2009 Archive - Mad Hedge Fund Trader

February 20, 2009

Global Market Comments for February 20, 2009
Featured Trades: (POT), (PBR), ($COPPER), (SCHW)

1) Gold blasts through $1,000 to a new high for the year. Need I say more?

2) Here is another thought about Obama's mortgage bailout plan. It is so small, and helps so few, it isn't really a bail out at all. It doesn't help those with mortgages over $625,000, a second home, investment properties, and those who have no mortgages (20% of the US total). Those who do qualify will have to run a gauntlet of qualifications and paperwork. No wonder the market for mortgage backed securities completely shut down! The plan does enable Obama to satisfy the left wing of the Democratic Party crying out for some government relief of their constituents, like Nancy Pelosi. It also makes a nice headline.

3) Here's another one for the unintended consequences file. The bankruptcy of Lehman Brothers could lead to up to 50 of London's better restaurants going under. The defunct investment bank was a profligate spender of expense accounts, corporate events, and bonus payments, racking up huge bills. Restaurateurs?? are coping by cutting staff costs, offering cheaper cuts of meat and more chicken dishes, bargain wines like Argentinean malbec and Spanish rioja, and great value for money prix fix menus.

4) Exchange traded funds, or ETF's, were one of the hot financial products of 2008, and enable investors to go 100% or 200% long or short any number of indexes, sub indexes, industry groups, bonds, currencies, and commodities. The largest issuers have been Barclay's iShares, State Street's StreetTracks SPDR's, Rydex, and PowerShares. Sponsors of ETF's have filed for registration of another 850 such products, including ETF's for many new single country funds for Columbia, Egypt, Argentina, Peru, and the Nordic countries. Charles Schwab (SCHW) has also announced that it is entering this field for the first time. These will allow fund managers to make more narrow and specific bets in the capital markets. But they will also increase market volatility, as they obviously did last year.

5) Someone recently bought a portfolio of performing home loans with an average FICO score of 698 for 14 cents on the dollar, giving a current yield of 45%. This shows you how shabbily these illiquid assets are being treated. It also tells you what the world is going to look like without leverage. Everything is going to be a lot cheaper for a long time.

6) Legendary investor George Soros has substantially increased his investment in Potash (POT) and Petrobras (PBR), two stocks I love. Potash is the Saskatchewan based world's largest miner of potassium carbonate, which is in heavy demand for fertilizer from China. The stock is only just recovering from a melt down from $240 to $50. Petrobras is Brazil's oil major, which has made a sting of offshore oil discoveries. PBR gives you a triple play on the recovery of crude prices, a long in the Brazilian currency, the Real, and the high growth rate of this emerging economy. All three offer great entry points right now. A classic 'George' play.

7) In 2007, global urban dwellers surpassed rural ones for the first time. Some 90% of all new urban dwellers are in emerging markets. By 2015 three out of four urban dwellers will be in emerging markets, according to the UN. Half of all emerging market urban dwellers do not have access to clean water, nor have their garbage collected. This has major implications for long term investment themes. Buy copper ($COPPER).

QUOTE OF THE DAY

'Pass this package by tomorrow, or we won't have an economy on Monday,' said Fed chairman Ben Bernanke at the Treasury's emergency meeting in October.

February 19, 2009

Diary

Global Market Comments for February 19, 2009
Featured Trades: ($GOLD), (DGP), (GLD), (WFC), (EPD)

1) GOLD! GOLD! GOLD! This is the cry being heard worldwide by investors in the Great Gold rush of 2009, looking for a generic 'short America' trade. Where in the past gold seekers used sluices, shovels, and jackhammers to extract the glittery stuff in California's Sierras, Alaska's Klondike, and South Africa's Rand, today the instrument of choice is the mouse. Online traders are unleashing clicks by the millions to buy ETF's, American Eagles, mining shares, and futures contracts. With stock traders sitting on their haunches, wondering if the Dow will hold 7,000, this is the only thing that is working right now. Gold is no longer just catastrophe insurance. Traders are buying gold more for what it isn't, than what it is. It isn't made of paper, made in the US, or held in custody by Bernie Madoff or Stanford Financial. The yellow metal hit a new high for the year of $887 overnight, and the risk of a 'melt up' is increasing. The Street Tracks Gold Trust ETF (GLD) is now the seventh largest holder of the barbaric relic in the world. For the newly aggressive, look at the DB Gold Double Long ETF (DGP), which gives you a 200% long exposure to gold, and is up 54% in a month. Who says there is nothing to buy out there?

2) We learn today that Stanford Financial invested with Bernie Madoff. A Ponzi scheme investing in a Ponzi scheme. Is this what we have come to? What ironic justice! It also appears that many of the world's top professional golfers invested with Stanford and have been wiped out.

3) Wells Fargo Bank (WFC) has been in a free fall for the last two weeks, as investors bail out of the stock in fear of nationalization, or an Alt-A loan loss driven bankruptcy. The stock has vaporized 47% in three weeks, down to a new 12 year low. Veloceraptor like hedge funds have been major short sellers of the stock because it is one of the last banks with any meat still on the bone. Demand for out of the money puts is soaring. The stock is being dragged down further by big selling of bank and financial ETF's, like the Financial Select Sector SPDR (XLF), which has WFC as its second largest holding at 8.74%.

4) The longer crude stays below $40, the more production is being taken off the market. At this stage all 35 million barrels of storage at the Cushing, Oklahoma delivery point for west Texas intermediate are brimming with crude. The 709 million barrel Strategic Petroleum Reserve (SPR) is nearly full. And there is another 50 million barrels stored in supertankers at sea which is building by the day. Demand has collapsed so fast, that oil companies can't shut down production fast enough. The scary thing about this is that when the next crude spike upward in crude comes, it will be worse than the last one. Take advantage of the current distress prices to accumulate oil infrastructure stocks. Kinder Morgan Energy Partners (KMP) has a PE multiple of 25 and a dividend yield of 8.3%. Enterprise Products Partners (EPD) has a $10 billion portfolio of fractionation facilities, storage, offshore drilling platforms, and 32,478 miles of product, natural gas, and crude pipelines, and carries a modest PE multiple of 12 X and a dividend yield of 9.2%. More expensive Kinder Morgan Energy Partners (KMP) with a PE multiple of 25 X and a dividend yield of 8.3% is also worth a look see.

QUOTE OF THE DAY

'He that lives upon hope will die fasting,' said Benjamin Franklin.

February 18, 2009

Diary

Global Market Comments for February 18, 2009
Featured Trades: (NAT)

1) Obama's mortgage bailout package is out, and the market didn't care, hitting new six year lows. After wading through pages of arcane, mind scrambling detail, it appears that $75 billion will be made available to distressed homeowners to cut mortgage payments to 31% of their income. It allows cram downs, where bankruptcy judges can reset loan principal amounts. The plan only applies to conforming loans of $625,000 or less, which account for 50% of the $12 trillion in debt outstanding. This means that only 4-5 million homeowners will qualify, who own less than 7% of the US housing stock. Homeowners with jumbo loans in CA, NV, NY, AZ, and FL, who are now seeing default rates of 9%, need not apply. At best, the plan is merely a 'feel good,' political measure that will do nothing to halt the downward spiral in home prices.

2) An increasing number of companies are claiming that the current financial crisis entitles them to trigger 'force majeure' clauses to get out of contracts. Hoosier Energy successfully did so to get a stay on $120 million in loan repayments to John Hancock. Now Dow Chemical is attempting the same to void their $15.4 billion takeover of Rohm & Haas, as is Donald Trump in getting out of a $40 million loan guarantee for a condo tower in Chicago financed by Deutsche Bank. At the very least, the threat of litigation is forcing counterparties to the table to reconsider terms.

3) George Soros, who is now approaching 80, is about to publish another book entitled The Crash of 2008 and What It Means. Conditions are now worse than during the Great Depression, when total credit peaked at 160% of GNP. It was at 365% a year ago, and may reach 500% before we turn a corner. Obama's fiscal stimulus package is great, but is just a down payment. A new mortgage system has to be built out of the ashes of the old, where originators have to absorb the first 10% of any ensuing loss. The banking system needs to be recapitalized, with bad assets diverted into a government financed 'side pocket', much like the large, illiquid hedge funds are doing. The government needs to use taxation to guarantee a $70 floor for oil prices to spur an alternative energy industry. The international financial system needs to be remade through the creation of new, American sponsored 'Standard Drawing Rights' (SDR's) which the IMF can use to support weaker emerging economies. It is all well thought out. This summary will save you from having to wade through George's normally dry, turgid prose.

4) With 50 million barrels of crude in storage at sea, tanker companies have the buffer they need to weather the first globally synchronized recession. As long has crude for delivery in a year trades at a $10-$15 premium to the spot price, known as contango, this fleet will grow. Slow steaming, or cutting cruise speeds from 15 to 13.5 knots to reduce fuel consumption, is having the effect of taking another 35 million tons of tanker capacity off the market. With a 10% yield, Nordic American Tanker Shipping (NAT) is now the highest dividend paying stock listed on the NYSE, and gives you a pretty safe way to play this anomaly. The stock has no debt, $500 million in unused credit lines, and a bargain PE multiple of 9 X.

5) Some 20% of US electricity comes from nuclear power. Half of that is powered by fuel made out of reprocessed Russian nuclear weapons which we bought from the old Soviet Union. I didn't know that. Talk about pounding swords into plow shares!

6) Here are the top internet search terms for December. Amazingly, 0.6% of all Internet traffic was looking for Santa.
Rank ???? ??Search Term ???? ??Volume
1. ???? ??santa tracker ???? ??0.04%
2. ???? ??obama shirtless ???? ??0.03%
3. ???? ??norad santa tracker ???? ??0.02%
4. ???? ??track santa ???? ??0.02%
5. ???? ??after christmas sales ???? ??0.01%
6. ???? ??eartha kitt ???? ??0.01%
7. ???? ??michael jackson ???? ??0.01%
8. ???? ??mnemonics ???? ??0.01%
9. ???? ??www.itunes.com ???? ??0.01%
10. ???? ??itunes.com ???? ??0.01%

February 17, 2009

Diary

Global Market Comments for February 17, 2009
Featured Trades: (TM), ($GOLD), ($SSEC)

1) In three short weeks we have gone from an administration that had a political interest in portraying the economy as not as bad as it really was, to one that paints the economy as worse than it really is. The markets don't like it. It says a lot that the Dow is taking a run at a new six year low, and is perilously close to a 12 year low, the day Obama signs his stimulus package.

2) Gold continues to move from strength to strength, hitting a new high for the year of $972 today, up 22% from my recommended entry point.?? In January, gold ETF's bought a record 104 tonnes of the yellow metal. Last week alone, purchases soared to an astonishing 110 tonnes. There has also been huge buying of December, 2009 1,000 calls, suggesting that some players are hoping for a melt up if we break the old highs at $1,050. Looks like we have found our new bubble. Let the games begin!

3) Nobel Prize winning economist Paul Krugman published a blistering editorial in the New York Times yesterday where he makes the shocking observation that there has been no increase in Americans' net worth since 2001. The entire surge in asset prices this century was nothing more than a Madoff style illusion. This is what we should have been expecting all along, since as a nation, we have been spending more than we have been saving for a decade. Krugman uses the just released Federal Reserve Survey of Consumer Finances to support his position. Housing has another 10-15% to drop, and the fall is unstoppable. The just passed $787 billion stimulus package is only a quarter the size of the reflationary program that ended the Great Depression, known as WWII. All sobering food for thought. Now we have to restart the century all over again!

4) I thought you'd be interested to know the top 20 websites visited on the internet in December. No big surprises here.

Rank ???? ??Website ???? ??Market Share

1. ???? ??www.google.com ???? ??6.38%
2. ???? ??mail.yahoo.com ???? ??4.7%
3. ???? ??www.myspace.com ???? ??3.71%
4. ???? ??www.yahoo.com ???? ??3.65%
5. ???? ??mail.live.com ???? ??1.74%
6. ???? ??www.facebook.com ???? ??1.65%
7. ???? ??www.ebay.com ???? ??1.64%
8. ???? ??search.yahoo.com ???? ??1.52%
9. ???? ??www.msn.com ???? ??1.17%
10. ???? ??www.youtube.com ???? ??0.98%
11. ???? ??www.gmail.com ???? ??0.93%
12. ???? ??images.google.com ???? ??0.55%
13. ???? ??www.amazon.com ???? ??0.5%
14. ???? ??www.wikipedia.org ???? ??0.5%
15. ???? ??mail.aol.com ???? ??0.44%
16. ???? ??my.yahoo.com ???? ??0.4%
17. ???? ??www.pogo.com ???? ??0.4%
18. ???? ??search.msn.com ???? ??0.4%
19. ???? ??www.craigslist.org ???? ??0.37%

5) According to the New York Stock Exchange, the five largest shorts in the market are: Ford Motor (F), Citigroup (C), General Electric (GE), American International Group (AIG), and Wells Fargo (WFC).

6) Japan's Q3 GDP shrank 3.3%, worse than expected, and the current quarter may show a greater decline. Exports fell a stunning 45%. The country's finance minister, Shoichi Nakagawa, appeared drunk at a press conference, then resigned. The Tokyo stock exchange is off 14% YTD, making it the world's worst performer. Toyota has chopped the price of a new Prius to $20,000, with 0% financing, to clear an enormous backlog of unsold vehicles to make way for the launch of the new plug-in version at the end of this year.

7) One of the few mustard seeds out there continues to be the Shanghai stock market, up 32% YTD, and the best performing stock market in the world. Pundits with short memories are rehabilitating the 'decoupling' theory again, which so far has only 'decoupled' investors from their money. While the Middle Kingdom's growth rate has backed off from a torrid 13% to probably 5%, it is the only major economy that is actually growing. The bet is that their stimulus package, which has a much higher component of infrastructure as opposed to social spending and tax cuts, will work better than ours. Betting against China has been a loser for 30 years now.

QUOTE OF THE DAY

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

February 13, 2009

Diary

Global Market Comments for February 13, 2009
Featured Trades: (ABX), FCX), (GOLD)

1) We learned yesterday that not only does the Obama administration watch the stock market carefully, it also has a technical analyst on board. We were exactly at a crucial support point on the charts when the Treasury leaked the home mortgage subsidy plan, triggering a ferocious 300 point short covering rally in the Dow. A couple of points lower, and a deluge of stop loss sales would have been triggered, taking the market down 500. The message from the Feds is that if you want to play on the short side here, do so at your own peril. Suddenly, running a hedge fund has become harder, as if we didn't have enough on our plate already.

2) If you have been regularly reading my letter you should by now have sacks of gold American Eagles stacked up against the walls, your portfolio is brimming with gold mining stocks like Barrick (ABX), Freeport McMoran (FCX), and Rangold Resources (GOLD), and your safety deposit box is groaning from the weight of the gold bars it is holding. The barbaric relic is now up 20% since I recommended it in December, and you are no doubt wondering how to spend your new found fortune. Gold has since become the trade of the first quarter, with the open interest on call options on the Street Tracks Gold Shares ETF (GLD) exploding from 445,000 to 1.1 million in just the past few weeks. Options implied volatilities are suggesting that gold could hit $1,115/ounce by June. Oops, you forgot to buy the yellow metal? Use $50 pullbacks to get long. Investors will continue to pour into the sector, since it is one of the few things the government can't create more of with a printing press.

3) New Hampshire's Republican Senator Judd Greg withdrew his nomination for Commerce Secretary, the second such to go down in flames. The bribes he must have gotten not to switch sides had to be enormous. Why is the administration having difficulty filling this position at the height of the worst financial crisis in 70 years? Who wouldn't want to take the job of social director on the Titanic?

4) Noted economist David Hale sees Obama's stimulus package and bank bailout paving the way for a US led a global economic recovery from this summer. The plans will act as an insurance policy against a worsening of conditions, and may be worth 3% of GDP growth. The spending is necessarily back ended because of the time delay needed by large projects. It is spread out over the following years:

2009-$170 billion
2010-$356 billion
2011-$174 billion
2012-$48 billion
2013-$25 billion
2014-$24 billion
2015-$11 billion

Q1 GDP could fall by as much as 6% as a huge inventory liquidation ensues. The new TALF will make available $1 trillion to private investors cheaply to buy CDO's backed by credit card, student loans, and home mortgages. It is significant enough to have a major impact on prices, although the market has not digested this yet. The program will preclude any further major bank failures and lead to a rally in bank shares, although many small banks will still go under. The collapse of the global auto industry, with sales falling from 50 million annually to 39.5 million in a year, has been especially damaging for export economies. Japan will see -11% GDP this year, the worst since WWII, followed by -6% for Germany, and -4% for the UK. What to buy now? Gold, which could see new highs this year. What a surprise! Net, net, it is a pretty upbeat, but realistic analysis.

QUOTE OF THE DAY

'The rate of profit is always highest in the countries that are going fastest to ruin,' said Adam Smith in The Wealth of Nations on the dangers of 'overtrading.'

February 12, 2010

Diary

Global Market Comments for February 12, 2009
Featured Trades: (DEO)

1) Those who believe that the wine and spirits business is recession proof should take a look at UK based Diageo (DEO). Its shares just hit a new low for the year of $50, down 42%. Although the giant purveyor of alcoholic beverages posted profits up 18% in the recent half, CEO Paul Walsh says that a consumer in retreat is forcing him to scale back expectations for this year.?? The UK firm is hoping to limit the damage by restructuring to cut costs. There is no doubt they have buyer's remorse for the many wine labels it acquired at premium prices in recent years, including Rosenblum, Blossom Hill, Sterling, Acacia, and Chalone. The economic collapse has been so rapid and so severe, that old, trusted models for predicting consumer behavior are now useless. Shoppers are trading down to less expensive labels, and it is harder to realize higher prices on everything. People are going out to drink less, but taking beverages home for consumption more. Shoppers are more inclined to buy well known brands, and less prone to risk limited disposable income on experimenting with unproven new brands. Of course the world's largest owner of alcohol brands would say this, talking his own book.

2) In excessively focusing on our own problems here in the US, it is easy to miss an economic collapse of Biblical proportions that is going on in Japan. Q4 GDP is coming out next week, and the median forecast is -12%, with more dire numbers of -15% out there. This is four times the rate of decline we saw in the US. The global economic shut down is heavily concentrated in the auto industry, of which Japan is the largest exporter. My old friend IMF managing director Eisuke Sakakibara, known as 'Mr. Yen', does not see a recovery for two more years. The country has no ability to convert from an export led to a domestic demand economy in the short term. Bubbles are long in building, and long in deflating. As Vice Minister of Finance in Japan during the lost decade of the nineties, he should know.

3) Why don't we accept the wisdom of crowds and accept the market's judgment that the big banks are worthless? Let them all go bankrupt. With Bank of America (BAC) and?? Citigroup (C) down 95% from their peaks, shareholders have already been wiped out. All we are arguing about here is whether they should be allowed to come back in the next economic recovery. The Geithner bailout plan missed a golden opportunity to shock us all to our senses. Whatever happened to creative destruction? Let the weak banks go, and they will be replaced by stronger, better managed ones without any government involvement at all. Let the natural Darwinian survival of the fittest run its course. I watched with chagrin while Japanese banks pretended they were solvent for 15 years. Everyone in the country suffered as a result, and a whole generation's worth of economic growth was lost.

4) Notice how the campaign against hedge fund short sellers has quietly slithered back into the hole from which it came. It turns out that many of these banks were worthless after all. Hedge funds have in fact been one of the few sectors of the financial system that has not taken government bailout money. For this they got hit with the ill conceived short sale ban, which cost many players big money.

QUOTE OF THE DAY

'Perfect can't be the enemy of the necessary,' said President Obama about the just passed stimulus bill.

February 11, 2009

Diary

Global Market Comments for February 11, 2009
Featured Trades: (IWM), (LSE-AJG), (BAC)

1) After the passage of an $800 billion in stimulus, and another bank bailout package, I don't see any market boosting events on the horizon. Hence the Dow's 400 point swan dive yesterday. The market is not going to wait until the end of the year for all of this stuff to work. Until then, we only have Obama moaning about the Republican caused train wreck of an economy he inherited, and Congress highlighting how incompetent and crooked our financial leaders are. This isn't exactly going to inspire investors to rush out and buy stocks. Look for new lows.

2) I always hate listening to Barney Frank's House Financial Services Committee hearings. Bank of America (BAC) CEO Ken Lewis took an eight hour train ride from North Carolina to attend. Talk about the blind leading the one eyed. I can't believe how much Morgan Stanley's CEO John Mack has aged. I'd rather listen to someone scratch their fingernails across a chalk board. And our fate is in their hands! Sheesh. No wonder gold hit a new high for the year of $948. The people are voting with American Eagles.

3) More than 48 million Americans own shares in the top five banks.

4) Some 90% of all mortgage lending is now coming from the government. The balance is being made by large banks to borrowers with FICO scores of 800 or better, or by small regional banks you never heard of that never got into the securitization business.

5) According to one recent poll, 44% of the workforce is worried about losing their jobs. These people aren't going to be trading up to new houses anytime soon.

6) 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. Many 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. Expect a lot of once hard to get office space to become available for cheap on Sand Hill Road soon.

7) This is a great time to buy small cap stocks in any equity market, including Japan. 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. I have always been a big cap player because I have always dealt with investors who had to get $100 million to work in the market in a hurry, an impossibility in the small cap arena. In the U.S., buy the iShares Russell 2000 Index ETF (IWM). For the Japan play, buy the closed end Atlantis Japan Growth Fund (LSE-AJG) traded in London, managed by my old friend Ed Merner, at $8.05, a bargain basement 27% discount to its NAV of $11.04, if you are lucky enough to find shares to buy.

Atlantis Japan Growth Fund

QUOTE OF THE DAY

'Necessity never made a good bargain,' said Benjamin Franklin.

February 10, 2009

Diary

Global Market Comments for February 10, 2009
Featured Trades: (IWM), (C), (BAC), (INTC)

1) Treasury Secretary Tim Geithner announced his bailout plan and the market gave him a big raspberry. Long on platitudes and short on specifics. The Dow plummeted 381, Bank of America (BAC), dropped 18%, and Citigroup (C) pared 16%. The 'End of the World' trade is back on again. A number of technical models had gotten traders long, and you could see the stop losses being triggered all the way down. Ouch! The market is betting these banks will run out of money before the economy has a chance to recover. One analyst said that up to 1,000 banks could go under over the next 3-5 years. Listening to the House financial committee hearings, it is clear that Geithner has become the whipping boy for Hank Paulson's sins. In the meantime, Obama wheedled a Senate majority for his stimulus package by getting the Republican Senator from Maine, Susan Collins, to switch sides. I predict that a rash of new bridges, freeways, and roadside rests is about to break out in the Pine Tree State.

2) Nassim Taleb, author of The Black Swan, made a great point today. He argued that the financial crisis was caused by a complete failure of risk control. Investors focused only on large short term gains, and ignored possible, but highly improbable events that can have a huge, even cataclysmic impact on your performance. Who does the opposite of this? The Pentagon, which spends all of its time preparing for infinitesimally possible events, like nuclear war. Taleb applauds the US military's risk control as a model for all professional investors.

3) I loved the piece in the New York Times yesterday informing us that at the last market top in 2007, 95% of broker analysts had 'buy' recommendations on their stocks. Today it is still 60%. A worse lagging indicator there never was. These people are nothing more than shills for their investment banking departments. The surest way to the poor house is to listen to your broker. Remember, 'When EF Hutton speaks, others listen?' RIP.

4) If you wondered where the gold rally went, take a look at this chart of the yellow metal priced in Euros at a multi year high of ???720. Safe haven buying of bars and coins is accelerating, with demand for $50 American Eagles up four times from a year ago. Flows into gold ETF's in January soared by 105 tonnes to a record 1,370 tonnes ($1.23 billion). Much of the buying has been by high net worth individuals who are stashing large bars in bank vaults.

5) Here is a nice early spring mustard seed. Intel (INTC) announced they plan to invest $7 billion in new factories in Arizona, New Mexico, and Oregon, hiring 7,000 workers. The company in the past has said that high costs, over regulation, and unreliable power supplies will prevent it from ever again building a major manufacturing facility in California. The plants will build low energy chips using the next generation 32 nanometer technology. At least this round is not going to China. Only the big cap tech companies have the cash to pull this off.

February 9, 2009

Diary

Global Market Comments for February 9, 2009
Featured Trades: (IWM), ($COPPER), (DRYS)

1) This week it is all about Washington. CNBC has turned into CSPAN. Democrats coming off an eight year starvation diet are loading the stimulus plan with more pork than a bacon factory, and sending Obama the bill. There is also a personal element of payback going on here by the former minority party for eight years of administration abuse. The Republicans are retaliating by painting Nancy Pelosi as Karl Marx 2.0. It all makes for great theater. Apolitical traders are thankful for any rally to sell into.

2) More than $1 billion of the stimulus package will be spent in the San Francisco Bay Area, creating 27,000 jobs. The shovel ready projects include the reconstruction of Doyle Drive, the San Jose BART extension, a parking structure for the Oakland Airport, a terminal extension at the San Francisco International Airport, and a fourth tunnel through the mountains on Highway 24 from Oakland to Walnut Creek.

3) The American Securitization Forum is meeting in Las Vegas Today. How appropriate. I bet they got great deals on their rooms. I didn't know this, but there has never been a standardized definition for 'full documentation.' The hotter the market became the more dilutive the definition became, until a 'full doc' loan had minimal requirements. A classic example of 'definition creep.' There also has never been a requirement to notify a first mortgage holder about the extension of a second mortgage. What an eye opener! Until these questions are resolved there will be $2 trillion in lending capacity missing in the US.

4) One of the rock stars at Davos was Professor Nouriel Roubini, the firebrand uber bear who forecasted the current recession three years ago. He believes that if the government does everything perfectly we will have a 'U' shaped recession three times longer than usual, followed by only 1% growth in 2010. If they blow it, we will have a lost decade. The consumer is on the ropes. Credit losses will top out at $3.7 trillion. The 'bad bank' plan won't work because so many are insolvent zombie banks which will have to be nationalized Sweden style. The US economy that recovers will be substantially different, with less leverage, fewer MBA's, and more engineers. Medium term, Dr. Doom sees globalization driving a healthy economic growth rate. Only 5% of the world are Americans, and the other 95% want to live like US.

5) Early reflationary plays were flashing the green light today. Copper was limit up in Shanghai to a two month high at $1.61/pound. Also, take a look at the Greek shipping firm Dry Shipping Inc. (DRYS), which I recommended in November at $3. It soared 460% to $17, fell back to $5, and is now up to $6.30 on news that they successfully rolled over $800 million in debt. It is another great time to make a second visit to the trough for (DRYS), in case you missed it the first time. This shows you that successful refinancings are going to have a huge positive impact on stock prices as we bump along the bottom here, and will be a major market play for the rest of the year.

February 6, 2009

Diary

Global Market Comments for February 6, 2009
Featured Trades: (BAC), (TM), (TBT)

1) The dreaded January nonfarm payroll came in at minus 598,000, the third monthly figure over a half million, taking the unemployment rate up to 7.6%. It was the worst monthly reading since 1974. We'll probably see 9% by June. Notice how the numbers always come in worse than expected, with big revisions upward in the back months. Three million jobs were lost in 2008, and 3.6 million since the recession began in Q4, 2007, taking the national total up to 11.2 million. Only the health care and education sectors gained jobs. Because the lion's share of job losses are in male dominated industries, like auto manufacturing and construction, and hiring is taking place in female staffed industries, women will soon account for more than 50% of the U.S. work force.

2) Yesterday, Bank of America (BAC) stock hit a low of $3.60. The preferred is now paying 25%, a yield you normally see only in the lowest grade of junk bonds, those in default. Unbelievable! One leading bank analyst is still keeping his earnings forecast for BAC at $5/share, giving you a multiple of 0.7 X. We learned that during its last year of trading, the bank's new Merrill Lynch subsidiary increased its long position in collateralized debt obligation s from $4 billion to $60 billion. More unbelievable! Where was the risk control? What is the market telling us that we don't know? If this company isn't going bankrupt, it is certainly doing a great imitation.

3) There is a new proposal making the rounds for solving the financial crisis known as 'desecuritization.' There are $1.4 trillion in CDO's outstanding backed by Alt-A and subprime loans in the form of 3,700 individual securitizations. 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% discount. This is where the $700 billion figure for the first TARP comes from. 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 can be discounted to maybe 70% because they are still secured by the value of the underlying homes. This would boost the value of the entire asset class assets from 50 cents to 90 cents on the dollar. Restored balance sheets would enable banks to resume lending. It sounds like a workable plan, and therefore is unlikely to ever see the light of day.

4) Japanese analysts were stunned when Toyota Motors (TM) announced that it expects to lose $3.8 billion in the current fiscal year, its first loss since 1950. The company is getting decimated by the strong yen, which raises the cost of production in Japan, while shrinking foreign earnings when brought back to Japan. Moody's cut its rating of TM debt from AAA to AA+. The forecast was three times worse than one made only two months ago. The company expects sales to fall from 9.3 million cars in 2008 to only 7.2 million this year. Every assembly line in Japan has been shut down except one. Management does not expect sales to recover until year end, and that, I'm sure, is just a hopeful guess. This is a once in a lifetime opportunity to buy one of the world's greatest companies on the cheap, down 60% from its 2008 high.

5) My top pick of the year, the Lehman Power Shares Ultrashort 20 Year Plus short ETF (TBT), which gives you a 200% short play on long government bonds. It has been absolutely roaring, hitting a high of $49.5, up 37% from my recommended buy a month ago. With a $900 billion stimulus package, and a $2 trillion 'bad bank,' piled on top of a $700 billion TARP, it is clear to everyone that the government is about to flood the debt markets with paper. The US money supply M2 is now growing at a breakneck 20% rate and is accelerating. This trade has further to run.

OBITUARY OF THE DAY

Herbert Hamrol, the last survivor of the 1906 San Francisco earthquake, died yesterday, aged 106. Hamrol was three when his mother hustled him out of a collapsing building during the great earthquake, which killed 3,000. Hamrol, who worked at stocking supermarket shelves until he retired last month, said the secret to a long life was 'wild women and good liquor.'

QUOTE OF THE DAY