1) California voters resoundingly rejected all five out of six budgetary measures by an overwhelming two to one margin, setting the stage for a new financial crisis. Trashed at the polls were plans to create a rainy day fund, improve education, borrow from the state lottery, and pay for children's services and mental health. Only prop 1F, freezing legislator pay raises during deficit years, passed. The state now has to immediately cut spending by $21 billion by laying off 10,000 teachers, 5,000 other state workers, and shortening the school year by seven days. It will raid every city and county government for additional cash. The state will also release 20,000 non violent state prisoners and suspend maintenance and construction on thousands of projects. My home town high school is closing their sports and music programs. If the state's latest round of $6.5 billion in bond issues did not carry federal government guarantees, they would have been wiped out in the market. No doubt our well tanned, Austrian immigrant governor, Arnold Schwarzenegger, who was in Washington DC for a CAFE photo op with Obama, will be sent back to the gym to pump iron sooner than he thinks.

2) Traders are making much of yesterday's drop of the volatility index (VIX) under 30% for the first time since the Lehman bankruptcy in September. Please see my April 7 forecast that it would collapse from 40%.?? Are we now at the bottom of a 30%-50% range, or will 32% be the new ceiling on the way back down to the 10% we saw two years ago? Part of the confusion springs from a misunderstanding of what the VIX is by ordinary investors. It is just a mathematical guess about how big the next move in the market will be.?? A 40% VIX implies that one out of three days will see a 2.25% palpitation, and once a month we will suffer a 4.5% gyration. You can have the market drop 10%, rise 11.1%, remaining unchanged, but still generate a tremendously high VIX. The equation doesn't care what the direction is. VIX unfairly picked up a bearish connotation because of the panicked rush by long side only investors to buy downside protection in falling markets, driving 'put' implied volatilities through the roof. This is why investors associate a high VIX with falling markets. In the end, this debate can only be resolved in one way, and that is to the downside. Smart hedge funds that shorted out of the money calls on VIX higher up, are now taking profits. But the VIX will crash again when markets go to sleep, as they inevitably will. Believe me, trading around a low VIX is your worst nightmare. Traders don't pull down million dollar compensation packages playing 'Solitaire' on their computers.

3) You know things are bad when traders celebrate a Q1 GDP of minus 4%, better than the 4.4% that had been forecast, but still the worst in history. The main causes were a 26% decline in exports and a strong yen, which diluted foreign profits. Apparently, people don't rush out and buy a new Lexus when they lose their jobs. Many economists are hoping for a recovery when the government's $160 billion stimulus package hits seriously pared back inventories. However,?? global asset allocators are facing a larger quandary. What is Japan's role in the 'new' world? It is not an emerging market, nor is it Europe or the US. It is on the doorstep of the world's worst demographic problem, and its labor is not exactly cheap. But chastened by its own financial crisis that started 20 years ago, it has some of the few global banks left standing, as well as some world beating companies, and a great neighborhood customer in China. As American power declines, will it fall into the Chinese orbit? Maybe country allocations don't matter anymore. Until either the Japanese or I figure this out, I'd rather stand aside. This is coming from someone who lived there ten years.

4) I never cease to be amazed by the feedback I get on my work from around the world. Yesterday, I published a piece on the dire state of shipping in Singapore. So of course, I find a chart of the exact locations of all of the troubled ships in question in my in box this morning, sent by a follower in the island nation. If I go to Google Earth, I can even get a close up satellite view of bored crews lounging around the decks playing cards. There truly is nowhere to hide anymore.

QUOTE OF THE DAY

'The people of California don't like to be told what to do,' said California's Governor Arnold Schwarzenegger.

I Won?t Be Back

1)???? ??Last week, I dropped in on the rock festival of investment conferences, the Las Vegas Money Show, at the posh and cavernous Mandalay Bay Hotel. A mild 95 degrees outside, I mingled with the Hawaiian shirt and cargo short wearing masses, with a sharp eye out for the next big investment themes. The event was organized in partnership with the top drawer financial blog aggregator, Seeking Alpha. The high profile confab attracted several industry celebrities, such as OptionMonster?s John Najerian, Standard & Poor?s Sam Stoval, retired Fed Governor Robert McTeer, and the Gartman Letter?s Dennis Gartman.?? I have to confess, I was stunned by the variety of exhibitors presenting their wares. Heavyweight players like TradesStation and Thinkorswim were there, offering presentations of their sophisticated trading tools on the hour. Some of the widely followed newsletter families were there, including Mark Skousen's Forecasts & Strategies. I was surprised by the number of great industrial companies there using the venue for traditional investor relations, like Petrobras (PBR), my favorite emerging market oil company, Cemex (CX), my preferred developing infrastructure firm, and Duke Energy (DUK), the best US electric power utility. There was a profusion of gold and silver mining companies, bullion dealers, and American eagle bearing coin brokers, which I thought was unique to Nevada. But regulars tell me this is a trend that has been building nationally for a couple of years. Reeally! Is that how gold flew to $1,000??? Exploration oil and gas limited partnerships were also in abundance, side by side with alternative energy start ups looking for new venture capital. There are in fact 11 Money Shows put on around the country each year by Sarasota, Florida based Charles and Kim Githler and their hard working staff of 70, attracting 75,000. In the business now for 31 years, they have expanded their offerings to international venues, and their ?Money Cruises? have made them the largest booking agent for Crystal Cruises. All in all, it is a must go event for those who need to keep in touch with the broader investing universe out there.

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 as 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) The Las Vegas residential market has broken every record with the speed and the viciousness of its collapse over the last two years, with the median price plunging 56% from $360,000 to $160,000. Driving around the outskirts of the city there is no shortage of half finished neighborhoods, complete with vacant shopping malls. But after a near shut down in December, it appears that the market has hit at least an interim bottom. In March, a halving of the price produced a doubling of the volume, with new sales jumping from 1,954 to 3,626 units in a year. Bargain basement buyers are definitely chewing through record high inventories, as they are in other black holes like Sacramento and Stockton, California. I don't want to get too excited here, but this is what bottoms look like.

4) I know that Las Vegas is not in India, but I can't let today's letter go out without mention of today's stunning move in India. The Congress Party won an upset victory in national elections, its coalition taking 262 out of 543 seats, paving the way for much needed economic reforms. At the top of the list is a liberalization of foreign investment restrictions, which will unleash torrent liquidity into the stock market. After two limit up moves took the Bombay Sensex ($BSE) up 17%, exchange officials shut down the market. This 'melt up' is a great 'tell' for global capital markets as it shows you the tremendous extend of the latent buying of high growth emerging markets that is out there. This is a theme that I have been hammering away on all year, and will continue to do so until I cash in my chips (gratuitous Vegas reference).

QUOTE OF THE DAY

'In America, the cruelty of not letting your staff know where they stand is outrageous,' said Jack Welch, former CEO of General Electric.

1) I?ll tell you what GM?s problem is. My dad was a lifetime GM customer, religiously?? buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize home. Thirty years ago I told him he was doing GM no favors by buying their cars, and the only way to force them to improve a tragically deteriorating product was to buy better made German and Japanese vehicles. This was right after the State of California forced auto makers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, ?I didn?t fight the Japanese for four years so I could buy their cars.? (He was a Marine). GM?s problem is that my Dad passed away seven years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are only 1.5 million left. All of them loved Detroit because it built great Jeeps, Sherman tanks, and half tracks that brought them home from harm?s way. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese and Indian vehicles. It is no coincidence that GM?s problems really accelerated with the passing of the ?greatest generation.? During the last 35 years, when Japan?s share of the US car market climbed from 1% to 40%, I begged GM to mend their ways and build a quality, price competitive product that Americans wanted to buy. They answer was always the same: ?Nobody can tell GM how to build cars.? Maybe someone should tell them.

2) Iam more convinced than ever that real estate has another 25% to fall, and best case, it is dead money for another five to ten years. The New York Times produced some insightful data on inflation adjusted home prices for the last120 years, which baselines at a $100,000 for a single family home in 1890. Few people realize how superheated the recent real estate bubble really got. Past bubbles very consistently peaked at $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000 in 2005, almost double the previous record highs. And while we have dropped 34% since then, to $135,000, we haven?t even fallen tothe past all time highs yet. If you look at historical lows, my call for a further 25% slump looks positively bullish. We saw lows consistently around$66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000 in 1976,1983, and 1996. These figures suggest the best case low is down a further 28%,and the worst case is down another 51%. I think I?ll go find something else to trade.

3) After a merciless torrent of budget cuts, California?s public education system has been bled dry, and now ranks 50th in the US, down from number one when I attended classes here a half century ago (oops!). The golden state now spends more on its 170,000 prisoners that on educating the young. When I recently tried to get Fedex to send a package to Japan, the clerk thought it was a city on the east coast and refused to take it because she couldn?t find the zip code. I ended up mailing it. Those trying to engineer an economic recovery in California don?t understand that you can?t become globally competitive with a dumbed down work force.

4) The migration of American business to online formats is accelerating, with over 1,000 new business being created every day. Internet advertising continues to go from strength to strength, and is one of the few growth sectors of the economy. The Interactive Advertising Bureau reported that online advertising grew 10.6% last year to $23.4 billion in a year when the total advertising market shrank from $132 billion to $125 billion. It now ranks as the third largest ad distributor in the US, after newspapers ($34.4 billion) and TV ($28.8 billion). Search advertising dominated, with 45% of the total. Video adverting was the fastest growing sector, up 123%. Display advertising managed 8% growth, even after the collapsing economy caused a very week fourth quarter.

QUOTE OF THE DAY

?Cash bonuses on Wall Street are going to become a dinosaur,? said Jon Corzine, governor of New Jersey, and former chairman of Goldman Sachs.

1) Is your bank giving you the cold shoulder on your last loan application, not retuning your phone calls, or asking for interminable documentation? Just bypass them. Try an online peer to peer bank, the Internet's answer to the financial crisis. With massively expensive branch networks, 19th century loan processing, inches of closing documents, and a boatload of regulation, banks are ripe for cannibalization by low cost predators. I had a chance to speak to several of these entrepreneurs at the recent Finovate Startup 2009 conference in San Francisco. The simplest model matches a one page online loan application and FICO score with a single lender at interest rates of around 9%, plus a small fee. More advanced organizations pool borrowers and lenders, and offer secondary markets for loans, if you want to cash out before maturity. Prosper was the oldest present, and unfortunately was early enough to get sucked into the subprime debacle. They have since relaunched their product with tightened lending standards. Lending Club came next, followed by Pertuity Direct and National Retail Fund. People Capital is pursuing a niche market matching up student borrowers with lenders. We are not far off from the sector being viewed as a new alternative asset class, with the total loan book now exceeding several hundred million dollars. Watch this space.

2) I met Jack Welch last night, the legendary retired CEO of General Electric (GE). 'Neutron' Jack gets the credit for boosting the market cap of GE from $13 billion to $400 billion in 20 years, turning it into a Wall Street darling in the process. The 'hedge fund that makes light bulbs' is the last big industrial finance company standing, and when the market turns it will make a fortune, because there is no competition left. Jack is currently on the board of a private equity firm and several Internet media start ups. He gives Obama an 'A' for leadership and communication, but believes his economic policies are seriously flawed. They are based on a 4% annual growth assumption for the next decade. We never managed to achieve that rate during the go go days of the eighties and nineties, let alone attempt it during a new age fraught with deleveraging and frugality. If we get only 2.5% instead, the deficit will explode from $13 trillion to $30 trillion, at which point 'we will be cooked.' Who knew Jack was a closet gold bug, dollar bear, and inflation hawk? Jack thinks GM should be allowed to go bankrupt, and the current arrangement where the UAW gets the company and the bond holders get pennies on the dollar is 'bizarre.' Jack was passing through San Francisco at the end of a national tour promoting his wife Suzy's new book '10-10-10', which is about how to create a 'values driven life.' In his heyday, Jack was considered the best manager in the country. Never one to mince words, he is an absolute terror now that shareholder feelings are no longer a consideration.

3) Insider buying and selling is supposed to be a great leading indicator of a company's fortunes. Bob Lutz, vice chairman and head cheerleader of General Motors (GM), has sold 81,000 shares of his holdings in the troubled car maker at $1.61/share, reaping a mere $131,000. Only 18 months ago, the shares were worth $3.4 million. With Bob, the great killer car that was going to save the company was always coming out next year, and this went on for 30 years. Bob is an ex Navy pilot, and in his free time flies and maintains his vintage jet fighter. Good thing we don't reward failure.

4) To give an idea of the market's new appetite for risk, look at Japanese small cap stocks. This sector was one of the worst hit in the recent melt down, but historically it outperforms by a large margin in the first 12 months after the end of a recession. Once their survival is no longer in doubt, these often debt dependent stocks rocket on any improvement in the economic trend. This is the only time I ever hire outside managers, because I haven't the patience, the manpower, or the expertise to scour over the balance sheets and earnings statements of hundreds of obscure little niche companies, especially when they are written in in Japanese. I have always been a big cap player because I have dealt with investors who had to get $100 million to work in the market in a hurry, an impossibility in the small cap arena. One who does this magnificently is my old friend Ed Merner who runs the Atlantis Japan Growth Fund (LSE-AJG) traded in London. It has been on a real tear for the past month, and at $7.80 is at a bargain basement 18% discount to its NAV of $9.47, if you are lucky enough to find shares to buy.

QUOTE OF THE DAY

'We almost lost the country in September,' said Jack Welch, former CEO of General Electric.

1) The May nonfarm payroll came in at minus 539,000, better that the consensus of minus 650,000, taking the unemployment up to 8.9%. The improvement was caused by temporary hiring of government workers for the 2010 census. A peak above 10% now looks like a chip shot. Including discouraged workers, we are now at 15.8%, moving towards the great depression peak of 25%. In several industries, like autos, real estate, and construction, conditions are already worse than the thirties. It is clear that not a drop in stimulus money has led to any appreciable hiring yet. This may be the last really terrible number in this cycle, but you can expect continued hemorrhaging for a while.

2) The US Treasury's auction of 30 year bonds yesterday was a complete disaster. There were few takers of the $14 billion in paper on offer, spiking yields up 20 basis points to a six month high of 4.35%, and crushing the futures by two points.?? My beloved PowerShares US Lehman short bond fund (TBT) roared up 8%, breaking out to a new high for the year of $53.The failure is an early indication that fixed income investors are anticipating a resurgence of inflation down the road, as long dated bonds are the most sensitive to inflationary expectations. The the government hopes to sell $2 trillion in debt in the coming year, and so far the Fed has committed to buy $500 billion. Where will the rest of the money come from? China, Japan, and the UK, until now biggest buyers of our debt? Could they possibly be suffering from buyer's remorse, indigestion, new found prudence, or all three? The debacle is welcome news for commodity owners of all shades, the new hard assets of choice, especially of the gold and silver variety.?? I have been pounding the table about inflationary risks for months, and an accident like this was just waiting to happen.

3) Crude has been riding the reflationary wave, hitting a six month high of $58 yesterday. It is time to take another look at San Antonio, Texas based NuStar Energy (NS). A spinoff of Valero Energy's asphalt division, the company boasts 58.5 million barrels of storage facilities around the Gulf. The stock has already doubled since crude prices collapsed big time in October. The company has also been buying up asphalt production from other companies like CITCO, and may offer an additional infrastructure play, once Obama's $30 billion road rebuilding program starts in earnest. Since my recommendation on January 29 (see???? http://madhedgefundradio.com/January_29__2009.html) the stock has risen 15%. Given that one of the few certainties in life is that crude prices are going up, I would add to this position on any substantial dips.

4)?? The dinosaur bone market has crunched. Once a favorite collectable of high flying hedge fund managers, the prices of everything from tyrannosaurus rex to brontosaurus fossils have skidded. A recent auction of a triceratops skeleton failed to reach its minimum bid of $1 million. Even prices for fossilized dinosaur excrement, a popular niche market, have gone down the toilet. The all time high for these specimens was hit ten years ago when a T-rex named Sue sold for $10 million , which after much litigation, ended up in the Field Museum in Chicago. You floor traders in the pits should go have a look at what a real predator looks like someday. Dealers are hoping that the upcoming sale of a rare three foot tall, 18,000 year old possible pre human hominid, homo floresienses,?? discovered in Indonesia, will help revive the market.

QUOTE OF THE DAY

'Put ears on it and call it Lassie,' said CNBC reporter Rick Santelli of yesterday's disastrous 30 year Treasury bond auction.