October 2009

October 30, 2009

Global Market Comments
October 30, 2009

Featured Trades: (SPX), (TBT), (FISKER AUTOMOTIVE), (TAR SANDS)

NOTE TO READERS: There is a short letter today, as a cable has snapped on the San Francisco Bay Bridge, slicing though a car, and shutting down Interstate 80. Mercifully, the startled driver was spared. I am holed up at the Marines? Memorial Association, trapped with hoards of steaming, angry commuters, taking turns with the four computers in the business center. This is further evidence that our pre Cambrian infrastructure is rotten and rusting to the core, and is in desperate need of more government spending for repairs.

Bridge2.jpg picture by madhedge

1) Those of you who heeded my GLOBAL RISK ALERT on October 13 (click here for report ) missed the top of the market by six trading days and 10 S&P points. I?m sorry; I?ll ring the bell more precisely next time, with a more accurate date and time. Since then, technical sell recommendations have been breaking out like acne at a junior year prom dance. You are all now out of your positions, or love them so much that you are willing to carry them through another crash. At the risk of hubris, even PIMCO?s Bill Gross has jumped on the bandwagon, although I doubt he needs my help ascertaining the direction of stocks and bonds. The way everything turned tail and ran at exactly the same time was a complete vindication of my theory that a tsunami of liquidity was raising all boats, completely unjustified by the underlying fundamentals. Long time readers of this letter know the only short I have advocated this year was in long dated Treasury bonds through the TBT. But the better than expected Q3 GDP of 3.5%, obviously fueled by temporary government programs like ?cash for clunkers? and the first time homebuyers tax credit,? may be presenting one of those pristine, ?sell on the news? moments. Will this data finally give us our long awaited double top? Fading rallies in stocks is looking more enticing by the day.

2) I can?t imagine a finer example? of? ?creative destruction? than Fisker Automotive?s takeover of a General Motors plant in Boxwood, Delaware that once built unwanted Pontiacs and minivans, but closed in July. The startup car maker will use a $528 million US government loan to build 100,000 plug-in hybrid electric cars a year that will sell for under $40,000. The firm?s Danish entrepreneur founder, Henrik Fisker, describes the new car as a ?green BMW.? The firm plans to export at least half its production. The Irvine, California based company is already building a high end electric sports sedan in Finland called the ?Karma? for $87,500. Joseph Schumpeter?s spirit must be smiling.

3) Anyone who has any illusions about the Canadian tar sands business should take a look at the March issue of National Geographic (click here), not normally a prime source of financial and economic news for me. I?m not a fanatic, sandal wearing, organic bean sprout eating environmentalist, but just looking at the glossy, eye opening pictures tells you that is this an eco disaster of Biblical proportions. A $50 billion investment by several firms over the last decade is now producing 750,000 barrels/day, and another $100 billion was headed north before prices crashed last year. You have to cut down a whole forest, remove two tons of peat, then another two tons of sand, and burn 100 barrels of oil equivalent to heat rivers of water to steam, just to produce a single miserable barrel of oil. This gives you the world?s highest production cost, thought to be $80-$100/barrel. There are now 50 square miles of sludge ponds in Northern Alberta leaching a witch?s brew of poisons into the water supply, which has caused the local cancer rate to explode tenfold. We?re not just talking about a few sick geese here. Canada is the largest foreign supplier of oil to the US, accounting for 19% of our total, and half of that is coming from tar sands. One can only assume that the whole industry was built as a hedge against some Third World War, Armageddon type total cut off of all foreign crude supplies that would drive prices to $500/barrel, making all of this hugely profitable someday. Maybe the owners think they can get away with this because it is in the middle of nowhere. An army of lawyers hitting these projects with a tidal wave of litigation think otherwise. After looking at these pictures and analyzing the numbers, you have to ask if it is really worth it, just so I can drive my Hummer to Wal-Mart.

QUOTE OF THE DAY

?Nobody in our industry was immune. Everybody has done a few deals which in hindsight we wish we hadn?t done. But you live and learn,? said David Rubenstein, Managing Director of the $86 billion private equity firm, the Carlyle Group

October 29, 2009

Diary

Global Market Comments
October 29, 2009

Featured Trades: (GOLD), (DOW), (BRAZIL), (EWZ)

1) A few years ago, I went to a charity fund raiser at San Francisco's priciest jewelry store, Shreve & Co., where the well heeled men bid for dinner with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area's premier hotties, who shall remain nameless. Suffice to say, she has a sports stadium named after her. The bids soared to $6,000, $7,000, $8,000. After all, it was for a good cause. But when it hit $10,000, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer's remorse came to me and offered his date back to me for $9,000.?? I said 'no thanks.' $8,000, $7,000, $6,000? I passed. The current altitude of the stock market reminds me of that evening. I have just had one of the best years of my career, and have cashed out of most of my positions so I can greedily await payment of my year end performance bonus. If you rode gold from $800 to $1,050, oil from $35 to $80, and the FXI from $20 to $40, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now? I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands. But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: 'There is a time to fish, and a time to hang your nets out to dry.' At least then I'll have plenty of dry powder for when the window of opportunity reopens for business. One of the headaches in writing a letter like this is that while I publish 1,500 words a day for 250 days a year, generating about half the length of War and Peace annually, you really need to tinker with your portfolio on only a dozen or so of those days. So while I'm mending my nets, I'll be building new lists of trades for you to strap on when the sun, moon, and stars align once again. And no, I never did find out what happened to that date.

2) 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.

3) I've got to comment on Brazil's (EWZ) idiotic move last week to impose a 2% tax on real stock and bond purchases to scare off foreign investors. It's like firing off an emergency flare in the night and saying 'Come and get me.' If any portfolio manager was living in a cave for the past ten years and somehow missed the attractions of investing in an emerging market that exports food and energy, has an appreciating currency, and an almost perfect demographic profile, they can see it now, clear as day. This lunacy reminds me of Malaysia prime minster Mohamad Mahathir's rantings and ravings about George Soros's selling of his country's markets during the Asian financial crisis, when in fact, George was buying. I sympathize with Brazil's dilemma, similar to those of the Swiss during the eighties and nineties, when the whole world wanted to buy their currency, forcing the government in Berne to drive interest rates to zero, pushing domestic prices through the roof. But this is the price of economic success. Everyone wishes they had Brazil's problems. Better to just let things be.

4) The gold rush is back on in California. On my way back from Lake Tahoe last weekend I saw that every bend of the American river was dotted with hopeful miners, looking to make a windfall fortune. Weekend hobbyists were there panning away from the banks, while the hardcore pros stood in hip waders balancing portable pumps on truck inner tubes, pouring sand into sluice boxes. A sharp eyed veteran can take in $2,000 worth of gold dust a day. The new 2009'ers were driven by a record price of gold at $1,066 and the attendant headlines, but also by unemployment, and recent heavy rains that flushes new quantities of the yellow metal out of the Sierras. They were no doubt inspired by the chance discovery of an 8.7 ounce nugget in May near Bakersfield, worth an impressive $9,200. Local folklore says that The Sierra's have given up only 20% of their gold, and the remaining 80% is still up there awaiting discovery. Out of work construction workers are taking their heavy equipment up to the mountains and using it to reopen mines that have been abandoned since the 19th century. The US Bureau of Land Management says that mining permits in the Golden State this year have shot up from 15,606 to 23,974. Unfortunately, the big money here is being made by the sellers of supplies and services to the new miners, much as Levi Strauss and Wells Fargo did in the original 1849 gold rush. Gee, do you think Wall Street is familiar with this concept?

QUOTE OF THE DAY

'We get 150,000 job applications a year, and more when a James Bond movie comes out,' said Leon Panetta, Director of the CIA.

October 28, 2009

Diary

Global Market Comments
October 28, 2009

Featured Trades: (ROACH MOTELS) (FCX), (COPPER), (DOLLAR), (ALTERNATE RESERVE CURRENCY), (LONDON OLYMPICS)

1) This is how you trade this market. Buy the dips on any pull back in any asset, keep a tight stop loss, and run like Hell if it get?s triggered. No doubling up or leaning in. There is only one problem with this strategy. This is how the entire rest of the world is trading! So after the first couple of mouse clicks to the downside, the markets will seize up, as they did last year.?? Anyone with a position larger than the change under your living room sofa cushions won?t be able to get out. Portfolio managers will helplessly watch as their positions get marked down with no trade. The world has been borrowing dollars at zero and buying anything and everything, and the time to pay the piper is fast approaching.?? Dr. Nouriel Roubini, the Turkish economics professor at New York University whose recent negativity has brought him guru like status, made some interesting points yesterday. The Fed is keeping rates low to hasten a recovery before the next election, but Wall Street is jumping on the gravy train and avariciously coining it, creating a new bubble worse than the last one. When the inevitable synchronous global crash happens, it will make last year?s affair look like a walk in the park. There will be no place to hide. If we learned anything last year, it?s that the global capital markets have become Roach Motels. You can check in, but you can?t check out.

2)Last February, I told you I would kill myself if you didn?t buy the world?s largest copper producer, Freeport McMoRan (FCX) (click here for the call). OK, I exaggerate. I said I would throw myself in front of a train. Who knows, I might have survived the train. Since you all followed my advice, you are all now as rich as Croesus, as the stock has since gone parabolic, from $15 to $85, up 560%. Providing the rocket fuel for this move was copper?s leap from $1.25 to $3.00.?? CEO Richard Adkerson is the kind of burly, no nonsense kind of guy you might expect to find in an afterhours bar near one of the many open pits the company works around the world. Although Q3 revenues fell from $4.6 billion to $4.1 billion YOY, FCX has reinstated its dividend, and is clearly back in the catbird seat. China is importing record amounts of copper both for stockpiling and consumption by it explosively growing auto, consumer, infrastructure, and power industries. Record gold prices, which FCX also mines, are giving a further boost. Projects mothballed last year are back on track, and idle equipment is going back to work. When I was at Morgan Stanley during the eighties, any association with the red metal was considered career death, as it was in the grips of a 20 year bear market, trading as low as 60 cents. The guy who covered our big client in the sector was nice enough, but people avoided his table in the company cafeteria in the GM building like he had AIDS. I have to pinch myself when I see copper?s performance today. I wonder where that guy is now?

3) Will people pleeease stop incessantly nattering about the possibility of China dropping the dollar as a reserve currency? What else are they going to use? Monopoly money? Taiwanese dollars? Collectable postage stamps? At $2.3 trillion and rising fast, the Middle Kingdom?s reserves are so enormous that no other currency in the world could accommodate the switch, and no other security offers the necessary depth and liquidity but US Treasuries. China only needs to breathe on any other market for it to skyrocket, we have seen in the relatively Lilliputian commodity markets this year. And really, how likely is it that China embarks on radical new monetary policies that suddenly halves the earnings of it?s exporters, as well as its 30 year hoard of accumulated savings? The demise of the dollar has been predicted more often than the ditching of Microsoft?s Windows as the global PC operating system, and is just as likely.?? Hate the greenback as much as you like, but there just isn?t any other alternative. I have been hearing these arguments ever since the US went off the gold standard in 1971. First there was a perennial Arab threat to price crude in a basket of currencies. Gee, they never seem to complain when the buck is going up. Then there was the speculated emergence of the ?Yen Block?, in the eighties, back when Japan was dominating international trade and the yen was bumping up against ??80 to the dollar. Remember the book ?Japan as Number One? What a laugh. Then we got all that European whining after the launch of the euro, when the weak dollar was every trader?s free lunch. Let?s face it, Europeans hate using someone else?s currency as the primary reserve instrument. Before the dollar, sterling was the de facto reserve currency, and was equally despised. So rather than waste time discussing this issue anymore, let?s talk about something more important, like who is going to win the World Series this year. I?m wearing my Yankees hat.

4) With the British economy mired in a vicious recession, many are wondering if hosting the 2012 London Olympics was such a great idea. The original plan was to convert the one square mile, Lower Lea Valley site into a new suburb, and sell the condos to hungry buyers at high prices. Market conditions today couldn?t be more hostile. Runaway cost overruns have pushed the budget from $2.8 billion to a back breaking $9.3 billion. The East London neighborhood is so bad that ?when you take the tube out there, life expectancy declines with every stop,? said one staffer. A profusion of undiscovered WWII bombs, a stone age cemetery, and a toxic waste dump have also caused delays. When I lived in England I flew over this area weekly to skirt the Eastern edge of the London air traffic control zone, and I will be charitable in calling this place an industrial wasteland. The last time the British attempted a major project like this, the 2000 Millennium Park, multibillion dollar losses resulted. But who can forget that great film Chariots of Fire? Maybe it?s worth it for the Brits after all?

LondonOlympics2-1.jpg picture by madhedge

QUOTE OF THE DAY

?We cannot continue to run trillion dollar deficits and remain a powerful nation,? said Leon Panetta, Director of the CIA

October 27, 2009

Diary

Global Market Comments
October 27, 2009

Featured Trades: (CIA), (TBT), (DBA), (FCX), (USO), (TM), (CVX), (XTO), (RSX), (GOOG), (BIDU)

1) Lunch with the Central Intelligence Agency is always interesting, although five guys built like brick shithouses staring at me intently didn?t help my digestion. Obama?s pick of Leon Panetta as the agency?s new director was controversial because he didn?t come from an intelligence background, upsetting the career spooks at Langley to no end. But the President thought a resume that included 16 years as the Democratic congressman from Monterey, California, and stints as Clinton?s chief of staff and OMB Director, was good enough. So when Panetta passed through town on his way home to heavenly Carmel Valley, I thought I?d take advantage of my top secret clearance from my days at the old Atomic Energy Commission to catch a briefing. The long term outlook for supplies of food, natural resources, and energy is becoming so severe that the CIA is now viewing it as a national security threat. Some one third of emerging market urban populations are poor, or about 1.5 billion souls, and when they get hungry, angry, and politically or religiously inspired, Americans have to worry. This will be music to the ears of the readers who I have been stampeding into food, commodities, and energy all year. Panetta then went on to say that the current monstrous levels of borrowing by the Federal government abroad is also a security issue, especially if foreigners decide to turn the spigot off. I was stunned, not because this is true, but that it is finally understood at the top levels of the administration. Toss another hunk of red meat to my legions of carnivorous traders in the TBT, the ETF that profits from falling Treasury bond prices! Job one is to defeat Al Qaida, and the agency has had success in taking out several terrorist leaders in the tribal areas of Pakistan with satellite directed predator drones. The CIA could well win the war in Afghanistan covertly, as they did the last war there with their stinger missiles used against the Russians. The next goal is to prevent Al Qaida from retreating to other failed states like Yemen and Somalia. The agency is currently basking in the glow of its discovery of a second uranium processing plant in Iran, sparking international outrage. Cyber warfare is a huge new battlefront. Some 100 countries now have this capability, and they have stolen over $50 billion worth of intellectual property from the US in the past year. I thought Panetta was incredibly frank, telling me as much as he could without having to kill me afterwards. I have long been envious of the massive resources that the CIA deploys to research the same global markets that I have for most of my life. If I could only manage their pension fund with their information with a 1%/20% deal! The possibilities boggle the mind! Panetta?s final piece of advice: don?t make a cell phone call in Pakistan. Better take another look at the Market Vectors agricultural ETF (DBA), Freeport McMoRan (FCX), and the Oil Trust (USO).

2) That unappreciated source of great investment ideas, National Geographic magazine, has a short piece on the infrastructure that will be needed to support the coming electric car boom in its November issue (click here for the full story at http://ngm.nationalgeographic.com/). Dozens of different plug-in hybrid and?? electric cars are about to hit the market, most of which run out of juice in 40 miles, needing a vast recharging network which doesn?t yet exist. If the main fuse on my house blows whenever my daughter uses her hairdryer, how am I supposed to top up my plug-in Toyota Prius, which will need an eight hour charge? California always lives perilously close to brown outs. What happens when you throw a million electric cars into the mix? The answer will be unique to each family, depending on their own personal transportation needs. Those driving cars from Better Place in the San Francisco area from next year will simply drive though a car wash type facility, where a new battery is swapped while the driver is sipping a fresh latte. Home ?smart meters? will take advantage of variable electricity pricing that will charge cars only at night when power is cheaper. The 240 volt outlet that you already have to run your dryer or hot tub will halve the charging time. Gas stations along major interstates will soon start offering hefty 480 volt ?quick charge? plugs where a recharge can be had in as little as 20 minutes. Alternative energy naysayers rightly complain that electric car enthusiasts are blind to these complex realities. But in 1908 you had to go to a drug store to buy a one gallon tin of gasoline to power your model T, yet 17 years later there were 25,000 gas stations across the US, and that?s when most had to be built using a horse and wagon.

3)If you think oil is expensive here at $80, look again. The Department Energy chart below of US oil consumption per unit of output shows that, in fact, we are at a 40 year low in the price of crude. In other words, it takes half as much oil to produce a unit of GDP than it did in the late sixties, when 12 miles per gallon was considered reasonable, and only Lincoln Continentals got abused because they consumed a gluttonous six miles per gallon. This is the why current lofty prices are having a negligeable effect on a reviving economy. The other chart shows the price of oil in inflation adjusted terms. Again, we are at the high end of the range, but nowhere near the top. What?s the lesson in all of this? If the price of oil is not hurting now, then it will move a lot higher to where it does hurt big time. When the US gets back on track, and the emerging markets return to firing on all 12 cylinders, triple digit oil is a gimme, and new highs will easily be attainable. Then you can expect the current perfect correlation between rising stock and crude prices to shatter. Make sure you maintain exposure to the oil patch, either through majors like Chevron (CVX) (click here ), oil service companies like XTO Energy (XTO) (click here ), the Russian market ETF (RSX) (click here), or just the plain vanilla Oil Trust ETF (USO). If noting else, these names will help immunize your portfolio against the certainty of higher fuel prices. If you are wondering where the ?W? recession might come from, this is it.

4) If you think Google (GOOG) has a great future (click here for my recent update), then you?ll love Baidu (BIDU), which is Google on Viagra. With economic growth for China exploding a sizzling 8.9% in the recent quarter, it can mean only one thing for the Chinese Internet provider. The business for banner ads is booming, and with that comes expanding margins as economies of scale kick in. I have been pounding the table, trying to get readers to buy Baidu since December, when it bounced off $100 (click here for my recommendation). Since then the stock has rocketed to $438. It is not exactly cheap here, but what multiple do you put on a hyper growing company in the world?s hottest economy? If you do play, I would suggest a limited risk vehicle in case someone soon stuffs some smelling salts up the noses of the global equity markets. Outright call options are too expensive for this bad boy, so cut your cost with a 1:1 call spread involving a long near money call against a short out of the money call. Use the surprise 20% pullback today to become a Baiduphile.

QUOTE OF THE DAY

?The next Pearl Harbor will be a cyber attack,? Said Leon Panetta, Director o the CIA.

October 26, 2009

Diary

Global Market Comments
October 26, 2009

Featured Trades: (CANADIAN DOLLAR), (FXC),
(AUSTRALIAN DOLLAR), (FXA), (NEW ZEALND DOLLAR),
(BNZ), (RSX), (OIL), (ZACHARY KARABELL)

1) It?s all about the dollar, which I have despised all year like the red headed stepchild it has become (click here for my initial recommendation). The assured onslaught of federal debt issuance headed our way will be the overriding investment consideration for traders and portfolio managers for the next decade. That will knock the stuffing out of the greenback against every currency except the Zimbabwean dollar, and even that will rally when you get a long overdue regime change. As the new currencies of barrels of crude oil, 100 pound ingots of copper, or rail cars of iron ore won?t fit into your wallets or purses, foreign currencies offer a great dollar alternative. There was once an argument that foreigners piled into these currencies to capture a huge yield pickup, but even that advantage is now gone, with almost everything now yielding nothing. The soggy buck also explains a lot of what is going on in our stock market, with companies earning most of their revenues from increasingly wealthy foreigners, like those in technology, energy, and commodities. As I write this, I am looking at new one year highs for my favorite picks of the former British crown colony currencies of the Canadian dollar (FXC), up 28% YTD, Australian dollars (FXA) up 49% , and New Zealand dollars (BNZ), up 80%? dollars. Their bounteous natural resources, Anglo-Saxon contract law, a semi common language, and vibrant ports make them the safe bet of choice. Sure, they are all overheated and way overdue for a short term pull back. But over the long haul, you can count on the loony to hit parity, to be eagerly followed by the Aussie dollar, and then the kiwi. And once again, I am including a gratuitous photo of my favorite Canadian, Pamela Anderson to pique your interest.

2) Last January I was extremely positive about building long equity exposure in Russia, one of the two BRICKS that is a big energy exporter (click here for the call ). I predicted that the Market Vectors Russia ETF (RSX) would deliver double the upside of the S&P 500 in the imminent bull market. Well I lied. It actually tripled, while the Dow eked out a measly 70%. It even would have worked as a market neutral pairs trade, long Russia, short the US. This was an oil play on steroids, and with crude then trading in the $30s, how hard of a call was that? A recovery in the ruble also gave you a nice hockey stick effect in the dollar traded ETF. The bounce in the Russian currency stopped the country?s reserve outflow dead in its tracks, and enabled the Russian Central Bank to start slashing interest rates from the nosebleed territory of 13%. There is plenty of room for further cuts. But Russia is not out of the woods yet. Some 30% of the $780 billion in corporate debt is due for rollover this year, and the unemployment rate is at 9.5% and climbing. It also doesn?t help that they lock up oligarchs on bogus tax charges, and will expropriate foreign assets at the drop of a hat, as they did from Shell and British Petroleum. But none of my investors told me I could only do business with nice people who gave me a warm and fuzzy feeling. A rising oil price atone for all sins, as any Middle Eastern sheik can attest. You might want to take a shower after you write the trade ticket, buy hey; sometimes you just have to follow the money. Just watch out for the volatility.

3) Zachary Karabell, president of River Twice Research, is one of the few original thinkers out there who also has a sense of humor. So there?s more than one? Zach has brought his considerable talents to bear on the current state of the Chinese-American relationship in a new book, Superfusion: How China and American became One Economy and Why the World?s Prosperity Depends On It.? International trade has fused the two countries into a single economic unit that accounts for a quarter of the world?s population and a third of its GDP, despite wildly different cultures, much like the loose confederation that makes up the European Community. The Middle Kingdom now has reserves of $2.3 trillion, which is overwhelmingly invested in the US. Where else can it go? That enabled them to step up and play an important role in the bail out of the US financial system this year. But it is an imbalanced agglomeration, with Americans over consuming and under saving and the Chinese doing the reverse. This has to stop, lest the symbiotic relationship tears itself apart. The tit for tat, storm in a tea cup, where the US imposed punitive import duties on Chinese tires and the they retaliated with a ban on American chicken feet (yes, they eat them, yuk!), is a recent example. The reality is that old, boring industries that once might have fought tooth and nail for protection are now migrating to China en masse and finding new life. Bet you didn?t know that General Motors sells more cars in China than in the US, some 1.6 million this year? Don?t hold your breath waiting for China to float the Yuan, as it is one of the few tools that give the Mandarins in Beijing direct control of a huge, disparate economy. Chinese military spending is so parsimonious that it won?t remotely comprise a threat to the US. What little they have is directed at potential regional aggressors, like Japan, India, and Russia. The greatest risk to the existing relationship is that Chinese growth continues so rapid, that it pits them against the world in resource bidding wars, which could get ugly. With crude at $82 and copper at $3, has that already started? The book is well worth a read for some excellent ?out of the box? analysis. Does anyone have any good recipes for chicken feet?

QUOTE OF THE DAY

?Looking at dreadful air pollution outside, we see an environmental disaster and the Chinese see progress,? said Zachary Karabell, president of River Twice Research.

October 23, 2009

Diary

Global Market Comments
October 23, 2009

(SPECIAL WHEAT ISSUE)

Featured Trades: (AGU), (POT),
(MON), (DBA), (CAT), (JON STEWART)

1) With December wheat (WZ09) tickling $5.48 yesterday, the e-mails are now pouring in from farmers, co-ops, and silo managers in the Great Plains states offering reasons why it should go higher. The Northern states and much of the Midwest west have now endured a couple of cycles of heavy rains followed by punishing freezes. With much of the crop now being brought in wet, it has to be dried by burning large amounts of natural gas to keep it from rotting, delaying shipping. The intemperate weather is pushing back the double planting of new crops. Railroad managers tell me that extra cars are being booked by the hundreds to ship wheat to the West coast ports to accommodate larger than expected Chinese buying. The harvest in the Ukraine is coming in seven million metric tonnes less than expected, which will force some Eastern European nations to come here to buy. My bet that weather would not continue perfect is paying off big time. How hard was that? I also predicted that the September $4.40 bottom would be put in by cash strapped small farmers desperate to unload at any price in order to finance seed and chemicals for the next crop (click here for the report). Traders who took my advice now have the luxurious choice of cashing in their three week, 25% profit (175% if you did it through the futures) and running, or rolling over to a longer dated contract to catch the bigger trend. For a list of reasons why you want to do this, read the piece below on the coming food crisis. And if you want to know how to get set up on the futures, don?t hesitate to email me at www.madhedgefundtrader.com.?

2) 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 cool website by clicking here). 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 food supply. 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 the PowerShares Multi Sector Agricultural ETF (DBA). These will all surpass last year?s stratospheric highs at some point.

3) Caterpillar (CAT) presents itself as a bib overall, straw hat, work boot wearing, ?aw shucks,? rural Illinois company, much like the open pit miners and roustabouts who use their elephantine products. In reality, CAT is one of the slickest, most sophisticated multinationals selling, 70% of its wares to the harshest, most unforgiving corners of the globe, where sweaty, determined men rip things out of the ground for a living. That is why CAT is one of the few companies that I have followed on a bottom up basis for the last 35 years as a great ?tell? for the future course of all things I hold dear, like gold, silver, copper, iron ore, coal, and agriculture. In announcing his 53% drop in Q3 YOY earnings to $404 million, CEO Jim Owens made crystal clear that he is of the ?V? persuasion. He thinks a horrific -6.1% GDP quarter will be followed by two back to back 3%-4% quarters. Confidence is returning in the crucial growth markets in Asia, and rising commodity prices auger well for the future. Last year?s melt down was so traumatic that the best companies in the world radically cut inventories, which now have to be rebuilt in a hurry. Owens sees starts in housing, another big market for the firm, recovering to the one million level next year because pent up demand is building, and affordability is at a 25 year high. The only doubts stem from the disturbing degree that this spending is accomplished with borrowed money here and around the world. Last February, I told you I would lay down on the nearest railroad tracks and let a train run over me if you didn?t load up on CAT at $25 as a great indirect commodities play (click here ).? The big question now is whether Owens will put his money where his mouth is and hire new workers. Everything Owens says is incredibly bullish for energy and commodities of every flavor.

4) I am frequently asked where I find my best sources of market intelligence. Well here they are: Saturday Night Live, The Colbert Report, The Onion, and The Daily Show With Jon Stewart. How else would I know that Jim Cramer argued vociferously that Bear Stearns wouldn?t go under, a week before it croaked, or that Dora the Explorer had been appointed to the Supreme Court? For a great example of Stewart?s astute analysis, click here for his take on the Goldman Sachs (GS) earnings. I?ve seen my trading performance improve significantly when I keep the Comedy Channel on all day, instead of CNBC, which has degenerated into a wearisome series of softball questions and an endless infomercial for its owner, General Electric (GE). And now I hear it?s for sale. I though the ?cash for clunkers? program had ended. If you can?t have a sense of humor about this business, it?s time to retire.

QUOTE OF THE DAY

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

October 22, 2009

Diary

Global Market Comments
October 22, 2009

Featured Trades: (XOM), (DBA),
(USO), (RJI), (AFRICA), (AFK), (GAF), (EWH, (FXI)

1) Those of you searching for the 'new normal' better take a close look at the China National Offshore Oil Company's (CNOC) efforts to top Exxon Mobil's (XOM) $4 billion bid for development rights to a giant new field off West Africa. This is only the latest chapter in a global bidding war for essential resources they, and we, need. Long gone is the day when the Standard Oil Company only needed to deliver King Saud a new Cadillac every year to assure rights to his kingdom's oil supplies, even though it often had to be towed by teams of camels, as there was no refining capacity yet on the peninsula. Decades later, I was part of a SWAT team at Morgan Stanley whose schmoozing kept the crude flowing and the cash surpluses recycling. Having grown up in the desert near Indio, California, I was the only one in the company who actually liked caravanning out into the desert to scoop up cooked rice with my fingers off of giant brass platters, and guzzle illicit Johnny Walker Red, said to be smuggled in by a wayward member of the royal family. I never did get used to the sheep brains, though. But I digress. To the current generation of oil traders, I might as well be talking about the Pax Romana than the Pax Americana, which is now equally ancient history. The hard truth is that they are out there bidding against the new 800 pound gorilla in the market, as are others for coal, iron ore, copper, gold, silver, wheat, corn, soybeans, and myriad other essentials. If you have any doubts about China's acquisitive determination, look at the chart below showing that the Middle Kingdom's outbound direct investment is outstripping inbound investment for the first time. Will the Pebble Beach Golf Course next? For you and I, this means we can count on the price of everything to go up in the future, a lot. Keep food, commodity, and energy ETF's permanently on your radar, like the PowerShares agricultural (DBA), the Rogers International Commodities (RJI), and the Oil Trust (USO). Jim Rogers, are you listening?

2) Two of my favorite picks for the year blasted through to new highs last night, the Hong Kong ETF (EWH) and the China ETF (FXI). Even Bono is singing about Chinese stocks going up. The FXI is now up a staggering 136% from the March lows, compared to a measly 65% for the S&P 500. Looks like those decades of eating fish heads and rice are finally paying off for me. Have you ever noticed how the quality investments rise much faster than the dodgy ones over time? At least the global wave of liquidity is surging into the good names, not only just the crap, as it is here in the US. Jim Rogers, are you listening yet?

3) Feel like investing in a state sponsor of terrorism? How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped? Another country lost four wars in the last 40 years. Still interested? How about a country that suffers one of the world's highest AIDs rates, endures regular insurrections where all of the westerners are massacred, and racked up 5 million dead in a continuous civil war? Then Africa is the place for you, the world's largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo. Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms. Goldman Sachs has set up Emerging Capital Partners, which has already invested $1.6 billion there. China sees the writing on the wall, and has launched a latter day colonization effort, taking a 20% equity stake in South Africa's Standard Bank, the largest on the continent. In fact, foreign direct investment last year jumped from $53 billion to $61 billion, while cross border M & A leapt from $10.2 billion to $26.3 billion. The angle here is that all of the headlines above are in the price, that price is very low, and the perceived risk is much greater than actual risk. Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. The reality is that Africa's 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure. For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It reminds me of the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years, because the risks were so high. This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has rocketed by 82% from the March lows to the recent highs, and the SPDR S&P Emerging Middle East & Africa ETF (GAF).

QUOTE OF THE DAY

'Interest rates are at zero. The Fed has made it very painful not to take risk,' said Ed Yardeni, president of Yardeni Research, a former chief economist at EF Hutton and Federal Reserve Governor.

October 21, 2009

Diary

Global Market Comments
October 21, 2009

Featured Trades: (GOOG), (MS),
(1987 CRASH), (CVA), (AMSC)

1) When people ask me what is the one stock they should put in their kid?s college fund and forget about, I always give them the same company: Google (GOOG). The toll taker for the Internet that controls 70% of the global market for search just announced record Q3 profits of $1.6 billion on a revenue rise from $4 billion to $4.4 billion. In this economic environment these numbers are nothing less than astounding, making GOOG one of the few US firms that has actual top line growth.? Google earnings, in fact, have turned into a valuable leading economic indicator by telling us that the strong ad growth came in the retail, travel, and the automotive sectors. This bang up performance is further proof that the irresistible tectonic shift away from old line media like newspapers, radio, and TV, to online, is accelerating, offering advertisers far and away the highest return on investment. Google is fast becoming the operating system for all advertising. While critics focus on the myriad ways the company recklessly burns money on peripheral businesses like Google TV, YouTube, forays into print media, and their private space program, I see gigantic growth opportunities that will prevent the company from becoming another Microsoft (MSFT). Mobile search grew 30% QOQ as the growing legion of sophisticated portable devices are increasingly used for search. Also, click rates cratered in the great recession, the price of ?investment advisor? for example plunging from $4 to pennies. A recovery could bring an equally ferocious rebound in rates that fall straight to GOOG?s bottom line. Most analysts are now targeting the high $600s for the stock price, which I believe will prove conservative. If you are ever worried about America?s future, then just look at these two kids, Larry Page and Sergey Brin, who built a $400 billion company out of their dorm room at Stanford in virtually no time, with no capital. Just ignore the office foosball table, volley ball court, and at-desk massage service.

2) With the orgy of recollections about the 1987 stock market crash on the 22nd anniversary yesterday, I suppose I should throw in my two cents worth. I was in Paris visiting Morgan Stanley?s top banking clients, who then were making a major splash in Japanese equity warrants, my particular area of expertise. I was escorting around our Tokyo economist, David Gerstenhaber, now a noted hedge fund manager, who waxed on bullishly about the long term prospects for the Japanese economy. When we walked into our last appointment, David casually asked how the market was doing (Paris is six hours ahead of New York). We were told the Dow was down 300. Stunned, I immediately asked for a private conference room so I could call the equity trading desk in New York to buy some stock. A woman answered the phone, and when I said I wanted to buy, she burst into tears and threw the handset down on the floor. Redialing found? all transatlantic lines jammed. I never bought my stock, nor found out who picked up the phone. I grabbed a taxi to Charles de Gaulle airport, and flew my twin Cessna as fast as the turbocharged engines would go, breaking every known air traffic control rule. But by the time I got back to London, the Dow had closed down 512. Then I learned that George Soros asked us to bid on a $250 million blind portfolio of US stocks after the close. He said he had also solicited bids from Goldman Sachs, Merrill Lynch, JP Morgan, and Solomon Brothers, and would call us back if we won. We bid 10% below the final closing prices for the lot. Ten minutes later he called us back and told us we won. How much did the others bid? He told us that we were the only ones who bid at all. Scrotums tightened throughout the firm. The next morning the Dow continued its plunge, but after an hour managed a U-turn, and ensued on a monster rally that went on the rest of the year. We made $75 million on that one trade. It was the worst investment decision I have seen in the markets in 35 years, executed by its most brilliant player. Go figure. Maybe it was George?s risk control discipline kicking in. At the end of the month, we then took a $75 million hit on our share of the British Petroleum privatization, because Margaret Thatcher refused to postpone the issue, giving Morgan Stanley?s equity division a flat P&L for the month of October, 1987. I think I sweated off five pounds that day Even now, I refuse to gas up at a BP station, no matter how green it is.

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

QUOTE OF THE DAY

?The shape of the recession is going to be an ?L? for Europe, a ?U? for the US, and a ?V? for Asia,? said my former Morgan Stanley colleague and buddy, Tom McManus, the chief investment officer at Wells Fargo Advisors. Tom?s current number one pick is the energy sector, also a favorite of min
e.LUV

October 20, 2009

Diary

Global Market Comments
October 20, 2009

Featured Trades: (DINNER WITH OBAMA),
(MS), (BYRON WIEN), (JULIUS CAESAR),

1) The black GM Suburban barreled into the parking structure at San Francisco?s posh St. Francis Hotel, its emergency lights flashing, and quickly disgorged a team of secret service agents. Behind them the armored Cadillac limo screeched to a halt, and out lept Barrack Obama, the President of the United States. He came to speak to a select group of wealthy, A-list, party faithful who had paid $15,200 each for the privilege of? having their picture taken with our famous president. Although the tension was so thick you could cut it with a knife, Obama firmly shook my hand with the controlled cool he is famous for, and produced the obligatory grin for the camera, as if on autopilot. The scene outside in Union Square was a mad house, with every fringe group but the Lemurians well represented, and the police struggling to prevent a shouting match between antiwar demonstrators and the anti-abortion activists exploding into violence. An Obama win in the California was never in doubt, with 85% of some districts going for the Democratic candidate. Yet,?? the Golden State was a mandatory stop for Obama as it generated the cash flow needed to fund wins in a half dozen battleground states. The support paid off, as dozens of desperately needed infrastructure projects started raining down upon us the second after the budget was passed, and no less than a half dozen UC Berkeley notables filed into the administration, with more waiting in the wings. I always thought that Obama was a man from the future, but he is 150 years from the future, and would bring upon us more rapid change than many even in his own party are able to digest. He is not an African American, but an African and an American, and bears no taint of slavery in his DNA. He is taking huge risks with the future of the country now, and may drive us all to ruin if his lofty plans don?t work out. But what choice does he have? The backdrop for the 2012 was either going to be the Great Depression II or a fragile recovery fueled by massive borrowing. Seems like a no brainer to me. I?ll just go out and short more dollars, laughing all the way to the bank. Call me a cynic, but as they used to say at Morgan Stanley, who is guilty of losing the $100 bill, the guy who dropped it, or the one who picked it up? You can find the photo on my Facebook page.

2) It warmed the heart to see my old Morgan Stanley (MS) colleague, Byron Wien, on TV. After my incendiary and iconoclastic interview with Bill Fleckenstein yesterday (click here to read), I thought I?d get the view from the other side of the street. Byron was our strategy guru at MS, then went on to mega hedge fund Pequot, and then parachuted comfortably into a co-chairman?s role at the all seeing, all knowing Blackstone. At 76, he looks pretty old and crotchety, but then he looked old and crotchety when I first met him 30 years ago. Byron gained his fame by annually publishing a top ten list of market surprises that traders believe are unlikely, but have a high probability of happening, which the clients used to absolutely eat up. His list for 2009 is looking pretty good. Back in January when the world was ending, Byron predicted that by year end, gold would blast through to a new high of $1,200, oil would rebound to $80, the S&P 500 would reach 1,200, Chinese growth would come in at 7%, ten year Treasuries would sell off to a 4% yield, housing would bottom, and Obama would become a hawk on Afghanistan. He could be batting ten for ten by year end. He argues that Christmas sales will come in better than expected, and the top line surge will enable the S&P 500 to climb the last leg to his target. We are close enough to his other targets to call it a win for him. When his next top ten list comes out in January, pay close attention.

3) One of the great pleasures of running an online business like this is that not a day passes without being totally amazed by the Internet. You may recall that last week I wrote a piece translating the arcane Latin found on a US dollar bill (click here for the story). What do I find in my in-box the next morning but a dozen new subscriptions from Romans! Who knew Romans were surfing the net? I mean the modern kind from Rome and other parts of Italy. It turns out that an Italian language investment website is screening the net for Italian language pieces, and to your dumb, garden variety search engine, Latin is close enough. If you want to give your Italian a real work out and see that I?m not making this up, click here . I haven?t been to Italy since I totaled a plane there taking off from Palermo, Sicily, which it turns out has one of the worst wind shear airports in Europe (it was a rental). So to my new Italian subscribers, I say, quoting Julius Caesar, vini, vidi, vici!

QUOTE OF THE DAY

?In the next two to three years, more money will be lost in long term Treasury bonds than was lost in the last two years in the stock market,? said Allan Lance of the Lance Letter.

October 19, 2009

Diary

Global Market Comments
October 19, 2009

Featured Trades: (BILL FLECKENSTEIN),
(DIN), (RIMM), (JWN), (DOW 10,000), (FSLR)
(TRES AMIGAS TRANSMISSION FACILITY)

1) I have worshipped legendary hedge fund manager, Bill Fleckenstein, as the God that he is for decades. So I thought it was time to catch up with the noted bear on the day the Dow popped above 10,000. Bill said he took out his 'Dow 10,000' hat and symbolically placed it on top of the six foot tall stuffed grizzly he keeps in his office. The same idiots who sold the bottom in March are now buying the top, and some fantastic short selling opportunities are setting up. He is in no rush, as the current liquidity driven tide that is lifting all boats could run into January. But 2010 could be the year when serious money is once again made on the short side. His favorite targets will be technology companies like Research in Motion (RIMM), where double ordering is now rampant, as Kool-Aide drinking managers rush to replenish depleted inventories. Retailers like high end department store Nordstrom (JWN) are also in his cross hairs, as are restaurant chains like IHOP (DIN). Big banks are a temptation, but they are a black hole on information, and the government is changing the rules every day, so he'll stay away. 'Anything with a bad balance sheet will get clubbed,' said Bill, with the subtlety of a 20 pound sledge hammer. Long Treasury bonds are a bubble waiting to burst, and the TBT is a home run staring you in the face. He can understand why the low end in residential real estate is holding up, with the government offering a tax free bribe of $8,000 to all comers ($15,000 in California). But the high end is in serious trouble, and it is raining McMansions in tony neighborhoods.?? The nightmare won't end until the banks foreclose on everything and then puke it all out, putting in the real bottom. This could be a long time off. He doesn't see any way commercial real estate can avoid disaster. What Bill does like is gold and silver, which seem to be climbing a higher wall of worry than stocks. He also likes the commodity producing currency, the Canadian dollar. Imagine that? Have I left anything out? Buy wheat. Traders are transfixed by this year's huge American crop, when in reality, 40% of the wheat producing areas of the world are suffering prolonged droughts, and $8/bushel is not out of the question. How does he know all of my positions? Did someone tell? At least if I'm wrong in my own views, I'll have some distinguished, articulate, and very entertaining company. For more on Bill's views, go to his insightful and informative blog called the 'Daily Rap' by clicking here

2) Wow! Dow 10,000! It is definitely the year of the bungee cord. Of course, the GDP is now 40% higher, and the national debt, at $12 trillion, is more than double the first time the index crossed this magic number in 1999. Some are saying this is an indication of how cheap the market is. Some, but not all- including me. We have a 'V' shaped stock market recovery discounting an 'L' shaped economic recovery, a match made in Hell, which will come back to haunt us all. Bond fund subscriptions are outpacing stock fund subscriptions by 13 to one. Humongous amounts of cash prefer to sit on the sidelines in money market funds and short term Treasury bills yielding nothing. Insider buying is nonexistent. Only 85% of the population is participating in the economy now, if you use the broader unemployment statistics, and only 75% of you take out the 'black' economy. It seems like much of the investing public has taken up the attitude of fool me once, shame on you. Fool me twice, shame on me. Sure you could strap on a long here and make a few bucks. Could you conceivably get away with it? Maybe. Is it a good idea? No. Making 10% on the upside at the risk of a 50% loss is not how great fortunes are wrested from the market. There is a time to play and a time to sit, and I vote for the latter. There is no law that says that you always have to trade, despite what your broker might say.

3) Just thought I'd pass on a complimentary review of my letter and website by one of the more sophisticated personal blogs out there, posted by Laurence Hunt. You can read it by clicking here . I slave away 16 hours a day, tracking 100 markets around the world, writing until my shoulders are so stiff they feel like they've turned into concrete, wondering if anyone ever reads this stuff. Reviews like this are indisputable proof that someone is, and keeps me going.

4) There was an article in the Wall Street Journal the other day which I'm sure you skipped over, but which has earthshaking implications for the energy future of the US. Until now, the country's power grid has been divided into three unconnected chunks, making transnational transmission impossible, leading to huge regional mispricing. While California and New York suffered from brown outs and sky high prices, electricity was given away virtually for free in Texas. A group of power companies is now proposing to build the $1 billion Tres Amigas superstation in Clovis, New Mexico that would connect all three grids. The plant would use advanced superconducting technology that will send five gigawatts of power down cables cooled at 300 degrees below zero. The facility would solve a major headache of alternative energy planners, and will no doubt accelerate development. It would allow the enormous wind farms on the drawing board in the Midwest to ship energy to the power hungry coasts. Ditto for the mega solar projects proposed in the Southwest deserts, and the big geothermal plants being built in Nevada. With Obama sending tidal waves of government cash towards the sector, the timing couldn't be better. It is also great news for major alternative suppliers like First Solar (FSLR). Some of these projects might now actually make some sense. For the complete story, please click here .

QUOTE OF THE DAY

'The economic crisis will continue until we get some real leaders and get rid of all the whores in Washington,' said the ever diplomatic Bill Fleckenstein, a legendary hedge fund manager.