1)The upside breakout to a new 10 month high of 19,500 in Hong Kong?s Hang Seng Index last night, up 70% from its March low,? could be a signal for better emerging market performance everywhere. I have always viewed the former British crown colony as the older, better dressed, more respectable brother of its rougher, often irresponsible, riskier sibling in China. Hong Kong companies offer experienced management, believable accounting, and liquid, unrestricted securities to trade. The Hong Kong dollar is pegged to the US currency, eliminating currency risk for dollar based investors. Foreign capital flows into Hong Kong have been huge this year, as investors cash in their US blue chips for Chinese ones. Once considered a place where you only played with your ?mad? money, Hong Kong is rapidly becoming a core holding. Look at Marty Whitman?s 3rd Avenue Fund, which has and eyebrow raising 39% of its holdings in Hong Kong stocks. Now there?s a bet and a half! Hong Kong is the China play that lets you sleep at night. Look at the iShares Hong Kong Index ETF (EWF).

 

2) I stumbled across a free webinar on investing in emerging market ETF?s, which is a great introduction for those new to the field. Presented by Matt Hougan at IndexUniverse.com, and sponsored by major ETF issuer Wisdom Tree, it goes through the ABC?s of this new and rapidly growing investment vehicle. Some 25% of world GDP is now accounted for by emerging markets, which are making the transition to core holdings in many portfolios. Would you rather pay a 12.5 multiple for zero economic growth in the US, or 32.5 times earnings for 8% growth in China? The risk/reward for many countries has flip flopped so that it is the industrialized countries that have become huge borrowers, while many emerging countries are virtually debt free. Investing here also gives you a natural bias in favor of energy and commodity plays, another sector I prefer, which proliferate in these countries. But you must know your ETF, as asset allocations within regional, and even specific country ETF?s can vary hugely. Please note that the EEM, which I have been hammering away on all year, hit a new high for the year at $34.80. Check out the webinar link.

3) With North Korea testing low grade nukes and short range missiles (think WWII German V2?s), and a former prime minister jumping off a cliff to commit suicide, you wouldn?t think this is the best time to contemplate an investment in South Korea. You may recall that I recommended that the Hermit Kingdom be added to spell ?BRICK? with a ?K? last January. Korea is in fact somewhere in between a true emerging market and a developed country, with lower risk and lower returns, than say a Taiwan or an India. Let?s see how that call fared. After hitting a low of 998 in March, it broke out to a new high for the year last night to 1,480, up 48%. For long term investors, this is opening a rare window to scale into some exposure here. Short term traders should wait for a bigger pull back. They used to say you bought Asia only when there was blood in the streets. This isn?t really blood, but is close enough.

4) If you have had any doubt that commercial real estate is not the place to be putting your capital right now, take a look at the latest Q2 industry data. The vacancy rate jumped from 19.9% to 21.4%. Net negative absorption nearly doubled from 600,000 sq. ft. to 1 million sq. ft., while 723,896 in new space was completed. Closed?? sales plummeted from $87.2 million, to $45.9 million. Paying tenants looking to add space are staying away from the market in droves, easily renegotiating reductions in lease rates instead of committing to risky new purchases. The inventory glut is dragging prices down, scaring off marginal lenders. Several high profile bankruptcies of trophy properties have only exacerbated the pain. The capital drought looks likes it will get worse before it gets better. I would love to recommend shorts here, but the listed REIT?s have already been so crushed, I?d rather stay away. Look at the chart for Prologis (PLD). Pilots will recognize all of this as an irrecoverable flat spin, a twin pilot?s worst nightmare. Non-pilots should watch Top Gun.

 

 

 

1) The ?head and shoulders? is off the table, and now the S&P 500 is looking at a double top at 950. This is why I hate listening to technical analysts, and why they shop at Men?s Warehouse and drive Hyundai?s instead of Bentley?s (see my earlier piece ). Generally, technical analysts tell you to buy every rally, sell every dip, and in a market that?s going nowhere this is a perfect formula for losing money. Watch them tell you to load up if we hit 950. It is clear from the ferociousness of the 70 point, three day rally, that too many hedge funds were drinking the Kool Aid and the blood is flowing as a result. One meekly explained to me that ?head and shoulders? formations fail only 6% of the time. Well, welcome to the 6%. They are going to have to invent a new name to describe this formation (?head and shoulders with a hump back?). This is why I issued my now famous ?Sell in May and Go Away? piece, because the quality of the trades you usually get in the three months that follow is uncommonly low. Look at the chart that has ensued so far. It looks like a lot of nothing.

2) I will be the first to bemoan the abundance of frivolous law suits in the investment community. But no litigation was more richly deserved than the $1 billion action brought by the California Public Employees System against the three rating agencies, Moody?s, Standard & Poor?s, and Fitch?s. CALPERS is claiming that the triple A rating they gave subprime backed SIV?s were wildly inaccurate, causing it to suffer huge investment losses as a result. An airing out of the dirty laundry in this industry, which sells fig leaves to debt issuers for high prices, is long overdue. When I go to my grave, the one revelation I will always remember about this crisis is that the models rating agencies used could not accept negative numbers for future real estate price assumptions!

 

3) As a follow up on yesterday?s gold piece I?d like to pass on to you an article by Global Resource Alert?s Peter Krauth outlining the entire long term bull case for the yellow metal. The future for the dollar is dark, indeed. Central banks, led by China, are backing off from US Treasuries and the dollar, and are returning to gold as a reserve currency. China has in fact increased its gold holding by 450 metric tonnes over the past six years. Individuals are doing the same, doubling their purchases to 862 million tonnes last year. US budget deficits are already running at the greatest levels since WWII, and a second stimulus package will pour more fuel on the fire. It?s just a matter of time before gold breaks to a new high. To read Peter?s well thought out article in its entirety, please click here .

 

4) To celebrate Bastille Day I walked over to my favorite French restaurant, Left Bank, to book what is normally the busiest day of the year. Sadly, on the front door was a sign saying ?au revoir, that the chain was closing half its San Francisco Bay Area restaurants because of the ?severe recession.? So instead, I walked to the Meridian Hotel, normally a safe bet for a steak au poivre on France?s national day. I found the main dining room was only open for breakfast, and was closed for the rest of the day to cut costs. However, I could get a nice cheap rib eye in the bar with great wines at ?happy hour? prices. The deals out there are awesome and legion. I reserved a room at a high end Lake Tahoe resort a few weeks ago that normally goes for $300 a night. I paid $40, and was the only one in the building. It appears that hotels are engaging panic dumping of rooms online, and will take whatever they can get. So 85% off is the new 50% off. How do you say ?green shoots? in French?

QUOTE OF THE DAY

?Democracy must be something more than two wolves and one sheep voting on what to do for dinner,? said commentator James Bovard.

 

1) When I turned on my computer this morning and saw the S&P 500 futures up 40 from yesterday?s low, I knew it was time to fix the flat on my kid?s bicycle, trim the hedges, repair the torn screen window, and unclog the downstairs toilet. The worst thing you can do in these low volume, summer short covering rallies is sell too soon. Kudos to Goldman Sachs for bringing in a blowout quarter, which I had long expected. When junk yields move from 25% to 13% how hard is it to make money? It just shows you what a great business model they have, that of a ?portfolio? of traders, some of which are making money at all times. But what is great for GS is not so good for the rest of us. Much or their future will rely on the vast expansion of public debt from every quarter, from 30 year Treasuries to your local sewer works, all of which has to be traded where they have the Ax. The remaining?? financials and the economy as a whole are no Goldman Sachs. So you have to view the rally they sparked as a gift to sell into. There are no green shoots in the US, and only a few in Asia, as the Shanghai market?s doubling since November has been shouting at us at the top of its lungs. Call them bamboo shoots. Look at the chart below prepared by Price Headly at Big Trends at http://www.bigtrends.com/index.php, showing that we are still safely and solidly in a downtrend. Still, keep some buy stops up above as insurance, just in case traders really want to go nuts and squeeze the index above 930.

2) I have been a huge bull on gold this year, piling investors into the yellow metal at the $800 level in early January. But after an exciting couple of months, it has tiresomely become dead money. This is a commodity that has absolutely everything going for it; the Great Depression II, threats of nuclear war with North Korea, riots in Iran and China, a government borrowing binge of Weimar proportions, and money supply growth that is through the roof. In fact the US is doing everything imaginable to debase its own currency. Unfortunately,?? all I see on my screen right now is an ugly smudge at $910 an ounce. So what gives? Someone has been leaning heavily on gold every time it approached the magic $1,000 level, and they have now created a quadruple top on the charts. Gold has become the metal that everyone loves, but nobody wants to buy. There have been rumors of European Central Bank selling of gold reserves, Russian selling to cope with a lower oil price, and traders simply playing the range for lack of anything else better to do. The global risk reduction that began with a vengeance a few weeks ago is certainly having an impact. If demand from the famed Indian wedding season doesn?t come through, things could get worse. Gold bugs should expect to suffer more short term pain in this great long term core holding.

3) Who is holding the bag of rapidly rottening commercial real estate loans? Banks, led by Bank of America (BAC) and Wells Fargo (WFC), hold 50%, followed by collateralized mortgage backed securities 30%, life insurance companies 10%, and pension funds 10%. It is no accident that these two banks have the greatest exposure?? in the melt down states of California and Florida. The scary thing is that the banks with the biggest exposures are also suffering from a simultaneous assault on their balance sheets from defaulting residential home loans. As low as these stocks are, a rollover in global equity markets could send them right back into survival mode. Use the Goldman Sachs rally to sell into.

4) 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 Exxon (XOM) 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 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 the Exxon (XOM), one acre of algae also has the ability to produce 2,000 gallons of fuel per year, compared to 650 gallons for palm trees, 450 gallons for sugar cane, and 250 gallons for 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. Of course, you probably wouldn?t want to live next door to where this is happening. But if we have to hold our nose to beat the next energy crisis, so be it.

QUOTE OF THE DAY

?The stronger dollar has no greater friend than China, and no greater enemy than Ben Bernanke??. A weak dollar is a wealth transfer from China to the US, and they?re not going to stand for it??.Bernanke wakes up in the morning and thinks ?How can I weaken the dollar today?? He?s got quantitative easy, zero interest rates, and junk of the Fed balance sheet. He?s a smart guy, so I think he?ll come up with other things,? said Jim Rickards, senior managing director for market intelligence at the applied research organization Omni

 

1) Every once in a while I stumble across a chart which is so clear, so vivid, so unequivocal in its implications, that it lifts the investment fog. This is that chart. Drawn up by stockchart.com?s Arthur Hill, it shows that we are going to spend the rest of our summer probing for the bottom right hand shoulder in a screamingly obvious ?head and shoulders? pattern. It gives a range of possible bottoms from 850 all the way down to 666 by the end of August. The chart fits my own fundamental scenario like a hand in Michael Jackson?s glove (see ?The Worm Has Finally Turned? . Soaring unemployment, terrible earnings reports, collapsing commodity prices, a catatonic consumer, real estate of every flavor in free fall, and tidal waves of government spending are not what bull markets are made of. Did I mention the weather is terrible? Every feeble, half hearted, low volume rally we saw this week pushed us closer to the cliff. The charts of every stock and commodity market in the world rolling over in lockstep, like a thirties Busby Berkeley musical, gives you all the smoking gun confirmation you need.?? Hold on to those shorts as if your life depended on it.

 

2) When I put out my sell recommendation on natural gas at $4.30, the virtual trucks backed up to dump abuse on me from technical analysts, day traders, and wannabe pundits who were convinced that CH4 was the buy of the century. I also received a ton of e-mails from geologists, wildcaters, and gas men from all over the country with stories of even more, vast, unreported, shale discoveries. One in British Columbia I didn?t even know about. When it comes on betting my own money, I much prefer listening to engineers who spend countless hours driving pickups down dusty, potholed, washboard roads to get their data, than the online diletants, any day of the week. Best to watch the pain and suffering in the natural gas space from afar.

3) OK, I?m going to have to come down hard on this one. The administration is proposing banning smoking in the military. About time! The Pentagon spends $846 million a year on cigarettes, and another $6 billion treating smoking related diseases. I became a cigarette addict myself when the military gave me all the free ?coffin nails? I wanted in Southeast Asia 35 years ago, and it took me ten years to kick the nasty habit. Some 59,000 men died in Vietnam, and I?m sure many more than that died from the lung cancer that followed. Few people know that the Bureau of Prisons banned smoking three years ago, precisely to reduce spiraling health care costs. The riots that followed went unreported. The military in fact banned obesity 30 years ago. If a soldier is over his benchmark weight, his pay gets docked, and if he doesn?t go on a diet, he gets kicked out on a medical. While they?re at it, they should stop giving combat soldiers and pilots amphetamines. Is it any coincidence that the meth disaster that is unfolding in the Midwest coincided with the return from Iraq of thousands of troops? Not good for Altria (MO).

 

4) I have not been called a war criminal for at least 35 years. But that?s what was screamed at me when I muscled my way through a crowd of chanting anti war protesters on my way to a briefing from General David Petraeus, Commander of the US Central command. Every senior military officer in the San Francisco Bay Area could be found in the packed, steamy hall, including at least 20 generals and admirals. Petraeus, a four star with a PhD in international affairs from Princeton?s Woodrow Wilson School, ran through a thoroughly researched PowerPoint presentation that laid out how he was going to get our 130,000 troops out of Iraq by 2011. Only a caretaking force providing close air support from remote bases will be left behind to back a large civilian presence. A dramatic change in counterinsurgency strategies has brought the daily number of attacks from 160 down to 10, and monthly suicide bombings from 130 to 10. The goal is to ?Iraqrotize? the country so it can stand on its own feet, both politically and militarily. Iraq now has a reliable military of 550,000 men, but last year?s collapse in oil prices is creating budgetary problems. Afghanistan will be a much harder nut to crack, requiring more troops, money, and time. Priority one is to wipe out the poppy fields in the South from which the Taliban derives its financing and local support. Rising wheat prices will help this effort. Some 70% of the violence is in 10% of the country in the mountains that border Pakistan. The good news is that Pakistan is fighting its own war, not our war, for its own interests. Their nukes are secure and safe. Petraeus is bringing to bear incredibly sophisticated technology, including sensors mounted on the ground, in towers, balloons, drones, aircraft, and satellites, many of which are controlled remotely in the US and Europe. Bandwidth is his most valuable weapon. I follow the war in Iraq closely, not only because of the family I have in harm?s way, but also because of the $1 trillion in immediate costs and $2 trillion in long term costs we have already run up, on top of the 4,200 American and 100,000 plus Iraqi lives lost.?? I hope Petraeus is able to achieve his ambitious goals.

 

QUOTE OF THE DAY

Seen on a Marine commanding officer?s door in Baghdad: ?In my absence, figure out what your orders should have been, and then go out and execute them,? according to General David Petraeus.