May 2009

May 14, 2009

Global Market Comments
May 14, 2009

Featrured Trades (GM)

1) I?ll tell you what GM?s problem is. My dad was a lifetime GM customer, religiously?? buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize home. Thirty years ago I told him he was doing GM no favors by buying their cars, and the only way to force them to improve a tragically deteriorating product was to buy better made German and Japanese vehicles. This was right after the State of California forced auto makers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, ?I didn?t fight the Japanese for four years so I could buy their cars.? (He was a Marine). GM?s problem is that my Dad passed away seven years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are only 1.5 million left. All of them loved Detroit because it built great Jeeps, Sherman tanks, and half tracks that brought them home from harm?s way. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese and Indian vehicles. It is no coincidence that GM?s problems really accelerated with the passing of the ?greatest generation.? During the last 35 years, when Japan?s share of the US car market climbed from 1% to 40%, I begged GM to mend their ways and build a quality, price competitive product that Americans wanted to buy. They answer was always the same: ?Nobody can tell GM how to build cars.? Maybe someone should tell them.

2) Iam more convinced than ever that real estate has another 25% to fall, and best case, it is dead money for another five to ten years. The New York Times produced some insightful data on inflation adjusted home prices for the last120 years, which baselines at a $100,000 for a single family home in 1890. Few people realize how superheated the recent real estate bubble really got. Past bubbles very consistently peaked at $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000 in 2005, almost double the previous record highs. And while we have dropped 34% since then, to $135,000, we haven?t even fallen tothe past all time highs yet. If you look at historical lows, my call for a further 25% slump looks positively bullish. We saw lows consistently around$66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000 in 1976,1983, and 1996. These figures suggest the best case low is down a further 28%,and the worst case is down another 51%. I think I?ll go find something else to trade.

3) After a merciless torrent of budget cuts, California?s public education system has been bled dry, and now ranks 50th in the US, down from number one when I attended classes here a half century ago (oops!). The golden state now spends more on its 170,000 prisoners that on educating the young. When I recently tried to get Fedex to send a package to Japan, the clerk thought it was a city on the east coast and refused to take it because she couldn?t find the zip code. I ended up mailing it. Those trying to engineer an economic recovery in California don?t understand that you can?t become globally competitive with a dumbed down work force.

4) The migration of American business to online formats is accelerating, with over 1,000 new business being created every day. Internet advertising continues to go from strength to strength, and is one of the few growth sectors of the economy. The Interactive Advertising Bureau reported that online advertising grew 10.6% last year to $23.4 billion in a year when the total advertising market shrank from $132 billion to $125 billion. It now ranks as the third largest ad distributor in the US, after newspapers ($34.4 billion) and TV ($28.8 billion). Search advertising dominated, with 45% of the total. Video adverting was the fastest growing sector, up 123%. Display advertising managed 8% growth, even after the collapsing economy caused a very week fourth quarter.

QUOTE OF THE DAY

?Cash bonuses on Wall Street are going to become a dinosaur,? said Jon Corzine, governor of New Jersey, and former chairman of Goldman Sachs.

May 13, 2009

Diary

Global Market Comments
May 13, 2009

Featured Trades: (GE), (SPX), (BRAZIL)

1) Ahem. Excuse me. Did someone out there say sell in May and go away?. Do I sense that risk is coming back into the market? Is it time for a reality check? Helloooo! Crude at $60? Take a look at your charts and you will see a whole host of them rolling over from nosebleed territory and dying on withering volume. You can start with the S&P 500, the DAX, the Nikkei, and go on to the dollar. These markets have summer written all over them. The flip side is that gold and silver have been positively perky, and the train wreck that has been long Treasuries are way overdue for a short covering rally. 'Things could be worse' was never a great argument for a new bull market. The dead cat has bounced. If ever there was a time to keep your powder dry it is now. The wafting scent of Coppertone beckons.

2) At the Harvard Business School they teach you that bond holders are senior creditors, followed by preferred stock investors and ordinary equity owners.?? A former community organizer from Chicago has taken over the role of a bankruptcy judge and upended this precedent. We are now learning that the 'prepackaged bankruptcy' of General Motors (GM) is Obamese for screwing bond investors, who are being stripped of their rights, so the United Auto Workers can have a booby prize. For years, widows, orphans, and pension fund investors regularly flocked to GMAC debt to capture the 400 basis points over Treasuries they offered. Now we know why. The last time I checked, the bond holders were only being offered 28 cents on the dollar, compared to the 43 cents the employee health care trust is getting; plus, they get control of the company. No wonder the hedge fund owners of the bonds prefer a normal bankruptcy. At least they would get the factories. But they are doing better than unsecured creditors, who are getting a mere five cents on the dollar. The trashing of bond holders' rights makes a mockery of 400 years of contract law, and is not exactly the right signal to send when you are betting the future of the country on selling gargantuan quantities of more bonds to finance exploding federal deficits.

3) Travel guru, Arthur Frommer, says that now is the best time to travel in 20 years, thanks to a combination of a strong dollar and desperate price cutting forced by the recession. One year after oil hit an historic peak at $148/barrel, when $500 fuel surcharges abounded and the demise of the travel industry was widely predicted, costs in some countries, like Mexico and Costa Rica are 50% lower than a year ago. Talk about price elasticity with a turbocharger! Frommer believes there are three sea change trends going on today. Business is moving away from the big three travel websites, Travelocity, Orbitz, and Priceline, who have more preferential side deals with airlines than can be counted, towards pure aggregator sites that almost always offer cheaper fares, like Kayak.com, Sidestep.com, and Fairchase.com. There is a move away from traditional 48 person escorted bus tours towards small group adventures, like those offered by Gap Adventures, Intrepid Tours, and Adventure Center, that take parties of 12 or less on eye opening public transportation. There has also been a huge surge in programs offered by universities that turn travelers into students for a week to study the liberal arts at Oxford, Cambridge, and UC Berkeley. His favorite was the Great Books programs offered by St. Johns University in Santa Fe, New Mexico. He says that the Internet has given a huge boost to international travel, but warns against user generated content, 70% of which is bogus, posted by the hotels and restaurants themselves. The 79 year old Frommer turned an army posting in Berlin in 1952 into a travel empire that publishes 340 books a year, or one out of every four travel books on the market. I met him on a swing through the San Francisco Bay Area (his ticket from New York was only $150), and he graciously signed my original 1968 copy of Europe on $5 a Day, which was crammed in my backpack for two years. Which country has changed the most in his 60 years of travel writing? France, where the citizenry have become noticeably more civil since losing WWII. Bali is the only place where you can still travel for $5/day, although you can see Honduras for $10/day. Always looking for a deal, Arthur's next trip is to Chile, the only country he has never visited, because the currency there has crashed.

4) Take a look at the recent performance of Brazil's Bovespa stock index, which I strongly recommended on February 4. It has jumped a healthy 68% since the March low, and gives credence to my theory that when global stock markets recover, emerging markets will rise twice as fast as developed ones. The best effort the Dow could mount was 33%, and even that is looking pretty wobbly now. There is really only one global stock market now that moves in the same direction most of the time. Only volatility varies country to country, and when conditions are good you want to own the most volatile, high beta ones. Look at the ETF for Brazil (EWZ), which offers the best of all worlds, an oil and food exporting emerging market with big cash reserves and a strong currency.?? Also on your shopping list should be the ETF's of other young natural resource exporting countries like Canada (EWC), Australia (EWA) so you can cash in on the long term trends in favor of commodities. When it comes time to be bullish on equities again, this is where you want to be long.

QUOTE OF THE DAY

'Don't forget my brain tumors,' said Arlen Specter, when listing the infirmities that will challenge him as a new Democratic Senator, having just defected from the Republican party.

May 12, 2009

Diary

Global Market Comments
May 12, 2009

SPECIAL FINOVATE STARTUP 2009 CONFERENCE ISSUE

Featured Trades: (GE), (GM), (LSE-AJG)

1) Is your bank giving you the cold shoulder on your last loan application, not retuning your phone calls, or asking for interminable documentation? Just bypass them. Try an online peer to peer bank, the Internet's answer to the financial crisis. With massively expensive branch networks, 19th century loan processing, inches of closing documents, and a boatload of regulation, banks are ripe for cannibalization by low cost predators. I had a chance to speak to several of these entrepreneurs at the recent Finovate Startup 2009 conference in San Francisco. The simplest model matches a one page online loan application and FICO score with a single lender at interest rates of around 9%, plus a small fee. More advanced organizations pool borrowers and lenders, and offer secondary markets for loans, if you want to cash out before maturity. Prosper was the oldest present, and unfortunately was early enough to get sucked into the subprime debacle. They have since relaunched their product with tightened lending standards. Lending Club came next, followed by Pertuity Direct and National Retail Fund. People Capital is pursuing a niche market matching up student borrowers with lenders. We are not far off from the sector being viewed as a new alternative asset class, with the total loan book now exceeding several hundred million dollars. Watch this space.

2) I met Jack Welch last night, the legendary retired CEO of General Electric (GE). 'Neutron' Jack gets the credit for boosting the market cap of GE from $13 billion to $400 billion in 20 years, turning it into a Wall Street darling in the process. The 'hedge fund that makes light bulbs' is the last big industrial finance company standing, and when the market turns it will make a fortune, because there is no competition left. Jack is currently on the board of a private equity firm and several Internet media start ups. He gives Obama an 'A' for leadership and communication, but believes his economic policies are seriously flawed. They are based on a 4% annual growth assumption for the next decade. We never managed to achieve that rate during the go go days of the eighties and nineties, let alone attempt it during a new age fraught with deleveraging and frugality. If we get only 2.5% instead, the deficit will explode from $13 trillion to $30 trillion, at which point 'we will be cooked.' Who knew Jack was a closet gold bug, dollar bear, and inflation hawk? Jack thinks GM should be allowed to go bankrupt, and the current arrangement where the UAW gets the company and the bond holders get pennies on the dollar is 'bizarre.' Jack was passing through San Francisco at the end of a national tour promoting his wife Suzy's new book '10-10-10', which is about how to create a 'values driven life.' In his heyday, Jack was considered the best manager in the country. Never one to mince words, he is an absolute terror now that shareholder feelings are no longer a consideration.

3) Insider buying and selling is supposed to be a great leading indicator of a company's fortunes. Bob Lutz, vice chairman and head cheerleader of General Motors (GM), has sold 81,000 shares of his holdings in the troubled car maker at $1.61/share, reaping a mere $131,000. Only 18 months ago, the shares were worth $3.4 million. With Bob, the great killer car that was going to save the company was always coming out next year, and this went on for 30 years. Bob is an ex Navy pilot, and in his free time flies and maintains his vintage jet fighter. Good thing we don't reward failure.

4) To give an idea of the market's new appetite for risk, look at Japanese small cap stocks. This sector was one of the worst hit in the recent melt down, but historically it outperforms by a large margin in the first 12 months after the end of a recession. Once their survival is no longer in doubt, these often debt dependent stocks rocket on any improvement in the economic trend. This is the only time I ever hire outside managers, because I haven't the patience, the manpower, or the expertise to scour over the balance sheets and earnings statements of hundreds of obscure little niche companies, especially when they are written in in Japanese. I have always been a big cap player because I have dealt with investors who had to get $100 million to work in the market in a hurry, an impossibility in the small cap arena. One who does this magnificently is my old friend Ed Merner who runs the Atlantis Japan Growth Fund (LSE-AJG) traded in London. It has been on a real tear for the past month, and at $7.80 is at a bargain basement 18% discount to its NAV of $9.47, if you are lucky enough to find shares to buy.

Atlantis Japan Growth Fund

QUOTE OF THE DAY

'We almost lost the country in September,' said Jack Welch, former CEO of General Electric.

May 11, 2009

Diary

Global Market Comments
May 11, 2009

Featured Trades: (DVN), (CHK), (NATGAS), (GOLD), (SILVER)
Special Natural Gas Issue

1) I know what keeps Obama awake at night. Let's say we spend our $2 trillion and get a couple of quarters of weak 2% type growth. Then once the effects of the stimulus wear off, we slip back into recession, setting up a classic 'W' type recession. Unemployment never does stop climbing. This happened to Roosevelt in the thirties. So congress passes another $2 trillion reflationary budget. Everybody get's wonderful new mass transit and alternative energy infrastructure. But with $4 trillion in spending packed into two years inflation really takes off. The bond market collapses, the dollar tanks big time, gold goes ballistic to $3,000, and silver to $50. Ben Bernanke's replacement has no choice but to engineer an interest rate spike, taking the Fed funds rate up to a Volkeresque 20%. Housing, having never recovered, drops by half again. This all happens in the 2012 election year. Obama is burned in effigy, a Mormon is elected president, and the Republicans, reinvigorated by new leadership, retake both houses of congress. We invade Iran. Crude hits $200. This is not exactly a low probability scenario. Remember Jimmy Carter? This is why junk bond yields are still stubbornly high at 14.5%, and credit default swaps are at lofty levels. The risk of Armageddon is still out there. Just thought you'd like to know. Pass the Ambien.

2) I am reprinting below in all humility my April 14 recommendation to buy natural gas at $3.60, the strongest, most aggressive, table pounding advice I have given this year (http://madhedgefundradio.com/April_14__2009.html ), with appropriate apologies to red headed people. Only years of driving around hot, sweaty, dusty roads, wildcatting for good old CH4 in Texas and Colorado, could enable me to make such a call. After one last puke out round of stop loss selling that took it down to an unbelievable $3.22, it soared 36% to $4.38. Chesapeake Energy (CHK) rocketed by 85%, and Devon Energy (DVN) roared by 71%. No doubt that it has been dragged up by crude's move to $58, kicking and screaming all the way. Although this is not as impressive as crude's 80% lift off its $32 bottom, it is still one of the most rapid and impressive moves of any commodity this year. You can also bet that every electric power utility in the country was scampering to acquire advance supplies of the clean burning fuel, taking advantage of a rare opportunity to buy at below the cost of production. While the juice may be out of this for a day or weekly trade, natural gas is still a steal at these levels for the long term.

3) (Dated April 14, 2009) '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 byproducts 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 plants 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 big 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.'

4) One of the great asset management blunders of all time has to be the EC's decision to sell its gold reserves in the wake of the launch of the Euro in 1998. The decision led to the fairly rapid sale of 3,800 tons of the yellow metal at an average price of $280/ounce, reaping about $56 billion, according to the Financial Times. Today with gold at $920/ounce, the stash would be $52 billion more. On top of this, the Swiss National Bank is poorer by $19 billion, after offloading 1,550 tons of the barbaric relic. The large scale, indiscriminate selling depressed gold prices in the early part of this decade. It is a classic example of what happens when bureaucrats take over the money management business, ditching the best performing investment on the eve of a long term bull market. The funds raised were largely placed in poorly performing national Eurobonds. At least they didn't buy stocks ? or invest with Bernie Madhoff. The good news for gold bugs is that these reserves are largely drawn down now, and future selling will trail off in the years ahead.?? The shrinking supply can only be positive for prices.

QUOTE OF THE DAY

'The rate of profit is always highest in the countries that are going fastest to ruin,' said Adam Smith, in The Wealth of Nations, on the dangers of 'overtrading.'

May 8, 2009

Diary

Global Market Comments
May 8, 2009

Featured Trades: (NS), $USB), (TBT)

1) The May nonfarm payroll came in at minus 539,000, better that the consensus of minus 650,000, taking the unemployment up to 8.9%. The improvement was caused by temporary hiring of government workers for the 2010 census. A peak above 10% now looks like a chip shot. Including discouraged workers, we are now at 15.8%, moving towards the great depression peak of 25%. In several industries, like autos, real estate, and construction, conditions are already worse than the thirties. It is clear that not a drop in stimulus money has led to any appreciable hiring yet. This may be the last really terrible number in this cycle, but you can expect continued hemorrhaging for a while.

2) The US Treasury's auction of 30 year bonds yesterday was a complete disaster. There were few takers of the $14 billion in paper on offer, spiking yields up 20 basis points to a six month high of 4.35%, and crushing the futures by two points.?? My beloved PowerShares US Lehman short bond fund (TBT) roared up 8%, breaking out to a new high for the year of $53.The failure is an early indication that fixed income investors are anticipating a resurgence of inflation down the road, as long dated bonds are the most sensitive to inflationary expectations. The the government hopes to sell $2 trillion in debt in the coming year, and so far the Fed has committed to buy $500 billion. Where will the rest of the money come from? China, Japan, and the UK, until now biggest buyers of our debt? Could they possibly be suffering from buyer's remorse, indigestion, new found prudence, or all three? The debacle is welcome news for commodity owners of all shades, the new hard assets of choice, especially of the gold and silver variety.?? I have been pounding the table about inflationary risks for months, and an accident like this was just waiting to happen.

3) Crude has been riding the reflationary wave, hitting a six month high of $58 yesterday. It is time to take another look at San Antonio, Texas based NuStar Energy (NS). A spinoff of Valero Energy's asphalt division, the company boasts 58.5 million barrels of storage facilities around the Gulf. The stock has already doubled since crude prices collapsed big time in October. The company has also been buying up asphalt production from other companies like CITCO, and may offer an additional infrastructure play, once Obama's $30 billion road rebuilding program starts in earnest. Since my recommendation on January 29 (see???? http://madhedgefundradio.com/January_29__2009.html) the stock has risen 15%. Given that one of the few certainties in life is that crude prices are going up, I would add to this position on any substantial dips.

4)?? The dinosaur bone market has crunched. Once a favorite collectable of high flying hedge fund managers, the prices of everything from tyrannosaurus rex to brontosaurus fossils have skidded. A recent auction of a triceratops skeleton failed to reach its minimum bid of $1 million. Even prices for fossilized dinosaur excrement, a popular niche market, have gone down the toilet. The all time high for these specimens was hit ten years ago when a T-rex named Sue sold for $10 million , which after much litigation, ended up in the Field Museum in Chicago. You floor traders in the pits should go have a look at what a real predator looks like someday. Dealers are hoping that the upcoming sale of a rare three foot tall, 18,000 year old possible pre human hominid, homo floresienses,?? discovered in Indonesia, will help revive the market.

QUOTE OF THE DAY

'Put ears on it and call it Lassie,' said CNBC reporter Rick Santelli of yesterday's disastrous 30 year Treasury bond auction.

May 7, 2009

Diary

Global Market Comments
May 7, 2009

Featured Trades: (SILVER), (GOLD), (TIPS)

1) If you don?t rush out and buy silver right now at $13.70 an ounce, I?m going to pick you up and shake you by the lapels of your coat until your false teeth pop out and fall clattering to the ground. Take a look at the chart below and hold in wonder the definitive break out to the upside from its recent tedious range. The trigger is a selloff in global stocks from their recent heady nine week run. The metal is at the low end of its historic valuation relative to gold, which has ranged between 12:1 (Remember the Hunt Brothers?) and 70:1m and is currently 65:1. Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon's mine, to Nazi gold bars in Swiss bank vaults, and would fill two Olympic sized swimming pools. But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps. Silver did take a multiyear hit when the world shifted from silver based films to digital photography during the nineties. Now rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference, as in Latin America. That means were are setting up for a classic supply demand squeeze. I think we could run from the current $13.70/ounce to the old high of $50/ounce in the next economic cycle. Since silver can trade with double the volatility of gold, this forecast could prove conservative.

2) There are now more cell phone only households in the US than land line only homes, according to the Center for Disease Control. Those who only have cell phones jumped from 7.3% to 20% since 2005, while land lines fell from 34.4% to 17.4%. Most generation 'Y' customers have never had a land line, and probably never will, and are even abandoning voice communication for Facebook, Twitter, and texting. 'Cord cutting' really took off when cheap and effective wireless routers hit the market a few years ago, and land lines, with their high costs may eventually become a dinosaur. The CDC originally got in the cell phone business in an effort to research claims that the devices cause brain cancer or any other number of maladies. The research has proved so popular with industry, it has been continued and expanded. The brain cancer was never found.

3) Five to six million students are expected to graduate from college this spring. Only 30% are believed to have nailed down jobs so far. I doubt these kids put on an average of $40,000 in debt so that could ask customers if they want french fries with their big macs. The best thing they can do now is to go for their Masters degrees, if they can get the financial aid.

4) With money pouring into equities, another window is opening for investors to go into Treasury Inflation Protected Securities (TIPS). If you believe that imminent and massive Treasury issuance is going to pop the Treasury bond bubble, and that Obama's reflationary policies are long term inflationary, you have to be looking at what TIPS offer. Investors get a US government guaranteed protection against future price hikes by raising the security's principal in line with the inflation rate. A 3% coupon TIPS facing a 10% inflation rate automatically boosts the face value of your bond from an issue price of 100 to 110, giving you a total return of 13%. You can buy these directly from the US Treasury, or buy the iShares Lehman TIPS Bond Fund (TIP). Of course this is all based on the government's calculation of the inflation?? rate, which we all know is rigged, and has massively understated the true inflation rate for decades. But some protection is better than none. The best time to buy flood insurance is at the end of a long drought.

QUOTE OF THE DAY

'I'm used to a market that trades off of hard data, not one that is blindfolded and walking across the interstate,' said David Bahoric, at Trade the News about the recent run up in the stock market.

May 6, 2009

Diary

Global Market Comments
May 6, 2009

Featured Trades: (BAC), (WFC), (1688.HK)

1) Volatility alert! Volatility alert! The ADP employment report showed 491,000 in job losses for April. Whoopee! We are only losing 16,000 jobs a day instead of 20,000! But the consensus for the Friday's nonfarm payroll is -650,000. The divergence is sure to boost market volatility, either pushing the market up or down big. Winner to be announced at 8:30 am on Friday, East coast time.

2) The other shoe is dropping in the commercial real estate market. Sector delinquencies on securitized loans have jumped from 0.5% last fall to 2.45% in April, the most rapid acceleration in history. Foreclosures are spreading, knocking valuations of properties down as much as 70%, wiping out the equity investors, the mezzanine debt holds, and a good chunk of the primary debt owners. The General Growth Properties (GGWPQ) bankruptcy last month, the largest on record, is further clouding the picture. The firm is trying to bring remote special purpose entities normally immune to these proceedings into the general bankruptcy. If the judge rules in their favor, it will shake the foundations of the whole industry, and send lenders into a long hibernation. Whatever the result, the commercial real estate industry that rises from the ashes years down the road will be unrecognizable. Watch the shares of Bank of America (BAC) and Wells Fargo (WFC), two of the biggest lenders in the sector. Is it any wonder that BAC disclosed today that they need another $35 billion in capital, on top of the $40 billion in TARP money they have already taken, and that WFC needs and additional $15 billion?

3) The real estate tracking firm Zillow.com estimates that 30% of all US homes are now underwater on their mortgages, equivalent to 27 million homes. There is a 'shadow inventory' of a further 30 million homeowners who want to sell their houses on the any improvement in prices. Newly tightened lending criteria have permanently knocked another 10 million potential buyers from the market. Some five million of the nation's 90 million houses are either for sale, in foreclosure, or held in bank inventories. I have a question. With 72 million on the sell side, who is going to power the much heralded rebound in prices? It could be a veeery long wait. I realize there is a lot of double counting here, but you get my meaning. It all bodes for an 'L' shaped recovery in the real estate market, which means no recovery. Keep that rental. No principal risk, no property taxes, and just a phone call unclogs the toilet.

4) Chinese Internet 'B to B' firm Alibaba.com (1688.HK) is the place you go to make those T-shirts, cell phones, computer parts, and pretty much anything which you then sell to the rest of the world. The company is one of the Middle Kingdom's spectacular growth stories, with users growing from 5 million to 8 million in the last three quarters, including 1.2 million in the US. In Q1 the company dropped fees and managed to pull in another 50,000 users. It believes that the recent quarter was the bottom of this economic cycle and that we are now in an upturn, with the fastest growth seen in Brazil and India (hint, hint). Given that their business gives them a unique peak into future business flows, it is a call you should take seriously. You should also look at the Hong King listed stock, which has risen 75% to $10.50 since February. With $1 billion on the balance sheet, it is also the most cash rich Internet firm in China.

QUOTE OF THE DAY

'The reason loan documents are thick is because when they were skinny, someone lost money,' said Tom Fink, senior vice president of Trepp, a commercial real estate securities data firm.

May 5, 2009

Diary

Global Market Comments
May 5, 2009

Featured Trades: (BIDU), (GOOG), (NTES), (SINA), (SOHU), (EEM), (TBT)

1) Has anyone noticed how boring things have gotten, or is it just me? After enduring 1,000 point daily ranges in the Dow, a volatility index at 88%, and blue chips stocks going to zero, maybe my nerve endings are scarred. Has it suddenly become safe to take my entire net worth out of the coffee can I have buried in the back yard, under the garden gnome? Maybe my inner adrenaline junkie will be appeased Friday morning when the April nonfarm payroll is released. My guess is that we will get a depressing figure showing that another 600,000 plus souls have joined the ranks of the downtrodden. Certainly the markets are bracing themselves for something horrific. If I'm wrong, a less awful number will rally the markets and define a new higher limit to our trading range.

2) If you need further proof of where the future growth in the global economy is coming from, take a look at the Chinese Internet firm Bidu (BIDU), the Google of China, which I strongly recommended on March 6 (check my online archives). It has since jumped 85% to $250, and has been one of my better calls of the year. In the meantime, our Google (GOOG) rose by only 35% to $400, almost in line with the S&P 500. These two hedge fund darlings are best of breed companies, but the Chinese one outperformed the American counterpart by a factor of 2.5:1. This is the consequence of the US economy making a permanent shift from a 5% growth rate to 1.5%-2%, and is a pattern you can expect to see repeated around the world for the next decade. The cruel truth here is that American companies with the drag of a mature economy will never command the same multiples of Chinese ones. Expect huge growth of the four horsemen of the Chinese Internet sector, which?? includes Netease (NTES), Sina (SINA), and Sohu (SOHU), have done as well as BIDU, and who are going to eat our lunch.

3) We are gathering a head of steam towards our next financial crisis, even before the current ones are solved. The perpetrator will be new financial product du jour, the super leveraged Exchange Traded Funds (ETF's), which are being created at a breakneck rate, sucking in billions of dollars from investors. ProShares has filed for 94 funds, which offer traders 300% long or short plays in markets as diverse as the Russell 1000 Index, the MSCI Malaysia Index, and the Nikkei 225 stock average. Direxion has gathered $3.4 billion with 16 different 3X funds launched since November. There are now more than 800 ETF's, and I have been a big fan of?? those for emerging markets (EEM) and short Treasuries (TBT), which allow investors to take positions in niche sectors and foreign markets which are otherwise difficult or expensive to get into. These also allow mutual funds the only means to go short, and include tax advantages and hedging opportunities. But the leveraged versions include risks that most buyers don't fully understand, even if they parse through the voluminous prospecti with a magnifying class. They promise their triple tracking only for the day you buy it. Beyond that, the tracking error can be huge. The mechanics of these funds force them to be buyers of every rally and sellers of every dip. Over time, leveraged short funds can actually suffer large losses, even in falling markets, and vice versa. It is just a matter of time before one of these goes to zero, wiping out investors. They are already being blamed for an increase in market volatility in the last hour of trading. Gaming sector ETF's has become the new blood sport for nimble hedge funds. You can expect a replay of a movie you've seen before. At the first sign of trouble, liquidity will disappear, auditors will mark them down to nothing, and suddenly the whole world will be for sale. Sound familiar? You have been warned!

4) In case you missed it, the second hand animal market has crashed. Forced to slash budgets by cash starved municipalities, the nation's public zoos have been paring back their collections of living exhibits. The Washington Zoo is trying to offload a 7,000 pound hippopotamus, while the San Francisco Zoo is short some tigers after one ate a visitor last year. The Portland Zoo was able liquidate a portfolio of lemurs only because of the popularity of the recent DreamWorks' 'Madagascar 2' animated film.?? When zoos are forced to economize, they downsize the big eaters first to save on feed costs, hence the absence of elephants in San Francisco (could this be a political gesture?). The hardest to move? Baltimore has been trying to sell its snake collection for two years now. Talk about an illiquid market. Maybe they should try AIG. Snake derivatives anyone?

QUOTE OF THE DAY

'Pass this package by tomorrow, or we won't have an economy on Monday,' said Fed chairman Ben Bernanke at the Treasury's emergency meeting in October.

May 4, 2009

Diary

Global Market Comments
May 4, 2009

Featured Trades: (RCC), (CUK), (SFD), (CHL), (EWT), ($XJY)

1) San Francisco Bay looks like Normandy on D-Day today, invaded by a flotilla of cruise ships diverted by the swine flu from Mexican destinations. Two ships from Carnival (CUK) and one from Royal Caribbean (RCC) are docked at piers normally occupied by garbage scows and tugboats. Operators of a total of 28 ships have asked the Port of San Francisco for emergency landing rights, disgorging 1,000 to 2,000 free spending passengers each on the City by the Bay. Those who booked holidays looking forward to 90 degree temperatures, tacos, and tequila grumbled when they were delivered bone chilling fog, Dungeness crab, and Napa wine. Good luck getting a seat on a cable car this weekend. In the meantime, the government is going through great pains to convince us that you can't catch the bug from pigs. You can get heart disease, diabetes, obesity, and hardening of the arteries from pork, but definitely not the flu. Take a look at Smithfield Foods (SFD), which has dropped 30% since the pandemic fears hit.

2) March pending home sales jumped a surprising 3.2%, according to the National Association of Realtors, prompting another tidal wave of calls that we have hit bottom in the real estate market. Obama's $8,000 tax credit for first time purchasers ($14,000 in California), record low mortgage rates, a feeding frenzy by sharks and flippers, and the lowest prices in a decade were the cause.?? Contracted purchases were up 3.9% in the West (California) and down 5.7% in the Northeast (Michigan). I think we are anything but out of the woods. Several state and federal moratoriums on foreclosures are about to expire, unleashing another onslaught of foreclosures and short sales on the market. While inventories are shrinking for the moment because of the near shut down on new home construction, unemployment induced delinquencies are still soaring. At this stage of the economic cycle, you can count on seeing a raft of contradictory data. I'm afraid that I'm a glass half empty guy on this one. With all of the reasons to buy listed above, where are the multiple offers and the bidding wars? Continue to rent.

3) Regular readers of this letter are well aware of my aggressive recommendations to buy emerging markets China and Taiwan. Now you have another reason to buy both. The Middle Kingdom's China Mobile (CHL), the world's largest cell phone company, bought 12% of Far Eastone Telecommunications (4904.Taiwan). Although a small deal, it represents the first ever direct investment by a mainland company in the rebellious former province. The move could trigger a takeover binge by big Chinese companies of their offshore cousins. It was only a few years ago Taiwanese businessmen were arrested for just visiting, let alone investing in China, which they have done in a major way for 30 years. The iShares MSCI Taiwan fund ETF (EWT) has popped by 32% since the announcement last week, and is now up a gob smacking 74% from the March lows. Having endured daily shelling from the mainland (at exactly 12:00 noon every day) while on the small Republic of China island of Quemoy, this is more than just a symbolic gesture for me. I guess if you can't beat them, buy them.

4) Japan's Financial Services Agency has decided to cap the leverage available to retail investors in the foreign exchange market, down from 100:1 to 20-30:1. The move is an attempt to dampen rampant currency speculation by yield starved individuals, where short term interest rates have been close to zero for 14 years. Japanese housewives spurred on by commission hungry foreign exchange dealers shorted the yen ($XJY) against every imaginable high yield currency, from the Turkish lira to the New Zealand dollar, in the hope of generating income. Before they went on vacation en masse last August they closed positions, causing the yen to soar. The agency is hoping to head off a repeat this year.

QUOTE OF THE DAY

'The best time to buy stocks is when business is lousy,' said Warren Buffet, CEO of Berkshire Hathaway (BRK/A) and the Sage of Omaha.

May 1, 2009

Diary

Global Market Comments
May 1, 2009

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

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

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

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

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

QUOTE OF THE DAY

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