1) As much as I like to open beer bottles with my teeth, do my own tattoos, and roll around in the snow naked and beat myself with birch branches, when it comes to pain in my investment portfolio, I am definitely a wimp. So I have to take notice when a ?Golden Cross? occurs on one of the major indexes, as happened with the S&P 500 on June 23 when it hit 888. For the initiated, a ?Golden Cross? occurs when the 50 day moving average moves up through the 200 day moving average. Historically, this means that the index will rise 7% in the next three months, 8% in the next six, and 19% over the coming year. The trouble is that if technical analysts were always right, they would only wear Jon Green or Anderson & Sheppard suits, drive Bentley Turbo RT?s, and certainly wouldn?t deign to talk to you. The harsh reality is that most shop at Men?s Warehouse, drive Hyundai?s, and work on salary for brokers. If they were paid based on performance, there would be no need for Jenny Craig or Weightwatchers. Not that they are to be ignored. They are right at least half the time. But their opinions are just one more thing to throw into the decision making soup.

2) I spent the evening with Dr. Robert Frank, professor at the Cornell University School of Management, and author of The Economic Naturalist?s Field Guide. US consumer spending?? peaked at $10 trillion, or 73% of GDP in 2000, and in the new world of falling incomes and enforced savings rates, it will take many years to come back. The current disaster was a guaranteed outcome, because while incomes stagnated over the last 30 years, the median home size jumped 50% to 2,600 square feet. Deregulation poured gasoline on the fire, enabling an unsustainable culture of leverage. California is in a real pickle, because governor Arnold Schwarzenegger is forced to act as Herbert Hoover did by balancing a budget while falling into a Depression. Dr. Frank argues that we should use this economic crisis to fundamentally remake the US tax system. The current system taxes savings on multiple levels, but spending is tax free. We need to scrap the income tax (three cheers), and implement a steeply progressive consumption tax. We need to tax pollution the same way. Dr. Frank, who co-authored a previous book with Fed governor Ben Bernanke, offers radical solutions. It seems that desperate times require desperate measures.

3) If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis, so investment in fresh water infrastructure is going to be a recurring long term investment theme. (See my earlier efforts to get you into the water space). One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world?s population, up to 90% of the fresh water is already polluted, some irretrievably so. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years. Aquifers in the US, which took nature millennia to create, are approaching exhaustion. While membrane osmosis technologies exist to convert sea water into fresh, they use ten times more energy than current treatment processes, a real problem if you don?t have any, and will easily double the end cost to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the US stimulus package will be similarly spent. It says a lot that when I went to the UC Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds! At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 32% since I first brought it up. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world?s greatest per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

4) It appears that my website was one of the few that did not crash on news of the death of Michael Jackson. I wonder why? Twitter survived its first serious crash threat when traffic spiked to 65,000 tweets a second. AT & T?s network did less well, and almost came down. That?s better than Google?s search engine, which temporarily froze. Yahoo says they got the greatest number of clicks on a news story in its history. The Internet was built to survive a nuclear war, but was taken down by the passage of a drug addicted musician. You would think that the copyright holder on the Jackson titles, Sony (SNE), would do well, but not so. Instead, Amazon (AMZN) stock took off, offering for sale the top ten selling Jackson CD?s by the King of Pop. Most of them sold out in a day. I guess it?s a new world out there. Those with the best selling machine, win. Our local winner? Butler Amusements bought four carnival rides at a Neverland Ranch auction last year, and these can be ridden today at the Alameda County Fair. Talk about a windfall!

QUOTE OF THE DAY

?If 1.4 billion people suddenly decide to spend an extra dollar a day, it will have a massive impact on what?s going on in the world,? said Andy Brough, a fund managers at Schroeder?s, about Chinese efforts to stimulate domestic consumption.

Would you like to receive each post from The Mad Hedge Fund Trader 24 hours earlier than anyone else? Is so, please subscribe to our client newsletter at our store at www.madhedgefundtrader.com. For $29 a month you can get the head start that can make a crucial difference in your trading and investment decisions. In a world when indexes move 10% a day, and individual stocks move 25%, a day can seem like a lifetime. Global research is getting more expensive, especially with a falling dollar. Thanks for your support.

1)Like Paul Revere on his midnight ride, I feel a patriotic duty to warn you of the foreign invasion that is headed our way. No I?m not talking about the British, but redcoats of a more Eastern origin. I?m referring to the Chinese electric car company ?Build Your Dreams? (BYDDF) (see http://www.byd.com/company.php) . CEO Wang Chuan-Fu, who Charlie Munger describes as a combination of General Electric?s (GE) legendary manager, Jack Welch, and inventor Thomas Edison, scraped up $300,000 from relatives to start a knock off cell phone battery company in Shenzen in 1995. He grew the company into a massive, vertically integrated conglomerate, employing 130,000 workaholics at 11 factories, including those in Hungary, Romania, and India (interesting choices). BYD bought a defunct car company in 2003 and re-engineered it to launch the $22,000 F3DM sedan last year, an old technology ferrous oxide based plug-in hybrid that gets 62 miles on a charge. General Motors (GMX) Volt and Toyota?s (TM) plug in Prius, which won?t come out until next year, will only get 40 miles per charge and cost more. All-electric models are coming out this year. Warren Buffet was so impressed, he made a rare foreign investment last year, asking for a 25% stake and settling for 10% for $230 million. Wang, who has already earned himself a place on the Forbes 400 list, intends to build BYD into the world?s largest automaker, and quickly. Why do I feel like this war is over before the first shots were even fired?

2) If the 2009 Clean Energy Bill passes, it is going to pave the way for major structural changes to the US economy, which few of the non-engineering types voting for it in Congress understand. The bill encourages electric power utilities to switch to renewables, upgrade the electric power grid, and put in place a cap and trade system which places an enormous burden on the power industry to go green (see my June 15,2009 Newsletter). The bill is expected to sail through the House, but faces a major fight in the Senate, where the administration is going to have to get all of their ducks in a row for it to pass. The bill provides the legal structure to spend that $100 billion for alternative energy already passed in the stimulus bill. In his cheerleading press conference for the bill, Obama correctly declared that dependence on hydrocarbons was jeopardizing our national security. He also cleverly described this as a massive creator of high tech jobs that can?t be exported.? I?m not highlighting this because I live in California, wear sandals all year, drive a Prius, or have a refrigerator stuffed as if a giant gerbil does my shopping. Since this economic crisis started, the key has been to buy whatever the government is buying, and since they are going into alternatives in a big way, you want to be right ahead of them (see my solar piece). Time to add more alternative energy names to your list to buy on dips. Look at American Superconductor (AMSC), which is involved in advanced wind turbine designs and electric power grid upgrades. Also take a peek at Covanta (CVA), an established business that profitably burns trash to create electricity.

3) 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% of face because they are still secured by the value of the homes. This would boost 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. Why aren?t people talking about this?

4) Another green shoot bites the dust as weekly jobless figures jumped 12,000 back up to 627,000. They started offshoring hedge fund managers years ago.?? And now South Carolina governor Sanford tells us that his state has started offshoring mistresses. Where will it all end? Is there no shame? Please pray for me, Argentina.

QUOTE OF THE DAY

?You can?t produce a baby by getting nine women pregnant for one month,? said Oracle of Omaha, Warren Buffet, revering to Obama?s multifaceted attempts to revive the economy.

1) All eyes will be on the Fed interest rate decision today, but your time will be better spent watching the NBA finals, the US Open, or Wimbledon, which you have wisely Tivo?d for days like this.?? US industrial capacity utilization is terrible, and still falling, while unemployment is still rising at a record pace. Sure, commodity prices have doubled this year, but the give back there has already started. The buying that did occur happened because investors were looking for an alternative to the sick dollar, not because there is huge underlying demand by end users. This is one of the reasons why I became cautious about all of my long positions last month. So I can say with complete confidence that the chances of an interest rate hike are less than zero for the foreseeable future.

2) I warned readers that pain was on the way eight days ago, and one of the big reasons was a major reversal in the euro/yen cross rate, a great barometer of global risk taking by hedge funds. After trading as high as ??170 in 2007, it plummeted to a low of ??114 earlier this year. It then took off like a scalded chip three weeks before the S&P 500 made its prophetic 666 low on March 9. Look at the charts for the euro/yen and the SPX and you?ll see the correlation has been huge. This is a valuable and highly predictive cross rate to track, because the big boys can finance positions for free by borrowing in yen and investing in other high yielding, commodity producing currencies, like the Australian, New Zealand, and Canadian dollars. After a spike up to ??141 on June 8, euro/yen reversed all the way back to ??132 warning that a tempestuous round of deleveraging and risk reduction was on the way. For mere mortals, this translates into selling of everything across the board and is why trades as diverse as copper, crude, stocks, and BRICS have suffered vicious sell offs. Watch the euro/yen cross as a wizened old sailor keeps a weather eye on his barometer.

3) If you want to impress your friends with your vast knowledge of financial matters, then here are the Latin translations of the script on the backside of a US dollar bill. ?ANNUIT COEPTIS? means ?God has favored our undertaking.? ?NOVUS ORDO SECLORUM? translates into ?A new order has begun.? The Roman numerals at the base of the pyramid are ?1776.? The better known ?E PLURIBUS UNUM? is ?One nation from many people.? The basic design for the cotton and linen currency with red and blue silk fibers, which has been in circulation since 1957, carries enough symbolism to drive conspiracy theorists to distraction. An all seeing eye? The darkened Western face of the pyramid? And of course, the number ?13? abounds. Thank Benjamin Franklin for these cryptic symbols, and watch Nicholas Cage?s movie National Treasure. The balanced scales in the seal are certainly wishful thinking and a bit quaint. Study the buck closely, because there are going to be a lot more of them around.

4) These are indeed dark days for Silicon Valley?s venture capital industry. With the exit door slammed shut for years to come, new money is staying away, avoiding the high risk multiyear lock up. Angel investors have gone back to heaven. The deterioration of the economy has been so rapid that the rationale for many start ups is no longer there. Countless web 2.0, next generation models for social networking sites, video sharing sites, wikis, blogs, and folksonomies never made it to profitability, and will be swept away. Unfortunately, this means there will be an untold number of great ideas that will never see the light of day. Alternative energy is one of the few areas where business plans are getting any traction. Many investors are bracing themselves for reports of losses on their existing holdings, once the industry?s arcane accounting makes that possible. Expect a lot of once hard to get office space on Palo Alto?s Sand Hill Road to become available for cheap soon.

QUOTE OF THE DAY

?While there?s an energy shortage, we have no shortage of energy,? said John Hofmeister, former CEO of the US operations of Shell Oil.

1) The Potential Gas Committee of the American Gas Association published a report that US reserves have jumped by 35% to 1,836 trillion cubic feet, thanks to the huge discoveries of new shale fields since 2006. Also contributing are the new fracturing technologies, which I had a hand in pioneering myself ten years ago. That means our natural gas reserves can now meet 100 years of current consumption, and are roughly equivalent to Saudi Arabia?s crude reserves on a BTU basis. Natural gas futures dove 26 cents to $4.23, and the ETF (UNG) gave back 4%. A buddy of mine close to the committee warned me that something like this was headed down the pike, which is why I sent readers a warning two weeks ago to cash out at $4.30. When you only see chart driven traders buying a commodity and the industry insiders selling the Hell out of it, you want to stay away. Bewildered technicians were last seen feverishly searching for Hainesville on Google. It was their models that sucked $3 billion into UNG over the last three months. This is great news for the big consumers of NG, like the utility industry and the petrochemical industry. It will also give a shot in the arm to Boone Pickens? plan to shift our transportation system to NG (see my March 30, 2009 Newsletter). Even the ratio, pairs, and mean reversion traders have been burned by NG this year. As cheap as NG is, a Saudi Arabia?s worth of supply hitting the market could easily knock the price down by half from here. As extreme as the move in the oil/gas ratio is at 18:1, we could be breaking new ground.

2) While searching for beneficiaries of lower natural gas prices, I stumbled across an interesting little company in Connecticut called FuelCell Energy (FCEL). It sells onsite power plants which are basically giant lithium ion batteries that run of NG as well as biomass, wastewater, propane, and landfills. Think of a cell phone battery that pumps out 50 megawatts of electricity, enough to power a small city. Since the NG is soundlessly electrochemically reacted and not burned, there are no greenhouse gases produced. I have been following this technology for 35 years, and you used to only find things like these at remote industrial sites well outside the power grid, like on Pacific islands or in Northern Canada, where the only alternative was a diesel generator expensively shipped in. While the technology created warm and fuzzy feelings with environmentalists, a cost of four times the market was usually buried in a footnote on page 247. Not true anymore. Their net cost is 16 cents a kilowatt hour, which looks good in high cost states like Hawaii and California. But if you throw in the abundance of state and Federal subsidies now available for alternative energy, that cost drops to 12 cents. Imagine what a halving of NG prices would do? The Golden State accounted for 40% of FCEL?s orders last year, you can find them at several Marriot Hotels in San Francisco, but a South Korean utility has become a large customer, boosting the stock by nearly triple from the March lows.? This is a classic example of why old fossils like myself have to more frequently clear out the cobwebs from our brains in order to root out the new trading opportunities.

3) A lot of people like to follow Warren Buffet?s Berkshire Hathaway (BRK/A) as a leading indicator for the market. What better guide than a portfolio of the best of the best, run by the world?s great investor? Recently the news has not been good. If you wonder what a stock looks like when it is rolling over on diminishing volume, this is it. The only question is how big, how fast. As much as I worship the avuncular, chocolate milkshake loving, Sees Candy eating Oracle of Omaha, memorizing his annual letter to investors?? and hanging on his every spoken word, he hasn?t been doing that well lately. Since March, his main investing vehicle has only managed a 35% gain, compared to a 40% pop for the S&P 500; despite heavy weightings in such best of breed financials like Goldman Sachs (GS). Better keep his ticker on your desk top, because what BRK/A does, the world will follow.

4) I have really been avoiding financials for the last few months after they had their dead cat bounces. However, I had to listen to Midsouth Bank CEO Rusty Cloutier when he spoke on CNBC. His 24 branch bank, with a market cap of only $103 million, is based in Lafayette, LA, one of my old stomping grounds and home of the world?s greatest ??touff??e and shrimp gumbo. He says that ?Unless we break up the big banks and get back to sound banking principles we are going to relive this over and over again??.Free enterprise has to have the right to fail??.Allan Greenspan and his administration have some problems they have to ??fess up to.? With the current system of megabanks ?they get the gain and we get the pain??.I?m regulated now by 13 agencies of the US government and I don?t know that I need a 14th.? There?s no one who can read you a riot act like a Southern regional banker.

QUOTE OF THE DAY

?We?re trying to fix everything in four months that took place over 100 years, said Jack Welch, retired CEO of General Electric (GE).

1)There?s nothing like getting up in the morning, taking off your shirt, and splitting a quarter cord of wood to get the blood flowing. One of life?s little pleasures is also calling up investors and telling them their position went limit up yesterday. That is what happened with lumber, and I seem to be the only one out there who likes the knotty, aromatic commodity. The knee jerk explanation was that the numbers for housing starts for May were up a blistering 17%, much better than expected. Starts have been bouncing along at an annual rate of 500,000, compared to the peak of 2.2 million in 2005. But the big lumber stocks like Weyerhaeuser (WY) didn?t go up, nor did the besieged homebuilders. The real reason is that we are crawling off of a five year bottom; we have miles to go before we approach a decade high of $4.60, and that lumber is still inherently cheap. What will happen when the Chinese start buying? They?ve bought everything else. One of the tip offs that you?ve got a great position is that all of the accidents and surprises tend to happen on the upside.

2)First of all, let?s get some facts straight. No one is buying oil here at $72 because they plan to burn it, use it to drive more miles, make asphalt or plastics, or rub it all over their bodies. They are buying Texas tea because they hate the dollar and there is no other surrogate reserve currency. Some of the biggest buyers of crude now are the oil producers, desperate for any appreciating asset they can park their revenues in size. This is why you can now walk across the Caribbean and not get your feet wet, jumping from one storage tanker to the next. The world is choking on surplus crude. Does anyone see anything wrong with this picture? Even perma bull Boone Pickens has a target of only $75. I hope he remembers to sell this time (sorry for the cheap shot Boone). The problem is that when you have so many hedge funds, financial players, and non consumers bunching up in a trade, the turns can be particularly vicious. All it would take is a little more evidence of a double dip economy, or even just an innocently strong dollar. Watch those green shoots with a magnifying glass.

3) I couldn?t help but laugh when I saw my old colleague from Morgan Stanley, Stephen Roach, on CNBC today. The current chairman of Morgan Stanley Asia (MS) is bearish on the economy and sees no chance of a ?V? shaped recovery, just a very weak one at best. The ?green shoots? are still underground. ?The consumer is toast,? he averred, and he expects consumer spending to plummet from a record 72% of GDP to 67% in five years. Since a massive external deficit has to be funded by foreigners, the outlook for the dollar is ?down, down, down.? There won?t be a crash, just a gradual descent, as we have seen for the last 38 years. China isn?t going to bail us out. The US has only 4.5% of the global population, but accounts for $10 trillion of consumer spending. China and India together have 40% of the population, but only spend $2 trillion. This disparity is 50:1.?? Steve was an early BRIC fan, like me, and since China is so overbought short term, India is his first pick. You want to buy countries that have to build infrastructure and a middle class, and China has already done that. India?s recent election of a more pro business government is the trigger. I aggressively pushed India at the beginning of the year, and it has doubled since then. The humorous thing about all of this is that Steve has been spouting the same bearish line for the US for 15 years. The in-house joke at MS was that he was sent to China because his negative sentiments were scaring the firm?s conservative US institutional investors. Given the performance of the BRIC?s since then, it is Steve having the last laugh.

4) Sadly, once again, my once beloved but now spurned home state of California is threatening to commit suicide. The formerly Golden State officially runs out of cash in 50 days, and our body building governator, Arnold Schwarzenegger, refuses to borrow any more until the legislature delivers $24 billion in spending cuts. Standard & Poor?s has placed it on Credit Watch, and premiums for credit default swaps on the state?s debt have already spiked back up to 300 bp. I got a letter today from Robert Birgeneau, Chancellor of the University of California at Berkeley, where my son goes to school, telling me that his budget shortfall has just leapt from $67 million to $145 million, and that tuition is going up 9.3%, while staff wages will be cut by 8%, and financial aid will be chopped to the bone. Yikes! And this is the place we are counting on to deliver the scientists, engineers, and professionals who are supposed to keep us globally competitive.?? Pleas to Obama for a bailout have already been brushed aside, like a pesky fly. He rightly sees us as an alcoholic friend asking to buy him just one last drink. A default would be no joke, as California accounts for 15% of US GDP, and ranks as the world?s eighth largest economy. Few realize that the state is home to the country?s second highest per capita payers of tax revenue into Treasury coffers, after New York (Sarah Palin?s Alaska is the lowest). Hardly a day goes by without banner headlines about closing state parks, cancelling local sports programs, or freezing payments to mothers with dependent children. In fact, most state residents now prefer the Sacramento government to go bust in order to bring a speedier resolution. There is only one possible solution. A new governor holds a constitutional convention to reduce the vote to pass a budget from two thirds to 50%, or a statewide voter initiative accomplishes the same. Maybe ex Ebay CEO Meg Whitman, who will run for Arnold?s job next year, is up to the task?

QUOTE OF THE DAY

?It?s hard to believe that with more regulatory oversight and less leverage permitted, that return on equity is not going to fall??.my guess is that it is three to four points lowe
r,? said Bob Doll, co-chairman at Black Rock, the world?s largest money manager.