2009 Archive - Mad Hedge Fund Trader

August 7, 2009

Global Market Comments
August 7, 2009

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

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

2) Trade School

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

QUOTE OF THE DAY

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

August 6, 2009

Diary

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

Special Natural Gas Issue

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

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

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

QUOTE OF THE DAY

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

August 5, 2009

Diary

Global Market Comments
August 5, 2009

Featured Trades: (SPX), (F)

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

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

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

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

QUOTE OF THE DAY

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

August 4, 2009

Diary

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

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

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

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

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

QUOTE OF THE DAY

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

August 3, 2009

Diary

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

Special Announcement

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

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

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

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

QUOTE OF THE DAY

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

July 31, 2009

Diary

Global Market Comments
July 31, 2009

Featured Trades: (SPX), (GS), (MS), (KBE)

1) I thought PIMCO co-CEO Mohamed El-Erian hit the nail on the head when he said that the July stock market rally was nothing more than a sugar high. Skyrocketing unemployment does not create new demand. We are going nowhere without a real housing recovery, which is impossible with gun shy lenders. What little improvement we are seeing in the economy stems from unsustainable government spending. If you think the last stimulus package was tough to get through congress, wait until the next one. With three quarters of Q2 earnings out now, it is clear that company managements panicked and shed staff like a fur coat in a New York summer. This produced a string of top line disappointments and bottom line surprises. Companies can?t continue this, unless they want to shrink themselves out of existence. They are gaining weight by eating their seed corn. I think that if you want to go long here you are risking 10-15% to make 2-4%. It doesn?t look like a good risk/reward ratio to me. I prefer the inverse. There?s no law that says you have to trade every day of the year, despite what the brokers say. Better to keep your powder dry here with the S&P 500 at 993, and watch the long players inevitably crash and burn.

2) Those whose bacon was saved by the Q2 doubling and tripling of bank share stocks, better not count on a repeat in Q3 and Q4. For a start, there isn?t going to be any more government issued adrenaline to ramp prices with TARP?s, TALF?s, ZIRP?s, stress tests, and forced takeovers. The next move in interest rates is going to be a flattening one, cutting into their now hugely profitable margins. Q2 earnings showed that the best performing banks made the largest portion from trading, likely an unrepeatable performance. There is room for only one Goldman Sachs (GS) in the world, maybe two, if you count Morgan Stanley (MS). Wasn?t this the well that poisoned so many of them in the first place? Dare I say that many banks are now overvalued? The quick fingered might even entertain a sector short here in the bank ETF (KBE). For an excellent separation of the wheat from the chaff, take a look at Martin Hutchinson?s work by clicking here .

3) It always irritates the hell out of me when those off Wall Street try to tell those of us on Wall Street how to pay ourselves, contract issues aside. The only reason Phibro?s Andrew Hall is owed $100 million is because he made $500 million for his beleaguered Citigroup (C) parent. C needs more traders like him, not fewer. A 20% performance bonus is the most common of hedge fund compensation arrangements. What Main Streeters don?t get is that in bad years you get paid zero, and in fact, get a due bill, if you throw in the overhead. If C shareholders don?t like the deal, they can hire the guy who is happy to work for 10%, or 5%, or the fixed salary of a postal worker, but they may not like the results. For more on this debate, look at Jason Simpkins piece by clicking here .

4)China is using the global collapse in asset prices to ramp up their acquisition of foreign companies?? by 13% this year, well up from 2008?s hefty $52 billion total.?? Enterprises like Sinopec, Beijing Automotive, and Haeir have been targeting companies like GM?s Hummer and Opel units, a Japanese department store, and Australian iron ore producer Rio Tinto.?? The goals are twofold: lock up long term supplies of natural resources and food, and access to advanced technology to enhance their competitive position in global markets. These are not small deals. A rumored bid for the largest oil producer in Argentina is thought to be around $14 billion. JP Morgan Chase and Morgan Stanley are making a killing on the fees. The great thing is that they don?t even need a credit card to pull this off. These are all cash deals, funded by the diversion of just a portion of China?s monthly US Treasury purchases. I remember the last foreign takeover binge, when it looked like Japan was going to buy the world. Remember Pebble Beach and Rockefeller Center? They ended up top ticking every market they touched. So sell away. Better to brush up on your Mandarin and start practicing with those chopsticks, because your next boss may come from the Middle Kingdom.

QUOTE OF THE DAY

?When I switched from the Democratic to the Republican parties, people called me a ?transvestocrat,? said Billy Tauzin, current lobbyist with the trade group Pharma, and former Cajun senator from Louisiana.

July 30, 2009

Diary

Global Market Comments
July 30, 2009

Featured Trades: (SPX), (DOW), ($XAD), ($CDW), ($NZD), (COPPER), (LUMBER), (WHEAT), (NATURAL GAS), (GOLD)

1) OK, so they didn't mention the mosquitoes, the poison oak, or the guy snoring in the next tent on the website. But I'd rather put up with all of that than the absolute dearth of trading opportunities I faced on my return. The S&P 500, the Dow, NASDAQ, the euro, the Australian, New Zealand, and Canadian dollars, gold, copper, lumber, and anything else I like are overbought, bumping up against Fibonacci's, moving averages, RSI's, oscillators, and any other technical warning light you want to mention. Only wheat looks cheap, the greatest growing conditions in history knocking a bushel down to the low five dollar handle (click here for the argument at http://madhedgefundradio.com/June_16__2009.html). Natural gas prices are low, not to be confused with cheap, with every uptick getting smashed with a new field discovery. Only a hurricane can save NG. It's amazing how many people have turned bullish now that everything has gone up for two plus weeks. The only thing that makes sense here is to go short, but not on my first day back. Give me some time to gird my loins and build a risk appetite. And pass the calamine lotion, please.

2) Chicago magnate Sam Zell thinks the big foreclosures won't hit commercial real estate until the institutional holders run out of money in 2-3 years. From 2000 to 2007, half of the commercial properties in the US were sold and releveraged, and even the weaker holders have enough cash flow and reserves to last until then. Having peaked at a higher top, single family homes are now crawling off a much lower bottom, giving a crucial boost to an economy based on consumer spending. I'd call this a future green shoot, if I didn't know that the grizzled property pro was talking his own book. After completing?? a brilliant sale of a huge portfolio of properties to the Black Rock Group at the absolute peak of the market, Sam is now suffering from buyer's remorse with a turbocharger, having rolled the money into the bed ridden and nearly comatose Chicago Tribune/Cubs combo. Sam's favorite overseas foray is Brazil, where a large, growing, educated population backed by rich natural resources, falling interest rates, and a strong currency provide a great backdrop for property investment. China looks good too, but you have to speak Mandarin.

3) A handful of positive data on residential real estate, and all of a sudden everyone is jubilant that the crisis is over. June new home sales popped by 11%, while the S&P Case Shiller Price Index flaunted two back to back monthly gains. Never mind that these are the same people that have been calling a bottom almost every day for the past two years, and who themselves have gone broke in the process. It's a basic law of economics that when you drop the price, the volume goes up. We have not paid enough penance yet. We have not atoned for a generation of under saving?? and overconsumption. The harsh reality is that the torrent of selling is being briefly staunched by a dwindling group of first time buyers once priced out of the market, who saved their cash, and stayed away from the stock market, and are now buying two thirds off the top. Take away the fantastically generous government subsidies that expire in a few months, throw in the next wave of Option ARM reset induced foreclosures, and this market folds like a wet taco shell. I'm waiting to buy at 20th century prices, and make that a home with an indoor swimming pool and basketball court.

4) With the British economy mired in 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 aged cemetery, and a toxic waste dump have also caused delays. When I lived in England I flew over this area weekly to skirt the London 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 the film Chariots of Fire? Maybe it's worth it after all.

QUOTE OF THE DAY

'You've got to be the best company in the subspace you are looking at. The number three or the number four market share is worth effectively nothing these days. You see it in cellular, retail, packaged consumer goods, or anything else you are looking at.,' said Larry Haverty at Gabelli global Multimedia trust.

July 24, 2009

Diary

Global Market Comments
July 24, 2009 Featured Trades: (SPX), ($INDU), (NASDAQ), (DO), (JAPAN), (CALIFORNIA)

Note to Subscribers: The Diary of a Mad hedge Fund Trader will not be published on July 27, 28, and 29. It?s time to clear out the cobwebs and restore my animal spirits. These days will be added on to the end of your subscription period. I knew it was time to take a break when I put the Preparation-H on my tooth brush this morning.?? I am going to be researching hiking trails in California?s Big Sur, looking for rare birds, and practicing my fly cast for the next few days. Those still in need of investment advice can look for me at the third campsite on the left past, the showers. I?ll even put some hot chocolate on the fire for you if you bring your own steel cup.

1)There is no doubt that the next trade from here in stocks is a sell. Buying NASDAQ on a 12th consecutive up day, the S&P 500 on the back of a 110 point move,?? and the Dow on top of a 1,000 point pop is not what great fortunes are made of. After stopping out of my own shorts in the 880?s, I have been holding back, holding back, holding back. See my warning not to sell too soon . I have never been one to fight the tape. The only trader who is always right is Mr. Market. The earnings to support a full fledged bull market are not just there. Deleveraging worlds don?t support expanding earnings multiples. It all works for me because the more it goes up now, the bigger the fall later. Even the raging bulls are warning about a ?W? shaped recession and another market dive in 2010. How finely do you want to trade this thing? It?s clear the big core shorts at the major hedge funds haven?t budged, and that most of the recent low volume action has come from day traders, momentum players and CTA?s. All we need now is for mom and pop to come in and ring the bell at the top. Is 2009 going to be replay of 2008? Is a ?Sell in May and go Away? to be followed by another October crash? If your friends? long positions make money from here, just revel in their good fortune,?? and let them pick up the dinner check.

2) I am a huge long term bull on crude, and now that it is again threatening $70 it might be wise to look at more energy plays, especially since many analysts and companies still have their 2009 average prices pegged at $45. When a company like Diamond Offshore (DO) announced great Q2 earnings of $946 million, while Texas tea gyrates from $80 to $148 to $32, it piques my interest (check out the website at http://www.diamondoffshore.com/). Deep offshore is the marginal, high cost oil supply, and when crude runs, the operating leverage on companies in this area can be enormous. DO leases out 30 semisubmersables, 14 jack ups, and one drill ship, and has a $9 billion order backlog. Only the natural gas area continues depressed. It also has the additional benefit in that they are a major long term supplier to one of my favorite companies, the Brazilian oil exploration and production company, Petrobras (PBR). CEO Larry Dickerson says that even though US oil demand is weak, the long term needs of China and India will drive prices upward long term. It all sounds like music to my ears.

3) Japanese Prime Minister Taro Aso?s call for national elections on August 30 is setting up a potential ?black swan? type event. His Liberal Democratic Party (LDP) has ruled for all but 11 months of the past 55 years. But his party?s 18 year effort to spend itself out of an ?L? shaped recovery has failed miserably, succeeding only in converting Japan from the least, to the most indebted industrialized country.?? Think of a 1,000 ?bridges to nowhere.? Look at the 30 year round trip in Japanese real estate in the chart below. So the opposition Democratic Party of Japan (DPJ) has a real shot here, which has promised to fundamentally remake the economy by boosting social spending, canceling useless construction projects, and encouraging domestic consumption. Remember what a surprise Congress Party win did for India?s stock market? Look at the excellent piece from The Permanent Wealth Investor?s Martin Hutchinson?? for an analysis of how such an outcome could affect Japan on a stock by stock basis by clicking here.

4) The good news is that California has finally come to a budget compromise, covering a $26.3 billion shortfall with $8.8 billion in education cuts, $4.4 billion in forced borrowing from local governments, $2.2 billion in chopped social programs, $1.3 billion in unpaid furloughs of?? state employees, and $3.5 billion in accounting fudges. The bad news is that we are giving San Diego back to Mexico and San Francisco to China, who already own most of it anyway. As for me, I am going to spend the weekend putting iron bars up on my windows, installing a new burglar alarm system, and setting up booby traps. Part of the deal involves the release of 27,000 of the Golden State?s 155,000 prisoners. While 10,000 will be deported to Mexico, I?m sure the rest will be dumped in my front yard.

QUOTE OF THE DAY

?Daddy always wanted to be the bride at every wedding, and the corpse at every funeral,? said Alice Roosevelt Longworth about her father, Teddy Roosevelt, in an interview granted me during the seventies. The once beautiful and ever vivacious Alice mesmerized me with stories of her visit to China in the aftermath of the 1900 Boxer Rebellion and her audience with Japan?s Meiji emperor.

July 23, 2009

Diary

Global Market Comments
July 23, 2009 Featured Trades: (FCX), (COPPER), (CAT)

1) One of my favorite stocks, and one of the great ?tells? on the state of the global economy is Freeport McMoRan (FCX), the world?s largest copper and gold producer. CEO, Richard Adkerson, says it?s all about ?China, China, China?, which has been frenetically stimulating its economy with a $586 billion reflationary package, and rebuilding stockpiles of the red metal at a furious pace. The ongoing lifestyle upgrade in other emerging markets is adding to demand, as is the switch to hybrid cars in industrialized countries, which use two to three times more copper than conventional cars. Last year FCX mined 102 billion pounds of copper, 40 million ounces of gold, and 266 million ounces of silver. A doubling of copper prices since January enabled FCX to announce blowout earnings yesterday. The stock has tripled since my New Year recommendation . Did I mention that this is the number two performing stock in the S&P 500 this year? If you want a core holding that is in many right places at the right time, use dips to back up the truck for FCX.

2) Another great ?tell? stock for me is Caterpillar (CAT). I have never owned CAT in my life, but have always followed the company closely because it speaks volumes about the state of the world economy, and because they used to hand out those neat yellow hats at the analyst meetings.?? CEO, Jim Owens, says that only painful job cuts held the decline in earnings to 66% on a 41% fall in revenues, with the emphasis on the word ?earnings? in the most severe conditions since the thirties. The news was good enough to take the stock up a whopping 40% in a week. CAT gets 61% of its revenues from abroad. Business in Western Europe and Japan is worse than in the US, and what strength they are seeing is in Asia, with China up 8%. Large customers are seeing a resumption of credit lines, while smaller and medium sized ones are not. Owens sees a turnaround beginning in Q4, and a full scale recovery beginning next year, as the cyclicality of its major customers in construction, mining, and energy kicks in to the upside. Longer term, Owens sees CAT?s future in the ongoing infrastructure build out in the emerging markets. Hey, didn?t FCX just tell us that? Is there a trend going on here?

3) It looks like Goldman Sachs (GS) is going to leg over the Treasury once again. It is buying back the warrants it issued the Feds as part of its TARP dole out for a mere $1.1 billion, giving a 23% annualized return on the investment. Why is the government selling? Do you think GS knows something about its future earnings the government doesn?t? Could this be the greatest example of insider trading of all time? Has anyone at the Treasury considered keeping free calls on GS to maturity, as Warren Buffet is with his paper? Then they might be worth $10 billion, or even $100 billion. I know that if hedge funds could get these warrants at the same terms as the Treasury, they?d be loading the boat. Safe to say that when GS shakes your hand, you want to count all of your fingers afterward.

4) I have quit listening to the health care debate because there is so much false information being pumped out there. Over the past month I have been told that if you get a heart attack in England in the middle of the night, you have to wait until 9:00 am the next morning to see a doctor. I have been told that vast numbers of Canadians are flocking to the US for treatment because the lines at home are so long. I have also been told that even vaster numbers of Americans are flocking to Canada to buy cheaper drugs. Having spent 25 years living overseas and been a frequent user of the medical services there, I know from firsthand experience that all of the above are untrue. I never invest in health care anyway because the business models are so unpredictable. Better to be amused from afar. So I?ll just turn off the TV and wait to see what makes it through Congress, and then decide what to do.?? My time is better spent elsewhere.

QUOTE OF THE DAY

?He who lives upon hope will die fasting,? said Benjamin Franklin.

July 22, 2009

Diary

Global Market Comments
July 22, 2009

Featured Trades: (SPX)

1) Let me tell you that I, and the rest of the hedge fund industry, are highly suspicious of the global stock market rally that has ensued over the past week. Companies lowered earnings expectations so far they were easy to beat, and could be achieved by laying off a few more workers. The question this raises is how the economy moves forward with skyrocketing unemployment. Now that we have double topped in the S&P 500 at 956, even the bulls are saying we only have another 4% to go. This on a day when we are all wondering if commercial real estate loans will be the stick that breaks the back of the banking industry. Mike Mayo, a banking analyst with Clayon Securities, says that the industry may have to write off a quarter of its $7 trillion loan book over the next three years, levels greater than seen during the Great Depression. While banks are making a lot of money trading, they are losing it even faster in loan losses. It's like trying to fill a barrel with water that has been perforated with a shotgun blast. If you are playing from the long side here, keep one foot in the exit, and a finger right on your mouse.

2) One can't help but be overwhelmed by a sense of history walking by the Las Vegas Strip's City Center; unquestionably one of the worst commercial real estate disasters ever. The glitzy, ultra modern, Cesar Pelli designed, 63 acre complex occupies the quarter mile between the Bellagio and the Monte Carlo Hotels and will become one of the wonders of the world if it is ever finished. Nearly completed are the Mandarin Oriental, Aria, Veer, Harmon, and Vdara Hotels, offering 4,000 rooms and 2,600 condos. They will be adorned by two casinos, a convention center, a new theater for the Cirque du Soleil, an enormous shopping mall, and parking for 7,500. The finished project will employ 12,000. But strikes and overruns sent costs soaring to $8.5 billion, and the project is now hopelessly behind schedule. I saw a total of one worker in a cherry picker working on the building with a screwdriver. The other guy going up in an elevator turned out to be a lender contemplating a jump off the top. Kirk Kerkorian wanted to build the ultimate Sin City destination resort when his MGM-Mirage partnered with Dubai World, years ago. The relationship has soured, with Dubai World filing suit against its partner for negligence and mismanagement, which it later withdrew. The bigger question is who is going to stay in these rooms? Those who financed trips to Las Vegas with home equity loans or subprime credit cards definitely are not coming back. If the project files for bankruptcy, it will leave a gigantic eyesore at the heart of the tourist area, and will become a monument to excess, in a city of excesses. Unfortunately, what happens in Vegas doesn't always stay in Vegas, as a financial collapse would send shivers through the industry globally.

3) I picked up a copy of Peter Schiff's latest book, The Little Book of Bull Moves in Bear Markets, which outlines his investment thesis for the next decade.?? First, let me tell you that I am really glad that I stocked up on 9 mm ammo and survival gear, the vegetable garden is well underway, and I already stored lots of canned food and fresh water because of the frequent earthquakes we have here in San Francisco. After all, a complete breakdown of civilization can happen at any time. I'm not so sure about the corn flake hoarding he suggested. Don't they go stale? I'm kind of old to learn a new language, but my son tells me that learning Mandarin is easy, if you already speak Japanese. These are the pearls of wisdom Peter bestowed upon readers to prepare for the coming economic and financial collapse, which will make the Sack of Rome look like a tea party. I was much more sympathetic to his investment strategy, which is similar to my own. A collapsing dollar, minimal GDP growth for a decade, and soaring commodity prices mean you should get all of your assets out of the US. American real estate in all its forms will be a black hole. Your available funds should be invested in the safe haven of foreign stock, bond, and currency ETF's, rounded out with healthy dollops of gold, silver, copper, and oil. Hyperinflation will be the order of the day. Retirees unable to live on fixed incomes will be forced to move to Costa Rica to make ends meet. Only a decade of frugal living, high savings, and small government will get the US out of this funk. We have been living beyond our means for decades, and it is now time to pay the piper. Peter wrote the book early in last year's presidential election, and he is positively apoplectic now that Obama is in the Oval Office. Make that two decades of ruin. For Peter's take on Obama's health care plan in all its eloquence, take a look at his Money Morning piece today . For those who are wholly invested in the US, the book is a refreshing splash of cold water on their faces.

QUOTE OF THE DAY

The guys who ran the trains didn't get to run the airlines. It just doesn't happen,' said Martin Wolff, a contributor to Vanity Fair, about the impossibility of newspapers moving to profitable online business models.