1) The stage is now set for the dollar. With the US 20 months into a recession, it?s just a matter of time before the Feds pull us back from zero interest rates. With the ECB late to the funeral, European Central Bank president, Jean-Claude Trichet, last week reaffirmed his commitment to keep their benchmark rate at 1% to restore the economy. There?s your trade. The next move in the euro/dollar spread will be in favor of the greenback, as the US will be the first out of recession. On top of that, you can pile a fading US stock market and a back off in commodity prices, which are also dollar positive. You can expect the euro to trade down to the low $1.30s. Mind you, this is still a counter trend trade, which I generally try to avoid. It?s a one night stand, not a marriage. Anyone reading the National Enquirer knows the dollar is sick, and even my cleaning lady has a major position in the futures. Thus, the street is overdue for a spanking, the inevitable outcome when there are too many bets on one side of the table. I still think it will cost two BUCKS to buy a EURO sometime in the foreseeable future. For those hardy souls willing to scoop up some pennies in front of a steam roller, look at the 200% short euro ETF (DRR), which has backed off 34% from $63 to $42 since November.

2) When crude suddenly spiked $4 to make a new high for the year at $73.50 on June 30, many in the industry, myself included, smelled some three day old fish. So I was not surprised to learn that the move was caused by a rogue trader trying to artificially engineer a short squeeze. According to the Financial Times, the perpetrator was PVM Oil Associates broker, Steve Perkins, who entered bogus orders to buy 16 million barrels of oil in one hour, double the daily production of Saudi Arabia. This was on a day mysteriously devoid of the nerve rattling news that usually drives prices up, leaving us all scratching our heads. By the time the firm discovered and unwound the trades, it had lost $10 million. The scandal had the unfortunate side effect of creating a failed double top in the oil charts, paving the way for a broader sell off in crude and other commodities as well. With hedge funds dominating trading, a large portion of their purchases going into storage in tankers chartered on the cheap, and all of this acquisition going on in the face of a death spiral in the economy, I have been avoiding this space since the first time it ran up to $72 on June 9 (see ?Get me out of Oil? ). I think you?ll see a pull back in crude to the high fifties, bringing the price more into balance with the true supply/demand situation. Gee, I wonder if they?ll ever catch the rogue trader who ran it up to $148 last year?

3) For the latest news from the front trenches of the solar industry, listen in to the all day analyst meeting given in Las Vegas by First Solar (FSLR) by clicking here .?? If you don?t want to wade through six hours of data that could only arouse a bachelor engineer, here are the highlights. The headline is that the cost of solar is now down to ten cents per kilowatt hour, versus three cents for coal. But the Clean Energy Act of 2009 is certain to make solar cheaper and coal more expensive. The industry will face a completely new set of challenges gearing up from a few rooftop panels on environmentalist rooftops to becoming a major portion of the US power supply. For a start, solar energy is most abundant where there are no people, because these areas were uninhabitable until air conditioning came along. That means building a huge network of power lines from scratch, something that will require Federal Energy Regulatory Commission (FERC) shepherding. Unlike other power sources, solar is highly variable, hour by hour and even minute by minute. Not a problem when you are running a freeway sign, but a big problem when running a large regional network, so ?smart? grids will be the order of the day. The technology to do this on a large scale hasn?t even been invented yet. The ongoing credit crisis is a major problem, since one gigawatt of capacity will cost $800 million in capex. Nevertheless, this industry now has a huge global tailwind and should remain permanently on your radar. Consider FSLR on the next big dip. For more, see my earlier piece.

4) I thought you would be fascinated to read these headlines from the Wall Street Journal:

?Washington Officials Will Be Looking Carefully at Whether Record Low Interest Rates will Revive Business?

?Current Speculative Sentiment is Bearish?

?Market Observers See Hopeful Signs?

?Senator Glass Considers Changes in Banking Regulation?

This last one was the tip off, Glass, of Glass Steagle fame. A thoughtful blogger has started posting daily headlines from today?s date in the year 1930 (check out his site). Terms like ?over leverage? and ?green shoots? abound. Do any of these sound familiar? The famous Winston Churchill quote comes to mind ?the nation that forgets its past is doomed to repeat it.?

QUOTE OF THE DAY

?I think it?s almost inevitable that, with a billion people in China wide awake for the first time, and a billion people in India, there?s going to be some kind of a terrible run against the dollar. And I doubt it can stay orderly, because all of our own hedge funds will be right in the vanguard of the operation,? said Nobel Prize winning economist Paul Samuelson.

Global Market Comments
July 2, 2009

Featured Trades: (BA), (COAL)

1) I spent the evening with Dr. Janet Yellen, the president of the Federal Reserve Bank of San Francisco. She thinks that thanks to the government?s tax cuts and spending programs, we will be out of the recession by the end of this year. After massive inventory liquidation, the auto industry in particular is poised for a rebound. Financial markets are now in better condition than we imagined possible six months ago. However, the pace of the recovery will be frustratingly slow, and it could take several years to return to full employment. Since the majority of the Fed board members feel that inflation will be stuck at 2% for years to come, deflation presents a greater risk than inflation. We are not by any means out of the woods yet. Rising energy prices and interest rates are a potential drag on the economy. Commercial real estate is at the top of her worry list, as falling rents and capital values could create a downward spiral, further impairing the banks. China?s wishes for an alternate reserve currency are impractical. Answering questions as only a UC Berkeley professor can, she further confirmed my belief that we are looking at an ?L? shaped recovery at best (see here and here). However, she did pour some cold water on my idea that the TBT has further to run. ?Inflation running up to untoward levels doesn?t make any sense,? she averred.

2) It?s amazing that Al Franken won his state Supreme Court case over Norm Coleman for the Minnesota Senate seat, just as the Clean Energy Act of 2009 comes up for a vote (see my June 26, 2009 Newsletter). Now the Democrats can ram the bill through, no questions asked, leaving fuming Republicans on the sidelines bitching to Fox News. This is one of those seemingly insignificant events which will have a huge impact on history. The last one of these I can remember was when a Cuban orphan named Elian Gonzalez washed up on a Miami beach, and ultimately threw the Cuban vote, the state of Florida, and the entire national election against Al Gore. The bad news is that the cost of your utility bill, gasoline bill, tax bill, and everything else you buy is going up. Those unhappy readers in the Midwest and South can expect more of their income to get shifted towards the two coasts. The good news is that you get to breathe, and your kids will live a full life.

3) Let me tell you first that my family has a long history with Boeing (BA). During WWII, my dad got down on his knees and kissed the runway when the B-17 bomber in which he served as tail gunner (two probables, one confirmed) made it back despite the many holes. Some 40 years later, I got down on my knees and kissed the runway when a tired and rickety Boeing 707 held together with spit and bailing wire, which was first delivered as Dwight Eisenhower?s Air Force One in 1955, flew me and the rest of Reagan?s White House Press Corp to Tokyo and made it there in one piece. I even tried to buy my own B-17 in the nineties (the Piccadilly Lilly), but was outbid by Paul Allen on behalf of his Seattle Museum. So it is with the greatest difficulty that I examine this company in the cold hard light of a stock analyst. Nevertheless, to say that investors are disappointed by the umpteenth outsourcing caused postponement in the 787 Dreamliner is an understatement. They took the Dow stock down 23% from $53 in days. In fact, long suffering shareholders have been pummeled by a torrent of bad news, with the cancellation of the Pentagon?s futuristic $160 billion Land Warfare Weapons Program and Quantas yanking an order for 15 Dreamliners. But I?m a firm believer in buying when there is blood in the street, and I see bucketfuls. BA is selling at 8.7 times earnings, a huge discount to competitors Lockheed Martin (LMT) at 10.5 times and Raytheon (RTN) at 10.9 times. It has $3.3 billion in cash, a 4% dividend, and an increasingly scare A+ rating on its debt. BA?s immensely profitable defense business still accounts for 52% of revenues. When the super fuel efficient Dreamliner does come through, the three year, $151 billion order backlog for 890 planes will deliver a huge kicker for earnings. Its main competitor, Airbus, does have the minor problem in that its planes keep falling apart fully loaded with passengers. If you can get BA under $40, you?d be getting a best of breed company at a mongrel price.

4) I wanted to get the low down on clean coal to see how clean it really is, so I visited some friends at Lawrence Livermore National Laboratory. The modern day descendent of the Atomic Energy Commission, where I had a student job in the seventies, the leading researcher on laser induced nuclear fission, and the administrator of our atomic weapons stockpile, I figured they?d know. Dirty coal currently supplies us with 50% of our electricity, and total electricity demand is expected to go up 30% by 2030. The industry is spewing out 32 billion tons of carbon dioxide (CO2) a year and the global warming it is causing will lead us to an environmental disaster within decades. Carbon Capture and Storage technology (CCS) locks up these emissions deep underground forever. The problem is that there is only one of these plants in operation in North Dakota, a legacy of the Carter administration, and new ones would cost $4 billion each. The low estimate to replace the 250 existing coal plants in the US is $1 trillion, and this will produce electricity that costs 50% more than we now pay. And while we can build a wall to keep out immigrants, it won?t keep out CO2. This is a big problem as China is currently completing one new coal fired plant a week. In fact, the Middle Kingdom is rushing to perfect cheaper CCS technologies, not only for their own use, but also to sell to us. Since it appears that Obama is not willing to wait on anything, expect to hear a lot of sturm und drang about CCS this year. The bottom line is coal can be cleaned, but at a frightful price. For more on this see my June 15 Newsletter.

QUOTE OF THE DAY

?We are slogging through the starkest economic landscape in our lifetimes,? said Dr. Janet Yellen, president of the Federal Reserve Bank of San Francisco.

1) As much as I like to open beer bottles with my teeth, do my own tattoos, and roll around in the snow naked and beat myself with birch branches, when it comes to pain in my investment portfolio, I am definitely a wimp. So I have to take notice when a ?Golden Cross? occurs on one of the major indexes, as happened with the S&P 500 on June 23 when it hit 888. For the initiated, a ?Golden Cross? occurs when the 50 day moving average moves up through the 200 day moving average. Historically, this means that the index will rise 7% in the next three months, 8% in the next six, and 19% over the coming year. The trouble is that if technical analysts were always right, they would only wear Jon Green or Anderson & Sheppard suits, drive Bentley Turbo RT?s, and certainly wouldn?t deign to talk to you. The harsh reality is that most shop at Men?s Warehouse, drive Hyundai?s, and work on salary for brokers. If they were paid based on performance, there would be no need for Jenny Craig or Weightwatchers. Not that they are to be ignored. They are right at least half the time. But their opinions are just one more thing to throw into the decision making soup.

2) I spent the evening with Dr. Robert Frank, professor at the Cornell University School of Management, and author of The Economic Naturalist?s Field Guide. US consumer spending?? peaked at $10 trillion, or 73% of GDP in 2000, and in the new world of falling incomes and enforced savings rates, it will take many years to come back. The current disaster was a guaranteed outcome, because while incomes stagnated over the last 30 years, the median home size jumped 50% to 2,600 square feet. Deregulation poured gasoline on the fire, enabling an unsustainable culture of leverage. California is in a real pickle, because governor Arnold Schwarzenegger is forced to act as Herbert Hoover did by balancing a budget while falling into a Depression. Dr. Frank argues that we should use this economic crisis to fundamentally remake the US tax system. The current system taxes savings on multiple levels, but spending is tax free. We need to scrap the income tax (three cheers), and implement a steeply progressive consumption tax. We need to tax pollution the same way. Dr. Frank, who co-authored a previous book with Fed governor Ben Bernanke, offers radical solutions. It seems that desperate times require desperate measures.

3) If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis, so investment in fresh water infrastructure is going to be a recurring long term investment theme. (See my earlier efforts to get you into the water space). One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world?s population, up to 90% of the fresh water is already polluted, some irretrievably so. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years. Aquifers in the US, which took nature millennia to create, are approaching exhaustion. While membrane osmosis technologies exist to convert sea water into fresh, they use ten times more energy than current treatment processes, a real problem if you don?t have any, and will easily double the end cost to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the US stimulus package will be similarly spent. It says a lot that when I went to the UC Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds! At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 32% since I first brought it up. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world?s greatest per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

4) It appears that my website was one of the few that did not crash on news of the death of Michael Jackson. I wonder why? Twitter survived its first serious crash threat when traffic spiked to 65,000 tweets a second. AT & T?s network did less well, and almost came down. That?s better than Google?s search engine, which temporarily froze. Yahoo says they got the greatest number of clicks on a news story in its history. The Internet was built to survive a nuclear war, but was taken down by the passage of a drug addicted musician. You would think that the copyright holder on the Jackson titles, Sony (SNE), would do well, but not so. Instead, Amazon (AMZN) stock took off, offering for sale the top ten selling Jackson CD?s by the King of Pop. Most of them sold out in a day. I guess it?s a new world out there. Those with the best selling machine, win. Our local winner? Butler Amusements bought four carnival rides at a Neverland Ranch auction last year, and these can be ridden today at the Alameda County Fair. Talk about a windfall!

QUOTE OF THE DAY

?If 1.4 billion people suddenly decide to spend an extra dollar a day, it will have a massive impact on what?s going on in the world,? said Andy Brough, a fund managers at Schroeder?s, about Chinese efforts to stimulate domestic consumption.

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1)Like Paul Revere on his midnight ride, I feel a patriotic duty to warn you of the foreign invasion that is headed our way. No I?m not talking about the British, but redcoats of a more Eastern origin. I?m referring to the Chinese electric car company ?Build Your Dreams? (BYDDF) (see http://www.byd.com/company.php) . 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 Shenzen in 1995. He grew the company into a massive, vertically integrated conglomerate, employing 130,000 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 more. All-electric models are coming out this year. Warren Buffet was so impressed, he made a rare foreign investment last year, asking for a 25% stake and settling for 10% for $230 million. Wang, who has already 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?

2) If the 2009 Clean Energy Bill passes, it is going to pave the way for major structural changes to the US economy, which few of the non-engineering types voting for it in Congress understand. The bill encourages electric power utilities to switch to renewables, upgrade the electric power grid, and put in place a cap and trade system which places an enormous burden on the power industry to go green (see my June 15,2009 Newsletter). The bill is expected to sail through the House, but faces a major fight in the Senate, where the administration is going to have to get all of their ducks in a row for it to pass. The bill provides the legal structure to spend that $100 billion for alternative energy already passed in the stimulus bill. In his cheerleading press conference for the bill, Obama correctly declared that dependence on hydrocarbons was jeopardizing our national security. He also cleverly described this as a massive creator of high tech jobs that can?t be exported.? I?m not highlighting this because I live in California, wear sandals all year, drive a Prius, or have a refrigerator stuffed as if a giant gerbil does my shopping. Since this economic crisis started, the key has been to buy whatever the government is buying, and since they are going into alternatives in a big way, you want to be right ahead of them (see my solar piece). Time to add more alternative energy names to your list to buy on dips. Look at American Superconductor (AMSC), which is involved in advanced wind turbine designs and electric power grid upgrades. Also take a peek at Covanta (CVA), an established business that profitably burns trash to create electricity.

3) There is an easier, cheaper, and faster way to solve the banking crisis which no one is talking about on Capitol Hill.?? If collateralized debt obligations (CDO?s) are the problem, just get rid of them! Desecuritize them! Just convert them back into the underlying loans. There are $1.4 trillion in CDO?s outstanding, backed by Alt-A and subprime loans in the form of 3,700 individual securitizations of perhaps 3.7 million loans. Over 68% of the loans backing these bonds are current.?? Mark to market rules are forcing the banks to carry this paper on their balance sheets at 50%-80% discounts. The problem is that mark to market is a meaningless accounting fiction when there is no market. If you break up these securities and place the underlying loans back on the banks? balance sheets, the good mortgages can be valued at 100% of face, and those behind in their payments, or in default, can be discounted to maybe 70% of face because they are still secured by the value of the homes. This would boost the entire asset class from the current 20-50 cents up to 90 cents on the dollar. Restored balance sheets would enable banks to resume lending. Of course it would be a massive admin job unwinding the rats? nests behind some of these securities, but Heaven knows there is abundant subprime and Alt-A expertise available for hire these days. Just sift through the ashes of Lehman Brothers and Bear Stearns. Why aren?t people talking about this?

4) Another green shoot bites the dust as weekly jobless figures jumped 12,000 back up to 627,000. They started offshoring hedge fund managers years ago.?? And now South Carolina governor Sanford tells us that his state has started offshoring mistresses. Where will it all end? Is there no shame? Please pray for me, Argentina.

QUOTE OF THE DAY

?You can?t produce a baby by getting nine women pregnant for one month,? said Oracle of Omaha, Warren Buffet, revering to Obama?s multifaceted attempts to revive the economy.

1) All eyes will be on the Fed interest rate decision today, but your time will be better spent watching the NBA finals, the US Open, or Wimbledon, which you have wisely Tivo?d for days like this.?? US industrial capacity utilization is terrible, and still falling, while unemployment is still rising at a record pace. Sure, commodity prices have doubled this year, but the give back there has already started. The buying that did occur happened because investors were looking for an alternative to the sick dollar, not because there is huge underlying demand by end users. This is one of the reasons why I became cautious about all of my long positions last month. So I can say with complete confidence that the chances of an interest rate hike are less than zero for the foreseeable future.

2) I warned readers that pain was on the way eight days ago, and one of the big reasons was a major reversal in the euro/yen cross rate, a great barometer of global risk taking by hedge funds. After trading as high as ??170 in 2007, it plummeted to a low of ??114 earlier this year. It then took off like a scalded chip three weeks before the S&P 500 made its prophetic 666 low on March 9. Look at the charts for the euro/yen and the SPX and you?ll see the correlation has been huge. This is a valuable and highly predictive cross rate to track, because the big boys can finance positions for free by borrowing in yen and investing in other high yielding, commodity producing currencies, like the Australian, New Zealand, and Canadian dollars. After a spike up to ??141 on June 8, euro/yen reversed all the way back to ??132 warning that a tempestuous round of deleveraging and risk reduction was on the way. For mere mortals, this translates into selling of everything across the board and is why trades as diverse as copper, crude, stocks, and BRICS have suffered vicious sell offs. Watch the euro/yen cross as a wizened old sailor keeps a weather eye on his barometer.

3) If you want to impress your friends with your vast knowledge of financial matters, then here are the Latin translations of the script on the backside of a US dollar bill. ?ANNUIT COEPTIS? means ?God has favored our undertaking.? ?NOVUS ORDO SECLORUM? translates into ?A new order has begun.? The Roman numerals at the base of the pyramid are ?1776.? The better known ?E PLURIBUS UNUM? is ?One nation from many people.? The basic design for the cotton and linen currency with red and blue silk fibers, which has been in circulation since 1957, carries enough symbolism to drive conspiracy theorists to distraction. An all seeing eye? The darkened Western face of the pyramid? And of course, the number ?13? abounds. Thank Benjamin Franklin for these cryptic symbols, and watch Nicholas Cage?s movie National Treasure. The balanced scales in the seal are certainly wishful thinking and a bit quaint. Study the buck closely, because there are going to be a lot more of them around.

4) These are indeed dark days for Silicon Valley?s venture capital industry. With the exit door slammed shut for years to come, new money is staying away, avoiding the high risk multiyear lock up. Angel investors have gone back to heaven. The deterioration of the economy has been so rapid that the rationale for many start ups is no longer there. Countless web 2.0, next generation models for social networking sites, video sharing sites, wikis, blogs, and folksonomies never made it to profitability, and will be swept away. Unfortunately, this means there will be an untold number of great ideas that will never see the light of day. Alternative energy is one of the few areas where business plans are getting any traction. Many investors are bracing themselves for reports of losses on their existing holdings, once the industry?s arcane accounting makes that possible. Expect a lot of once hard to get office space on Palo Alto?s Sand Hill Road to become available for cheap soon.

QUOTE OF THE DAY

?While there?s an energy shortage, we have no shortage of energy,? said John Hofmeister, former CEO of the US operations of Shell Oil.