July 2009

July 14, 2009

Global Market Comments
July 14, 2009 Featured Trades: (SPX), (JAPAN), (CRUDE), (CVX)

Happy Bastille Day!

1) Yesterday, I showed you Arthur Hill?s elegant, technical, well thought out analysis of the S&P 500?s prospects. Below, please find my inelegant, non technical, graphical rending of a dead cat bounce. Any stocks dependent on the consumer feeling good about himself, like consumer discretionary and high end retail, you want to sell especially hard, because the consumer is about to feel a whole lot worse. If you don?t believe me, ask the shareholder of sharper Image and Linens and Things. There?s a Weed Whacker plowing through the green shoots. Keep in mind that there are not a small number of strategists out there who are expecting new lows for the S&P 500 below 666. Use the Meredith Whitney inspired short cover rally to sell into. Expect truck loads of towels to be thrown in when the big break finally occurs.

2) I drove over the Benicia Bridge today, passing over ships unloading Toyotas from Japan. The company?s entire product line was there, from Lexus to Prius to Corolla, baking in the sun, still wrapped in plastic, and unsold by the thousands, the victims of a 40% YOY sales drop. So it was no surprise when the Bank of Japan informed us that wholesale prices in June fell a gob smacking 6.6% YOY, confirming?? the most dire forecasts that the country is still in the grips of a nearly 20 year economic ice age. This is why the US is not headed for the same big freeze, as many Cassandras are predicting.?? Japan?s bail out of its banks was a slow motion affair stretched out over eight years. Treasury Secretary Hank Paulson pulled the trigger on a much bigger bazooka with the TARP, a month after Lehman went bust, and Secretary Tim Geithner and the Fed?s Ben Bernanke followed up with their 155 mm howitzer. Tokyo?s insiders made sure well connected ?zombie? borrowers have stayed alive to this day. The truly great strength of the US is that creative destruction is a constant, unrelenting, and unstoppable force, enabling the economy to bury its mistakes quickly and move on to the next game. Look at GM. Japan?s fiscal stimulus was an impotent, irregular drip of inadequate packages financing bridges to nowhere. Obama?s hurricane of a $2 trillion budget in his first month provided more stimulus than Japan did in ten years in GDP terms, and now there is the threat of a second package. The bottom line is that Japan never understood the true debacle they were into until it was too late to do anything about it. The US realized in September we were on the precipice of a Great Depression II, and have thrown in everything, including the kitchen sink, to stop it. The US recession may be long and brutal, and the recovery subpar, but we are definitely not looking at Japan?s two lost decades.

3) Armed with a pass from Chevron (CVX) CEO, Dave O?Reilly, I drove out to the company?s Richmond, California refinery to see how bad the crude storage situation really is. This is where tankers unload crude from Alaska?s Aleyaska Pipeline for refining into gasoline and other products. What do I find, but mile upon mile of full tank cars, the firm?s storage facilities already loaded to the gills. The industry?s central delivery facility at Cushing, Oklahoma is full, the Strategic Petroleum Reserve is full, and if any more crude is imported, it will have to be stored in left over milk bottles. The filling of the last bit of storage in the US is what?s behind the two week, $15 drop in oil, now that contango driven traders can no longer profitably buy spot, sell forward, and store in the interim. Owners are choking on the stuff. Investor buying of crude as the new reserve currency is what caused it to double this year, not demand by end users. I?m sorry, but I?m an old school hedge fund manager. If a company tells me something, I have to go out to the storage facility, mine, well, pit, warehouse, and see it for myself.

4) I met with General David Petraeus, commanding general of the US Army?s Central Command, after yesterday?s briefing in San Francisco (see yesterday?s Newsletter ). He is on a US tour selling his new Iraq strategy, having spent the previous day with the Microsoft crowd in Redmond, Washington. He told me his staff prepared an itinerary for his day off, which included yoga, aromatherapy, a seminar on website construction, and a visit to the farmer?s market to buy organic bean sprouts. He decided to pass, and instead went for a long run along our waterfront Embarcadero, drinking in the brisk, cool air, an unavailable pleasure in Baghdad. Do you think our foggy city has some sort of a reputation, or what? I asked him to look out for my nephews, young men in their early twenties who are fluent Arabic speakers, who are joining his cyber warfare group. If anyone is speaking in Arabic on a phone call in the Middle East in the near future, please say Uncle John said hello.

QUOTE OF THE DAY

?Buyers are looking for great bargains, and sellers are looking to get what they might have gotten a year ago, so no deals are getting done,? said NBC Universal CEO Jeff Zucker.

July 13, 2009

Diary

Global Market Comments
July 13, 2009

Featured Trades: (SPX), (NATURAL GAS), (IRAQ), (MO)

1) Every once in a while I stumble across a chart which is so clear, so vivid, so unequivocal in its implications, that it lifts the investment fog. This is that chart. Drawn up by stockchart.com?s Arthur Hill, it shows that we are going to spend the rest of our summer probing for the bottom right hand shoulder in a screamingly obvious ?head and shoulders? pattern. It gives a range of possible bottoms from 850 all the way down to 666 by the end of August. The chart fits my own fundamental scenario like a hand in Michael Jackson?s glove (see ?The Worm Has Finally Turned? . Soaring unemployment, terrible earnings reports, collapsing commodity prices, a catatonic consumer, real estate of every flavor in free fall, and tidal waves of government spending are not what bull markets are made of. Did I mention the weather is terrible? Every feeble, half hearted, low volume rally we saw this week pushed us closer to the cliff. The charts of every stock and commodity market in the world rolling over in lockstep, like a thirties Busby Berkeley musical, gives you all the smoking gun confirmation you need.?? Hold on to those shorts as if your life depended on it.

2) When I put out my sell recommendation on natural gas at $4.30, the virtual trucks backed up to dump abuse on me from technical analysts, day traders, and wannabe pundits who were convinced that CH4 was the buy of the century. I also received a ton of e-mails from geologists, wildcaters, and gas men from all over the country with stories of even more, vast, unreported, shale discoveries. One in British Columbia I didn?t even know about. When it comes on betting my own money, I much prefer listening to engineers who spend countless hours driving pickups down dusty, potholed, washboard roads to get their data, than the online diletants, any day of the week. Best to watch the pain and suffering in the natural gas space from afar.

3) OK, I?m going to have to come down hard on this one. The administration is proposing banning smoking in the military. About time! The Pentagon spends $846 million a year on cigarettes, and another $6 billion treating smoking related diseases. I became a cigarette addict myself when the military gave me all the free ?coffin nails? I wanted in Southeast Asia 35 years ago, and it took me ten years to kick the nasty habit. Some 59,000 men died in Vietnam, and I?m sure many more than that died from the lung cancer that followed. Few people know that the Bureau of Prisons banned smoking three years ago, precisely to reduce spiraling health care costs. The riots that followed went unreported. The military in fact banned obesity 30 years ago. If a soldier is over his benchmark weight, his pay gets docked, and if he doesn?t go on a diet, he gets kicked out on a medical. While they?re at it, they should stop giving combat soldiers and pilots amphetamines. Is it any coincidence that the meth disaster that is unfolding in the Midwest coincided with the return from Iraq of thousands of troops? Not good for Altria (MO).

4) I have not been called a war criminal for at least 35 years. But that?s what was screamed at me when I muscled my way through a crowd of chanting anti war protesters on my way to a briefing from General David Petraeus, Commander of the US Central command. Every senior military officer in the San Francisco Bay Area could be found in the packed, steamy hall, including at least 20 generals and admirals. Petraeus, a four star with a PhD in international affairs from Princeton?s Woodrow Wilson School, ran through a thoroughly researched PowerPoint presentation that laid out how he was going to get our 130,000 troops out of Iraq by 2011. Only a caretaking force providing close air support from remote bases will be left behind to back a large civilian presence. A dramatic change in counterinsurgency strategies has brought the daily number of attacks from 160 down to 10, and monthly suicide bombings from 130 to 10. The goal is to ?Iraqrotize? the country so it can stand on its own feet, both politically and militarily. Iraq now has a reliable military of 550,000 men, but last year?s collapse in oil prices is creating budgetary problems. Afghanistan will be a much harder nut to crack, requiring more troops, money, and time. Priority one is to wipe out the poppy fields in the South from which the Taliban derives its financing and local support. Rising wheat prices will help this effort. Some 70% of the violence is in 10% of the country in the mountains that border Pakistan. The good news is that Pakistan is fighting its own war, not our war, for its own interests. Their nukes are secure and safe. Petraeus is bringing to bear incredibly sophisticated technology, including sensors mounted on the ground, in towers, balloons, drones, aircraft, and satellites, many of which are controlled remotely in the US and Europe. Bandwidth is his most valuable weapon. I follow the war in Iraq closely, not only because of the family I have in harm?s way, but also because of the $1 trillion in immediate costs and $2 trillion in long term costs we have already run up, on top of the 4,200 American and 100,000 plus Iraqi lives lost.?? I hope Petraeus is able to achieve his ambitious goals.

QUOTE OF THE DAY

Seen on a Marine commanding officer?s door in Baghdad: ?In my absence, figure out what your orders should have been, and then go out and execute them,? according to General David Petraeus.

July 10, 2009

Diary

Global Market Comments
July 10, 2009 Featured Trades: (TBT), (TLT), (SPX)

1) The incredible melt up in Treasuries yesterday tells you that traders are dumping the global reflation trade like a hot potato. The ten year yield spiked up to a high of 3.28%, down from 4% only a month ago. Yesterday?s auction of ten year Treasury notes saw an amazing bid to cover ratio of 3.28, the highest in 15 years. When traders don?t want to play, they flee to government paper. The music has stopped playing, so it?s time to sit down. It looks like the deflationistas are going to have the upper hand over the inflationistas for the next couple of months. See my interview with Janet Yellen . This certainly puts my TBT trade on hold (see ?Sell in May and Go Away? and ?The Viagra is Wearing Off?. It?s best to read the writing on the wall, especially when it is in ten foot high, in fluorescent block letters, like this.

2) CNBC held a dynamite interview with David Rosenberg, former Merrill Lynch chief economist and current strategist at Gluskin Sheff, who offered the kind of big picture, 30,000 foot view that I love. We are well into an epic post bubble credit collapse. Deleveraging in the private sector is dramatically overwhelming any fiscal stimulus Obama can throw at it. The $50 trillion US household balance sheet is shrinking at an unprecedented rate. The unemployment rate will easily sail through 10.8% to a new high and spill over to a higher foreclosure rate. We?ve had two decades of baby boomers living beyond their means, and it is now time to revert to the mean. The stock market has already priced in an earnings recovery which we won?t see until 2012 at the earliest. Bull markets move in perfect 18 year cycles, and we are only half way through a generational washout in equity ownership that started in 2000. ?Buy and Hold? is dead. An S&P 500 trading around a 13 multiple means will be stuck in a 650-950 range for years, and that?s being generous. Rent, don?t own stocks. The one place to be is commodities, because they will be underpinned by the undeniable demand coming from Asia, and have benefited greatly from consolidation. The big ?Tell? here is that in last year?s huge sell off , they all bottomed at the previous cycle?s peak prices. It?s nice to hear someone reading from the same sheet of music as I. Too bad Merrill Lynch didn?t listen to David. Wow, do you think I should be selling rallies here at 886?

3) I was somewhat tickled to see the New York Times piece on the collapse of the Nantucket Island real estate market, which says there are 600 homes for sale on the tiny, windswept island, about 6% of the total housing stock. My family was the first western owner of the island, one Thomas Mayhew having bought it from the Wamponoag tribe for three ax heads and a cow in the 1600s. A great, great, great, great, great uncle, Owen Coffin, was a cabin boy on the Essex, which was rammed by a giant whale and sunk in the Pacific in 1820 (read In the Heart of the Sea by Nathaniel Philbrick). He spent 99 days in a tiny whaleboat, and then, after drawing straws,?? was eaten by his shipmates. The story became the basis for Herman Melville?s Moby Dick, written 31 years later, whose pages mention the Coffin name?? in seven places. The Times estimates that the value of property on the island has dropped from $20 billion to $14 billion since last year. Gee, do you think we sold too soon?

4) Here?s another great Chart of the Day from Clusterstock showing that we have fallen back to 2000 levels of total employment. Only one out of 2.4 Americans now has a job. Stocks, real estate, and many other asset classes have also given up the decade?s gains. In the meantime, the US population has grown by 26 million to 307 million. Has the 21st century happen yet?

QUOTE OF THE DAY

?When all the experts agree, something else is usually going to happen,? said David Rosenberg, former Merrill Lynch Chief Economist and current strategist at Gluskin Sheff.

July 9, 2009

Diary

Global Market Comments
July 9, 2009

Featured Trades: (SPX), (EURO/YEN), (GS)

1) If anyone is wondering what that foul odor is, it's the sushi that hit the fan. Even the most obstinate,?? Kool Aid drinking perma bulls now concede the head and shoulders is in on the S&P 500. That great barometer of global risk taking, the Euro/yen cross, didn't just break key support at ??132.50, it completely melted down to ??128.00. Oil traders have had an epiphany, rediscovering fundamentals like wayward sinners finding a new religion, which, by the way, are terrible. So how did crude double in the face of a collapsing economy? Was it speculators? Was it Goldman Sachs? 'Green shoots' have returned to being those pesky things you get dirt under your fingernails ripping out of your back yard. If I get any more negative I am going to have to change the name of this letter to the 'Assisted Suicide Daily.' So I have to finish on an up note. I'm not in the Armageddon camp, which sees us going to new lows below Satan's 666. I think 750-800 is more realistic. But then I was always the one to take the easy money. If you get another Lehman bankruptcy type event, you could see a real crash. For the last two years, the market has had an unceasingly ability to come up with these shocks.

2) Totally overshadowed by Thursday's catastrophic June nonfarm payroll were the figures on total employment, which were much worse, falling by 0.8%. That means that one million fewer people worked in June. Furthermore, the average workweek fell to 33.0 hours, the lowest on record, while the weekly paycheck plummeted to $611.49. To illustrate how this is not your father's recession, or even your grandfather's, look at the chart below from www.chartoftheday.com, which shows that we were well on the road to recovery at this point in the cycle in past recessions. The jobs recovery should have started three months ago. Who is going to buy all of those houses?

3) If you want to read the greatest hatchet job of all time on a financial institution, pick up the July 9-13 issue of Rolling Stone and check out the piece on Goldman Sachs (GS) by Matt Taibbi, which the blogosphere is tittering about. Yes, the office was worried when they saw me walk in with the Jonas Brothers on the front cover tucked under my arm. According to the story, Goldman Sachs is responsible for every financial crisis during the last eighty years, including the 1929 crash, the dotcom bubble, the housing craze, the sub prime crisis, the oil spike, the bank bailout, and next, the trading of carbon credits created by cap & trade. Oh yes, and they control every aspect of the US government. Written in the edging, snarky, f*** you kind of style that appeals to a younger audience, any professional journalist will recognize this for what it really is. This is the most forceful buy recommendation of a stock I have ever seen. If GS really is that powerful, back up the truck. I want to own a stock with a 'damn the torpedoes, full speed ahead' management who will boost earnings at any cost. They're just the alpha males in a world of predators. Someone has to be number one. I think Taibbi is just angry that he could never get in the front door there, let alone get a job. Some people will say anything to sell their publication.

4) Those hoping for a quick rebound in residential real estate prices can now join the realm of Santa Claus, the Easter bunny, and the tooth fairy. The near complete shutdown of the high end housing market has prompted rating agency Moodys to downgrade 344 tranches of 61 securitizations of prime jumbo loans issued from 2002-2004. This is all full doc, high FICO stuff. They were prompted by a jumbo delinquency rate that has skyrocketed from 1% to 6% in four years. Worst hit will be the jumbo Meccas of California, New York, and Florida. Wells Fargo and Bank of America were the biggest originators of this defrocked paper. With the securitization markets closed, originators face the unappetizing alternative of keeping new loans on their own books, hence no deals. The only consolation in all of this is that Moody's is the same company that missed the whole crisis, sold the best ratings to the highest bidder, used a model that couldn't accept negative numbers for future home price assumptions, and rated junk as triple 'A'. If you are looking for another reason to jump off a cliff, check out Clusterstock's chart of the day showing that the home vacancy rate has shot up to 3%. That works out to 5 million homes, the equivalent of a New York City that is empty. Has anyone seen the Will Smith film I Am Legend?

QUOTE OF THE DAY

'Consumer sentiment has really risen on the pixie dust of this equity rally we have seen over the last four months'?a lot of those people are going to put some of that money in their pocket this week,' said Lincoln Ellis, managing director?? of the Linn Group.

July 8, 2009

Diary

Global Market Comments
July 8, 2009

Featured Trades: (OIL), (SPX), (EEM), (DBA), (GLD), (XEU), (XJY), (VIX), (SDS), (DRR), (NATURAL GAS), (WHEAT), (CORN)

1) I am about to do you a huge favor. You can clear all of the stock tickers and widgets off of your computer desktop. The only thing you need to watch now are the wild, gut wrenching moves in oil. Everything else will follow suit. So when it drops $10 in four trading days, as it has done since Tuesday, it sends a sell signal so obvious that even Stevie Wonder can see it. For confirmation, take a look at Euro/yen, which I earlier identified a great ?tell? for global risk taking . It has sold off sharply since the ?green shoot? killing, Thursday unemployment figures, and if it breaks below ??132, the sushi will really hit the fan. Also look at the long term chart of the volatility index (VIX), which shows that we hit major long term trend support at 25%, and is overdue for a rebound to a least the mid thirties. That means lower stocks. If I had time, I could go into a dozen additional indicators flashing red lights. If you can?t get the tea leaves to work, then slaughter a goat and examine the entrails.

2)?? Given the profusion of negative indicators, and moving averages rolling over like the Bismarck, I would be remiss in my public duties if I did not tell you to sell everything. Dump the reflation trade. The ?green shoots? are dead. Liquidate emerging markets (EEM), commodities (DBA), the metals (GLD), foreign currencies (XEU), and cover your shorts on safe haven pays, like Treasuries (TBT) and the yen (XJY). Real estate in all forms will continue to die its own private death. Batten down the hatches. Reduce your risk. If you can?t sell, then hedge your positions. If you can?t hedge, then sell calls against your positions. If you can?t sell calls, then find another line of work, because there are so many inverse ETF?s around these days, you no longer have an excuse to take a big downside hit. This is where your stops earn their pay. I begged you, pleaded with you, and beseeched you to dump your position on May 1 (see ?Sell and May and Go Away? and June 16 see ?The Worm has Finally Turned? , and now I am trying again. Please also revisit the short plays I offered earlier on the S&P 500 (SDS) and the Euro (DRR) . And don?t ever call me indecisive, waffling, or equivocating.

3) You may recall my advice to abandon natural gas at $4.30 in the face of giant new discoveries in shale formations (see ?Cash out here at $4.30) and ?Huge Discoveries . Since then, the Midwest has suffered its wettest spring since 1871. It rained 25 inches in Chicago the first half of the year, drowning golf courses, and sending the mosquito population exploding to Biblical plague proportions. Let me assure you, I have absolutely no ability to predict the weather, except that my combat scars itch when a storm is coming. Cold weather means no air conditioning, which means cratering natural gas demand and a new two month low of $3.37. But when you see a parallel contract like crude soar to new heights, and NG fail a half dozen times to get off a five year low, you know rough weather is coming. The crude/gas ratio players really got carried out in body bags on this one, as one record after another was shattered, taking it to a stunning 19.4:1. Natural gas has been the worst performing investment this year, the ETF (UNG) falling a mind blowing 54% since January.?? Best to wait for natural gas to find its new, lower, range before entertaining a position.

4) For indisputable proof that I am not infallible, please re-examine my call to watch wheat for a buy below $5.90 . It has since dropped 12%, falling almost every day.?? The weather that cut the legs from under natural gas has been great for grain supplies, but terrible for prices. The trigger was last week?s USDA report on corn acreage, which instead of delivering 1-2 million fewer acres because of late planting, announced a shocking increase of 1 million acres. The 3 million acre swing caused corn futures to go limit down, dragging the rest of the soft complex with them. On top of this, you can add the general flight from assets of all classes that has been unfolding over the last few weeks. This is yet again, another lesson about keeping stops on your ag positions at all times. You never know when a lightning bolt like this is literally going to come out of the blue. I still like the entire food play longer term, so for investors, as opposed to traders, this is a chance to build a core holding at lower prices. To quote Marine Corps. General Oliver Smith, at Korea?s Chosin Reservoir, ?Retreat, Hell,?? we?re attacking in a different direction.?

QUOTE OF THE DAY

?It has been a rude shock to see so many economists with good reputations recycling old fallacies,? says Paul Krugman, winner of the Nobel Prize for economics, and firebrand columnist for the New York Times. He is warning Obama of a replay of 1937, when an attempt to balance the budget triggered a second depression.

July 7, 2009

Diary

Global Market Comments
July 7, 2009

Featured Trades: (CRUDE), ($WTIC), (EURO), (FSLR)

1) The stage is now set for the dollar. With the US 20 months into a recession, it?s just a matter of time before the Feds pull us back from zero interest rates. With the ECB late to the funeral, European Central Bank president, Jean-Claude Trichet, last week reaffirmed his commitment to keep their benchmark rate at 1% to restore the economy. There?s your trade. The next move in the euro/dollar spread will be in favor of the greenback, as the US will be the first out of recession. On top of that, you can pile a fading US stock market and a back off in commodity prices, which are also dollar positive. You can expect the euro to trade down to the low $1.30s. Mind you, this is still a counter trend trade, which I generally try to avoid. It?s a one night stand, not a marriage. Anyone reading the National Enquirer knows the dollar is sick, and even my cleaning lady has a major position in the futures. Thus, the street is overdue for a spanking, the inevitable outcome when there are too many bets on one side of the table. I still think it will cost two BUCKS to buy a EURO sometime in the foreseeable future. For those hardy souls willing to scoop up some pennies in front of a steam roller, look at the 200% short euro ETF (DRR), which has backed off 34% from $63 to $42 since November.

2) When crude suddenly spiked $4 to make a new high for the year at $73.50 on June 30, many in the industry, myself included, smelled some three day old fish. So I was not surprised to learn that the move was caused by a rogue trader trying to artificially engineer a short squeeze. According to the Financial Times, the perpetrator was PVM Oil Associates broker, Steve Perkins, who entered bogus orders to buy 16 million barrels of oil in one hour, double the daily production of Saudi Arabia. This was on a day mysteriously devoid of the nerve rattling news that usually drives prices up, leaving us all scratching our heads. By the time the firm discovered and unwound the trades, it had lost $10 million. The scandal had the unfortunate side effect of creating a failed double top in the oil charts, paving the way for a broader sell off in crude and other commodities as well. With hedge funds dominating trading, a large portion of their purchases going into storage in tankers chartered on the cheap, and all of this acquisition going on in the face of a death spiral in the economy, I have been avoiding this space since the first time it ran up to $72 on June 9 (see ?Get me out of Oil? ). I think you?ll see a pull back in crude to the high fifties, bringing the price more into balance with the true supply/demand situation. Gee, I wonder if they?ll ever catch the rogue trader who ran it up to $148 last year?

3) For the latest news from the front trenches of the solar industry, listen in to the all day analyst meeting given in Las Vegas by First Solar (FSLR) by clicking here .?? If you don?t want to wade through six hours of data that could only arouse a bachelor engineer, here are the highlights. The headline is that the cost of solar is now down to ten cents per kilowatt hour, versus three cents for coal. But the Clean Energy Act of 2009 is certain to make solar cheaper and coal more expensive. The industry will face a completely new set of challenges gearing up from a few rooftop panels on environmentalist rooftops to becoming a major portion of the US power supply. For a start, solar energy is most abundant where there are no people, because these areas were uninhabitable until air conditioning came along. That means building a huge network of power lines from scratch, something that will require Federal Energy Regulatory Commission (FERC) shepherding. Unlike other power sources, solar is highly variable, hour by hour and even minute by minute. Not a problem when you are running a freeway sign, but a big problem when running a large regional network, so ?smart? grids will be the order of the day. The technology to do this on a large scale hasn?t even been invented yet. The ongoing credit crisis is a major problem, since one gigawatt of capacity will cost $800 million in capex. Nevertheless, this industry now has a huge global tailwind and should remain permanently on your radar. Consider FSLR on the next big dip. For more, see my earlier piece.

4) I thought you would be fascinated to read these headlines from the Wall Street Journal:

?Washington Officials Will Be Looking Carefully at Whether Record Low Interest Rates will Revive Business?

?Current Speculative Sentiment is Bearish?

?Market Observers See Hopeful Signs?

?Senator Glass Considers Changes in Banking Regulation?

This last one was the tip off, Glass, of Glass Steagle fame. A thoughtful blogger has started posting daily headlines from today?s date in the year 1930 (check out his site). Terms like ?over leverage? and ?green shoots? abound. Do any of these sound familiar? The famous Winston Churchill quote comes to mind ?the nation that forgets its past is doomed to repeat it.?

QUOTE OF THE DAY

?I think it?s almost inevitable that, with a billion people in China wide awake for the first time, and a billion people in India, there?s going to be some kind of a terrible run against the dollar. And I doubt it can stay orderly, because all of our own hedge funds will be right in the vanguard of the operation,? said Nobel Prize winning economist Paul Samuelson.

July 6, 2009

Diary

Global Market Comments
July 6, 2009

Featured Trades: (SPX), (GMGMQ), (T-M), (HMC), (IRAN)

1) OK, so I don?t really open beer bottles with my teeth and do my own tattoos. But my call that the ?golden cross? in the S&P 500 on June 23 was a bogus one turned out to be a bulls eye, and the abuse I piled on the analysts who predicted an upside breakout was richly deserved. I have kept a laser like focus on the real technical picture that has been unfolding for the last two weeks, that of a bearish head and shoulders top. David Fry nicely does the scut work on technical matters for me though his excellent? ETF Digest blog. His chart and comments below are about to force us all to become historians, for it is setting up a perfect replay of 1937. That was when Roosevelt buckled under pressure from conservatives disgusted with four years of record government spending and groundbreaking social programs, and balanced the budget, igniting the second down leg of the Great Depression. It is no coincidence that both Chair of the Council of Economic Advisors, Christine Romer, and Fed Governor, Ben Bernanke, are authorities on this era. Thanks to Thursday?s diabolical employment numbers, Mr. Market is now telling us that a ?W? recession and the second stimulus package it will demand are on the table. There is room for a short play here on US stocks. Look at the ProShares Ultra short S&P 500 (SDS), which is down 54% since March 9, and is overdue for a rebound. It will give you a nice 200% short position in a falling market. Please pass the church key.

2) Perhaps it was deliberate that AMC Channel featured an Arnold Schwarzenegger film festival this weekend. Was the gratuitous violence of Terminators, Judgment Day, and the End of the World intended to drive us all to the negotiating table (?speak to the hand?)? We now have a new currency in circulation, Golden State ?script?, which is thoughtfully being printed in green as I write this. Of course the banks haven?t said they will accept this past July 10, so many spent the July 4th weekend at Big Five Sporting Goods stockpiling ammo and drinking water (everyone here already owns guns), possibly inspired by the Arnold movies. Many schools have already cancelled summer school, so of course, the malls are full of jobless kids lounging around and smoking cigarettes, with nothing to do. Towns are going without fireworks celebrations, and worried citizens are bracing themselves for a complete cessation of state services by the fall. Obama has wisely turned a blind eye to all of this, leaving we non taxing big spenders to stew in our own manure. With everyone of all parties thoroughly disgusted with their leaders, I?m surprised that the grass roots campaign for a state initiative to dump the two thirds majority required to pass a budget hasn?t welled up yet. Does France still have that guillotine thing? Is it available for rent? Will they take California ?script??

3) It?s not often that the investor?s relations department of a company you follow sends you an e-mail telling you their stock is worthless. Neverless, that was the message I received from General Motors (GMGMQ) yesterday. Since the company filed for chapter 11, it has traded between $0.25 and $2.25, and has often been the best percentage gainer of the day ($0.50 to $0.75 is a 50% move up). No doubt, most of this is hedge fund buying of stock to close out short positions. Otherwise, the bean counters may force you to carry the positions for years, tying up capital and deferring your performance bonus. But then again, there are always some dummies out there who think the stock is cheap at $0.25, on its way back up to $150.

4) I had dinner with Neil MacFarquhar, UN Bureau Chief and former Cairo Bureau Chief for the New York Times, to get the latest view of what is happening on the Arab ?street.? MacFarquhar grew up in Libya around the time I tried to visit the country in the sixties (I was turned away at the Tunisian border), speaks and writes fluent Arabic, and has lived in Egypt, Kuwait, Israel, Cyprus, and Saudi Arabia, so he should know. Until now, the US has tried to turn everyone into Americans, which is why Bush?s policies were doomed to failure. As a result, our form of government has a bad name, which Iraqis now equate with violence and bloodshed. The political process in the Middle East is dead, with most countries run by dictatorships backed by secret police. Many have used the war on terrorism simply to lock up their own pro democracy dissidents, and of course, our outsourcing of torture there is well known. However, the bombings in Riyadh and Casablanca have clearly moved sentiment against Al Qaida. Ironically, the Arab cable TV network, Al Jazeera, has become a tremendous force for change by giving air to debate and alternative views, even though it has been opposed by the US for years. With 25% inflation and 30% unemployment, the mullahs have to eventually lose control in Iran, with the demographics running strongly against them. Obama was right to launch new initiatives the first week of his administration in the region, where leaders have learned they can resist foreign peace efforts by waiting them out. For more on the Middle east, see my interview with ex Bush diplomat Richard Haas . I covered the Middle East myself as a journalist in the seventies and for Morgan Stanley during the eighties, and what Neil says makes a lot of sense.

5) Ouch! The non-farm payroll came in at minus 467,000. What a spanking! The monthly figure is 100,000 worse than the expectations of most suicide prone economists, and took the unemployment rate up to 9.5%. There are now 14.5 million unemployed, an all time high, at least 20 million underemployed, and who knows how many more who have taken pay cuts, unpaid vacations, and furloughs. That leaves an ever diminishing pool of employed who are going to spend us into a recovery. Commodities got slammed across the board, stocks got trashed, and for a minute I thought they were going to run out of red arrows. Traders shorting the long bond got stopped out of their positions, yet again. Looking at the data, it is clear that this is the worst case scenario. Even construction and government jobs, the beneficiaries of so much Federal largess, are still falling. Only employment in education and health care is rising. This comes on top of yesterday?s disastrous figures showing sales at Chrysler fell 42%, Toyota (TM) 34.6%, General Motors (GMGMQ) 33.6%,
and Honda (HMC) 29.5%. At least this will put that annoying ?green shoots? crowd out to pasture. The Obama crowd has to be sweating bullets now, having fired their best shot at the enemy, with no apparent impact. Here comes the ?L?. Please see my ?Sell in May and Go Away? report.

QUOTE OF THE DAY

?CIA coups are underrated,? said Neil MacFarquhar, UN Bureau Chief and former Cairo Bureau Chief for the New York Times.

July 2, 2009

Diary

Global Market Comments
July 2, 2009

Featured Trades: (BA), (COAL)

1) I spent the evening with Dr. Janet Yellen, the president of the Federal Reserve Bank of San Francisco. She thinks that thanks to the government?s tax cuts and spending programs, we will be out of the recession by the end of this year. After massive inventory liquidation, the auto industry in particular is poised for a rebound. Financial markets are now in better condition than we imagined possible six months ago. However, the pace of the recovery will be frustratingly slow, and it could take several years to return to full employment. Since the majority of the Fed board members feel that inflation will be stuck at 2% for years to come, deflation presents a greater risk than inflation. We are not by any means out of the woods yet. Rising energy prices and interest rates are a potential drag on the economy. Commercial real estate is at the top of her worry list, as falling rents and capital values could create a downward spiral, further impairing the banks. China?s wishes for an alternate reserve currency are impractical. Answering questions as only a UC Berkeley professor can, she further confirmed my belief that we are looking at an ?L? shaped recovery at best (see here and here). However, she did pour some cold water on my idea that the TBT has further to run. ?Inflation running up to untoward levels doesn?t make any sense,? she averred.

2) It?s amazing that Al Franken won his state Supreme Court case over Norm Coleman for the Minnesota Senate seat, just as the Clean Energy Act of 2009 comes up for a vote (see my June 26, 2009 Newsletter). Now the Democrats can ram the bill through, no questions asked, leaving fuming Republicans on the sidelines bitching to Fox News. This is one of those seemingly insignificant events which will have a huge impact on history. The last one of these I can remember was when a Cuban orphan named Elian Gonzalez washed up on a Miami beach, and ultimately threw the Cuban vote, the state of Florida, and the entire national election against Al Gore. The bad news is that the cost of your utility bill, gasoline bill, tax bill, and everything else you buy is going up. Those unhappy readers in the Midwest and South can expect more of their income to get shifted towards the two coasts. The good news is that you get to breathe, and your kids will live a full life.

3) Let me tell you first that my family has a long history with Boeing (BA). During WWII, my dad got down on his knees and kissed the runway when the B-17 bomber in which he served as tail gunner (two probables, one confirmed) made it back despite the many holes. Some 40 years later, I got down on my knees and kissed the runway when a tired and rickety Boeing 707 held together with spit and bailing wire, which was first delivered as Dwight Eisenhower?s Air Force One in 1955, flew me and the rest of Reagan?s White House Press Corp to Tokyo and made it there in one piece. I even tried to buy my own B-17 in the nineties (the Piccadilly Lilly), but was outbid by Paul Allen on behalf of his Seattle Museum. So it is with the greatest difficulty that I examine this company in the cold hard light of a stock analyst. Nevertheless, to say that investors are disappointed by the umpteenth outsourcing caused postponement in the 787 Dreamliner is an understatement. They took the Dow stock down 23% from $53 in days. In fact, long suffering shareholders have been pummeled by a torrent of bad news, with the cancellation of the Pentagon?s futuristic $160 billion Land Warfare Weapons Program and Quantas yanking an order for 15 Dreamliners. But I?m a firm believer in buying when there is blood in the street, and I see bucketfuls. BA is selling at 8.7 times earnings, a huge discount to competitors Lockheed Martin (LMT) at 10.5 times and Raytheon (RTN) at 10.9 times. It has $3.3 billion in cash, a 4% dividend, and an increasingly scare A+ rating on its debt. BA?s immensely profitable defense business still accounts for 52% of revenues. When the super fuel efficient Dreamliner does come through, the three year, $151 billion order backlog for 890 planes will deliver a huge kicker for earnings. Its main competitor, Airbus, does have the minor problem in that its planes keep falling apart fully loaded with passengers. If you can get BA under $40, you?d be getting a best of breed company at a mongrel price.

4) I wanted to get the low down on clean coal to see how clean it really is, 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 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 new ones would 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 fired 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. The bottom line is coal can be cleaned, but at a frightful price. For more on this see my June 15 Newsletter.

QUOTE OF THE DAY

?We are slogging through the starkest economic landscape in our lifetimes,? said Dr. Janet Yellen, president of the Federal Reserve Bank of San Francisco.

July 1, 2009

Diary

Global Market Comments
July 1, 2009

Featured Trades: (VIX), ($BVSP), (RSX), ($BSE), (FXI), (EEM), ($KOSPI), (TBT), (JNK), (PHB), (HYG), (FCX), (X), (CHK), ($XEU)

1) Equities: UP

The collapse of the volatility index (VIX) is telling us that the horrific, gut churning, 10% daily moves are over. But equities are no longer a US play. Extracting the insane leverage of the last decade means chopping the US growth rate down from a booming 5% to an anemic 2%. This is not a strong argument to buy American companies, which is why most analysts only see the indexes recovering 10%-20% this year. You might just get tedious range trading after the late 2008 dead cat bounce. The real action will be in the BRIC countries, which will see upside returns double what you will get with the S&P 500. Buy Brazil?s Bovespa ($BVSP), Russia?s RSX (RSX), India?s Bombay Sensex ($BSE), and China?s FXI (FXI) or Hang Seng. And it may be time to spell BRIC with a ?K? by throwing in the Korean Kospi ($KOSPI) as a sweetener.

Grade: A+. The VIX went down virtually every day this quarter, plunging from 46% to 25%, so a ton of money was made on short volatility and time decay plays. My call that the export sensitive BRICK?s were a ?Buy? was a total home run, as they massively outperformed the US. At their H1 highs, Brazil was up on the year 45%, Russia 100%, India 58%, China 41%, and Korea 32%. At its highpoint the S&P 500 was up on the year by a woefully anemic 6%. With 80%-90% of the world?s economic growth over the next ten ears expected to come from emerging markets, Bricks are the place to be.?? Although you may get a decent pull back this summer, this trade has much, much further to run. We are still in the first inning of a 12 inning overtime game. If you want to be conservative and diversified, buy the iShares MSCI Emerging Market basket ETF (EEM), up 38% on the year, on the next major dip.

2) Bonds: Treasuries Down, Private Debt Up.

As I have been vociferously arguing in these pages for months, US Treasury bonds are witnessing the final stages of an overinflated bubble, and you don?t want to be anywhere near this asset class when it bursts. Take out the flight to quality and year end balance sheet window dressing bid from this market, and you have an accident begging to happen. Take in the long term inflationary impact of Obama?s plans, and you have a 30 year contract that peaked at 142 last week which is really only worth 70. It?s just a matter of time before massive government issuance buries largely foreign buyers. Throw in the 50:1 leverage offered by a long bond futures contract, and the profit potential of a short position is so enormous that there are not enough zeros on my calculator to total it up. Buy the Lehman 20 year plus ultrashort bond ETF (TBT). Unfreezing of the debt markets will move the prices for every other type of debt off of their current throw away levels. Buy corporates of every grade with a heavy weighting in junk, or fixed income securities backed by REIT?s, emerging markets, credit cards, student loans, or subprime loans. A convenient way to do this is to buy the ETF?s for the Lehman High Yield Bond Fund (JNK), the PS Corporate High Yield Bond Fund (PHB), and the iShares iBoxx Fund (HYG).

Grade: A+. My recommendation to short the Treasury?s long bond was spot on, with the US Lehman 20 year 200% short ETF (TBT) soaring by 60%. With the government?s printing presses running overtime, this is going to be your new free lunch. We have had a ten point pullback from the top, which may allow latecomers an entry point. The junk bond ETF?s PHB (up 16%) and HYG (up 11%) also were profitable, but did less well, as credit concerns linger. I believe these positions have further to run. But we need to see a real economic recovery, not just a mirage of a few green shoots, to get some serious upside movement from here. For the short term, the easy money has been made.

3) Commodities: UP

After giving up almost all of their 21st century gains, virtually all commodities, including grains, softs, energies, and metals, are due for a recovery. A good part of the sell off resulted from the disappearance of financing, which is slowly working its way back into the market. Now that newbie investors who never should have been involved, like pension funds, have bailed on this asset class, conditions are set for some serious base building. Commodities will be the principle beneficiaries of an epochal trend away from paper assets, towards hard assets, that will be the dominant investment theme for the next decade or two. Chinese and Indians still want to raise their standard of living faster than these substances can be grown, or ripped, or pumped out of the ground. Now Obama is adding America to the infrastructure build out story. A safe way to play this is through beaten down, dividend yielding, producing equities like Freeport McMoran (FCX) for copper, Chesapeake Energy (CHK) for natural gas, and US Steel (X) for steel and iron ore.?? However, don?t expect huge gains until we see signs of a global economic recovery by the middle of the year. Then watch out.

Grade A+. Commodities and their underlying stocks have been the place to be in 2009. You really couldn?t miss, with grains, softs, energies, and metals all doing well. Freeport McMoran rocketed by 148% on a robust 75% move in copper.?? Oil is up 78%, and gold ran 17% before its current pullback. The only letdown has been natural gas, which due to huge new discoveries, supply and storage difficulties unique to this one energy source, and the threat of imports, has fallen by 30%. However, my stock pick in the area, Chesapeake Energy (CHK), jumped by a robust 53%. Again, this trade has a long way to run. While they stopped making almost everything in this recession, the world hasn?t stopped making more people. They are all going to need to eat, travel on more roads, and live in more houses. The emerging market thirst for a higher standard of living is as strong as ever. Look for crude to move to $200/barrel on the next spike. Move your portfolio out of paper assets into hard ones.

4) Currencies: Dollar and Yen Down, Everything Else Up

Since we are smack dab in the middle of a six year trading range, I don?t really have a handle on what the buck is going to do short term. Could we see $1.20 or $1.00 for the greenback in an event driven overshoot, short term? You betcha! But longer term, the trend is still down. Obama?s highly inflationary reflationary policies will eventually lead to an utter collapse in the dollar. If they are successful, the economy will recover, bringing Americans back to their old low saving, high consumption, high importing ways, adding fuel to the fire. Don?t bet against the 45 year trend. No one ever got rich betting against the US consumer. Expect to pay $2.00 for a Euro in the years ahead. Take that European vacation now!

Grade: Pass. Here we are, Uncle Buck dead unchanged against the Euro on the year at $1.40. Since I really didn?t take a view, I don?t deserve a grade, so pass/fail applies. Even so, the collapse of the dollar is a mathematical certainty resulting from current US government reflationary policies in the extreme, and may be the trigger for the world?s next big financial crisis. Expect more action in the second half.

4) Real Estate: Down

With markets still deleveraging, and the son of subprime, the Alt-A loans on our doorstep, real estate is dead money at best. Although the cost of carry for home ownership is rapidly approaching equivalent rental costs on an after tax basis, fewer and fewer buyers are qualifying for loans. Add 1.2 million unsold homes from builders, to three million existing homes already on the market, and you have a staggering 4.2 million homes for sale in the US. There are at least another two million homes being held off the market waiting to smack down any recovery in prices. This is 7% of the total American housing stock. Probably 20% of US homeowners are underwater on their mortgages, and they?re not buying anything anytime soon. We also have an impending crisis in commercial real estate to deal with, generating lots of mall bankruptcies and empty retail space. Remember, ?debt? is a four letter word. I don?t see a meaningful recovery in residential real estate for five years, and then it will be a slow claw back at best.

Grade: A+. There is so much inventory out there it is unbelievable, yet the relentless tide of foreclosures keeps dumping more properties on the market. The sickness has metastasized to commercial real estate, which may be the next big shoe to fall. Look at the chart of the Case-Shiller Real Estate Price Index, which shows us back at 2003 price levels. If this were a stock, would you want to buy it? It is starting to take on the flavor of an all out capitulation. Only the 1990-1997 bottom looks safe. Stay away. Rent, don?t buy.

Final Grade: A. OK, so my self grading is biased. But I am sticking to my guns on all of my core trades for 2009. The big question is, do you sell your doubles? All of the good trades are now overextended on the upside and begging for a pullback. What do you do here? It all boils down to your time frame, your risk tolerance, and your propensity to trade. Short term traders should get out (see ?Sell in May and Go Away?), but look to get back in on serious dips. Long term investors should sit back and hang on, even if the next few months grow violent, scary, or just plain tedious. The wind is at your back.

Call me what you want. You can even call me ?Mad?. Does anyone have a billion dollar hedge fund they want me to run? E-mail me.

The Mad Hedge Fund Trader