1) Note to self. Don?t do your midnight pee next to the bear box. They?re called that for a reason. And I?m sorry that my shouting at the hungry, six foot tall black bear standing in front of me, no doubt more attracted by my Cheetos, hot dogs, and marshmallows than my Manhood, woke up the campers at the 57 surrounding sites. Of course it was too dark to find my bear spray. My ursine challenger eventually saw my logic that the neighbor?s ice chest was more appealing than I, and lumbered off into the darkness. I have successfully avoided bears of a different sort this summer, those of the stock market kind (see my July 15 warning not to sell to soon by clicking here). Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor. The bulk of the trading volume is now accounted for by worthless zombie stocks like Citibank (C), (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and not consumption. Puzzled CEO?s of every stripe are seeing no recovery in their businesses whatsoever. But bears who have sold into the summer rally have gotten a severe spanking. We are left with momentum players and chartists to grind out ever diminishing returns.? I have used the big up days to sell short dated out of the money calls in small size which, mercifully, expired worthless, sometimes just by pennies. That?s because I keep my favorite quote from John Maynard Keynes pasted to my monitor; ?Markets can remain irrational longer than you can remain liquid.? Better to wait for a more convincing break on the charts before piling on those shorts again.

2) ?When do I buy natural gas? is the most frequent question I am getting from clients these days. I can?t blame them, after watching CH4 dive from $13.50/MCF last year to a September contract low of $2.72. Massive new discoveries and an unusually cool summer is causing a looming storage shortage that has hammered longs. Those who dove in early have been punished, with stop outs followed by stop outs. The bizarre thing is that gas went up in flames while crude more than doubled, from $32 to $77, leaving pros stunned and speechless.?? The crude/gas ratio has soared to an unimaginable 27 times, up from a mere four times in the last decade. On a BTU basis, gas is now only 25% the cost of oil, it burns cleaner, with only half the carbon dioxide output, and is cheaper than high grade coal. Natural gas at these prices is another way of buying oil at $18 a barrel, with less pollution. Industry insiders don?t see it falling below $2/MCF, the breakeven cost of the longest term producers, where the shut off valves will start creaking en masse. Existing gas fields deplete at 25% a year, and the 60% cut in new drilling this year will deliver a rebound in prices by next winter. Longer term, the Pickens plan and the conversion of a large part of our national power generation to natural gas will drive prices higher. In the end, I think the final low will be defined by another Amaranth type disaster, where a super leveraged long hedge fund gets wiped out and is then liquidated under the worst conditions imaginable. In 2007, the Amaranth debacle took gas from $17 to $4 in the blink of an eye. Where Amaranth 2.0 will take us is anyone?s guess. But when it happens, possibly as early as September, other big hedge funds will stampede in like feral cats lapping up spilled milk. If I lived over a giant salt cavern, I would be pumping it full of natural gas now. But since these formations don?t exist in Northern California, I shall have to content myself with the futures markets, where longer dated contracts are selling at big premiums. Email me at madhedgefundtrader@yahoo.com if you need help getting set up on the futures. For those not looking for an ?E? ticket ride, it may now be time to Hoover up the leveraged natural gas equity plays like Chesapeake (CHK), XTO Energy (XTO), Southwestern (SWN), and Petrohawk Energy (HK), which appear to have already bottomed.

3) I drove over the Benicia Bridge yesterday, and saw ships lined up at the silos, sitting high in the water, waiting for transport our record wheat surplus to hungry China. After looking at barge schedules for the Columbia River, weather forecasts for Australia, and planting schedules for Texas and Kansas, I am getting more excited about buying December Wheat under $5 (click here for more background). The Southern planting schedule starts on September 1, and the financially weakest farmers will have to sell whatever they have in storage to pay for the new season?s seed and chemicals. This will give us the inventory clear out we need to allow prices to work higher by year end. The greatest growing conditions in living memory have driven prices for this basic foodstuff from last year?s spot high of $13 to the current low of $4.90. Philosophically, the cynic in me loves shorting ?Perfect,? like the ?Perfect? growth in Japanese bank earnings?? in 1989 (remember Japan as Number One?) and the ?Perfect? business models I saw in dotcoms in 2000 (remember the ?infinite revenues, zero cost? pitch?). You might get a buck out of wheat by year end, and more if conditions become less than perfect. Aren?t we supposed to see an El Nino winter (click here for details)? And you never know when the long term food shortage is going to kick in, where the sky will be the limit for prices (click here for details). View the recent spike in sugar prices as an appetizer, not a dessert. Remember, the Fed can print money, but not calories.

JOKE OF THE DAY

Purse snatchers stole the credit card belonging to Ben Bernanke?s wife. Their credit card company became suspicious when they saw multiple purchases of bankrupt car companies hit his card.

Global Market Comments
August 19, 2009

SPECIAL DEMOGRAPHIC ISSUE

Featured Trades: (VIETNAM), (VNM),
(POPULATION PYRAMIDS)

1)Desperate homeowners counting on a 'V' shaped recovery in residential real estate prices better first take a close look at global demographic data, which tells us there will be no recovery at all. I have been using the US Census Bureau's population pyramids as long leading indicators of housing, economic, and financial market trends for the last four decades. They are easy to read, free, and now available online at http://www.census.gov/. It turns out that population pyramids are something you can trade, buying the good ones and shorting the bad ones. These graphical tools told me in 1980 that I had to sell any real estate I owned by 2005, or face disaster. No doubt hedge fund master John Paulson was looking at the same data when he took out a massive short in subprime securities, earning himself a handy $4 billion bonus in 2007. To see what I am talking about, look at the population pyramid for Vietnam. This shows a high birth rate producing ever rising numbers of consumers to buy more products, generating a rising tide of corporate earnings, leading to outsized economic growth without the social service burden of an aged population. This is where you want to own the stocks and currencies.

2) Now look at the world's worst population pyramid, that for Japan. These graphs show that a nearly perfect pyramid drove a miracle stock market during the fifties and sixties which I remember well, when Japan had your model high growth emerging market economy. That changed dramatically when the population started to age rapidly during the nineties. The 2007 graph is shouting at you not to go near the Land of the Rising Sun, and the 2050 projection tells you why. By then, a small young population of consumers with a very low birth rate will be supporting the backbreaking burden of a huge population of old age pensioners. Every two wage earners will be supporting one retiree. Think low GDP growth, huge government borrowing, deflation, and a terrible stock and housing markets. Dodge the bullet.

3) Where does the US stand in all of this? Brace yourself. It shows that we are turning into Japan. As a silver tsunami of 80 million baby boomers retires, they will be followed by only 65 million from generation 'X'. The intractable problems that unhappy Japan is facing will soon arrive at our shores. Boomers, therefore, better not count on the next generation to buy them out of their homes at nice premiums, especially if they are still living in the basement. They are looking at best at an 'L' shaped recovery, which means no recovery at all. What are the investment implications of all of this? Get your money out of America and Japan, and pour it into Vietnam, China, India, Brazil and other emerging markets with similar population pyramids. You want the wind behind your investment sails, not in your face with hurricane category five violence. Use this dip to load the boat with the emerging market ETF (EEM).

4) Now that we have figured out that Vietnam is a great place to invest, we welcome the news that the Van Eck group is about to launch its own Vietnam Index Fund (VNM). The venture will invest in companies that get 50% or more of their earnings from that country, with an anticipated 37% exposure in finance, and 19% in energy. This will get you easily tradable exposure in the country where China does its offshoring. Vietnam has been one of the top performing stock markets this year, at its peak rising by an amazing 110%.?? It was a real basket case last year, when zero growth and a 25% inflation rate took it down 78% from 1,160 to 250. This is definitely your E-ticket ride. Vietnam is a classic emerging market play with a turbocharger. It offers lower labor costs than China, a growing middle class, and has been the target of large scale foreign direct investment. General Electric (GE) recently built a wind turbine factory there. You always want to follow the big, smart money. Its new membership in the World Trade Organization is definitely going to be a help. Until now, the only way to get involved with this country was to go through the tedious process of opening a local currency brokerage account, or buy a region sub emerging market ETF. I still set off metal detectors and my scars itch at night when the weather is turning, thanks to my last encounter with the Vietnamese, so it is with some trepidation that I revisit this enigmatic country. Throw this one into the hopper of ten year long plays you only buy on big dips, and go there on vacation in the meantime. Their green shoots are real. But watch out for the old land mines.

QUOTE OF THE DAY

'A weaker dollar over time is part of the solution. It facilitates the rebalancing that everyone needs. It allows Asia to consume more and it allows us to produce more. It needs to go down slowly,' Said Mohamed El-Erian, co-CEO of bond house PIMCO.

Global Market Comments
August 17, 2009

Featured Trades: (SUGAR), (CRUDE),
(NATURAL GAS), (CHK)

1) I?m sorry I?m late with my letter today, but the lady in front of me in line at MacDonald?s (MCD) with the four screaming kids maxed out all four of her credit cards buying some hamburgers and happy toys. Her new SUV with the chrome wheels baked outside in the summer heat. Sign of the times. When I got back to the office, Egg McMuffin in hand, I was surprised when someone told me that the recession in Europe was over, that Germany has reported Q2 GDP of a positive 0.3%. What immediately came to mind was that their ?Cash for Clunkers? program started much earlier and was much larger than ours, that they has fewer banks drinking the subprime Kool-Aid, and they saw a housing boom that was only a shadow of the mania that swept the US. Europe is also closer to Asia, does a lot more business there, and is being dragged up by the gangbusters Q2 growth in China. But when I looked at the figures closer, I found more fudges than one of Warren Buffet?s See?s Candies factories. The seasonal adjustment was big, there was more tweaking with the number of working days in the year, and if you strip these out, the number was still negative. The fact is, that heavily export dependent German GDP is down 5.9% YOY, with the euro zone shrinking at a 4.6% rate. It will take years to make this back. So don?t pour the schnapps just yet. I think I?ll go back to being a vegetarian.

2) I love it. The fat lady is singing on natural gas. Not only did we plunge to a multi month low of $3.23/MCF, the crude/gas ratio blew out to yet another new high of an amazing 21 times, wiping out yet another generation of quant players. How many standard deviations is this? Their computers must be melting from the models that are exploding. Didn?t anyone tell them these are just tools, and not gospel? The big providers have just not been able to shut down production fast enough. It looks like Chesapeake Energy?s Aubrey McClendon (CHK) is going to have to sell more of his wine collection and artwork (click here for their website). I have been overwhelmingly negative on NG since early June, (click here for report) , suffering an Internet full of abuse in the process. But you want to buy the final washout, because market conditions are bound to improve this winter. Let?s see if you can get a $2 handle, which traders have not visited this century.

3) The seventies are about to make a comeback. No, don?t drag your leisure suits, bell bottoms, and Bee Gee?s records out of your storage facility. I mean the nuclear industry, which has been in hibernation since the accident at Three Mile Island in 1979. There is absolutely no way we can deal with our energy crunch without a huge expansion of our nuclear capacity, which sits at a lowly 20% of our power generation. France has already achieved this, getting 85% of its electric power from nuclear, followed by Sweden at 60%, and Belgium at 54%. Unless you?re a nuclear engineer, you are probably unaware that the technology has moved ahead four generations. The first one produced the aging behemoths we now see on coasts and rivers, which used high grade fuel that would melt down if someone forgot to flip a switch. Generations two, three, and four never got off the drawing board. Generation five is not your father?s nuclear power plant, relying on a new form of fuel embedded in graphite tennis balls that is just strong enough to generate electricity, but too weak to risk a disaster. This eliminates the need for four foot thick reinforced concrete containment structures, which accounted for 50% of the old design?s cost. Low grade waste can be stored on site, not shipped to Nevada or France. The permitting process is being shortened from 15 years to four by confining new construction to existing facilities instead of green fields, urged on by a less fearful public and even some CO2 conscious environmentalists. At least 30 new reactors are expected to start construction in the US over the next five years, and over 90 in China. There has got to be an equity play here. The Market Vectors Nuclear Energy ETF (NLR), which has jumped an impressive 78% to $25 since March, is the easiest way in. You can also buy its largest components, like Cameco (CCJ), the world?s largest uranium producer, or ??lectrict?? de France (EDF SA) which has the monopoly in France and is developing a major export business.

4) I have been watching with some amusement the price action in world sugar, which has exploded from 16 cents/pound to 22 cents since June, because the world?s largest consumer, India, flipped from being an exporter to an importer. Besides demolishing the budgets this year for the big sugar users here, the chocolate, soft drink, and cereal companies, (and McDonald?s), the sugar spike is a wakeup call for everyone else in the commodity space.?? When sugar last peaked at 63 cents during the seventies, the Club of Rome was in vogue, and discussion of resource shortages and imminent global starvation was rife. That is over $1.50/pound on an inflation adjusted basis today. When global supply/demand get?s out of kilter for something everyone has to have, the sky is the limit on prices. Instead of the normal 10%, 20%, and 30% moves traders expect, they will be served up with gyrations of 10X, 20X, and 30X. I expect all commodities to have major moves up in the decade ahead. Sugar was just the first in line. For more details on how to play these moves, please click here

1) Traders are keeping a laser eye focus on two bellwether markets, which are starting to roll over like a cheap date.? The red hot Shanghai stock market has dropped 10% in the past few weeks, putting in an ominous double top on the charts. The Baltic Dry Index, an indicator of? Chinese bulk raw material importing expectations, put in its worst week in a year, off a bone chilling 40% from its recent peak. What are these markets telling us? Best case, the market is going to sleep. Worst case, we are seeing the red skies of a global sell off. Better trim back you?re long exposure of every size, shape, color, taste, and smell. This year?s mini bubble is over.

2) XTO Energy (XTO) CEO Bob Simpson sees natural gas bottoming around here and then spiking up to $7 next year (see their website ) . It was a perfect storm of a collapsing economy, huge new discoveries, and the coolest summer on record that took us from $13.50 to $3.10. Since then companies have slashed gas exploration and drilling budgets, taken the rig count down from 1,600 to 700, and that number is still falling at a precipitous rate. Total onshore production is down by 3% and will plunge by 10% by the winter. XTO is one of the largest independent oil and gas producers in the country, and Simpson is one of the savviest players in the space. He hedged all of his firm?s 2009 oil production?? at $96/barrel, and 40% of his gas production at a stunning $9/BTU. NG has sold off 15% in the past week, as I expected, and this could be the beginning of the final wash out if no hurricanes show up. Keep that natural gas ticker (UNG) ticker glued to your desktop. There certainly isn?t much else to buy out there right now.

3) I don?t normally rely on National Geographic magazine for investment advice, but in the June issue the screaming long term bull case for the soft commodities is there in all its glory (see their website ). During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields.?? Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won?t even mention the strain the politically inspired ethanol and biofuel programs have placed on the system. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. The net net of all of this is that food prices are going up, a lot. Entertain core long positions in corn, wheat, and soybeans on the next dip, as well as the second derivative plays like Agrium (AGU), Potash (POT) and Monsanto (MON). You might also look at DB Commodities Tracking Index Fund (DBC). These will all surpass last year?s stratospheric highs at some point.

4) The market has been buzzing about an enormous options position that has been put on by one of the major hedge funds, betting that that the S&P 500 goes out with a swan dive at the end of 2009. The trade involves going long 120,000 S&P 500 December 950 puts, and going short 240,000 December 820 puts, a strategy known by pros?? as a ?bear put ratio.? For newbies to the option world, this means the player would automatically go short $2.85 billion worth of stock if the index goes under 950, then goes long $5.70 billion of stock if the index drops below 820. I don?t think this is a trade someone did while sitting at home in bed with their Imac on their lap watching Lost on TV. The position generates a maximum profit of $390 million on December 18 with the S&P 500 at 820, just in time to jump on your G5 for a ski vacation in Aspen. It can be strapped on today for a cost of only $7.5 million, or $62.50 if you want to deal in only a one lot. But the trade suffers accelerated losses below 820. If you want to see the deep background on this trade, please click here . Looks like it?s time for me to download new bear photos from Google.

QUOTE OF THE DAY

?The risk of a ?W? is high because there are so many structural problems that will take a long time to work out. Commercial real estate is bad, the employment situation is not good and will be high for years, and we have huge policy issues, like high taxes, bigger deficits, big structural change,? said David Kotok of Cumberland Advisors.