March 2010

The Mad Hedge Fund Trader Interviews Barton Biggs of Traxis Partners on Hedge Fund Radio

Featured Trades: (MSFT), (INTC), (CSCO), (ORCL), (FXI), (PIN), (EWY), (THD), (EWT), (EWH), (TUR), (PLND), (RSX), (EWZ), (USO).

Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, what to do about Japan was the topic of the day, and I was bullish.

Today, Barton can say with ?real certainty? that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years. Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT).

The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all. Barton sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a ?new normal? of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the last decade to only 2.5 % in this one. But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation.

Looking at the world as a whole, Barton thinks Asia is the place to be. A bubble may be developing in China, but it is at least 3-5 years off, and there will be plenty of money to be made until then. India is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea, Thailand, H-shares in Hong Kong, and Turkey are also lining up in Barton?s sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland and Russia. Traxis is short Brazil, because it has already had a great run, and because the country still faces some severe social problems. Commodities had their run last year, and won?t do much from here, but they aren?t going to crash either. He sees oil grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds will be deflation driven for the next year, but are definitely not for your ?Rip Van Winkle? investor, as they represent poor value for money. Real estate is dead money.

To hear my interview with Barton at length, please click the ?play? arrow 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 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.

March 5, 2010

Diary

Global Market Comments
March 5, 2010

Featured Trades: (JAPAN), (YEN), (YCS),
(GOLD), (GLD),(NEM),
(NATURAL GAS), (UNG),
(HEDGE FUND RADIO), (BARTON BIGGS)

1) I?m hearing from my buddies in Japan that while things are already quite bad in that enchanting country, they are about to get a whole lot worse, and that it is time to start scaling into a major short in the yen.Australia and China have already raised interest rates, to be followed by the US, and eventually Europe. With its economy enfeebled, the prospects of Japan raising rates substantially are close to nil, meaning the yield spread between the yen and other currencies is about to widen big time. In the case of the Australian dollar, that works out to 4% per annum. Leverage up ten to one, and pile on anticipated capital gains brought in by a weakening yen, and you have a real carry trade on your hands. That will generate hundreds of billions of dollars worth of cascading yen selling as hedge funds dog pile in. It?s macro investing at its finest.Until now, the government has been able to finance ballooning budget deficits caused by two lost decades, but those days are coming to an end. Japan is quite literally running out of savers. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank.

The national debt has rocketed to 190% of GDP, and 100% when you net out government agencies buying each other?s securities. Japan has the world?s worst demographic outlook. Unfunded pension liabilities are exploding. Other than once great cars and video games, what does Japan really have to offer the world these days, but a carry currency?

Until now, the government has been able to cover up these problems with tatami mats, because almost all of the debt it issued has been sold to domestic institutions. Now that this pool is drying up, there is nowhere else to go but foreign investors. With Greece and the rest of the PIIGS at the forefront, and awareness of sovereign risks heightening, this is going to be a much more discerning lot to deal with.

That great bell weather of global risk taking, the Euro/Yen cross is telling us that the mother of all carry trades has already started. On the release of Friday?s surprisingly positive nonfarm payroll numbers, the cross popped from ?120 to ?123.5, sending shorts scampering. You also see this in the Ausie/Yen cross, and outright yen markets. I have been piling clients into short positions since Thursday at the ?88 handle, and they have already bagged an instant profit of ?2.

You could dip your toe in the water here around ?90. In a perfect world you could sell it as it double tops at the 85 level. My initial downside target is ?105, and after that ?120. If you?re not set up to trade in the futures or the interbank market like the big hedge funds, then take a look at the leveraged short yen ETF, the (YCS). This is a home run if you can get in at the right price.

2) If you are wondering where the bull market in gold went, take a look at the chart below of gold priced in Euros. The chart for gold priced in yen look just as healthy. The latest filings with the Securities and Exchange Commission show that the largest hedge funds are still adding to their already substantial positions. Soros Fund Management, with $25 billion under management, tripled its holdings in the gold ETF (GLD) in the fourth quarter of 2009. Tudor Investment Management quadrupled its holding in Newmont Mining (NEM), the largest miner of the barbaric relic in the US. Hedge fund giants, David Einhorn of Greenlight Capital and John Paulson of the Credit Opportunity Fund, have also been boosting substantial positions. These guys are not day traders, and are clearly in for the long haul. With some technical analysts arguing that gold still has several more months to go to digest the massive 80% gain it made off of the October, 2008 $680 low, that may be the wise approach to take.

3)The poster boy for everything that can go wrong with an ETF? is undoubtedly? the one for natural gas, the (UNG). If you had studiously done all of your homework in September and concluded that natural gas was severely oversold and about to go up 40%, you would have been dead right. If you then went out and bought the UNG you would have then lost 40%, as you can see from the chart below. You would think at first glance that this is a chart for an inverse gas ETF, which it isn?t, because such an instrument doesn?t exist. This dreadful state of affairs was brought about by the intricacies of contango, where far month contracts in the futures markets are trading at premiums to the front month. As each month expired, the managers of UNG bought fantastically rich forward contracts, and then rode them all the way down to spot, as they were mandated to do by their prospectus. They then repeated this exercise every month. If the contango continues indefinitely, the UNG will eventually approach zero. Since we are discussing CH4, I have to tell you that the outlook does not look great. We are just coming out of one of the worst winters in history, and NG only managed a rally from the $2.40 low to six bucks and change. Gas in storage is about to rise again, and gas producers are racing to out produce each other in the hope of offsetting falling prices with increased volumes. This is all happening with new discoveries occurring almost daily, thanks to the new miracle fracting technology. It seems that now one only need poke a straw in their backyard to obtain a lifetime supply of clean burning energy. And I read today that Poland is about to lead the charge deploying fracting technology in Europe. They must be sweating bullets in Qatar, which just invested $50 billion in gas exporting facilities. Moral to the story: don?t just punch in a symbol and hit enter. Read the damn prospectus first.

4) My guest on Hedge Fund Radio this week is Barton Biggs, founding partner of mega hedge fund Traxis Partners. Barton is a former colleague and mentor of mine at the Wall Str
eet giant, Morgan Stanley, where we spent nearly a decade sparring with each other over the international investment landscape. Barton is an ex Marine officer (semper fi) who went to business school, earning an MBA from New York University. He started in the business in 1961, when he joined brokerage house EF Hutton, and went on to start one of the first ever hedge funds.? Barton then joined Morgan Stanley in 1973, were he was a managing director for 30 years, founding Morgan Stanley Investment Management. He eventually served on the firm?s board of directors. Barton was rated, more than once, the number one global strategist by Institutional Investor Magazine. He left Morgan Stanley to start Traxis Partners in 2003. Hedge Fund Radio is broadcast 24/7 around the world for free. To access this online program and archives of past shows, please go to my website by clicking here

QUOTE OF THE DAY

?When you have a wave of bank crises, it is often followed by a wave of sovereign debt crises. There are a lot of countries with elevated debt levels, a lot of countries at risk??.It?s amazing how many countries have amnesia about their default rates,? said Dr. Kenneth Rogoff, a Harvard professor and former Chief Economist at the IMF.

March 3, 2010

Diary

Global Market Comments
March 3, 2010

Featured Trades: (JON NAJARIAN), (OPTIONMONSTER), (AUSSIE/EURO CROSS), (ETHANOL), (CORN)

1)How does an NFL linebacker develop a series of computer algorithms that give him a crucial edge when trading the market? That is the question I hoped to answer when I interviewed Jon Najarian, co-founder of OptionMonster (click here for the site at http://www.optionmonster.com/ ).Jon?s proprietary program, called Heat Seeker ?, monitors no less than 180,000 trades a second to give him an early warning of large trades that are about to hit the stock, options, and futures markets. To give you an idea of how much data this is, think of downloading the entire contents of the Library of Congress, about 20 terabytes, every 33 minutes.

His firm maintains a 10 gigabyte per second conduit that transfers data at 6,000 times the speed of a T-1 line, the fastest such pipe in the civilian world. Jon then distills this ocean of data into the top movers of the day, which he puts up for free on his website, and offers much more detailed analysis through a variety of premium subscription products. Jon is also co-founder of an online brokerage called ?TradeMonster? off the back of this impressive research effort. ?As with the NFL,? says Jon, ?you can?t defend against speed.?

The system catches big hedge funds, pension funds, and mutual funds in the midst of shifting large positions, giving subscribers a peak at the bullish or bearish tilt of the major players in the market. It also offers accurate predictions of imminent moves in single stock and index volatility. Long and short vol traders take note. If anything, the profusion of? dark pools and high frequency trading, now thought to account for 50% of the daily? volume, makes Jon?s tools more valuable because that are exacerbating the quantitative nature of the markets. Some 200,000 traders are believed to be following Heat Seeker?s advice.

Jon started his career as a linebacker for the Chicago Bears, and I can personally attest that he still has a handshake that?s like a steel vice grip. Maybe it was his brute strength and ability to take abuse that enabled him to work as pit trader on the Chicago Board of Options Exchange for 22 years, where he was known by his floor call letters of ?DRJ?. He formed Mercury Trading in 1989, built it into a substantial business, and then sold it to the mega hedge fund, Citadel, in 2004.

Jon developed his patented algorithms for Heat Seeker? with his brother Pete, another former NFL player (Tampa Bay Buccaneers and the Minnesota Vikings), who like Jon, is a regular face in the financial media.

Jon thinks that if China is serious about throttling back its economy, it will have a dampening effect on global financial markets for some time. The S&P 500 is going to stick around the 1100 level, and commodities are going to stay in a big sideways range. Volatility is going to die.

To hear my interview with Jon at length on Hedge Fund Radio, please click here.

2) Last night the Reserve Bank of Australia raised overnight cash rates from 3.75% to 4%, spurred on by a healthy, resource fueled economy and a booming jobs market. The move put a spotlight on the Aussie/Euro cross, which I recommended traders buy a month ago at $AUS 62.5 (click here for the call). With the cross now tickling 67, traders are sitting pretty, with the chart going, as Dennis Gartman likes to say ?from the lower left hand corner to the upper right.? The trade quite simply gets you long a country where everything is going right, and short a region where things are deteriorating by the day. The yield spread between the two currencies is now wide enough to drive a truck through, call that a lorry, and that gap looks to broaden further. Call this ?Cross Trading 101 for Dummies,? but sometimes the easiest trades work the best, because so many investors can understand them.

3) One of my biggest disappointments with Obama so far is his continued support of the ethanol boondoggle. The program was initiated by the Bush administration to achieve energy independence by subsidizing the production of alcohol from domestically grown corn. Add clean burning moonshine (yes, it?s the same alcohol? C2H5OH), whose combustion products are carbon dioxide (CO2) and water (H2O), to gasoline and emissions also go down. The irony is that if you include all the upstream and downstream inputs, the process consumes more energy than it produces. It also demands massive quantities of fresh water, which someday will become more valuable than the oil the ethanol is supposed to replace, turning it into toxic waste. Never mind the image of spendthrift, obese Americans burning food so they can drive chrome wheeled black Hummers to Wal-Mart, while much of Africa and Asia starves. Ethanol consumption of corn has soared from 1.6 billion bushels in 2006 to an anticipated 4.3 billion bushels this year. Ethanol?s share of our total corn crop has skyrocketed from 14% to 33% during the same period. This ignores the reality that Brazil, the world?s largest ethanol producer, can ferment all the ethanol it wants at one third our cost because they make it from much more efficient sugarcane, which has five times the caloric content of corn. However, protective import quotas and tariffs prevent meaningful quantities of foreign ethanol imports. Bush financed all of this wasteful pork, because Iowa has an early primary, giving it an outsized influence in selecting presidential candidates, and has two crucial Senate seats as well. Well, it turns out that Obama needs Iowa even more than Bush, where the Democrats are ahead 3-2 in the House, and have a tie in the Senate (1-1), so the ethanol program not only lives on, it is prospering. Shame, and double shame. Better to drink it than burn it, I say.

QUOTE OF THE DAY

?The dollar hating crowd is hating themselves now. Things in Europe aren?t improving any time soon,? said Jon Najarian of OptionMonster.

March 2, 2010

Diary

Global Market Comments
March 2, 2010

Featured Trades: (30 YEAR TREASURY BOND), (TBF), (TBT),
(RSX), (IDX), (THD), (PIN),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR)

1) Louise Yamada, one of the most widely followed technical analysts in the market, says the 29 year bull market in Treasury bonds is coming to a close. Looking at the 200 year history of interest rates in the US, such bull markets are historically 22-37 years in length, and this one is definitely looking long in the tooth. Although doubters insist that you?ll never get a collapse in bonds in a deflationary environment, Louise says that all bond peaks occur in such conditions. Yields show prolonged, saucer like bottoms, much like we are seeing now. She also says that retail interest in such paper also surges when interest rates are at multi decade highs, as we saw clearly with last year?s flow of funds. When foreign buyers lose interest in our debt, the 30 year Treasury bond is the first place their lack of interest will show up. The charts for the 30 year are setting up a perfect head and shoulders top, and when the yield break through 4.8%, watch out. The next stop may be 7%. Her advice is that if you are going to stay in the government bond market, shorted your duration as much as possible. My advice? Sell the 30 year bond futures, which today are selling at 119, up 2? points from last week?s low. If Louise?s scenario plays out, it will take the futures well below 100. If you can only sleep at night with less leverage, buy the (TBF) and the (TBT). We are about to enter the golden age for these short bond ETF?s.

2) If you wonder why I recommend a shower after investing in Russia, Bill Browder will give you the reasons at length on his YouTube video (click here for the link ). Bill is the founder and CEO of Hermitage Capital Management, one of the firms that pioneered equity investment in the former Soviet Union in the nineties. After a decade of pursing a campaign of activist investing that brought major changes in corporate governance in big companies like Gazprom and Sberbank, a mafia connected government struck back with a vengeance. It deported Browder in 2005, arrested his lawyer, and pressured him to provide false testimony again his boss, which he refused. A year later, the man died in prison from ?natural causes.? The Russian government then seized Browder?s operating companies, but fortunately for investors, not before he was able to sell off $4.5 billion in holdings and spirit the funds out of the country. Browder, who is of Russian descent, and whose grandfather was chairman of the America Communist Party, says his case is but the tip of the iceberg. Major multinationals like Shell, BP, and Ikea have also been the victims of corruption and faced arbitrary seizure of assets by the well connected. This lawlessness is the reason why Russian companies perennially trade at single digit multiples. They are cheap on paper, but carry hidden, unquantifiable risks. Browder has since refocused his interests, and is now managing $1.2 billion in other safer emerging markets, like Indonesia (IDX), Thailand (THD), and India (PIN). No doubt that investing in Russia is a double edged sword. It offers enormous oil reserves and natural resources, with GDP flipping from a -7.9% rate in 2009 to an expected 3.2% this year. Russia?s stock market (RSX) brought in a blazing 125% return in 2009. But you run the risk of a knock on the door in the middle of the night.

3) If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis. Investment in fresh water infrastructure is undeniably going to be a recurring long term investment theme. One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world?s population, up to 90% of the fresh water is already polluted, some irretrievably so with toxic heavy metals. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% over the next 20 years. Underground water sources in the US, like the Oglala Aquifer, which took nature millennia to create, are approaching exhaustion. Take a look at the photo below, which I pulled off the NASA website, showing dramatic falls in the water tables in the largest food producing areas of India and Pakistan, as measured by the Gravity Recovery and Climate Experiment (GRACE) satellite. While membrane osmosis technologies exist to convert sea water into fresh, they require ten times more energy than current treatment processes, a real problem if you don?t have any, and will easily double the end cost to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of last year?s stimulus package was similarly spent. It says a lot that when I went to the UC Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds! At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which brought in a positively effervescent 46% return in 2009. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world?s greatest per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

March 1, 2010

Diary

Global Market Comments
March 1, 2010

Featured Trades: (CYB), (YUAN), (AGU), (POT) (MON), (DBA),
(COPPER), (FCX), (CHILE), (ECH)

1) Since I have been setting off distress flairs warning of an inevitable revaluation of the Chinese Yuan, I thought you would be interested to hear about what popped up on my radar on Friday. No lesser authority than the Beijing based 21st Century Business Herald reported that The Ministry of Commerce and the Ministry of Industry and Information Technology have been running computer models to see how much of a Yuan appreciation the textile, shoe, garment, and toy industries could handle without breaking. The result was that these traditionally low margin industries would start to lose money with a Yuan 3%-5% higher than it is today. This is a classic government ploy that I have seen many times before where the government leaks a story to minor media for the sole purpose of gauging international reaction. Call it the opening gambit in the Yuan revaluation negotiations. Of course, 3%-5% is a laughably insignificant bump up. But it does give some basis to the perennial Chinese complaint that the bulk of the profits on their labor are made via mark ups in the US, and not at the factory. If a Chinese manufacturer assembles an IPOD for $20, sells it to Apple for $25, which then retails it for $200, you can understand their distress. Expect more trial balloons like this in the near future, and keep your focus on the ETF, the (CYB).

2) During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields. Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won?t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. In 2009 one of the greatest crop yields in history, brought on by perfect summer weather, delivered one of the largest grain crops in history. Fall rains and an early frost meant that much of this bounty ended up rotting in the field, providing the backdrop for price rises of 30% across the board. The US Dept. Of Agricultural January crop report then predicted that we are going to see a replay of record production this year, slamming prices once again, and delivering limit down moves in the futures markets. But the weather may not cooperate, as it did last year. The net net of all of this is that food prices are going up, a lot. Entertain core long positions in corn, wheat, and soybeans on this dip, as well as the second derivative plays like Agrium (AGU), Potash (POT) and Monsanto (MON). You might also look at the PowerShares Multi Sector Agricultural ETF (DBA). These will all surpass last year?s stratospheric highs at some point.

3) Readers of this letter are aware that I have been recommending liquidation of longs in copper futures and physical ingots from the $3.55/pound January high on down, along with major producer Freeport McMoRan (FCX). When trading resumes at the Shanghai open on Sunday afternoon US time, you can expect prices to open up huge. The 8.8 magnitude which decimated Chile on Saturday morning knocked out 27% of the world?s copper supply. Of the 19.7 million tons of the red metal produced globally in 2009, Chile accounted for 5.3 million tons. The earthquake was the fifth most powerful in history, and was the same magnitude that flattened San Francisco in 1906. While the epicenter is several hundred miles away from the main copper mining regions, Chile?s infrastructure has sustained major damage. There is no way to get the ore to smelters, or ingots to the market. Mines can?t operate without fuel or electric power. Roads, rail lines, bridges, and ports have been damaged. Banks can?t carry out trade finance without communications. If you haven?t unloaded your copper yet, this is an ideal chance to do so. If the markets really get the bit between their teeth and make it as high as $4.00/pound there could even be a shorting opportunity in copper setting up. With the global economy coming off of last year?s sugar high, base metals are looking to go sideways at best in the near future, and possibly down. You can also expect Chile?s stock market to get slammed when it reopens, whenever that is. If we get a major sell off, it could create a great buying opportunity for one of the few countries in Latin America that is doing everything right. I?ll be doing more research on this in the near future.

QUOTE OF THE DAY

?Inventories generate recessions, they don?t generate recoveries,? said my old buddy, David Gerstenhaber, President of Argonaut Capital Management.