off the market. One of America's largest suppliers, Mexico, will flip from an exporter to a net importer in the next five years. While Obama's new pronouncements about green energy are laudable, so far, it is just that, talk, without funding and any ability to generate a significant impact on the market for a decade. One speech doesn't slow down the five ultra large crude carriers headed our way every day. There hasn't been a whisper about conservation. Read the writing on the wall. If and when we do get a real economic recovery, watch out! $200, here we come!

4) To highlight again the pitiful state of public education in the US, I learned that six out of the last ten winners of the Scripps National Spelling Bee were of Indian descent, and several of these were home schooled. Last year's winner was Sameer Mishra, who correctly spelled 'numnah', a sheepskin used to prevent chafing between horse and saddle. The word is not even in my Microsoft spell checker. To win these contests kids not only have to learn almost every word in the English language, they also have to be knowledgeable of the Greek and Latin root languages. A smattering of Arabic, Dutch, French, Swedish,?? and Hindi helps too (the origin of 'numnah').When told the word, the nine year old Sameer said 'That's a relief.' See http://www.youtube.com/watch?v=IL6R2uEMTdM . This year the event will be disrupted by the demise of several of the sponsoring newspapers, such as the Rocky Mountain News.

QUOTE OF THE DAY

?When commodities are available for less than the cost of production, something good usually happens,? said Wally Weitz of Wallace R. Weitz & Co. of the current natural gas market.

May 27, 2009

Diary

Global Market Comments
May 27, 2009

Featured Trades: ($KOSPI), (CAL), (GM), (TBT)

1) With North Korea testing low grade nukes and short range missiles (think WWII German V2's), and a former prime minister jumping off a cliff to commit suicide, you wouldn't think this is the best time to contemplate an investment in South Korea. You may recall that I recommended that the Hermit Kingdom be added to spell 'BRICK' with a 'K' last January.
Korea is in fact somewhere in between a true emerging market and a developed country, with lower risk and lower returns, than say a Taiwan or an India. Let's see how that call faired. After hitting a low of 998 in March, it soared 45% to a seven month high. The recent troubles have pared it back by 10%. For long term investors, this is opening a rare window to scale into some exposure here. Short term traders should wait for a bigger pull back. They used to say you bought Asia only when there was blood in the streets. This isn't really blood, but is close enough.

2) Just a little note to point out that my long term Treasuries short recommendation has gone ballistic, hitting a new high of $56, and that the futures have crashed to 116 1/2. The ten year yield has ratcheted up to 3.56%, a new high for the year, and the 30 year to 4.5%. The market is finally reading the writing on the wall. Who thought the sale of $100 billion in new paper was going to go well? The dealers are now choking on this stuff. I'm sure government agents are now scouring the country for new sources of high grade linen, the best raw material for printing new $100 bills. My calls don't always work out this well this fast, so please indulge me, and let me savor the moment. Let the crash continue. Instead of focusing on the bankruptcy of GM, we should consider the United States government going under, as this cataclysmic move in federal debt seems to be presaging.

3) Continental Airlines (CAL) is suing nine of its former pilots, claiming that they entered into 'fake' divorces in order to make early withdrawals from their pension funds. The aces in question took out up to $900,000 each, even though they continued living with their ex spouses and kept legal proceedings secret from their families. The pilots cashed in because they were afraid CAL would go bankrupt before they retired, wiping out any obligation to pay benefits. Do you suppose they know something we don't? One has already returned the money. Do you suppose this is going on at General Motors (GM) too?

4) Take a look at the clock below, which I obtained courtesy of the blog of Clark Winters, and please tell me what time it is. It is the clock of investment behavior, and describes the 12 stages of a 'W' shaped recovery. I think the markets are discounting 11:00, when in fact, the economy is at 6:00, or even 3:00. Have the markets gotten ahead of themselves? Is there an arbitrage here? Despite the connection with the previous administration, I think that a 'W' shaped recovery is looking more plausible every day. I look forward to your erudite comments.

QUOTE OF THE DAY

'When asked if English should be made the official language of the United Sates, 80% said 'S??,' according to late night comedian Jay Leno.

May 26, 2009

Diary

Global Market Comments
May 26, 2009

Featured Trades: (TBT), (SPX)

1) Anyone who thinks that we have hit bottom in real estate should start smoking something else. The S&P Case-Shiller National Home Price Index fell 19.1% in Q1, the sharpest drop in history. Charlotte, NC did best, rising 0.3% while Detroit, where prices have fallen to 1995 levels, did the worst at -4.9%. San Francisco came in at -2.2%. Most disturbing is that the disease is metastasizing from the West coast and the Sunbelt to infect the entire nation. Home prices are now back to the 2000 level, meaning that we have given back the century to date. Foreclosures are accounting for up to 70% in some local markets, and while they are boosting sales volumes, they are also accelerating the downward march in prices. Today's data shows that the downward spiral is continuing, so most Americans are probably looking at another $100,000-$200,000 fall in home values. Not exactly a springboard for an economic recovery.

2) One of my core positions, the PowerShares Lehman 20 Year 200% short ETF (TBT), a bet that benefits from falling long Treasury prices, hit a new high for the year today at $54.50. Long time readers of this column got into it in December at $35. The ripple effects of last week's US downgrade chatter is still feeding into prices, exacerbated by another huge slug of new issuance this week. Treasury futures got slammed, gapping down two points to 118 3/4, and are off a breathtaking 20% from the recent peak. I think the downgrade talk is premature, and the inflation rationale for this trade is still years off. The news about another North Korean nuclear test is just noise. But when a security is as accident prone as Treasury bonds, you never know which of the panoply of negative surprises is going to hit first. I think the bond bubble has popped, and that the TBT could eventually spike to $200.

3) Today is the 60th anniversary of the launch of the Intelligent Investor, by Benjamin Graham, the Bible for all fundamental analysts. So it behooves us to recognize that multiples for the S&P 500 have just leapt from 13.1 to 15.5 times in a mere two months, the sharpest and most rapid multiple expansion in history. Did I say multiple expansion? Have the fundamentals really gotten that good, that fast? I think not. If anything, we are enjoying the calm between two back to back hurricanes. You only have three days left to sell in May and go away.

4) For readers in the Darien, CT neighborhood, I'd like to recommend a concert given by my friend David Gurwitz on June 11. The managing director of Charles Nenner Research is also a classically trained musician and composer. His own brand of music is so soothing, that it has been prescribed as therapy for stressed out traders, one of the country's few growth markets. You can listen to David's creations at http://www.youtube.com/watch?v=7kPhCr09-sA , which interestingly, has a large following in China. The funds raised will go to the Special Olympics.

QUOTE OF THE DAY

'In the land of the blind, the one-eyed man is king', said Dutch philosopher Desiderius Erasmus, in his Adagia book of proverbs, published in 1500. Once required reading for all students, he also was the originator of such modern terms as 'golden handcuffs', 'crocodile tears', 'out of tune', and 'no sooner said than done'.

May 22, 2009

Diary

Global Market Comments
May 22, 2009

Featured Trades: (GOLD), (ABX), ($XEU), (YEN), (NZD), (TO), (POT), (MON), (AFRICA), (W), (DBC)

1) I can't think of a better reason to keep a core long term position in gold than the prospect of the US losing its triple 'A' rating. The chatter about this yesterday took the barbaric relic up to a two month high of $958, a mere $50 from an all time high. Quite honestly, I never understood why the American rating has stayed this high for this long. If any other entity had increased their debt from $5 trillion to $11 trillion over the last eight years, then boosted it to $13 trillion over the last three months, their rating would have been slashed ages ago. Like to the level of Zimbabwe. Is it any surprise that gold demand soared by 38% in Q1, according to the World Gold Council? And now the Russian Central Bank is allowing other banks there to pledge gold as collateral. Keep your gold position so you don't miss the inevitable gaps up, as well as miners, like Barrick Gold (ABX).

2) When things slow down and there is nothing to do, like now, I do deep research for the unfound investment opportunity. Feel like investing in a state sponsor of terrorism? How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped? Another country lost four wars in the last 40 years. Still interested? How about a country that suffers one of the world's highest AIDs rates, endures regular insurrections where all of the westerners are massacred, and racked up 5 million dead in a continuous civil war? Then Africa is the place for you, the world's largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo. Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms. Goldman Sachs has set up Emerging Capital Partners, which has invested $1.6 billion there. China sees the writing on the wall, and has launched a latter day colonization, taking a 20% equity stake in South Africa's Standard Bank, the largest on the continent. In fact, foreign direct investment has jumped from $53 billion to $61 billion, while cross border M & A leapt from $10.2 billion to $26.3 billion. The angle here is that all of the headlines above are in the price, that price is very low, and the perceived risk is much greater than actual risk. Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. The reality is that Africa's 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure. For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It reminds me of the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years because the stakes were so high. This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has risen 59% since March, and the SPDR S&P Emerging Middle east & Africa ETF (GAF).

3) I don't normally rely on National Geographic magazine for investment advice, but in the June issue the screaming long term bull case for the soft commodities is there in all its glory. During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields.?? Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won't even mention the strain the politically inspired ethanol and biofuel programs have placed on the system. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. The net net of all of this is that food prices are going up, a lot. Entertain core long positions in corn, wheat, and soybeans on the next dip, as well as the second derivative plays like Agrium (AGU), Potash (POT) and Monsanto (MON). You might also look at DB Commodities Tracking Index Fund (DBC). These will all surpass last year's stratospheric highs at some point.

4) The prospective US rating cut is also cutting the legs out from the US dollar, which is hitting fresh 2009 lows against everything. It turns out that if the world is not going to zero, you don't need a safe haven like the dollar any more. And safe havens with a zero yield were not that great anyway. The New Zealand dollar has rocketed 30%, and the Euro has gapped through to a new yearly of $1.40.???? A lower dollar is one of the few certainties of life. The only question is how far, how fast. This further underlines my arguments to buy emerging markets and commodity producing countries.

QUOTE OF THE DAY

'People in uniform are more cautious about using force than people in suits,' said Richard Haas, a former Bush era diplomat.

May 21, 2009

Diary

Global Market Comments
May 21, 2009

Featured Trades: (EEM), (IFN), (FXI)

1)?????? Investors which took my New Year advice to load up on emerging markets are now facing the vexing problem of what to do with all of their new found wealth. The emerging market ETF has soared by 57% to $33, and two of my favorites, the China ETF and India ETF's, have doubled from their bottoms. The average emerging stock market is now up 50% on the year. The good news is that I believe this is just the down payment on a multiyear, tenfold move for many of these markets. The bad news is that all of these markets are way overbought on a short term and technical basis, and that we have to expect pullbacks this summer that could give up as much as half of the recent move. If you are a trader, take the money and run. If you are a long term investor, no pain no gain. I don't think any of these high growth plays are going to revisit the 2008 lows. Those were once in a century bottoms. This is the only long equity exposure you should have for the next decade.

2) John Doerr, partner at leading venture capital firm Kleiner, Perkins, Caufield & Byers, has been an early stage investor in Google, Yahoo,?? Amazon, Sun Microsystems, and Intuit and has one of the best 10,000 views of the long term trends. In just 15 years the Internet has grown to a $1 trillion industry with one billion users. By comparison, energy is a $6 trillion market with four billion users. While the US government was an early and massive investor in the Internet, they are nowhere in the energy sector. Only five of the top 30 wind, solar, and battery companies today are American, and we are way behind in research. What would the world look like today if Microsoft were a German company, and Google, Yahoo, Ebay and Apple were Asian? We don't want to replace a dependence of foreign oil with a dependence on foreign batteries. While I realize that John, who dates back to the 8088 chip days at Intel, is looking primarily for VC plays in the next big disruptive technology, it is always helpful to know what the smart money is doing.

3) There are very few people I drop everything to listen to, and one of them is Daniel Yergin of Cambridge Energy partners, your go to guru on all things oil. He says that our imports of Canadian tar sands oil have doubled since 2000 to 19% of the total, and may reach 40% by 2035, keeping it America's number one source of foreign supplies. The problem is that tar sands burn the majority of energy they extract on site to 'manufacture' more oil, creating a mine to tailpipe carbon footprint that is 10%-15% greater than conventional crude. With awareness of global warming growing, the new political realities may not tolerate this. Last year's crude crash tabled 70% on the new projects in Alberta, which are enormously capital intensive. But the next price spike will guarantee a role for tar sands, even though it is the world's most expensive source and is creating an ongoing ecological disaster.

4) I met with Richard Haas, ex-Bush administration diplomat and president of the Council on Foreign Relations, promoting his new book, War of Necessity, War of Choice: A Memoir of Two Iraq Wars. Although the focus now is on economic issues, the Obama era will be defined by the way it deals with the multiple foreign crises that are headed its way. Our most likely next war will be in Pakistan, where an unstable government of 175 million, with 100 nuclear weapons is ceding territory by the day. Obama has upped the ante in Afghanistan by sending 17,000 new troops there because we were clearly losing the war. His diplomacy initiative with Iran may defer the country from seeking its own nukes. Unfortunately, Bush thought Islamic rule there would fail, and didn't want to do anything to support it. By launching two wars in the region, we have made them justifiably paranoid, and given them a convenient whipping boy for their own economic failures. The good news is that so far, Iran has only refined reactor grade, and not weapons grade uranium. Bush invaded Iraq to launch a democratization movement in the Middle East, but achieved the opposite result, and made Iran the new regional power. Bush cherry picked his intelligence and surrounded himself with sycophants to achieve the conclusion for war he wanted, with disastrous consequences. There are a flood of new Iraq books out there and this is one of the better ones.

Looking for a Way Out

QUOTE OF THE DAY

'Green new energy could be the mother of all markets, said John Doerr, partner at leading venture capital firm Kleiner, Perkins, Caufield & Byers.

May 20, 2009

Diary

Global Market Comments
May 20, 2009

Featured Trades: (VIX), (JAPAN)

1) California voters resoundingly rejected all five out of six budgetary measures by an overwhelming two to one margin, setting the stage for a new financial crisis. Trashed at the polls were plans to create a rainy day fund, improve education, borrow from the state lottery, and pay for children's services and mental health. Only prop 1F, freezing legislator pay raises during deficit years, passed. The state now has to immediately cut spending by $21 billion by laying off 10,000 teachers, 5,000 other state workers, and shortening the school year by seven days. It will raid every city and county government for additional cash. The state will also release 20,000 non violent state prisoners and suspend maintenance and construction on thousands of projects. My home town high school is closing their sports and music programs. If the state's latest round of $6.5 billion in bond issues did not carry federal government guarantees, they would have been wiped out in the market. No doubt our well tanned, Austrian immigrant governor, Arnold Schwarzenegger, who was in Washington DC for a CAFE photo op with Obama, will be sent back to the gym to pump iron sooner than he thinks.

2) Traders are making much of yesterday's drop of the volatility index (VIX) under 30% for the first time since the Lehman bankruptcy in September. Please see my April 7 forecast that it would collapse from 40%.?? Are we now at the bottom of a 30%-50% range, or will 32% be the new ceiling on the way back down to the 10% we saw two years ago? Part of the confusion springs from a misunderstanding of what the VIX is by ordinary investors. 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 that shorted out of the money calls on VIX higher up, are now taking profits. But the VIX will crash again when markets go to sleep, as they inevitably will. Believe me, trading around a low VIX is your worst nightmare. Traders don't pull down million dollar compensation packages playing 'Solitaire' on their computers.

3) You know things are bad when traders celebrate a Q1 GDP of minus 4%, better than the 4.4% that had been forecast, but still the worst in history. The main causes were a 26% decline in exports and a strong yen, which diluted foreign profits. Apparently, people don't rush out and buy a new Lexus when they lose their jobs. Many economists are hoping for a recovery when the government's $160 billion stimulus package hits seriously pared back inventories. However,?? global asset allocators are facing a larger quandary. What is Japan's role in the 'new' world? It is not an emerging market, nor is it Europe or the US. It is on the doorstep of the world's worst demographic problem, and its labor is not exactly cheap. But chastened by its own financial crisis that started 20 years ago, it has some of the few global banks left standing, as well as some world beating companies, and a great neighborhood customer in China. As American power declines, will it fall into the Chinese orbit? Maybe country allocations don't matter anymore. Until either the Japanese or I figure this out, I'd rather stand aside. This is coming from someone who lived there ten years.

4) I never cease to be amazed by the feedback I get on my work from around the world. Yesterday, I published a piece on the dire state of shipping in Singapore. So of course, I find a chart of the exact locations of all of the troubled ships in question in my in box this morning, sent by a follower in the island nation. If I go to Google Earth, I can even get a close up satellite view of bored crews lounging around the decks playing cards. There truly is nowhere to hide anymore.

QUOTE OF THE DAY

'The people of California don't like to be told what to do,' said California's Governor Arnold Schwarzenegger.

I Won?t Be Back

May 19, 2009

Diary

Global Market Comments
May 19, 2009

Featured Trades: (PBR), (TM), (ABX)

1) Obama announced the adoption of California's stringent CAFE standards nationally, which will force car makers to improve gas mileage to 39 mpg for cars and 30 mpg for trucks in six years. The move is expected to save 1.8 million barrels/day of crude by 2016, cutting imports by 10%. But it is expected to raise the cost of a new car by $1,300. Left unsaid among the smiles and platitudes is that fact that the Japanese have been preparing for this day for 20 years, and the Big Three, with nothing even remotely close on the drawing board, have been hung out to dry by the consumer. One man behind Obama stood especially tall. The new regulations put Toyota USA (TM) president Jim Lentz in the sweet spot, with the largest hybrid market share of any manufacturer. This month its third generation, $22,000, 50 mpg Prius is bringing new customers into the showrooms in droves, helping to boost MOM sales by 15%.

2) I ran into a couple of geologists from the Brazilian oil company Petrobras (PBR) who knocked my socks off when they told me about the quality of the crude they were pulling out of their new deep offshore Tupi field. They are drilling at 20,000 feet and getting 15,000 barrels a day of hot, light sweet crude blasting back in their faces under its own pressure; the kind of premium crude you normally only find in the Middle East. Overall, the company plans to boost production from 2.4 million barrels/day today to 3.6 million in five years and 5.7 million in ten years, or half of Saudi Arabia's current production. I was unable to pin them down on the true cost of the offshore production, meekly claiming they didn't break the figures out separately. They did admit, begrudgingly, that it is well below $40/barrel compared to the $80 offered by some industry analysts, and $9.20 for the company's own weighted average cost. This confirms my belief that the next move in crude is up to $200, and then down to $10, as it is replaced by alternatives over time. Be sure to own PBR on the up leg.

3) I try not to fudge articles from the New York Times too often, but kudos on their piece about the glut of ships stranded in Singapore, the casualties of the near shut down of international trade. The greatest assemblage of ships since the D-Day invasion, some 735 bottoms totaling 42 million tons are begging for charters. With China-Europe 40 foot container rates down from $1,400 to $150, and bulk carriers falling from $300,000 to $10,000 a day, it could be a long wait. Singapore became the parking place of choice because of cheap labor, fuel, shipyards, mild weather, and minimal environmental regulations. A 300,000 ton crude carrier can make a pretty messy neighbor. Easy finance sparked a shipbuilding boom and oversupply that is now leading to major losses by European banks. Isn't this a story we've heard before? There is something wrong with this picture. Does a 35% move up in the Dow jive with 4% of the world's commercial fleet rusting in a forlorn Asian port? I don't think so. When I read stories like this, I go home and stroke my short positions until they purr, telling them their day in the sun is coming.

4) Peter Monk's Barrick Gold (ABX) snared approval for its Pascua-Lama adventure after Chile and Argentina signed a tax treaty on how to treat the mine's profits. When completed, the $3 billion, 13,000 foot high project will be one of the world's great engineering achievements, extracting a forecast 800,000 ounces of gold and 35 million ounces of silver in the first five years. This will raise the company's production by 10% at a time when precious metals are getting increasingly hard to find. Just another reason to buy one of the world's best managed companies producing the most sought after product.

QUOTE OF THE DAY

'The market is now getting 'D's' instead of 'F's', said Chris Johnson of the Johnson Research Group.

May 18, 2009

Diary

Global Market Comments
May 18, 2009

Special Las Vegas Money Show Issue

Featured Trades: (PBR), (CX), (DUK), (GOLD), (SILVER), ($BSE)

1)???? ??Last week, I dropped in on the rock festival of investment conferences, the Las Vegas Money Show, at the posh and cavernous Mandalay Bay Hotel. A mild 95 degrees outside, I mingled with the Hawaiian shirt and cargo short wearing masses, with a sharp eye out for the next big investment themes. The event was organized in partnership with the top drawer financial blog aggregator, Seeking Alpha. The high profile confab attracted several industry celebrities, such as OptionMonster?s John Najerian, Standard & Poor?s Sam Stoval, retired Fed Governor Robert McTeer, and the Gartman Letter?s Dennis Gartman.?? I have to confess, I was stunned by the variety of exhibitors presenting their wares. Heavyweight players like TradesStation and Thinkorswim were there, offering presentations of their sophisticated trading tools on the hour. Some of the widely followed newsletter families were there, including Mark Skousen's Forecasts & Strategies. I was surprised by the number of great industrial companies there using the venue for traditional investor relations, like Petrobras (PBR), my favorite emerging market oil company, Cemex (CX), my preferred developing infrastructure firm, and Duke Energy (DUK), the best US electric power utility. There was a profusion of gold and silver mining companies, bullion dealers, and American eagle bearing coin brokers, which I thought was unique to Nevada. But regulars tell me this is a trend that has been building nationally for a couple of years. Reeally! Is that how gold flew to $1,000??? Exploration oil and gas limited partnerships were also in abundance, side by side with alternative energy start ups looking for new venture capital. There are in fact 11 Money Shows put on around the country each year by Sarasota, Florida based Charles and Kim Githler and their hard working staff of 70, attracting 75,000. In the business now for 31 years, they have expanded their offerings to international venues, and their ?Money Cruises? have made them the largest booking agent for Crystal Cruises. All in all, it is a must go event for those who need to keep in touch with the broader investing universe out there.

2) One can't help but be overwhelmed by a sense of history walking by the Las Vegas Strip's City Center; unquestionably one of the worst commercial real estate disasters ever. The glitzy, ultra modern, Cesar Pelli designed. 63 acre complex occupies the quarter mile between the Bellagio and the Monte Carlo Hotels and will become one of the wonders of the world if it is ever finished. Nearly completed are the Mandarin Oriental, Aria, Veer, Harmon, and Vdara Hotels, offering 4,000 rooms and 2,600 condos. They will be adorned by two casinos, a convention center, a new theater for the Cirque du Soleil, an enormous shopping mall, and parking for 7,500. The finished project will employ 12,000. But strikes and overruns sent costs soaring to $8.5 billion, and the project is now hopelessly behind schedule. I saw a total of one worker in a cherry picker working on the building with a screwdriver. The other guy going up in an elevator turned out to be a lender contemplating a jump off the top. Kirk Kerkorian wanted to build the ultimate Sin City destination resort when his MGM-Mirage partnered with Dubai World years ago. The relationship has soured, with Dubai World filing suit against its partner for negligence and mismanagement, which it later withdrew. The bigger question is who is going to stay in these rooms? Those who financed trips to Las Vegas with home equity loans or subprime credit cards definitely are not coming back. If the project files for bankruptcy, it will leave a gigantic eyesore at the heart of the tourist area as a monument to excess, in a city of excesses. Unfortunately, what happens in Vegas doesn't always stay in Vegas, as a financial collapse would send shivers through the industry globally.

The Condos Are Not Moving

3) The Las Vegas residential market has broken every record with the speed and the viciousness of its collapse over the last two years, with the median price plunging 56% from $360,000 to $160,000. Driving around the outskirts of the city there is no shortage of half finished neighborhoods, complete with vacant shopping malls. But after a near shut down in December, it appears that the market has hit at least an interim bottom. In March, a halving of the price produced a doubling of the volume, with new sales jumping from 1,954 to 3,626 units in a year. Bargain basement buyers are definitely chewing through record high inventories, as they are in other black holes like Sacramento and Stockton, California. I don't want to get too excited here, but this is what bottoms look like.

4) I know that Las Vegas is not in India, but I can't let today's letter go out without mention of today's stunning move in India. The Congress Party won an upset victory in national elections, its coalition taking 262 out of 543 seats, paving the way for much needed economic reforms. At the top of the list is a liberalization of foreign investment restrictions, which will unleash torrent liquidity into the stock market. After two limit up moves took the Bombay Sensex ($BSE) up 17%, exchange officials shut down the market. This 'melt up' is a great 'tell' for global capital markets as it shows you the tremendous extend of the latent buying of high growth emerging markets that is out there. This is a theme that I have been hammering away on all year, and will continue to do so until I cash in my chips (gratuitous Vegas reference).

QUOTE OF THE DAY

'In America, the cruelty of not letting your staff know where they stand is outrageous,' said Jack Welch, former CEO of General Electric.

May 15, 2009

Diary

Global Market Comments
May 15, 2009 Featured Trades: (NG), (NATGAS), (WTIC)

?Fiat Lux?

1) Reformed oil man, repenting sinner, and borne again environmentalist T. Boone Pickens says that ?when we turn the US green, it will have the best economy ever.? I met the spry, homespun billionaire at San Francisco?s Mark Hopkins on a leg of his self financed national campaign to get America to kick its dangerous dependence on foreign oil imports. For the past 30 years, the US has had no energy policy because ?no one wanted to kick a sleeping dog.? Production at Mexico?s main Cantarell field is collapsing, and will force that country to become a net importer in five years. Venezuela is shifting its exports of its sulfur laden crude to China for political reasons, once refineries in the Middle Kingdom are completed to handle it. Unfortunately, the collapse of energy prices since June and the disappearance of credit have put urgent alternative energy development on a back burner, with his preferred natural gas (NG) taking the biggest hit. If the US doesn?t make the right investments now, our energy dependence will simply shift from one self interested foreign supplier (Saudi Arabia) to another (China). Wind and solar alone won?t work on still nights, and can?t power an 18 wheeler. Don?t count on the help of the big oil companies because they get 81% of their earnings from selling imported oil.The answer is in a diverse blend of multiple alternative energy supplies from American only sources.? Although Boone now has Obama?s ear, it?s a long learning process. Boone has donated $700 million to charity, and says the 20,000 trees has planted should offset the carbon footprint of his Gulfstream V. I worked with Boone to organize financing for a Mesa Petroleum Pac Man oil company takeover in the early eighties, when it was cheaper to drill for oil on the floor of the New York Stock Exchange than in the field. Now 80, he has not slowed down a nanosecond.
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2) There is an easier, cheaper, and faster way to solve the banking crisis which no one is talking about on Capitol Hill.? If collateralized debt obligations (CDO?s) are the problem, just get rid of them! Desecuritize them! Just convert them back into the underlying loans. There are $1.4 trillion in CDO?s outstanding backed by Alt-A and subprime loans in the form of 3,700 individual securitizations of perhaps 3.7 million loans. Over 68% of the loans backing these bonds are current.?? Mark to market rules are forcing the banks to carry this paper on their balance sheets at 50%-80% discounts. The problem is that mark to market is a meaningless accounting fiction when there is no market. If you break up these securities and place the underlying loans back on the banks? balance sheets, the good mortgages can be valued at 100% of face, and those behind in their payments or in default can be discounted to maybe 70% because they are still secured by the value of the homes. This would boost the value of the entire asset class from the current 20-50 cents up to 90 cents on the dollar. Restored balance sheets would enable banks to resume lending. Of course it would be a massive admin job unwinding the rats? nests behind some of these securities, but Heaven knows there is abundant subprime and Alt-A expertise available for hire these days. Just sift through the ashes of Lehman Brothers and Bear Stearns. It is a workable plan, and therefore is unlikely to ever see the light of day.
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3) Ian Bremmer, President of the Eurasia Group, the world?s preeminent independent risk control consultant, passed through town last week to promote his latest book, The Fat Tail: The Power of Political Knowledge for Strategic Investing.The book details how money managers must become cognizant of and deal with foreign laws, regulation, government turnovers, civil unrest, expropriation,terrorism, and war, in order to survive in this increasingly complex and interconnected world. Globalization has ground to a screeching halt. Governments are now more important than multinationals in influencing our economic future, and a new form of ?state capitalism? is emerging. We are shifting from a unipolar to a non polar world. Iraq is morphing from war into a peace keeping operation, while Afghanistan is rapidly moving in the opposite direction. Geopolitical risks are rising. With crude at $52 a barrel there is no Iran premium currently in the market, and $20-$30 could price in very quickly. China and Brazil are the long term winners in the new set up, and the dollar is the big loser. The greatest risk to the US is its over dependence on borrowing from China. This is a must read book for any hedge fund manager struggling with his global risk exposure and looking for some great long term plays.
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4) Symantec says that 15,000 to 20,000 new viruses are being created every day, forcing it to upgrade its software every five minutes. Google admits that one out of every 100 searches connects with a virus infected website. There is no prominent website that has not been affected, including www.obama.com President?s grass roots organizing website. Many of these are created by Russian cyber gangs, where boys as young as 14 can earn up to $30,000 a year.There is no local enforcement in the former Soviet Union as the victims arepredominantly ?rich? Americans.
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QUOTE OF THE DAY

?The depression is over,? said President Herbert Hoover in May, 1930. It still had eight more years to run.