November 2009

The Mad Hedge Fund Trader Interviews Bill Fleckenstein about 2010 on Hedge Fund Radio

I have worshipped legendary hedge fund manager, Bill Fleckenstein, as the trading God that he is, for decades. So I thought it was time to catch up with the noted bear to get his take on the New Year.

The sky high expectations for 2010 now endemic will disappoint, with the year ending substantially lower than we are now. In a stroke of genius, Fleck, as he is known to his friends, closed his short-only fund in March ahead of the coming onslaught of stimulus he saw.

When the Dow popped above 10,000, Fleck 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, though, as it is tough to short against zero interest rates.

This could be the year when serious money is once again made on the short side. His favorite targets will be technology companies, where double ordering of components is now rampant, as Kool-Aid drinking managers rush to replenish depleted inventories. Research in Motion (RIMM) is a train wreck where he already has a big, successful short position. Retailers like high end department stores with weak balance sheets, such as Nordstrom (JWN), are also in his cross hairs, as are restaurant chains like IHOP (DIN).

?Anything with a bad balance sheet will get clubbed,? said Bill, with the subtlety of a 20 pound sledge hammer.

Big banks are one big fantasy in a world of make believe, but are really more of a macro call here. With the government changing the rules every day, he?ll stay away.

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, since the government is offering a tax free bribe of $8,000 to all comers. But the high end is in serious trouble, and it is raining McMansions in tony neighborhoods everywhere. 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. Commercial REITS are a screaming sell, which are falling off a cliff but haven?t felt any pain because they haven?t hit bottom yet.

The current stock market bubble could continue for a few months, with Congress passing more stimulus projects to save their own skins in November. The bell will ring that the top is in when foreigners take away our printing presses by boycotting Treasury auctions, sending stocks, bonds, and the buck into a simultaneous tailspin. That will be the time to get aggressive.

What Fleck does like is gold and silver. To meet the big increase in demand, either production or prices have to go up, and he votes for the latter. Fleck congenitally despises all fiat paper currencies, but hold a gun to his head and he?ll tell you to buy the Canadian dollar (FCX), where a wealth of energy, metal, and food exports will enable the looney to outperform the others.

Buy wheat. Traders were transfixed by last year?s huge American crop and cratered prices, 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. Heavy autumn rains caused much of that to rot in the field, and now a horrific winter auguring for even higher prices.

For more on Fleck?s views, go to his insightful and informative blog called the ?Daily Rap? by clicking here at https://www.fleckensteincapital.com/index.aspx , which is literally worth its weight in gold. You can also catch Bill?s weekly multi market review at MSN by clicking here at http://articles.moneycentral.msn.com/Commentary/ByAuthor/BillFleckenstein.aspx .

Hedge Fund Radio is a weekly program featuring one-on-one interviews with the titans of the hedge fund industry. The show is hosted by legendary hedge fund manager John Thomas, one of the most seasoned players in the industry. It is broadcast live on station KGOL 1180 AM in Houston, Texas as part of the BizRadio? network to 100,000 local listeners, and will be streamed online to a further 100,000 national and international listeners.

The show is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For pilots and the military, that is 17:00 Zulu time. For the online link to the show, please go to www.bizradio.com or? click here, click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.? For that added insight into the future of the markets tune in, or catch the show in my Hedge Fund Radio archives.

November 25, 2009

Diary

Global Market Comments
November 25, 2009

Featured Trades: (HEDGE FUND RADIO),
(PLATINUM), (PGM), (PTM)

1) On Hedge Fund Radio this week I?ll be interviewing the legendary hedge fund manager, Bill Fleckenstein, who will give us his 2010 view of stocks, bonds, commodities, currencies, and of course gold. ?Fleck? is a 25 year industry veteran holding almost as many out of consensus views as me. Premium subscribers are invited to submit questions to me in advance at www.madhedgefundtrader@yahoo.com. To learn more about Bill, Please go to his daily blog by clicking here , and to his? Microsoft News Money Column by clicking here . The show will be broadcast live on station KTEK 1110 AM in Houston, Texas as part of the BizRadio?? network to 100,000 local listeners, and will be streamed online to a further 100,000 national and international listeners. The show will broadcast on Saturday, November 28 at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For pilots and the military, that is 17:00 Zulu time. For the online link to the show, please go to www.bizradio.com or click here , click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.?

2) Since you?ve been romancing gold, you should check out platinum, her younger, racier, and better looking sister, who wears the thong and the low riders. The white metal has risen by 67% this year compared to the more sedentary 44% appreciation seen in gold. While gold has made a hard fought new all time high, the Pt has to rise a further 50% from here just to match its 2008 high of $2,200, suggesting that some catch up play is in order. I have always been puzzled by the fact that platinum is 30 times more rare than gold, but at $1,500 an ounce, trades at a mere 30% premium to the barbaric metal. You have to refine a staggering 10 tons of ore to come up with a single ounce of platinum. The bulk of the world?s 210 tons in annual production comes from only four large mines, 80% of it in South Africa, and another 10% in the old Soviet Union. All of these mines peaked in the seventies and eighties, and have been on a downward slide since then. That overdependence could lead to sudden and dramatic price spikes if any of these are taken out by unexpected floods, strikes, or political unrest. While no gold is consumed, 50% of platinum production is soaked up by industrial demand, mostly by the auto industry for catalytic converters. Only last week, no lesser authority than Jim Lentz, the CEO of Toyota Motors Sales, USA, told me he expects the American car market to recover from the current 10 million units to 15-16 million units by 2015. That?s a lot of catalytic converters. Jewelry demand for platinum, 95% of which comes from Japan, is also strong, as the global pandemic of gold fever spreads to other precious metals. You can trade Platinum futures on the New York Mercantile Exchange, where a margin requirement of only $6,075 for one contract gets you exposure to 50 ounces of platinum worth $75,000, giving you 12:1 leverage. Email me at madhedgefundtrader@yahoo.com if you want to learn how to do this. For those who like to get physical, the US mint issues Platinum eagles from 1997-2008 in nominal denominations of $100 (one ounce), $50 (?? ounce), $25 (1/4 ounce) and $10 (1/10th ounce) denominations. Stock traders should look at the ETF?s (PGM) and (PTM).

3) I guess it?s a sign of the times when the comedy show, Saturday Night Live, pokes fun at America?s trade deficit with China. In an imaginary press conference, President Hu Jintao told Obama he was not allowed to pay off the US debt to the Middle Kingdom by giving them the 750,000 clunkers he bought with last summer?s stimulus program. He then asked how many jobs his program has actually created, and Obama had to give the sorry answer that it was none. China?s president then asked how the $1 trillion health care plan for 31 million uninsured Americans was going to cut the deficit, while China?s 1.3 billion went without coverage. I won?t tell you what happened next, except that China?s president complained he wasn?t being taken out to dinner and a movie first. Where is the Federal Communications Commission when you need them? Have America?s economic policies become the laughing stock of the world? I never thought I?d see the day when out budget and current account deficits became a target for popular culture, but here we are. Better take another look at the TBT.

4) The Mad Hedge Fund Trader is taking a break to have Turkey with the family. I ate an entire pumpkin pie last night just to give my digestive system notice that some heavy lifting was on its way. The next letter will be published on Tuesday, December 1. I am the oldest of seven of the most fractious and divided siblings on the planet. No doubt by brother will show up in his new Bentley Turbo R, flaunting his outrageous bonus check from Goldman Sachs. My born again Christian sister will be bemoaning Sarah Palin?s drubbing at the polls last year. The gay rights activist sister will be arguing the case for same sex marriage. A third sister does humanitarian work visiting the many American women held in Middle Eastern jails. Don?t even think about pulling out of Iraq! Sister no. 4, who is making a killing in commodities in Australia, and is up to her eyeballs in iron ore, will be missing. My poor youngest sister took it on the nose in the subprime derivatives market, and is holding on for a comeback. She is the only member of the family I was not able to convince to sell her house in 2005 to duck the coming real estate collapse because she thought the nirvana would last forever. My two Arabic speaking nephews in Army Intelligence will again delight in telling me that they can?t talk about their work or they?d have to kill me. Another nephew will be back from his third tour in Iraq with the Marine First Division without a scratch, God willing. My oldest son won?t be able to make it because they don?t have a Thanksgiving break in China, and he is trading shares like a demon anyway. We all be thankful that my yougest son wasn?t arrested in the latest round of rioting at the University of California at Berkeley. Reading the riot act will be my spritely, but hardnosed mother, who at 82 can still prop herself up on a cane well enough to knock down 14 out of 15 skeet with a shotgun, although we have had to move her down from a 12 to a 410 gage because of her advanced age and brittle bones. Suffice to say, that we?ll be talking a lot about the weather. I?ll be rejoining you next week. That i
s, if I survive.

QUOTE OF THE DAY

?I think we?re headed towards VAT taxes. It?s only a question of how long it takes for them to wake up and figure it out. You can?t tax the wealthy enough to close the budget deficit we have,? said Leon Cooperman of hedge fund Omega Advisors.

November 24, 2009

Diary

Global Market Comments
November 24, 2009

Featured Trades: (PCY), (LQD), (TM),
(TM), (BEN BERNANKE)

1) I spent an evening chewing the fat with James Lentz, the president of Toyota Motor Sales, USA, (TM) who let loose some incredibly insightful views on the long term future of the global economy. I have been following Toyota for 35 years, hobnobbing with senior management, touring their factories in Japan, and driving their marvelously engineered products. It is far and away one of the best run multinationals, with awesome research resources, spending $9 billion a year on R&D, but are also one of the most secretive organizations on the planet. If the CIA only kept its secrets so well! Peak oil is going to hit in 2017-2020, making gasoline prohibitively expensive. Toyota is racing to get as many hybrids out there as possible by then, converting a Mississippi factory from Highlanders to the hugely popular Prius. In Japan there is a backlog of 200,000 orders for these cars, and Toyota makes a profit on every one. The plug in version of this car will be fleet tested in the US next year, and sold to the public from 2012. But hybrids, which reduce emissions by 70%, compared to conventional cars, are just a transitional solution until the technology for hydrocarbon free alternatives, like electric only and fuel cells, mature in the 2020?s. The US car market will come in at 10 million units this year, but will rebound to 15-16 million units by 2015. At 9.3 years, the average age of the American car fleet is the oldest on record, and replacement demand will be huge. New car based consumer societies are also emerging in Argentina, Mexico, Thailand, and Indonesia. The American car industry, accounting for 4% of GDP and 10% of total employment, isn?t going away, as many fear. However, it will evolve beyond current recognition. Toyota is certainly putting its money where its mouth is, with an $18.2 billion investment in 14 American factories, directly employing 34,000, and indirectly another 380,000. Long term, I love this stock. James has worked for Japan?s largest car maker for 26 years, but still can only order one beer in that impossible pictographic language. By the time the evening was out, I made sure he could order a second, and a third, in Japanese.?

2) Last September, I suggested emerging market sovereign debt ETF?s as safe, high yielding investments in which to hide out in case the equity markets swoon again (click here for the link). Well, the stock market hasn?t swooned yet, so let?s see how they performed. The Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY), which has 40% of its assets in Latin American bonds and 31% in Asia, rose by a modest 3% before pulling back to unchanged. The two year old fund now boasts $340 million in market cap and pays a handy 6.20% dividend. This beats the daylights out of the one basis point you currently earn for cash, the 3.40% yield on 10 year Treasuries, and still exceeds the 5.38% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single ?A? US corporates. The big difference here is that PCY has a much rosier future of credit upgrades to look forward to. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. With US government bond issuance going through the roof, the shoe is now on the other foot. A price appreciation of 125% over the past year tells you this is not exactly an undiscovered concept. Still, it is something to keep on your ?buy on dips? list.

I?m safer than US paper, and pay a higher dividend too!

3) I managed to catch up with David Wessel, the Wall Street Journal economics editor, who has just published?? In Fed We Trust: Ben Bernanke?s War on the Great Panic. I doubted David could tell me anything more about the former Princeton professor I didn?t already know. I couldn?t have been more wrong, as David gave me some fascinating insights into the inner soul of our much vaunted chairman of the Federal Reserve.?? Bernanke was the smartest kid in rural Dillon, South Carolina, who, through a series of improbable accidents, ended up at Harvard. He built his career on studying the Great Depression, then the closest thing to paleontology economics had to offer, a field focused so distantly on the past that it was irrelevant. Bernanke took over the Fed when Greenspan was considered a rock star, inhaling his libertarian, free market, Ayn Rand inspired philosophy in great giant gulps. Within a year the landscape was suddenly overrun with T-Rex?s and Brontesauri. He tried to stop the panic 150 different ways, 125 of which were terrible ideas, the remaining 25 saving us from the Great Depression II. This is why unemployment is now only 10.2%, instead of 25%. The Fed governor is naturally a very shy and withdrawing person, and would have been quite happy limiting his political career to the local school board. But to rebuild confidence, he took his campaign to the masses, attending town hall meetings and meeting the public like a campaigning first term congressman. The price of his success has been large, with the Fed balance sheet exploding from $800 million to $2 trillion, solely on his signature. The true cost of the financial crisis won?t be known for a decade. Now that having pulled back from the brink, the biggest risk is that we grow complacent, and let desperately needed reforms of the system slide. How Bernanke unwinds this bubble will define his legacy. Too soon, and we go back into a real depression. Too late, and hyperinflation hits. That?s when we see how smart Bernanke really is.

QUOTE OF THE DAY

?The whole US market is pretty much low quality these days,? said Richard Bernstein, of Bernstein Capital Management.

The Mad Hedge Fund Trader Interviews Rick Renard of Millennium Metals on Hedge Fund Radio

Podcasts

This show features noted precious metal coin and bullion collector and dealer, Rick Renard, of Millennium Metals.

Hedge Fund Radio is a weekly program featuring one-on-one interviews with the titans of the hedge fund industry. The show is hosted by legendary hedge fund manager John Thomas, one of the most seasoned players in the industry. It is broadcast live on station KGOL 1180 AM in Houston, Texas as part of the BizRadio?? network to 100,000 local listeners, and will be streamed online to a further 100,000 national and international listeners.

The show is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For pilots and the military, that is 17:00 Zulu time. For the online link to the show, please go to www.bizradio.com or click here, click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.? For that added insight into the future of the markets tune in, or catch the show in my Hedge Fund Radio archives.

November 20, 2009

Diary

Global Market Comments
November 20, 2009

Featured Trades: (LUMBER), (TBT), (ZIMBABWEAN DOLLARS), (GOLD), (SILVER)
(HEDGE FUND RADIO)

1) Sometimes I think I?m the only guy who follows lumber futures. But they are a great ?tell? on the direction of wide swaths of the economy. Today, I?m not alone. Chart watchers have gone apoplectic because they think the five year downtrend for this most unloved of commodities was broken yesterday with an impressive limit up move (see my April call to buy this aromatic commodity by clicking here ). The move is telling us that either (a) new home construction is slowly reviving, (b) the Chinese have stepped up their buying of natural resources, (c) hard asset investors are rotating into the laggards after running up everything else, (d) the economy is recovering faster than we realize, or (e) all of the above. Better take a look at top lumber producers Weyerhaeuser (WY) and Louisiana Pacific (LPX), or the Timber ETF (CUT). If you want to know how to get involved in the futures, please email me at madhedgefundtrader@yahoo.com.

2) I want to thank the many readers who have been mailing in gold and silver coins in appreciation of my efforts to get them in at the beginning of the year at $800/ ounce for gold and $10/ounce for silver. Gold hit a new high today of $1,155, while silver tickled $18,75. The guys who leveraged up made an absolute killing, and they have numbers like $1,300, $2,300, and $5,000 dancing in their dreams. Hardly a day goes by without the mailman knocking on the door, a heavy but compact package in hand, smiling and winking while I sign. I also want to thank the reader who I got into the TBT in January. He had never heard of the thing, the ETF that bets on falling Treasury bond prices, but managed to ride this bucking bronco from the high thirties to $60 before pulling the ripcord. He sent me $300 trillion Zimbabwean dollars in cash in three crisp new $100 trillion banknotes hot of the printing press. He gave that amount because that is what it now costs to buy a cup of coffee in the hopelessly mismanaged African country. I see the TBT is back down to $45 handle again. Hmmm, looking at Obama?s latest deficit spending plans, I wonder if it is time to take another bite out of the apple?

3) There will be no letter on Monday, as I will be speaking at the San Francisco Hard Assets Investment Conference. No doubt things will be hopping this year. They say they have fascinating metal called ?gold? which magically levitates without the aid of hidden wires and pulley?s. I can?t wait to learn all about it. I?ll be reporting back. MHFT

QUOTES OF THE DAY

?The real problem is that the subprime foreclosure crisis is mutating faster than our ability to keep ahead of it. You have not just a second wave, but a third wave coming, as well,? said Howard Glasser of the Glasser Group, a real estate consultant.

?Forget the stock market. I am putting everything into whisky, gold, and ammo,? said a reader of the Diary of the Mad Hedge Fund Trader to me yesterday.

November 19, 2009

Diary

Global Market Comments
November 19, 2009

SPECIAL BOND MARKET ISSUE

Featured Trades: (EUROPE), (JGB), (JNK), (PHB), (HYG)

1) The US is turning into Europe. Think backbreaking taxes, chronic high unemployment, government involvement in everything, less innovation, and much lower growth, in exchange for a social safety net, more debt, and better coffee. That is the message the markets told us by retreating to the 6,000 handle in March, levels not seen since 1996, and down 54% from the 2007 peak. Equity prices have to shrink to multiples in line with permanently lower long term growth rates of maybe 1%-2%, a shadow of the 3% average rate seen for much of this decade. Hint: that analysis gives you a stock market lower than here. Perhaps this is what aging sclerotic economies are supposed to look like. Once Ben Bernanke stops spiking the punch with ecstasy and Viagra by raising interest rates, this is where the resulting hangover could leave us. If someone is holding a gun to your head and you must buy American stocks, only select names that are really foreign stocks in disguise. Microsoft (MSFT), Intel (INTC), Oracle, (ORCL), Cisco (CSCO) all get 60%-80% of their profits from overseas, where up to 90% of the real economic growth will come from for the next decade. Commodity, agricultural, materials companies, and their ETF?s also fit this picture. As for me, I think I?ll move to Tahiti and live off of coconuts and freshly speared fish, wearing only a loin cloth. Anything is better than becoming French.? And before you ask, that is not my behind in the picture below, but I wish it was.

2) The bond market vigilantes are gathering up for a lynching in Japan. Five year credit default swaps have jumped from 38 to 78 basis points since September, a move similar to the one that took AIG down last year, as institutions scramble to buy insurance before the house burns down. The rating agency Fitch?s is reaching for the Dramamine, threatening to downgrade Japan?s AA-?? rating as it sees the beleaguered country?s national debt soar from the current 180% to 227%, thanks to the new Hatoyama government?s policies. That would inflict a body blow on the bond market, and send the yields on ten year bond soaring from the current 1.42%. The big hedge funds are circling, with Greenlight Capital?s David Einhorn accumulating a major short in Japanese government paper. Remember him? He?s the guy who almost single handedly drove Lehman into bankruptcy a year ago. For more depth on the fundamentals behind this trade please, check out my ?End of Japan? piece? by clicking here. The only way to take advantage of this is to put on a short futures trade in Tokyo or Singapore, which trade from 6:00 pm to 3:00 am Chicago time, or to short the yen. If you want to know how to do this, e-mail me at madhedgefundtrader@yahoo.com, and I?ll get you set up.

3) One of my flock of canaries in the coal mine is the junk bond market, which is a great leading indicator of global risk taking. At the beginning of the year I stampeded readers into junk bond ETF?s like (JNK), (PHB), and (HYG), because the market was discounting a default rate of 18%, while I was expecting only 12% (click here ). These highly leveraged securities always overshoot on the downside when panic grips the herd. Believers reaped substantial returns, with JNK bringing in 65% since then. Now what? If you don?t get a double dip recession that default rate could fall to as low as 4%, as yield hungry institutions pile into the most leveraged companies with long term bonds yielding as high as 9.5% to 28%. That would cause JNK to double again from current levels. If we do plunge back into the Great Recession, as many hedge fund managers believe, then we could give up a chunk of this year?s gains. Let me know which one it is, will you? Even with the worst case scenario, I don?t think we will hit new lows. There was, after all, only one Lehman.

QUOTE OF THE DAY

?The ?new normal? never went away, it just went into hiding, and now it?s back,? said Vince Farrell, CIO of Soleil Securities.

CROSS CULTURAL MIX UP OF THE DAY

When Obama reviewed the troops during this week?s state visit, the Chinese Army Band played ?I Just Called to Say I Love You? by Stevie Wonder.

November 18, 2009

Diary

Global Market Comments
November 18, 2009

Featured Trades: (CALIFORNIA DEMOCRACY ACT OF 2010),
(VCV), (NCP), (NVX), (LITHIUM),
(SQM), (CVX), (BIOFUEL), (XOM)

1) I finished my indoctrination on how to overthrow the government last weekend. Specifically, I attended a grass roots meeting of activists in Berkeley, California planning to collect 450,000 signatures by April to put the ?California Democracy Act of 2010? on the November ballot. The measure seeks to amend California?s broken constitution by permitting passage of budget and tax measures with a simple majority. The current two thirds requirement, which California shares only with the miniature states of Rhode Island and Delaware, is widely blamed for the legislative impasse in Sacramento that has driven the state to financial ruin. Overdependence on capital gains-up to 40% of revenues in good years-enabled the state to just barely balance the budget at stock and real estate market tops, but death spiral into gigantic deficits during the inevitable busts that followed. Furthermore, since proposition 13 capped real estate taxes at 1.25% 1978, the state?s population has grown by 16 million to 38 million, placing a backbreaking strain on all services. Only six obstinate, conservative legislators are holding hostage the world?s sixth largest economy, right after France. Decades of relentless gerrymandering have made virtually every seat in the state safe, so elections offer no solutions. I sat down with Daryl Steinberg, president of the California Senate, who says that people of all political stripes are fed up. Once boasting the best public education system in the country, California now ranks 47th in spending/pupil and 49th in pupils/teacher. The University of California, the top public university in the world and a veritable PhD and Nobel Prize factory, has endured two 20% back to back budget cuts. Schools, police and fire departments, parks and aid agencies are closing throughout the state. Antiquated infrastructure is falling apart, with the San Francisco Bay Bridge closed for five days this month, forcing the local economy to take a huge hit. The barbaric prison system, which has been ruled by a federal judge as inflicting ?cruel and unusual punishment,? is letting 24,000 prisoners out early, since it can?t afford to house or feed them. The public outrage is so violent the initiative will almost certainly pass. When it does, taxes are going to go up a lot. Target numero uno: property taxes and the top 5% of income earners. Expect a battle royal, as the top 1% of taxpayers already pay a marginal state tax rate of 10.3%, the second highest in the country after Vermont, generating 50% of state revenues. This will make our sunshine the world?s most expensive. That will be great news for the Golden State?s beleaguered bond holders who will love to see new sustainable sources of revenue. Take a look at the California municipal bond funds (VCV), (NCP), and the (NVX). If California were a stock, I?d be buying it now. If you want to join the revolution, or just learn more about the issue, go to www.CAMajorityRule.com by clicking here.

2) It?s 1910, and I?m trying to get you to buy a company that refines gasoline, just before the number of cars in the world explodes from 1.3 million to 250 million. That?s what I?m trying to accomplish when I pile investors into Sociedad Quimica Y Minera (SQM), the Chilean company that is the purest play on lithium production (click here for their website). Early believers have booked a 60% gain so far, and there is a lot more to go (click here for my call). The Electrification Coalition, an industry trade group, says that the number of electric cars on the road is about to go ballistic, with a dozen companies planning all-electric model launches in the next two years.?? The first 120 million vehicles will shrink our oil imports by 8 million barrels a day to nearly zero, cutting our bill by $250 billion annually, and no doubt putting a major dent in the price of oil. Fire departments are even training first responders on how to deal with huge lithium batteries in car accidents with ?hazmat? teams. A battery charge is 75% cheaper than filling up a tank with gas, meaning our transportation costs are about to fall dramatically. SQM has to increase its production by a factor of ten, or face a takeover by a much larger company looking to move into the alternative energy space, possibly from an American oil major. Is anyone at Exxon (XOM) or Chevron (CVX) listening?

3) Since we?re on the topic of oil major diversification, let?s take a look at Exxon?s (XOM) biofuel program. As a former research biochemist at UCLA, I have long viewed biofuel as a huge waste of time, because there are not enough hamburger stands in the whole world to generate the needed grease for recycling. Ethanol was never more than expensive pork for corn producing swing states, and it?s no surprise they are going bankrupt, even with large subsidies. That?s ignoring the fact that they were burning food to power our chrome wheeled Cadillac Escalades, driving up prices for the starving masses in emerging markets. But when the progeny of John D. Rockefeller (I knew his grandson David) commits $600 million to move algae from the realm of science fiction to mass production, I have to sit up and pay attention. This is not a company that is interested in tree hugging or saving the world, but in the hardnosed business of finding and selling energy for a profit. There is no law confining them to the oil business, and it is wise for them to find alternatives while they have the bucks to do it. Never underestimate the power of pond scum. Algae have been used for centuries to produce agar and additives for food, cosmetics, and medicines. You?re probably already eating more than you realize. According to Exxon, one acre of algae also has the ability to produce 2,000 gallons of fuel per year, compared to 650 gallons from palm trees, 450 gallons from sugar cane, and 250 gallons from corn. As any marine biologist will tell you, these simple organisms accomplish this by absorbing massive amounts of carbon dioxide and turning it into oxygen, killing two birds with one stone, from an environmentalist?s point of view.? The catch is that no one has ever tried to do this on an industrial scale, and the production problems are certain to be formidable, with enormous inputs of water and nutrients required. You probably wouldn?t want to live next door to where this is happening either. But if we have to hold our nose to beat the next energy crisis, so be it.

QUOTE OF THE DAY

?There is still that great sucking sound of liquidity coming out of the market,? said Meredith Whitney of the Meredith Whitney Advisory Group, an independent research boutique, who is recommending aggressive sales of bank stocks.

November 17, 2009

Diary

Global Market Comments
November 17, 2009

Featured Trades: (BAC), (GOLD)

1) I don't care how many times you ask me, I'm not going to replace Ken Lewis as the new CEO of the Bank of America (BAC). I will not accept if nominated and?? I will not serve if elected (sorry General Sherman). Sure, it would look great on my resume, I'd get invited to all the right dinner parties, and unlimited use of the corporate jet has its appeal, especially if I get to be the pilot. Of course, there are those oodles of cheap stock options you are offering me. But with the shares now at $16, and the chart looking a little green around the gills and on the verge of puking, it will take so long for them to achieve any real value that my kids, or even my grandkids, are the most likely beneficiaries. Really, who wants to work for the government? There will be all of those chinless federal pencil necks second guessing my every decision. I do have a tendency to explode like a drill sergeant with a torrent of four letter words when submitted to media glare. Heaven forbid if I wanted to have a three martini lunch. Dinner at Elaine's with CNBC's muckraking Charlie Gasparino? You've got to be kidding. And who would want to live in Charlotte, North Carolina, anyway? The summers there make Hell seem like an island paradise. Best I could do would be a commute from Manhattan at company expense. With the bank about to get swamped with another tsunami of home mortgage foreclosures, I don't want to be there when the sushi hits the fan, offering lame excuses.?? Isn't it really a fall guy you are looking for? Certainly, there are others infinitely more patient and qualified for this job than The Mad Hedge Fund Trader? Why not John Corzine? I hear he's available. He did a great job with the State of New Jersey, didn't he? It's not his fault the Great Recession demolished his state's finances. Come on, John, I'm sorry I accidently drank out of your wine glass when you tried to recruit me for Goldman Sachs over lunch 20 years ago. Get me off the hook on this one and we'll call it even. Come to think of it, maybe I should be shorting BAC here. Any company the wants me as its CEO must have something seriously wrong with it.

2) Gold punched through to a new all time high today of $1,137/ounce. Occasionally I hit the nail on the head so precisely, it's worth a replay. So here is my September 10, 2009 story, which turned out to be the day that it was off to the races for the barbaric relic. For the link, click here . Yes, I know that a broken clock is right twice a day, that if you fire buckshot long enough you will eventually hit a barn, and even a blind man finally pins the tail on the donkey, but look at the chart of the yellow metal's move since then.

'The precious metals markets were stunned with Barrick Gold's (ABX) announcement that it will float a $3 billion public offering to retire its gold hedges in the futures markets. This means that the world's largest producer is cashing in its downside protection and gearing itself for a ballistic move up in the price of the barbaric relic. The timing of the announcement, the day that the yellow metal broke $1,000 for the first time since February, couldn't have been more auspicious. I have been a huge fan of Peter Munk's ABX all year, cajoling readers into the stock at $27 in January before its 56% run (click here for report ) . South Africa's largest gold miner, AngloGold Ashanti's CEO, Mark Cutifani, says his company put its money where its mouth is, taking off its hedges some time ago. 'People are doing what they have been doing for 5,000 years, and that is buying gold as the only hard currency,' opines Cutifani. In the meantime, the Street Tracks gold ETF (GLD) announced that it has $34 billion of gold holdings, making it the largest ETF of all, and the fifth largest owner of gold in the world after four central banks. If you want to buy gold bullion or coins for the tightest spread over spot, check out Millennium Metals by clicking here.'

QUOTE OF THE DAY

' The oil era will end in 30 years, as it is replaced by alternatives, offshore, and tar sands,' said Ahmed Zaki Yamani, the former Saudi oil minister, who invited me on his private jet for a trip to the kingdom so I could conduct an exclusive interview during the seventies.

November 16, 2009

Diary

Global Market Comments
November 16, 2009

SPECIAL CHINA ISSUE

Featured Trades: (FXI), (DBC), (DYY),
(DBA), (PHO), (BYDDF), (BIDU),
(SOHU), (NTES), (SINA)

1) I have long sat beside the table of Mckinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom. So I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director Dominic Barton when he passed through San Francisco visiting clients. These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up, sadly letting my bacon and eggs grow cold and congeal. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China's GDP will triple relative to our own from current levels. A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this doesn't work, they have another $500 billion package sitting on the shelf. But with GDP of only $4.3 trillion today, don't count on China bailing out our $14.4 trillion economy. China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC's, and to live in big cities. Asia has a huge edge over the West with a very pro growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75 story skyscraper is going up there every three hours! Some 1,000 years ago, the Silk Road was the world's major trade route, and today intra Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths. Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth. To me this all adds up to big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.

2) When people ask me for a potential ten bagger, I point them to the Chinese electric car company 'Build Your Dreams' (BYDDF) (check out their website by clicking here ) . I started following the company last year, and my early readers have already tripled their money on this pick. CEO Wang Chuan-Fu, who Charlie Munger describes as a combination of General Electric's (GE) legendary manager, Jack Welch, and inventor Thomas Edison, scraped up $300,000 from relatives to start a knock off cell phone battery company in Shenzhen in 1995. He grew the company into a massive, vertically integrated conglomerate, employing 130,000 highly motivated workaholics at 11 factories, including those in Hungary, Romania, and India (interesting choices). BYD bought a defunct car company in 2003 and re-engineered it to launch the $22,000 F3DM sedan last year, an old technology ferrous oxide based plug-in hybrid that gets 62 miles on a charge. General Motors' (GMX) Volt and Toyota's (TM) plug in Prius, which won't come out until next year, will only get 40 miles per charge and cost a lot more. All-electric BYD models are coming out this year. Warren Buffet was so impressed, he made a rare foreign investment last year, asking for 25%, and settling for a 10% stake for $230 million. In characteristic fashion, Buffet has already quadrupled his money. Wang, who has earned himself a place on the Forbes 400 list, intends to build BYD into the world's largest automaker, and quickly. Why do I feel like this war is over before the first shots were even fired?

3) If you need further proof of where the future growth in the global economy is coming from, take a look at the Chinese Internet firm Baidu (BIDU), the Google of China, which I strongly recommended on March 6 (click here for the call ). It soared 450%, then gave back a quarter of the gain in a single day with a change in some accounting practices (see my call to buy the dip by clicking here ) It has since recovered to the old highs. You should keep this ticker glued to your desktop, as it has become the canary in the coal mine for global volatility and hedge fund risk taking. In the meantime, our Google (GOOG) rose by only 130% to $575. These two hedge fund darlings are best of breed companies, but the Chinese one outperformed the American counterpart by a factor of nearly three to one. The cruel truth here is that American companies with the drag of a mature economy will never command the same multiples of Chinese ones. Google certainly thinks so, as it also owns a chunk of BIDU. If you like Chinese takeout for lunch, also look at these other high growth Internet names from the Middle Kingdom, including Netease (NTES), Sina (SINA), and Sohu (SOHU), which have done as well as BIDU, and who are going to eat our lunch.

QUOTE OF THE DAY

'People are finally starting to realize that 'extended period' means 'extended period,' said former University of Chicago professor and former Fed governor Randall Kroszner, about future interest rate expectations.

November 13, 2009

Diary

Global Market Comments
November 13, 2009

GLOBAL RISK CONTROL ALERT!

Featured Trades: (SPX), (RWR), (FRI), (VNQ),
(COMMERCIAL REAL ESTATE)

1) If I've told you once, I've told you a thousand times, stay out of those crummy neighborhoods, where the street corners are crowded with high priced stocks of dubious moral character wearing stiletto heels, fishnet stockings, miniskirts, and shoulder handbags. Sure, I know you young traders have needs, think with your hormones, and believe you can live forever. But if you absolutely have to go slumming, at least use some cheap protection. I noticed today that the January 1030 S&P 500 puts were selling at a bargain $19 today. That means for a mere $950 you can buy some decent downside protection for a $55,000 portfolio that takes you all the way out to January 15, 2010. That is bang on the support level that held in the last sell off. If you double top here on the charts and go down for a retest, you double you money. If yearend profit taking causes us to sell off going into the holidays, and we break that support, you make more. If the market melts down the day after we flip the calendar page to 2010, a distinct possibility, then you hit a home run. If the lemmings keep driving this market up every day for two more months, then you lose $900, or 1.72% of your portfolio, pennies, really, against the huge returns you have booked so far this year. It's a win, win, win, lose pennies trade. I know that the pros that have done for a long time put these trades on without even thinking about it. It's all about risk control. Since I am a cheapskate, I only like strapping on trades that have a risk/reward ratio overwhelmingly in my favor, and with the volatility index today a bargain 23%, this fits the bill nicely. Buy your storm insurance when the sun is shining.

2) The commercial real estate industry is going to need $500-$700 billion to recapitalize, according to William Mack, CEO of Mack-Cali realty, a major REIT investor. Domestic investors don't have this amount of cash to allocate to this sector, and US tax policies are preventing foreign capital from filling the void. This means that it is going to take up to a decade for the sector digest the current massive inventory glut. Values are down 25%-75% from the top, with undeveloped land, hotels, and retailers hardest hit. Multifamily residential (apartment buildings) has been the least affected. The government is giving the banks a free pass for now, letting them 'amend, extend, and pretend', and carrying properties on their books at unrealistically high values, until they can write off losses slowly over the next dozen quarters.?? Real recovery won't come until you see healthy job growth, which looks way beyond the horizon. Real estate mogul Sam Zell sees, commercial least rates stabilizing at 30% below 2007 levels, who could be a wildly unrealistic owner talking his own book. Another major player in the sector, Richard Lefrack, president of the Lefrack Organization, thinks as many as 1,000 regional banks could be dragged down by the industry's troubles. One of the great puzzlements for me is how well the listed REITS have performed, with the iShares Real Estate ETF (IYR) up a staggering 130% from the March lows.?? Maybe there's a great short opportunity here next year. Take a look at the Vanguard REIT Vipers (VNQ), the SPDR Dow Jones Wilshire REIT (RWR), and the First Trust S&P REIT (FRI).

3) Walking around San Francisco's financial district the other day, I couldn't help but notice the colorful, but huge 'for lease' and 'space available' signs wrapped around entire buildings. The San Francisco Chronicle produced some current market figures for the wasteland that is now the commercial real estate market. Rents have crashed 24% in a year, with Class 'A' office space plunging from $50.92 to $38.80 a square foot, the biggest drop since the dot com bust in 2001. Tenants are downsizing, consolidating, or disappearing altogether.?? The West coast financial center has been particularly hard hit by the consolidation of the financial industry, which has seen some major tenants, like Washington Mutual, disappear all together. Macy's and Charles Schwab are vacating a combined 500,000 square feet this year, with more than half of all Bay Area companies expected to shed staff in the next six months. Purchases of office building have ground to a complete halt because of the absence of financing. Not helping are the city's notoriously high operating costs, labor rules that would make Bolsheviks blush, and a tax rate that is about to jump from 8.75% to 9.75% to help bail out the state. It's a lot to pay for a great view. Will the last one leaving please turn out the lights?

QUOTE OF THE DAY

'Stocks have reached a permanently high plateau,' said Irving Fisher in 1929, one of the founders of the science of economometrics. Fisher lost a $10 million personal fortune in the 96% collapse in the market that ensued.