August 2009

August 7, 2009

Global Market Comments
August 7, 2009

Featured Trades: (NATURAL GAS), (UNG), (WHEAT), (TBT), (GOLD), (SILVER)

1) Where have all the cheap things gone? Now is the time to exercise your discipline and not behave like a stray dog chasing a fire engine in a crummy neighborhood. Only shop for the bombed out stuff, what stock picking icon Benjamin Graham called ?cigar butts left on the ground that still have one puff left in them.? I mentioned natural gas (UNG) yesterday (NG), which is seeing a major swoosh down today and could be the beginning of an entry point. Wheat is also popping up on my radar. We are witnessing the greatest growing season in history, with farmers reporting conditions near perfection. How do you improve on perfect? Prices got hammered, but seem to have found a floor around $5/bushel, off from last year?s spot high of $13.50. Once we get through the summer and the crop is in the silos, you can look for prices to start an uptrend into the winter. One December wheat contract (WZ09) on the CME buys you 5,000 bushels, worth $25,000 at $5.00/bushel, with a margin requirement of only $2,240. If the trade doesn?t work out, you can always take delivery and make a lot of croissants, or sourdough if you live in San Francisco. If you don?t have the futures account you need to strap on this position, e-mail me at madhedgefundtrader@yahoo.com and I?ll walk you through it.

2) Trade School

I am asked daily about my favorite financial books by the legions of subscribers who are using my blog to educate themselves about the markets. That is one of my goals. Below are my picks, which are entertaining if not insightful. I have left out books about specific trading systems guaranteeing windfall profits, because they all eventually blow up. The good books on the current financial crisis have yet to be written. The best trading strategies will never be written about, but only whispered of in poorly lit bars after work, the kind where your feet stick to the floor with the foul restrooms. Successful traders are a notoriously secretive bunch who don?t want copy cats hanging on to their coattails spoiling their markets. When I do hear about these I pass them on to you through my newsletter. Give yourself an edge and a descent education and foundation by reading the list below.

Security Analysis
by Benjamin Graham and David Dodd
The Bible of security analysis. If you are only going to read only one book, make this it.

A Random Walk Down Wall Street
Burton G. Malkiel
The history of risk analysis on Wall Street.

The Black Swan
by Nassim Nicholas Taleb
An iconoclastic, rock throwing, in your face rebuttal to convention risk analysis theory.

The Snowball: Warren Buffet and the Business of Life
by Alice Schroeder
The biography of the greatest investor of our time.

Extraordinary Popular Delusions and the Madness of Crowds
by Charles MacKay
The history of bubbles, from tulip mania, to the South Sea bubble, to the 1929 crash. Boy, does history ever repeat itself!

The Crash
By John Kenneth Galbraith
A must read history about the big one. You?ll be amazed by the parallels today.

Reminiscences of a Stock Market Operator
by Edwin Lefevre
Biography of one of the most famous speculators of the roaring twenties, who sadly committed suicide in a public bathroom in 1932. You won?t believe what they did in the pre-SEC days.

The Strategic Bond Investor: Strategies and Tools to Unlock the Power of the Bond Market
by Tony Crescenzi
The bond side of the equation. You need to know where interest rates are going and how they will get there

Economics
by Paul Samuelson
What you missed by not going to the Harvard Business School. Your classic education about Keynesian economics that lets you ignore all that fluff in the broker reports. He got a Nobel Prize for this.

Hot Commodities: How Anyone Invest Profitably in the World?s Best Market
by Jim Rogers
The former George Soros partner tells you why you?ve been buying all that copper.

Crash Proof: How to Profit from the Coming Economic Collapse
by Peter Schiff
Nicely outlines the rationale for moving out of the dollar an into foreign stock markets, gold, and silver, although he is a little extreme in his views of the future of the US.

Market Wizards: Interviews With Top Traders
by Jack D. Schwager
How the pros do it.

The Complete Guide to Investing in Commodity Trading and Futures: How to Earn High Rates of Return Safely
by Mary B. Holihan
The abc?s of commodity investing.

When Genius Failed: The Rise and Fall of Long Term Capital Management
by Roger Lowenstein
Why you?re not shorting deep out of the money volatility in big size.

Against the Gods: The Remarkable History of Risk
by Peter L. Bernstein
How ancient trade routes grew into the global financial system we all know and love.

Liars Poker: Rising through the Wreckage on Wall Street
by Peter Lewis
My friend?s first book, what it is like to work at Goldman Sachs, except then it was Salomon Brothers. When it first came out many thought I had written this book with a nom du plume.

Beat the Dealer: A Winning Strategy for the Game of Twenty-One.
by Edwin O. Thorp
How to win at Black Jack by card counting. I put myself through college on this book, and so did Pimco?s Bill Gross. Not so easy now. Every trader at Morgan Stanley was required to read this book. A nice introduction to probability analysis under stress.

The Money Game
by Adam Smith
How Wall Street Works. A peek into the Wall Street I grew up in during the sixties. How little has changed.

The Little Book that Beats the Market
by Joel Greenblatt
The traditional value approach to picking stocks

3) Ben Bernanke?s hands are so tightly tied that there is little he can do to head off stagflation, that recurring nightmare from the seventies. The $1 trillion he has added to the monetary base is certain to bite back the second there is an uptick in bank lending. Government crowding out has to push bond interest rates a lot higher. A budget deficit of 13% of GDP this year is about as inflationary as you can get. It?s time to take another look at gold, silver, and the short US Treasury bond ETF (TBT), which I recommended at the beginning of the year at? before its awesome 70% run. For more on the risks posed by the stagflation monster, please click here .

QUOTE OF THE DAY

?The Morons who are telling you to buy now are the same morons who were telling you to buy a year ago, just before the crash,? said a hedge fund friend of mine today.

August 6, 2009

Diary

Global Market Comments
August 6, 2009 Featured Trades: (UNG), (NATURAL GAS), (DVN), (CHK)

Special Natural Gas Issue

1)I have been a growling, obnoxious, and highly unpopular bear on natural gas since I put out my sell recommendation on June 2 , just before the crash from $4.30 to $3.10. Since then it has been bouncing around like a ball bearing in a boxcar on the Durango & Silverton Railway. Devon Energy?s (DVN) CEO Larry Nichols has me wondering how long this exasperating action will continue, and when a recovery will begin, if ever. NG has been a screaming chart buy for months, but with terrible fundamentals. Thanks to advanced fracting technologies, hardly a week goes by without a major new find somewhere in North America, taking our reserves from nine years to 100 years in a New York minute.?? So the US is sitting on a gigantic untapped gas formation? Who knew? DVN, one of the best managed companies in the industry, has a balanced oil/gas portfolio. Fortunately, windfall profits in oil have offset wrenching losses in gas. By chopping NG exploration to nothing, it has halved its drilling budget, and that money has dropped straight to the bottom line, enabling it to announce great earnings. See my call to buy competitor Chesapeake Energy (CHK) before its unbelievable 250% run . Despite the prices not seen in a decade, gas demand from industry remains moribund. But Nichols thinks continued production cuts will bring the gas market into balance sometime this winter, making those charts a lot more interesting. Maybe you should be picking up some of the NG ETF (UNG) on its next dive down to $12.50.

2) Reformed oil man, repenting sinner, and borne again environmentalist T. Boone Pickens says that ?when we turn the US green, it will have the best economy ever.? I met the spry, homespun billionaire at San Francisco?s Mark Hopkins on a leg of his self financed national campaign to get America to kick its dangerous dependence on foreign oil imports. For the past 30 years, the US has had no energy policy because ?no one wanted to kick a sleeping dog.? Production at Mexico?s main Cantarell field is collapsing, and will force that country to become a net importer in five years. Venezuela is shifting its exports of its sulfur laden crude to China for political reasons, once refineries in the Middle Kingdom are completed to handle it. Unfortunately, the collapse of energy prices since June and the disappearance of credit have put urgent alternative energy development on a back burner, with his preferred natural gas (NG) taking the biggest hit. If the US doesn?t make the right investments now, our energy dependence will simply shift from one self interested foreign supplier (Saudi Arabia) to another (China). Wind and solar alone won?t work on still nights, and can?t power an 18 wheeler. Don?t count on the help of the big oil companies because they get 81% of their earnings from selling imported oil. The answer is in a diverse blend of multiple alternative energy supplies from American only sources.?? Although Boone now has Obama?s ear, it?s a long learning process. Boone has donated $700 million to charity, and says the 20,000 trees has planted should offset the carbon footprint of his Gulfstream V. I worked with Boone to organize financing for a Mesa Petroleum Pac Man oil company takeover in the early eighties, when it was cheaper to drill for oil on the floor of the New York Stock Exchange than in the field. Now 80, he has not slowed down a nanosecond.

3) President Obama has a tough hand to play here. If the economy stagnates, the 2010 midterm elections are going to be an uphill battle. Only 7.7% of his $787 billion package has been spent so far, and when the rest hits, it will be like pouring gasoline on the flames. On top of that, add the cost of the new health care plan, still an unknown, but big. Perhaps this is why gold is now taking its fifth run at $1,000 in the past year? If his gargantuan stimulus takes hold, then it?s off to the races with inflation. For more on this, read the piece by William Patalon III by clicking here .

QUOTE OF THE DAY

?If you want a friend in Washington, get a dog,? said Harry S. Truman, the 33rd president of the United States.

August 5, 2009

Diary

Global Market Comments
August 5, 2009

Featured Trades: (SPX), (F)

1)Welcome to the new bubble. In four months we have gone from 35% below the 200 day moving average to 15% above. It turns out that 1,000 in the S&P 500 is 38.2% recovery of the fall from the 2007 peak, a great Fibonacci number. DeMark indicators are showing that buying power is getting exhausted. Daily sentiment indicators are 88% bullish. RSI?s and oscillators are over extended. Every day the buyers show up, marching in lockstep with military precision, to give us our needed spike up at the close to keep the rally alive on the charts one more day. Worst of all, I am getting deluged with emails from subscribers who, having stayed out all year, are asking if they should start buying now, and buying everything. All of this, and we still have the second half of the ?W? to discount.?? If the American stock market was the only issue, I wouldn?t really care, since most of my longs are overseas. But if the US rolls over like the Bismarck, emerging markets, foreign currencies, commodities, the energies, and junk bonds will be dragged down with it, because everything is so interlinked these days. There will be no place to hide. I think the glass half full crowd is coming to the end of their run, so I would urge investors to pare down some risk. If your friends stay in, and they make a ton of money, that?s fine. Just let them buy the next round of drinks.

2) So now we have euthanasia for cars. The Wall Street Journal tells us that a government condition of the Cash for Clunkers program (see my last report ) is that clunker buyers total the engines by pouring sodium silicate into them. That way they can?t be resurrected like Frankenstein at the junkyard. What?s next? Free Viagra for the high mileage, new car buyers? There?s a certain poetic resonance there. Anything that works. In the meantime, the Republican Party is publicly slashing its wrists by trying to block an expansion of the most popular program since the end of the mandatory draft. Is Mc Cain trying to lose the election a second time? I think he is oblivious of the warm and fuzzy feelings the clunker clensing is generating, which is far more valuable than any direct economic impact. Don?t they have Ford dealers in Arizona? I never thought I?d run a car company chart again, but here is Ford in all its glory, up a mind boggling 65% since Cash for Clunkers started. Like virginity, confidence is very hard to recover, once it is lost.

3) I spent a sad and depressing evening with Dr. Stephen Greenspan, who had just lost the bulk of his personal fortune with Bernie Madoff. The University of Connecticut psychology professor had poured the bulk of his savings into Sandra Mansky?s Tremont feeder fund, receiving convincing trade confirms and rock solid custody statements from the Bank of New York. This is a particularly bitter pill for Dr. Greenspan, because he is an internationally known authority on Ponzi schemes, and just published a book entitled Annals of Gullibility- Why We Get Duped and How to Avoid It. It is a veritable history of scams, starting with Eve?s subterfuge to get Adam to eat the apple, to the Trojan Horse and the Pied Piper, up to more modern day cons in religion, politics, science, medicine, and yes, personal investments. Madoff?s genius was that the returns he fabricated were small, averaging only 11% a year, making them more believable. The original Ponzi promised his Boston area Italian immigrant customers a 50% return every 45 days. Madoff also feigned exclusivity, often turning potential investors down. For a deeper look into Greenspan?s fascinating observations and analysis, go to his website at www.stephen-greenspan.com.

4) The Bespoke Investment Group produces some top rate research, and believes they have hit on a leading economic indicator that is telling us that the recession is over. Since peaking in April, the four week moving average of initial jobless claims has dropped by 15%. Every time period examined following past peaks like this showed substantial improvements for both the economy and the stock market. Of course, whether we go into a double dip recession later is still an open question. To get the full gist of their argument, please click here.

QUOTE OF THE DAY

?I can calculate the motions of heavenly bodies, but never the madness of crowds,? said Sir Isaac Newton, the inventor of calculus and discoverer of Newton?s Laws, who lost his entire fortune in a 17th century investment scam called ?the south Sea Bubble.?

August 4, 2009

Diary

Global Market Comments
August 4, 2009Featured Trades: (EURO), ($CAD), ($AUS), ($NZD), (JNK), (PHB), (HYG), (EWY)

1) The chickens are finally coming home to roost for the dollar, which has gapped since Thursday from $1.40 down to $1.4450 against the euro, and done even worse again the Australian, Canadian, and New Zealand currencies. Crude traders tell me that the weak buck is making oil go up, while currency traders inform me that it is strong crude that is causing the dollar collapse. It?s like an Agatha Christie murder mystery where all of the suspects are guilty. If we are on the eve of an economic recovery, many fear that the US will return to its old, evil, high consuming, high importing ways, and that the trade deficit will skyrocket. If is doesn?t, then you can count on burgeoning government borrowing to knock the stuffing out of the greenback. It sounds like a heads I will, tails you lose bet. This is not exactly a new trend. The chart below shows the purchasing power of the dollar since the Revolutionary War, and it has been mostly downhill since 1929. No, I have not been trading the market that long. Better to take your pay in Euros, American double Eagle gold coins, bushels of wheat, or barrels of crude.

2) Legendary investor and former George Soros partner Jim Rogers gave a great interview to Bloomberg TV over the weekend. Although he is a long term bull on China, he wouldn?t be adding to positions here, because having doubled in six months you?d be jumping on a moving train. China?s stimulus program is 2.5 times larger than ours on a GDP basis, and is generating more immediate results, as it is being entirely domestically spent. No generous subsidies for foreign car imports. Many industries are booming, and real estate is going crazy again. The better play here is commodities, which the Chinese absolutely have to buy, especially the grains (see my call to buy wheat). Jim is so wedded to his China play that he has moved to Singapore to get closer to his investments. He has always been very public with his ideas, getting people to buy what he already owns, and widely propagates YouTube with his interviews. Take a look at his personal investment website at http://www.allthingsjimrogers.com/.

3) At the beginning of the year I was wildly bullish about junk bonds, and recommended a covey of ETF?s, including the Lehman High Yield Bond Fund (JNK), the PS Corporate High Yield Bond Fund (PHB), and the iShares iBoxx Fund (HYG) (see my report ).? At the time, fears about The End of The World triggered cascading margin calls and distress liquidation that saw tidal waves of paper dumped into a no bid market. Some lesser credits traded with yields at 2,500 basis points over Treasuries. JNK is now 54% up from the March lows, and the others have done as well. Once the Great Depression II was taken off the table, the scramble for yield by hedge funds couldn?t have been more awesome. The average spread over Treasuries has been cut from 1,800 basis points to a mere 1,000, which was where spreads maxed out in the 1990 and 2002 recessions, and could be the new ?normal.? This is against a 20 year average junk spread of 600 basis points, and only 100 basis points seen at the ultra frothy 2007 peak. The good news is that falling junk yields may eventually force tight fisted commercial banks to ease up on the supply of conventional loans, which is restraining a real economic recovery. Gains on junk from here may be limited. Emerging market corporate issuers inundated this market in Q2, some dubious borrowers are starting to sneak back in, and the rollover calendar going forward is truly enormous. There are too many better fish to fry. I?d take the money and run.

4) I have long advocated that the term ?BRIC? should be expanded to ?BRICK? with the inclusion of South Korea (maybe BRISK??) (see my last last report ). The Hermit Kingdom?s exporters are super competitive, with Hyundai forging ahead in terms of both market share and quality in the US. South Korea is carving out a quality niche, where China can?t compete. The Won is undervalued, unemployment is relatively low, and the economy is now poised for an early recovery. The iShares MSCI South Korea Index ETF (EWY) has soared by 115% this year, tacking on 30% in the last three weeks alone. Better add some kimchee and bulgolgi to your diet. They?re delicious, but don?t try it before a date if you?re hoping for a return engagement.

QUOTE OF THE DAY

?The Chinese consumer is consuming,? said legendary investor Jim Rogers, about the Middle Kingdom?s successful stimulus program.

August 3, 2009

Diary

Global Market Comments
August 3, 2009Featured Trades: (NATURAL GAS), (TM)

Special Announcement

1) The Mad Hedge Fund Trader will be presenting a lecture to San Francisco?s prestigious Commonwealth Club of California at 5:30 pm on Tuesday, August 11, 2009. It is entitled Does America Have a Future? I will give a brief history of the hedge fund industry, and then launch into a broader explanation of the long term investment trends that will dominate for the next decade. An extended Q & A will follow. This is your chance to question the logic, the analysis, and yes, even the sanity of The Mad Hedge fund Trader in person. It will be held at the club headquarters at 595 California Street, second floor, San Francisco, CA 94105, which is right at the Montgomery Street BART station.?? Non members are welcome, but you must buy tickets in advance for $15, as the event is expected to be a sellout. For more information, please go to this link to the lecture by clicking here , or go to the club website at http://tickets.commonwealthclub.org/. Please leave the bags of rotten tomatoes at home, as I don?t want to get stuck with a cleaning bill.

2) Perhaps it was the newspaper gene in me that made me screech my car to a halt when I saw a near riot in progress at my local Toyota (TM) dealer. The showroom was more jammed than the unemployment office, with eager salesmen recalled from vacations, manning card tables set up in every available space. I managed to grab one peripatetic salesman by a lapel, who gushed that they sold 45 cars yesterday, compared to ten for a normal Friday, and that 35 of these were the fruit of?? the ?Cash for Clunkers? program. Sure I could get a $4,500 credit for my 1995 BMW (17 mpg), and apply it to a new Prius (50 mpg), taking the price down to $19,500 and the monthly payment to $450/month for five years. In fact, the government stimulus program was so successful, that it ran out of money in the first four days, and congress rushed to triple it to $3 billion on Friday. It was like the survivors of a ship torpedoed at sea were swimming frantically for the only piece of wreckage that floated. Assuming that the average car drives 10,000 miles a year, and the average swap generates a mileage improvement from 15 mpg to 27 mpg, junking 750,000 clunkers will save 30 million barrels of crude a year, 1.5 days of our total annual consumption, or three days of imports. I asked to see the cars that were traded in and was told that the lots for the dealer, the used cars, and the detailer were all full, but I could see some if I went to the Target nearby where they were renting extra spaces. There I saw the fleet condemned to clunkerdom, GM Safari?s, Jeep Cherokees, Buick Regals, Dodge Ram pickup trucks and vans, and Chrysler minivans by the dozen,?? all with ?CFC? marked on their windshields, a certain death sentence. These sorry excuses for transportation will never belch blue smoke, nor drip oil on our interstates again. I can?t imagine a sorrier commentary on the management failure of the US car industry for the last 30 years.

3) My favorite coincident economic indicator, the ?Boot Index,? is showing that we may be entering a very modest economic recovery. That is the price at which you can buy Asolo?s top line mountaineering boot at the REI member sales. I bought this hiker?s dream for $5 last March, and yesterday the price had climbed back up to $27. Of course, this is not the full retail price it should be selling for of $280, with tax. Similarly, we should be equally cautious about Friday?s report of Q2 GPD growth of minus 1%, and the downward revision of Q1 from minus 5.5% to minus 6.4%. To say this is an improvement is like taking money out of one pocket and putting it in the other, then booking a profit on the transaction. The hard truth is that consumer spending, business investment, housing, and inventories are still in terrible shape. Consumers are broke and getting broker, a big problem when they account for 71% of GDP. Only massive federal government spending is supporting the economy, and what happens when that runs out? The next $2 trillion in stimulus is going to be a lot more expensive than the first. Sorry, but I remain a skeptic. I?d rather go hiking in the Sierras than put money in the market here.

4) With the media going gaga over the imagined economic recovery, it?s time to take another look at Ben Bernanke?s exit strategy, or the lack of one. There is no doubt that a large part of our current financial stability is owed to massive Fed support of?? the entire spectrum of the debt markets and the forced recapitalization of the banks. If Ben vacates too soon, we?ll descend back into the depths of Hell. If he hangs around too long, he?ll be doling out massive dollops of hyperinflation. It?s like having an annoying dinner party guest who you can?t ditch because you need him to pay the bill. Fed watchers say the dilemma is as challenging as threading a needle in the dark while wearing pruning gloves. There are also the two 800 pound gorillas swept under the carpet named Fannie Mae and Freddie Mac, which are still major sources of home loans for the catatonic housing market. I?m glad it?s his headache and not mine. For a more in dept analysis of the problem, look at Shah Gilani?s work by clicking here.

QUOTE OF THE DAY

?What?s happening in shale gas is that in three years we?ve gone from a nine year reserve life to a hundred year reserve life,? said Steve Farris, CEO of independent oil and gas production and exploration company, Apache (APA).