January 2010

The Mad Hedge Fund Trader Interviews Andrew Horowitz of The Disciplined Investor on Hedge Fund Radio

The liquidity driven rally is going to have to get some legs on its own, or there will be big problems very shortly, says Andrew Horowitz, president and founder of Fort Lauderdale, Florida based Horowitz & Company.

Andrew, who has built a major presence on the Internet at www.thedisciplinedinvestor.com, argues that investors are getting worn out by an onslaught of contradictory news coming out of Washington, and can pull the rug out from the market very quickly.

?When the risk switch is flipped ?on,? traders pile into positions, and when it is flipped ?off?, they pile out just as quickly,? says Andrew.

Virtually every technical indicator he follows was flashing overbought in mid January, forcing Andrew to dump half his long positions. Andrew uses a holistic approach to the market which he calls ?QantaFundaTechna,? which blends quantitative, fundamental, and technical approaches to generate buy and sell recommendations on stocks, mutual funds, ETF?s, and options. He is only using mutual funds in the offshore small cap arena where managers can use language and knowledge of local business and accounting practices to add value. His strategy enabled him to get through the disastrous 2008 and 2009 with low single digit returns, even though many technical and fundamental models were blowing up, allowing him to live to fight another day.

Andrew is a registered investment advisor, blogger, and podcaster extraordinaire. His podcasts, 145 of which have been posted so far, and are rated among the ?Top Ten iTunes?. He lists among his most interesting interviewees former labor secretary Robert Reich and hedge fund manager Dennis Gartman.

In 2007, Andrew has published a book about his approach called The Disciplined Investor-Essential Strategies for Success. He also writes for AOL Finance and MSN Money. Longer term, Andrew, who now has $80 million in high net worth customer accounts under management, prefers, South Korea (EWS), Singapore (EWS), Brazil (EWZ), and India (EPI). Technology still has a long way to run, and among the commodities, coal looks interesting. He likes the precious metal, and thinks he?ll get more bang for the buck with silver versus gold. In the end, Andrew believes that we are all going to have to work a lot harder and smarter to get decent returns.

Hedge Fund Radio is a weekly program featuring one-on-one interviews with the titans of the hedge fund industry. The show is hosted by legendary hedge fund manager John Thomas, one of the most seasoned players in the industry. It is broadcast live on station KGOL 1180 AM in Houston, Texas as part of the BizRadio?? network to 100,000 local listeners, and will be streamed online to a further 100,000 national and international listeners.

The show is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For pilots and the military, that is 17:00 Zulu time. For the online link to the show, please go to www.bizradio.com or click here, click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.? For that added insight into the future of the markets tune in, or catch the show in my Hedge Fund Radio archives.

January 29, 2010

Diary

Global Market Comments
January 29, 2010

Featured Trades: (McCARTHY HEARINGS),
(GOLD), (ABX), (PCY), (LQD)

1)?Have you no shame, sir?? That is what I expected Treasury secretary Tim Geithner to cry out during his congressional grilling today. The circus was preceded by a Republican congressmen holding up emails for the cameras proving Geithner?s perfidy in the AIG bailout, but was unable to tell us exactly what was in them. Is Whitaker Chambers going to testify next? Are we going to be led to a pumpkin patch?? No, I?m not old enough to remember the red scare and the 1954 McCarthy hearings, although I know that many of you readers are. It was all comic theater listening to the conservative minority attempt to blame Geithner for the financial crisis they created, the bail out that Bush?s Treasury secretary initiated, and the bill that was passed on to Obama. Where were these people demanding full disclosure in October, 2008?? The farther we move away from those cataclysmic days, the more people come up to me saying we should have let all the banks go under and dealt with the aftermath. They don?t understand that a decade long Great Depression II was staring us in the face. I can remember enough of the stories my parents and grandparents told me about those difficult days to know that it is something I?d rather not suffer through myself. You can?t blame these people for being upset, as it was they who were abandoned by their leaders and left drifting in the wind. Somehow the party of fiscal rectitude morphed from Dr. Jekyll to Mr. Hyde as soon as it got into office in 2001, and raced to double the national debt to $11 trillion as fast as possible. It all makes me want to throw the remote at my TV and cry. I don?t understand why Republicans think blaming Democrats for Republican sins is going to get them anywhere. Antics like this are certain to guarantee another seven years of the one party state. Adjust your portfolio accordingly. Enough ranting and raving for today.

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2) If you are wondering about the long term prospects for gold, just ask the guy who has the biggest bet in the market. That would be Peter Munk, founder and CEO of Barrick Gold (ABX). His company produced the 8 million ounces of the barbaric relic last year, has the world?s largest reserves, and mined 6 billion ounces of copper as a sideline. In September, Munk set the cat among the pigeons when his company announced that it would take off its gold hedges at a cost of $5 billion. The move provided the launching pad for a 25% spike up in gold to a new all time high. Munk?s confident explanation was that the long term future of the yellow metal was so secure that the hedges were no longer needed to smooth out his company?s earnings. No other asset class was up every year for the past decade. Investors are so scared from the events of the financial crisis, with banks dropping like flies and fund managers blowing up right and left, that it will influence their investment decisions for decades. That means building a core holding of gold to protect against the next crisis, whether it ever comes or not. Munk recommended against short term trading the shares of gold miners, but to keep a permanent asset allocation to the sector. Uncertainty is rising, is now a permanent feature of the investment landscape, and a short term rally in the stock market isn?t going to change that. The rise of middle class gold buyers in emerging markets is also something that isn?t going away in our lifetime. ?They make cheap suits in China, but not cheap gold,? he said. Munk?s comments reconfirm my own view that we may see some sideways action in precious metals for six months before the next blast up to a new high, getting us closer to my own target of $2,300. Better take another look at gold futures, coins, bullion, the ETF (GOLD), and ABX shares themselves.

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3) Last year, I suggested emerging market sovereign debt ETF?s as safe, high yielding investments in which to hide out in case the equity markets swoon again. The stock mrket looked pretty grizzly last week, so let?s see how they performed. The Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY), which has 40% of its assets in Latin American bonds and 31% in Asia, was more or less unchanged. The two year old fund now boasts $451 million in market cap and pays a handy 6.29% dividend. This beats the daylights out of the one basis point you currently earn for cash, the 3.65% yield on 10 year Treasuries, and still exceeds the 5.37% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single ?A? US corporates. The big difference here is that the countries that make up the PCY have a much rosier future of credit upgrades to look forward to. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. Not so for the US, which has bond issuance going through the roof, and downgrade noises growing ever louder. A price appreciation of 125% over the past year tells you this is not exactly an undiscovered concept. Still, it is something to keep on your ?buy on dips? list.

4) News Flash: As I write, the S&P 500 has broken the 50 day moving average, an event that usually presages larger falls to come. Of course, you already knew this was going to happen when Charles Nenner warned you in his December 12 interview with me on Hedge Fund Radio, when he gave an exact date of January 7 for the market peak. He predicted that the market would fall 10%-20% from there. I reminded you again in my December 16 summary of the radio interview (click here ). I gave you a heads up one more time with my January 4 Annual Asset Allocation Review with my piece entitled I?d Rather Get a Poke in the Eye With a Sharp Stick Than Buy Equities. As it turned out, the S&P 500 peaked on January 11, which is close enough for government work. The Euro has also broken through to the $1.39 handle, and the dollar surrogates of crude, gold, and copper are also weak, as they should be in the face of a carry trade unwind. Commentators are blaming Obama?s State of the Union speech. The reality is that stocks were just too damn expensive, can?t be justified by the economy?s weak fundamentals, and only got this high because of the free money given speculators by the Fed
. Since everything else Charles forecast is coming true, you better listen to his interview on Hedge Fund Radio one more time by clicking here

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QUOTE OF THE DAY

?To stand back and let it burn is irresponsible,? said Treasury secretary
Tim Geithner during congressional hearings.

January 28, 2010

Diary

Global Market Comments
January 28, 2010

Featured Trades: (SOUTH KOREA), (EWY), WON),
(TIGERS), (LEMURS), (HEDGE FUND RADIO)

1) I have been banging on about South Korea (EWY) for some time now as the ?K? that should be in ?BRICK?, the country that has successfully carved out a niche between the rock and the hard place, China and Japan, yada, yada, yada. Click here for my last piece on the Hermit Kingdom. So when the recent Vice Minister of Finance for the ROK passed through town, I leapt at the opportunity to have dinner. The wrenching, soul searching rebuilding and reregulation of the financial system the US is suffering now, South Korea went through during the Asian financial crisis in 1998. That meant Korean banks entered the recent meltdown with less leverage, better balance sheets, and a healthier consumer loan book than its American counterparts. These institutions have non performing loan ratios to kill for. The happy dividend was a classic ?V? shaped recovery last year, it?s GDP hand springing from a -5% rate to a +4.5% in a matter of months. That enabled the KOSPI, the main Korean stock index, to outperform China?s, bringing in a 57% return in 2009, no mean feat. An export led recovery boosted the current account surplus, suddenly transforming the Won into a hard currency. This stellar performance gained Korea membership into the exclusive G-20 club of industrial nations. Korea is now pursuing a clever export strategy by climbing up the value chain from below and getting American and European consumers to replace more expensive Japanese and German cars with KIA?s and Hyundai?s, which deliver the same quality for half the price. There are challenges longer term. Korea has to win?? the race to develop a service economy while its larger neighbors are still over reliant on manufacturing. Think medical tourism a la Bangkok and New Delhi. It also has the world?s lowest birth rate, which at 1.19, is far below the replacement rate of 2.2. Seoul is the easiest major city in the world to flag a taxi, drivers outnumbering New York by 7:1 on a per capita basis, as this is a traditional parking palace for the unemployed.? As I know you are all astute followers of demography, you?ll immediately grasp that fewer babies today mean a dearth of consumers in 20 years. The only downside of the dinner for me was that after gulping down huge quantities of garlic soaked kimchee, my social life was put on an indefinite hold.?

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2) In case you missed it, the second hand animal market has crashed. Forced to slash budgets by cash starved municipalities, the nation?s public zoos have been paring back their collections of living exhibits. The Washington Zoo is trying to offload a 7,000 pound hippopotamus; while the San Francisco Zoo is short some tigers after one ate a visitor and had to be shot. The Portland Zoo was able to liquidate a portfolio of lemurs only because of the popularity of the recent DreamWorks? ?Madagascar 2? animated film.?? When zoos are forced to economize, they downsize the big eaters first to save on feed costs; hence, the absence of elephants in San Francisco (Could this be a political gesture?). In fact, zoo staff were recently busted for illegally harvesting acacia on private property, a favorite of giraffes, which grows wild here after its introduction a century ago. The hardest to move? Baltimore has been trying to sell its snake collection for two years now. Talk about an illiquid market. Maybe they should try AIG. Snake derivatives anyone?

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3) My guest on Hedge Fund Radio this week is Andrew Horowitz, president and founder of Fort Lauderdale, Florida based Horowitz & Company. Andrew is a registered investment advisor, blogger, and podcaster extraordinaire. He has built one of the most sophisticated investment websites on the Internet, and his podcasts, 145 of which have been posted so far, and are rated among the ?Top Ten iTunes?. Andrew uses a blended investment approach called ?QuantaFundaTechna? which combines stocks, mutual funds, ETF?s, and options to deliver investment returns. In 2007, Andy has published a book about his approach called The Disciplined Investor-Essential Strategies for Success. Andrew also writes for AOL Finance and MSN Money. You can learn more about Andrew Horowitz by visiting his website at www.thedisciplinedinvestor.com.
Hedge Fund Radio is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For the online link to the live show, please go to www.bizradio.com , click on ?Listen Live!?, and click on ?Houston 1180 AM KGOL.?? For archives of past Hedge Fund Radio shows, please go to my website by clicking here.

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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.

January 27, 2010

Diary

Global Market Comments
January 27, 2010

Featured Trades: (EXIT SRATEGY), (PALLADIUM), (PALL), (CANADIAN MAPLE LEAF),? (MILLENNIUM GENERATION)

1) I can tell you with absolute certainty that the ?Exit Strategy? the Fed?s Bernanke is contemplating is nothing less than a total, unadulterated myth. This is the fairy tale you read to your young children at night where the government cuts back its spending and the Fed shrinks its lending. The private economy then picks up the slack, and the rest of us live happily ever after. Unfortunately, this time there will be no Prince Charming riding in on a white horse. In 2009, the US ran an unprecedented $1.5 trillion budget deficit, financing the shortfall by issuing Treasury bonds. The Fed happily obliged by soaking up this tsunami of paper, either directly, or indirectly through mortgage purchases. This boosted its own balance sheet from $800 million to a mind boggling $2 trillion in the process, or about 14% of GDP. Were there any other takers of new government debt? China bought $100 billion, and another $200 billion went to a hodgepodge of assorted foreign central banks and sovereign funds, barely 20% of the total. Back out the Fed as the buyer of last resort, and where are we? The private demand isn?t there, especially if the Fed plans on raising interest rates at the same time. I can already hear the excuses the foreign buyers will be fobbing off on Tim Geithner; I?m sorry, but I?ve got to rush off to a Peking duck dinner; it?s Ramadan; I have a date with my mistress; the dog ate my homework; etc; etc; etc;. There are only two possible outcomes to the greatest financing gap in history. Interest rates have to soar to unimaginable levels to attract recalcitrant investors, or the plunge in spending sends us into a postponed Great Depression II. Let me know which one it is, will you? I?ll be hiding out in my camouflaged underground bunker in the desert. And if you do come calling, be a peach and bring me some MRE?s, a five gallon bottle of water, and a case of 9 mm ammo, will you?

2) When the current outbreak of angst biting at the heels of the markets runs its course, and traders morph back into risk accumulation mode, you can count on palladium outperforming the other precious metals. During 2009, gold rose 27%, silver 49%, platinum 56%, and palladium a whopping 117%, and I expect this outperformance to continue. Last month, Toyota?s USA?s president, Jim Lentz, told me over a couple of beers that the US car market will recover from the present 11 million annual units to 15 million by 2015. (You can forget the drug induced haze of 20 million annual units free money brought us, returning in our lifetime). Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by 3 million units a year. Which catalyst will the auto makers choose? Palladium at $440 an ounce or platinum at $1,550 an ounce? Hmmmm, let me think. They do have new management now, so maybe they?ll figure it out. Some 80% of the world?s palladium production comes from Russia and South Africa, dubious sources on the best of days. On top of this, you can add demand from the new platinum ETF (PALL), which with a launch of $250 million, will soak up a hefty 8% of the world?s palladium production on day one. Those set up to trade the futures can play the December contract, where a margin of $2,363 gets you a 100 ounce exposure worth $44,000. If you don?t know how to do this, email me at madhedgefundtrader@yahoo.com and I?ll tell you how. If you are looking for something to stash in your gun safe, bury in the backyard, or give to the grandkids on their college graduation, get physical with 100 ounce bars at $50 over spot, or Royal Canadian Mint one ounce palladium Maple Leaf coins at $80 over spot.

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3) I have been banging the table for years now about the importance of demographic trends for the economy, the financial markets, and the housing market. Well, politics is no different, as the table below of Obama?s approval rating shows. Millennials, who are now aged 18-29 (I have three of them) are suspicious of government, have a strong anti business bias, are opposed to new regulation, are highly conscious of environmental issues, and give the president his highest marks. They also happen to care the least about health care, and put a high value on ethics. This is important because the Millennium Generation will surpass in size 80 million baby boomers this year. No wonder the last election focused so much energy on Internet campaigning and fund raising. Is the outcome of future elections to be determined by clicks and bandwidth? The data effectively means that the population of liberals is growing, while that for conservatives is shrinking. Politician planners and makers of campaign tchotchke take note.

Age???????????????????????????????????????????????????????????????????????????? Approve?????????????????????????????? Disapprove

Millennials?? 18-29???????????????????????????????????????????? 60%???????????????????????????????????????????? 40%
Gen X?? 30- 46???????????????????????????????????????????????????????? ???? 56%???????????????????????????????????????? ?? 44%
Baby Boomers 47-63???????????????????????????????????? 56%???????????????????????????????????????????? 45%

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QUOTE OF THE DAY

?You don?t give an arsonist a medal for putting out the fire,? said a commentator today about the battle over the renomination of Ben Bernanke.

January 26, 2010

Diary

Global Market Comments
January 26, 2010 Featured Trades: (HEDGE FUND RADIO), (TRADER MARK), (ATHR), (ASIA), (DRWI), (BRF), (RSX), (IDX), (EWA), (VNM), (JAL), (NISSAN MOTORS), (NSANY), (NISSAN LEAF)

1) My guest on Hedge Fund Radio this week was Mark Hanna, publisher of the wildly popular, www.fundmymutualfund.com investment website, who believes that the US economy is in a ?drugged pleasure dome that kicks the can down the road,? and will bring ?another ugly episode in the market.? If the S&P 500 breaks the 200 day moving average, which is looking increasingly likely by the day, he?ll turn on a dime and bail on his longs. ?Trader Mark,? as he is known on the Internet, employs a hybrid fundamental/technical, long/short approach to the market which he has developed through trial and error over the last 15 years. His record enabled him to build a readership of 150,000 a month at his website, and brought him an impressive 13,482 followers at blog aggregator www.seekingalpha.com . Mark has delivered a 77% return through model portfolio tracker, Investopedia, that has brought him $7 million in commitments for a mutual fund he plans to launch this summer. Mark likes the small cap mobile technology area, and has traded in Atheros Communications (ATHR), Asia Info Holdings (ASIA), and Dragon Wave (DRWI). China and India have great fundamentals, even though they are getting overhyped. More attractive is Brazil, which offers a small cap ETF (BRF). In the BRIC complex, he?d take Russia (RSX) out, which presents unquantifiable country risks, and substitute in Indonesia (IDX), another resource exporter with a growing middle class that is close to China. Also on his horizon are Australia (EWA) and Vietnam (VNM). To listen to my interview with Trader Mark in its entirety, please go to Hedge Fund Radio at my website by clicking here

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2) I have to admit that I was stunned and then saddened when, as a four decade long customer of Japan Airlines, I heard that the national flag carrier had filed for bankruptcy. The airline will keep flying, but only after wiping out shareholders, cutting a third of its 52,000 employees, telling its banks to write off $4 billion in debt, and taking another $6.6 billion in bailout money from the Japanese government. It seemed like only yesterday that the company?s spanking new 747?s ferried camera toting tourists around the world en masse, offering the epitome of service, my own sister-in-law escorting them along the way as a stewardess. But the sins that felled the big American carriers 20 years ago (remember Pan Am, National, and Braniff?), those of back breaking legacy costs, powerful unions, an aging fleet, and horrific price competition, finally caught up with JAL. It didn?t help that it is thought to have hedged several years of fuel costs at the 2008 market top when crude was trading around $125/barrel. A never ending deluge of retiring government officials (a practice known in Japan as amakudari, or descent from heaven), assured a perennially weak management. In the end, it was the ousting of the Liberal Democratic Party in last year?s election and the crucial support that went with it that did it in. It is symptomatic of much of what is wrong with Japan today that it took this long to happen. I hope that JAL can cut a deal to provide either American or Delta Airlines new routes in exchange for $1 billion in cash to stay in the air, or I shall miss the hot sake in first class dearly.

3) It looks like Nissan Motors (NSANY) is going to win the race to bring out the first mass market all-electric sedan in the US with the introduction of its ?Leaf? model later this year. The company is now conducting a national road show enabling potential buyers, some of whom have developed a cultish interest in this product,?? to test drive the futuristic vehicle. The five passenger, front wheel drive, five door Leaf will get 100 miles per charge, which will accommodate the needs of 95% of American drivers? daily needs. At $2.75 per charge, the Leaf will get price equivalent mileage of 110 miles per gallon. Maintenance will be incredibly cheap, as the car will have no oil, antifreeze, transmission, cylinders, or tailpipe. If this technology takes hold, tens of thousands of local mechanics will become the unemployed buggy whip makers and carriage designers of our age, as there will be nothing for them to do but repack wheel bearings in grease. This is a mode of transportation with virtually no moving parts. The car will offer impressive acceleration and handle like any six cylinder engine vehicle. A full 220 volt charge will take eight hours, or 26 minutes if you are happy with an 80% quick charge. Nissan will be offering some cool features, like drive by wire, rear view cameras, regenerative braking to extend battery life, and IPhone apps to monitor battery status. The 24 kWh induction motors will run off of lithium ion batteries with a life guaranteed at five years, and possibly extending to ten years. Every buyer will get a free home inspection to assess charging options. Nissan is rushing to build a national infrastructure of public charging points at service stations and shopping malls that the car?s GPS can find on its own. The first cars will be manufactured in Japan, but Nissan anticipates bringing a Tennessee factory online down the road. The company is being cagey on pricing, hinting that it might come in at a competitive $25,000-$35,000, with a $7,500 federal tax credit. Beam me up, Scotty.

QUOTE OF THE DAY

?If you want to succeed, double your failure rate,? said Thomas Watson, the CEO who built IBM into a global force from the twenties to the fifties. He also said, ?I think there is a world market for maybe five computers.?

January 25, 2010

Diary

Global Market Comments
January 25, 2010

Featured Trades: (SPX), (TBT), (GLD), (FXA), (UNG), (WHEAT), (CORN), (SOYBEANS), (CYB), (OAKLAND BAY BRIDGE)

1) At the Friday close, technical analyst to the hedge fund stars, Charles Nenner, put out his long awaited sell signal on the S&P 500, with the market?s definitive break of the crucial 1,125 support level. From here you sell into the rallies. The SPX is going to plunge 10-20%, Treasury bond interest rates are going to soar (TBT), and gold (GLD) has peaked out. There are tradable shorts setting up in all three of these markets that will run for the first half of 2010. These calls are the product of Nenner?s proprietary Cycle Analysis System, which he has spent three decades developing, and generates calls of tops and bottoms for every major market in the world. I have diligently analyzed Nenner?s approach for a couple of years now. It appears to consist of multiple overlays? of traditional technical analysis, some mathematically derived time and momentum indicators, and a dash of Elliot Wave for good measure. The result is reliable enough to make a living, as long as you learn how to read him and don?t bet the ranch (or the windmill?) on any single trade. Nenner sees a trading rally in the dollar setting up which could deliver a strong greenback until May, when we should then re-establish shorts, especially in his favorite, the Australian dollar (FXA). The scientist turned technical analyst argues that major bull markets in wheat, corn, and soybeans will begin this year, sectors for which I am also hugely bullish long term. He sees natural gas (UNG) retesting the old lows at $2.40. Farther out, Nenner sees a new major bear market beginning in 2013 that will take both stocks and bonds to new lows. Nenner has a long career that includes stints at medical school, Merrill Lynch, Rabobank, and ten years as a technical analyst at the noted vampire squid, Goldman Sachs. To learn more about the approach of his firm, the Charles Nenner Research Center in Amsterdam, please visit his site at www.charlesnenner.com. To hear my in depth, extended interview with Nenner where he outlines all of his views for 2010, please go to my website by clicking here .

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2)Friday lunch had me sharing a cold, congealed chicken salad with Bill Clinton?s Secretary of Labor, Robert Reich at San Francisco?s Fairmont Hotel, who says that easy money is creating new bubbles around the world, especially in China and commodities, that will only end in tears. The Middle Kingdom is the first country where inflation may break out to the upside. There is also a new form of protectionism that has emerged under the guise of competitive devaluations, where counties printing paper money are racing to the bottom, which will eventually force a revaluation of the Chinese Yuan (CYB). A US GDP that is 71% dependent on consumer spending is unsustainable, since they can no longer afford it, can?t get credit, no longer have a personal ATM in the form of home equity loans, are worried about losing their jobs, suffer under a huge debt burden, and are now unexpectedly having to save more for their retirement since their houses have dropped in value by half. Scott Brown?s surprise win for the Massachusetts senate seat will only cause uncertainty in Washington to explode, not exactly a stock market friendly development. The Obama administration committed a major error by devoting one third of its massive $870 billion stimulus program to tax cuts, which in this environment, will get saved, not spent. The TARP money, while succeeding in rescuing the financial system, only ended up in Treasury bills and never made it to Main Street. The best way to revive the economy is to give money to the states directly, which, unable to run deficits, can only cut spending and raise taxes. This will create a $350 billion drag on the economy during 2010-2011, in effect an ?anti stimulus? that cancels out a third of the federal government?s reflationary efforts. I took two of Bob?s economics classes at UC Berkeley, and know too well his wry humor, acid wit, and preference for backing up arguments with mountains of empirical data. Bob warned his guests not to take his investment advise, as he bought his home in Berkeley at the 2006 market top, and has since had to to eat a 10% cut in his Berkeley professor?s salary forced on him by state budget cutbacks. A Rhodes Scholar who dated Hillary Clinton at Yale and ran for governor of Massachusetts, Bob is never without an original thought, nor a stranger to controversy.

3) The first 300 foot, 6,800 ton segment of the new approach to the Oakland Bay Bridge was delivered this week. This massive wing shaped piece of steel is the first of 28 to be delivered that will be used to rebuild the 73 year old symbol of the Foggy City. Out of towners may recognize this as the bridge that terrified motorists by partially collapsing during the 1989 Loma Prieta earthquake, paving the way for a ground up seismic retrofit. Where was it built? You guessed it, China, where inferior steel, shoddy welds, and poorly translated plans caused a 15 month delay in the fabrication, pushing completion of the new structure off to 2014. Despite delays caused by an El Nino winter, the new component made it over from Shanghai on a specially designed ship in only 22 days. Local unions bitterly opposed the offshoring of the project to the Middle Kingdom, even though a wholly American made bridge would have more than doubled the anticipated $6.3 billion cost. Looks like I?ll still have to hold my breath while driving over to San Francisco, even after it?s finished. It says a lot that the Chinese can rebuild one of America?s greatest engineering icons, ship it across the Pacific Ocean piecemeal like a giant Lego set, and erect it here at half the cost of the local help. It?s another ominous ?tell? on the future of the global economy.

Out With the Old, In With the New

QUOTE OF THE DAY

?Isn?t it funny when you walk into an investment firm, and you see all of the financial advisors watching CNBC??that gives me the same feeling of confidence I would have if I walked into the Mayo Clinic or Sloan Kettering and all of the doctors were watching the TV soap opera General Hospital,? said a bond manager friend.

The Mad Hedge Fund Trader Interviews Mark Hana aka ?Trader Mark? on Hedge Fund Radio

Podcasts

?Trader Mark?, who?s real name is Mark Hana, is the?? publisher of the wildly popular, www.fundmymutualfund.com investment website

He believes that the US economy is in a ?drugged pleasure dome that kicks the can down the road,? and will bring ?another ugly episode in the market.? If the S&P 500 breaks the 200 day moving average, which is looking increasingly likely by the day, he?ll turn on a dime and bail on his longs.

Mark employs a hybrid fundamental/technical, long/short approach to the market which he has developed through trial and error over the last 15 years. His record enabled him to build a readership of 150,000 a month at his website, and brought him an impressive 13,482 followers at blog aggregator www.seekingalpha.com . Mark has delivered an impressive? 77% return through model portfolio tracker, Investopedia, that has brought him $7 million in commitments for a mutual fund he plans to launch this summer.

Mark likes the small cap mobile technology area, and has traded in Atheros Communications (ATHR), Asia Info Holdings (ASIA), and Dragon Wave (DRWI). China and India have great fundamentals, even though they are getting overhyped. More attractive is Brazil, which offers a small cap ETF (BRF). In the BRIC complex, he?d take Russia (RSX) out, which presents unquantifiable country risks, and substitute in Indonesia (IDX), another resource exporter with a growing middle class that is close to China. Also on his horizon are Australia (EWA) and Vietnam (VNM).

To listen to my interview with Trader Mark in its entirety, pleaseclick the ?play? button below.

Hedge Fund Radio is a weekly program featuring one-on-one interviews with the titans of the hedge fund industry. The show is hosted by legendary hedge fund manager John Thomas, one of the most seasoned players in the industry. It is broadcast live on station KGOL 1180 AM in Houston, Texas as part of the BizRadio?? network to 100,000 local listeners, and will be streamed online to a further 100,000 national and international listeners.

The show is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For pilots and the military, that is 17:00 Zulu time. For the online link to the show, please go to www.bizradio.com or click here, click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.? For that added insight into the future of the markets tune in, or catch the show in my Hedge Fund Radio archives.

January 22, 2010

Diary

Global Market Comments
January 22, 2010

Featured Trades: (FXI), (GOOG), (WFC), (EL NINO)

1) After getting the FBI?s take on the Google brouhaha, I thought I get the other side of the story over dinner with Zhou Wenzhong, China?s ambassador to the United States, and the former vice minister for international affairs. Google gives us a crucial lead in the global technology race, and we should not view tampering with it lightly.? Zhou said that his country hopes that Google stays, but will continue to block access to websites, as other countries do. That?s all I could get out of him. He is a diplomat, after all. I didn?t want to risk pushing him further without getting a piece of Peking duck thrown in my face, or worst, have a more intimate relationship with his body guard thrust upon me, who was built like a giant brick with legs. The best way to reduce China?s gigantic trade surplus with the US, which zoomed up to a staggering $230 billion last year, the largest imbalance in world history, is to invest in America directly. That is easier said than done, as Sinopec?s failed bid for California oil company Unocal showed. However, they did succeed with GM?s Hummer division. If America wants to stay on the Middle Kingdom?s good side, it should quit selling arms to Taiwan, and cease encouraging independence movements in the Republic of China and Tibet. In exchange, China will oppose nuclear programs in North Korea, Iran, and Pakistan. The US should dump the old ?cold war? mentality, as the country?s miniscule defense budget is aimed solely at defending its very long borders against potentially hostile neighbors (How well would you sleep if you lived next door to Russia and India?). With China ranked 100th in per capita GDP, there is much the two countries can learn from each other, and there are 90,000 Chinese students in the US and 19,000 American students in China doing precisely that. The US and China are now celebrating 30 years of diplomatic relations, and Zhou himself, who?s English is nearly perfect,? has played no small part in bringing the two former enemies together. After dinner I wanted to invite Zhou?s bodyguard to spar at my dojo. But I wimped out, figuring that while his hands spoke of decades of practice in karate, judo, and kung fu and I would learn a lot, it would probably be at the expense of several broken bones. On the way out I saw him sizing me up and he winked at me, so I knew I had made the right decision.

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2)I caught an interesting interview with Howard Atkins yesterday, the CFO of Wells Fargo (WFC), gaining some insight into what is probably the best run big bank in the US. Profits soared to a record $12.9 billion in 2009, thanks to top line? revenue growth across the board in an incredibly well diversified portfolio of businesses, including insurance, brokerage, investment banking asset management, credit cards, consumer lending, and of course, home mortgages. The bank originated a breathtaking $94 billion in mortgages in Q4 alone, giving it a 25% share of the total US market. It basically stole Wachovia Bank at the height of the financial crisis, and immediately wrote down its loan book to a fraction of its face value. Loan losses in Q4 jumped from $2.9 billon to $5.4 billion, and that number will taper in 2010. But the bank is fortunately making money fast enough across all its businesses to healthily write off future losses. That eliminates the need for any further capital raises in the foreseeable future, with key ratios stronger that pre crisis levels. I am avoiding the financial sector for all of the abundantly obvious reasons. But if I had to own one big American bank, WFC would be it. I also like the cute little stage coaches they have on their checks, and a TV add program that rides out of a Louis L?Amour novel.

3) You?ll have to excuse me, but I?m sending my letter out early today so I can go over to my kids? elementary school and help fill sandbags to keep at bay the flooding brought on by California?s torrential rains this week. This morning I checked in with some old friends at the National Oceanic and Atmospheric Administration (NOAA) in Tiburon, California, located at the abandoned Navy base that was home to the Golden Gate Bridge?s antisubmarine net during WWII.? They warned me that our El Ni??o winter (check their site ) could deliver a drenching 10 inches of rain this week, in a state that normally sees 20 inches a year. So named because all of the fish disappeared off the coast of Chile one Christmas years ago, El Ni??o?s are caused by a sudden warming of ocean temperatures in the Central and Eastern Pacific, which lead to unusual weather patterns here. During the last El Ni??o in 1998, the rainfall in San Francisco soared from 20 inches to 100 inches, the American River dykes broke, railroads were destroyed beyond repair, the Sierras got pelted with 40 feet of snow, and species of fish like mahi mahi normally found in Hawaii suddenly hit the hooks of delirious fishermen in San Francisco Bay. Australia endured a terrible drought. This could all be great for wheat prices and bad for insurance companies, and no doubt this is one of the painful dividends of global warming.

QUOTE OF THE DAY

?Easy money is the mother?s milk of speculation,? said ?Trader Mark,? publisher of the hugely successful investment website www.fundmymutualfund.com

January 21, 2010

Diary

Global Market Comments
January 21, 2010

Featured Trades: (FXI), (CYB), (BRK/A), (BNR), (BTU), (ANR)

Note to Readers: Anyone interested in joining me for lunch in San Francisco on Friday, April 23 or New York on Friday, May 7, please email me at mhftorders@yahoo.com to indicate potential interest. I?m currently building a book.The cost will be $95 for a three course sit down meal to be followed by a Powerpoint presentation updating my current global strategy.

1) If you had any doubt that China was the canary in the coal mine for the global financial markets, a theory that I have been espousing for some months now, today?s action delivered the irrefutable proof. Two back to back interest rate rises for the Yuan, and a snugging of bank reserve requirements by the People?s Bank of China to fight inflation was all it took to knock 9% off of the Middle Kingdom?s ETF (FXI) in seven days. That is the price of allowing the Federal Reserve to set China?s monetary policy via a fixed Yuan exchange rate (CYB). It also gives some credence to my forecast that all asset classes have perversely mutated into one giant carry trade, thanks to easy money, as outlined in my January 4 Annual Asset Allocation Review. When markets turn, there will be no place to hide, but US dollar cash. That?s why the S&P 500 dove 20 points, crude shaved $2, the dollar punched against the Euro to $1.40, and gold shrank $30. This is all happening on a day when the health care and the pharmaceutical industries won the Massachusetts lottery, sending their shares soaring. In case you missed my opus on my predictions for the year, I?m resending it gratis to all paid subscribers today. It was derived by going to my local stockyard and obtaining a goat, so I could slaughter it and examine the entrails. No tea leaves for this Rambo.

2)If you are looking for a third derivative beneficiary of the surprise Republican win in Massachusetts yesterday, look no farther than King Coal. Now that the Obama is going to have to step back from his most aggressive and expensive policies, you can kiss Cap & Trade and Carbon Capture and storage goodbye. New environmental restrictions that had the coal industry squarely in their sites may also take a back seat. As you recall, President Bush virtually shut down the Environmental Protection Agency as a pandering gesture to libertarians. The timing is fortunate, as China has recently begun gobbling up the world?s coal output. Since 2007, the Middle Kingdom?s coal trade has flipped from exports of 5 million tons to imports of 100 million tons last year. As the former coal correspondent for the Australian Financial Review during the seventies (no kidding!), I can tell you that these numbers are nothing less than breathtaking. Another ?tell? is Berkshire Hathaway?s (BRK/A) takeover of Burlington Northern (BNR). As I live only a short distance from this road?s tracks, Buffet?s latest acquisition keeps me awake at night with an endless clickety-clack, enabling me to calculate that 70% of its business is shipping coal from the Midwest to China via San Francisco. I wouldn?t rush out and buy coal on day one of a global commodity melt down. But when we enter the next inevitable up cycle, keep Peabody Energy (BTU) and Alpha Natural Resources (ANR) on your short list, which exports the metallurgical coal the Chinese favor.

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3) My guest on Hedge Fund Radio this week will be Mark Hanna, publisher of the wildly popular, www.fundmymutualfund.com investment website, which he pens under the nom du guerre ?Trader Mark.? Mark parlayed a degree in economics at the University of Michigan into a successful career as a day trader during the dotcom boom of the nineties. He launched his website in 2007, which sought to educate investors about his own methodology, provide readers with successful trading ideas, publicize his track record, and ultimately raise money to launch his own mutual fund. Today, Mark?s site attracts 150,000 readers a month, and his new mutual will begin accepting clients this summer. Mark correctly called the real estate bust, and the outpouring of debris that followed. It?s really been a pioneering, guerilla, viral, bootstrap effort, which may provide a model for other aspiring mangers in the future. Hedge Fund Radio is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For the online link to the live show, please go to www.bizradio.com , click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.?? For archives of past Hedge Fund Radio shows, please go to my podcast page.

QUOTE OF THE DAY

?Products go from innovators, to imitators, to idiots,? said Warren Buffett in his down-to-earth explanation of the economic cycle.

January 20, 2010

Diary

Global Market Comments
January 20, 2010

Featured Trades: (BIDU), (GOOG), (RESIDENTIAL REAL ESTATE), (SHORT CANDIDATES), (CBS), (SIRI), (HTZ), (RAD), (M), (LVS), (AMR), (CAL), (S), (AMD)

1) Long time readers of this letter know that I have been a huge fan of China?s premier Internet search engine, Baidu (BIDU), recommending it back when it was $120/share (click here for the call). To me, buying into the dominant provider in the world?s fastest growing market seemed like a no- brainer. But even I was taken aback when the stock popped $85 to $470 when Google (GOOG) announced it would no longer censor searches in the Middle Kingdom. Has it gone too far too fast? The shares now boast an incredible 76 times 2009 estimated earnings of $6.15/share and 53 times 2010 estimates of $8.38/share. How much do you pay for revenues that could potentially double overnight? BIDU is certainly rich compared to GOOG?s 38 multiple, but GOOG has an unbelievable $22 billion in cash stashed in the mattress, compared to only $400 million for BIDU. Fascinating to me is how the whole GOOG-China war has morphed into a general debate on doing business with China, which is never easy on a good day, and your worst nightmare on a bad one (just ask the companies that saw contracted deliveries turned away at dockside after prices dropped by half en route in 2008). Do a Google search today, and you are greeted with an image of determined marchers with arms linked in solidarity. Whatever your conclusion, BIDU is definitely an E-ticket ride. GOOG and China could kiss and make up tomorrow, or come up with some kind of fig leaf compromise, sending BIDU tumbling, but I wouldn?t hold my breath. I know how stubborn and nationalistic the Chinese can be from hard earned experience. Ask me what to do tomorrow. I?m having dinner with China?s ambassador to the US tonight.

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2) As much as I would love to tell my friends to rush out and how a house now, I just can?t bring myself to do it. Take a look at the chart below of US house prices relative to incomes showing that homes are still expensive, and that prices continue to fall. On this basis, Los Angeles, San Francisco, and New York are the most costly markets in the country that are falling the fastest. Bank analysts and lenders take note. Home sales figures are turning soggy again, 25% of homeowners are underwater on their mortgages, a new wave of foreclosures is imminently going to slam the market, and one out of? six Americans are jobless and absent from the economy. That eliminates 40% of the buyers from the get go. There is also the mother of all demographic problems overhanging real estate, which no one seems to see but me. If you absolutely have to buy a home, make sure that you pick up one of those once-in-a-lifetime deals where you are taking it off a bank, or out of foreclosure, at 20% below the appraised value. I know these deals are happening. Buy it because you need a place to live, not an investment, and don?t count on selling it for a decent profit this decade. And also don?t expect to get the first born child you are putting up for collateral back until they are a teenager.

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3) Fear of law suits prevents most analysts from publishing lists of short selling targets. But the Audit Integrity Co., a forensic accounting firm,?? regularly posts lists of public companies they believe may go bankrupt (see http://www.auditintegrity.com). Many of their picks reflect the accelerating shift from the old economy to the new economy. With offices in New York and Los Angeles, they look at leverage, market position, debt, and their own proprietary indicators. Another red flag are the legal shenanigans that companies resort to when coming out of a recession, like writing off large amounts of good will. In the media space CBS (CBS), Sirius XM Radio (SIRI), and Hertz Global (HTZ) are at risk. In the consumer field, Rite Aid (RAD), Macy?s (M), and Las Vegas Sands (LVS) made the list. Advanced Micro Devices (AMD) is the largest tech company to warrant scrutiny. Airlines, always a favorite of bankruptcy mavens, include American Airlines (AMR), and Continental (CAL). Sprint Nextel (S) tops the list of telecom companies. With the stock market looking very toppy here, better take that portfolio out and give it a good scrubbing.

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QUOTE OF THE DAY

?Buy when everyone else is selling, and hold until everyone else is buying. This is not merely a catchy slogan. It is the very essence of successful investing,? said oil billionaire,?? Jean Paul Getty, the founder of Getty Oil, a pioneer in the Neutral Zone, and once the richest man in America.