July 2010

July 29, 2010 - It's Time to Revisit the TBT

Featured Trades: (TBT), (TMV)
ProShares Ultra Short Lehman 20+ Year Treasury ETF
Direxion Daily 30 Year Treasury Bear 3X Shares ETF

1) It's Time to Revisit the TBT. Shorting the world's most overvalued asset, the 30 year US Treasury bond, has got to be the big trade from here. The relentless whirring of the printing presses is so loud that they keep me awake at night, even though, according to Mapquest, I live 2,804.08 miles away. What will be unique with this meltdown is that it will be the first collapse in history of a bond market in a non-inflationary environment.

It is not soaring consumer prices that will execute the coup de grace to the long bond. It will be the sheer volume of issuance. The Feds have to sell nearly $2.5 trillion of debt to cover a massive budget deficit and refund maturing paper, easily the largest cash call in history. Bring in a double dip recession and a second, larger stimulus package, and those numbers ratchet up considerably.

Pile on top of that trillions more in offerings from states and municipalities that are bleeding white. By the end of 2010, total government debt from all sources will rocket to a staggering 350% of GDP. Throw in private debt requirements, like the rolling over of a trillion dollars worth of commercial real estate financing and your garden variety corporate offerings. The rush to borrow has started overseas too, with hundreds of billions of dollars more in Eurobonds floated by cash strapped sovereigns like the PIIGS. It's clear that the bond markets of all descriptions are going to become very crowded places, driving rates irresistibly higher.

At some point, the world runs out of buyers, and the long bond yields will begin their inexorable climb from the current, ridiculously low 4.10% to 5.5%, 6%, and higher.? Even Moody's is talking about a ratings downgrade for the US debt, not that we should give that disgraced institution any credibility whatsoever. The unfortunate camel whose back is on the verge of breaking is about to have sticks come raining down upon him.

I am a worshipper of the TBT, a 200% bet that long bonds are taking the Lexington Avenue Express downtown. I managed three round trips in Q1 covering the $46-$51 range before a flight to safety bid stopped me out in April. It has clawed its way back up from $34.80 to $37.15, compared to the $70 it traded at in 2008.? Falling interest rates have a silver lining in that the annual cost of carry for this leveraged ETF has dropped appreciably, from 10.5% to only 8.2%.

If short interest rates double from the current levels, a virtual certainty, so does America's debt service, from the current 11% to 22% of the budget. This could happen as early as 2014. That's when the sushi really hits the fan.

If I'm wrong on this and the 30 year bond prices surge to a yield of 3% in some sort of second Great Depression scenario, as they did last year, the TBT will drop down to the high $20's. If I'm right, the final target could be as high as $200, when long rates top 13%. That's where they were when I bought my first coop on Manhattan's Upper East Side in 1981.? If you have a serious pair of cajones on you, take a look at the 3X short ETF (TMV) with its higher cost of carry.

A 20% downside risk and a 540% upside potential sounds like a good risk/reward ratio to me. If the TBT dips again in August, it might be time to take another bite from the apple.

July 29, 2010 - Making a New Home for My Nissan Leaf

Diary

Featured Trades: (NISSAN LEAF), (NSANY), (PGE)

3) Making a New Home for My Nissan Leaf. The electrician from Nissan Motors (NSANY) showed up at my home today to ascertain if it can generate sufficient juice to recharge my new all electric Leaf, which will be delivered in December.

The good news is that it does, but the town permits and the installation of a new 50 amp circuit breaker for the EVSE charging dock (see below) was going to run several hundred dollars, half of which is tax deductable. Since the charging dock will have a 25 foot cable with a SAE standard J1772 universal plug, it can be used to top up a Leaf, a Volt, or any other electrical vehicle that comes down the pike. It is also over engineered to handle triple the Leaf's load demand to accommodate future upgrades with heftier battery packs.

It was quite entertaining chatting with the tech, drawing as much as I could from an ancient electrical engineering course I took in college. Some of his customers were 'extreme' environmental early adopters, with bidirectional 'time of use' electric meters that allow their solar panels and wind mills to make them net suppliers of power to the grid. My new PG&E (PGE) smart meter actually scored poorly on its SAT test, as it was still awaiting some future upgrade to become fully functional. He then pinned a life sized poster of my new charging station to the wall in the appropriate location, presumably so we and our gardening tools can learn to live with it.

As he left, he thanked me for taking the technology a long awaited leap forward. Wow! When was the last time someone thanked me for my business? I think all of this makes Nissan stock a huge buy here at $15.25, as the compnay is perfectly positioned to own the highest growth sector of its market.

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July 28, 2010 - Is "Snookie" our New Investment Guru?

Diary

Featured Trades: (RAIL TRAFFIC)

1) Is 'Snookie' our New Investment Guru? The ultra bears were sent packing in recent days, thanks to a spate of economic indicators showing some unexpected strength. Take a look at the chart below for rail car loadings showing an unequivocal spike upward. I warned last week that there was some positive action in this area (click here for the piece), and the latest data confirms my belief that we are not going into another crash, or even a double dip, but merely a slowdown to a 2% annualized GDP growth rate. It also gives credence to my expectation that the stock market is not going to collapse, but merely move to the lower end of a long term 900-1,200 range in the S&P 500. You knew that when the media was blaring in unison about 'death crosses,' stocks could only rally. But how much money do you want to put into a market where the characters of MTV's 'Jersey Shore' get to ring the opening bell?

Our New Investment Guru?

July 28, 2010 - Raising the Red Flags on Commodity ETF's

Diary

Featured Trades: (UNG), (USO), (CORN), (WEAT), (SOYB)
United States Natural Gas Fund ETF
United States Oil Fund ETF

2) Raising the Red Flags on Commodity ETF's. The July 26-August 1, 2010 print edition of? Business Week magazine put out a brilliant piece entitled 'Amber Waves of Pain'? detailing how retail investors are getting fleeced when playing the agricultural and commodities ETF's. The unwary are getting shredded by the contango, whereby far month futures contracts are trading at enormous premiums to the front month. An entire sub industry of hedge funds has arisen to take advantage of this spread, at the expense of the ETF investor. Commodity ETF's tend to own front month futures with huge premiums which quickly disappear, leading to a large underperformance relative to the underlying. I have been highlighting these risk for the past year, and have done my utmost to steer readers away from the worst offenders (click here for 'UNG is the Poster Boy for Everything that Can Go Wrong With an ETF'). The oil ETF (USO), has been similarly victimized, with Morgan Stanley now chartering tankers to take delivery of crude than Chevron. The problem persists in the agricultural commodities of corn (CORN), wheat (WEAT), and soybeans (SOYB), although to a much lesser extent. Hedge funds in particular game the published 'roll dates' when ETF's shift positions from one month to the next. The only way to avoid this haircut is to trade short term and avoid the roll, deal directly in the futures, or only trade the physical commodity with an expectation to take delivery. I have several friends who warehouse copper, and a London hedge fund recently accepted a huge quantity of cocoa (click here for 'Hedge Fund Corners the Cocoa Market'). Business Week, which was taken over by Bloomberg only a few months ago, is infamous in the investment world as the publication that ran its notorious 'Death of Equities' cover in 1982. That was right at the absolute bottom of a two decade bear market, when the Dow was trading at the 600 handle. But they do raise some appropriate red flags here.

July 28, 2010 - Is it Time to Buy Google on the Cheap?

Diary

Featured Trades: (GOOGLE), (IBM), (MSFT), (YHOO), (BIDU)

3) Is it Time to Buy Google on the Cheap? As much as I adore Google products and use their search engine all day long, the stock definitely left something to be desired when it was trading in the $600'S. That's why I steered readers away with my piece 'Why I'm Not Buying Google on This Dip' (click here for the link). At the time, Google was at war with China over censorship, the antitrust lynch mob in Europe was baying for blood, Apple was eating its lunch on the mobile front, and copyright and anti piracy lawyers were sharpening their knives. Naysayers predicted that GOOG was the next slow growth IBM (IBM), or worse, Microsoft (MSFT). While these challenges remain, the $400 handle puts it in a completely different kettle of fish. After much sturm and drang, the company renewed its license in the Middle Kingdom. It sits on a staggering $30 billion of cash worth $95 a share, and annually generates another $27 in free cash flow. While it may be a one trick pony, with 97% of its revenues coming from search, that's not a problem if the equine's name is Seabiscuit, with a 70% global market share. Even acquisitions that people originally laughed at, like YouTube, have been turned around, with the online video forum thought to bring in $500 million in profits this year through ad sales, something Google is incredibly good at. Revenues are expected to rise by a not bad 24% this year, delivering profit margins of 32%, on an anticipated $30 billion in revenues, giving it an ex-cash flow multiple of 13. That compares to 19 for Yahoo (YHOO), and a stratospheric 39 for Chinese competitor Baidu (BIDU). I confess, this all appeals to my inner tightwad. It's enough earnings momentum to take the stock back to $700 in a couple years, up 42% from today's level of $492. You might consider adding GOOG to your buy on dips list, especially if a technology frenzy returns, which it inevitably will. Just ignore their space program.

July 27, 2010 - The Residential Housing Market is Still Burning Down

Diary

Featured Trades: (RESIDENTIAL REAL ESTATE)

1) The Residential Housing Market is Still Burning Down. Today, the Commerce Department reported that June new home sales, at 330,000, were up a blistering 24%. So is the crash in residential real estate over? It's off to the races, right? Wrong! Much of the gains were cancelled out by whopping great downward revisions which caused April to shrink from 504,000 to 422,000, and May to shrivel from 300,000 to an unbelievable 267,000, a 60 year low. Every time I update my prediction that home prices are either going south or nowhere for a decade, my inbox gets flooded with angry emails from real estate agents around the country and other industry apologists screaming that I am missing record home affordability and historic low 30 year mortgage interest rates. Over the weekend I received an assist from Barrons (click here for the link), which highlighted an unexplored angle in the real estate crisis. The coming demographic curve predicts that there will be a shortage of those aged 35-49, prime first time home buyers. At the same time, there will be an oversupply of those over 50, like me, who are looking to downsize their housing requirements. The net effect is for national home ownership that peaked in 2004 at 69% to fall as low to as 64% by 2015, its 1993-94 bottom. The flip side is that renters will soar from 32.8% to 36% during the same time period. Needless to say, this is terrible news for house prices. It also explains why low end multifamily housing, where newly formed young families and immigrants reside, is one of the few sectors of the housing markets showing a pulse. If you want more depth on this politically sensitive issue, please read my notorious piece on 'The Hard Truth About Residential Real Estate' by clicking here.

July 27, 2010 - It's Harder Than it Looks

Diary

Featured Trades: (THE HARSH REALITIES OF TRADING)

3) It's Harder Than it Looks. A recent piece at the underground website, Zero Hedge, by one 'pivotfarm' resonated with me in explaining how hard it actually is making money in the market (click here for the link). It looks deceptively easy from the outside. You buy a share, watch it go up under its own power, and sell for a profit. How hard is that? This is why the securities industry has such a long history of attracting those interested in shirking hard work, aspiring to get rich quick. If you do encounter those with new found fortunes, they usually stole it. You want to run a mile from managers touting perfect track records, as they are usually fake. The reality is a little bit harsher. The author lists the great lengths that the pros go to insure success, including endless education, iron clad self discipline, and independence of thought. He refers to New Yorker writer Malcolm Gladwell's insight that if you look behind the scenes, success can usually be explained by unbelievable hard work (click here for my 'Evening With Malcolm Gladwell' ). I draw these simple analogies for potential traders. Just because you like listening to music on your car radio doesn't mean that you can compose Beethoven's Fifth Symphony, reading the Sunday papers doesn't bestow on you the gift to write Tolstoy's War and Peace, and watching weekend movies doesn't turn you into Steven Spielberg.

Potential Trading Wizards?

July 27, 2010 - Is Emerging Market Debt the New Prime Credit?

Diary

Featured Trades: (EMERGING MARKET DEBT), (PCY)
Invesco PowerShares Emerging Market Sovereign Debt ETF

4) Is Emerging Market Debt the New Prime Credit? 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 market has looked pretty grizzly for the last three months, 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, is up 156% from its low, and up 10% since the beginning of the year. The two year old fund now boasts $481 million in market cap and pays a handy 6.44% dividend. This beats the daylights out of the one basis point you currently earn for cash, the 3.02% yield on 10 year Treasuries, and still exceeds the 5.44% 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 can look forward to a much rosier future of credit upgrades.? PCY received a boost from a flight of capital, out of the euro zone, into other sovereign credits. 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. Still, all good things must come to an end. If you are holding a position in this ETF, I would think seriously about cashing out. With 10 year Treasury bonds tickling a 2.83% yield last week, I am getting leery about the entire fixed income universe. And no one even got fired for taking a profit.

Is it Time to Cash in Your Emerging Market Debt?

July 26, 2010 - Give All the European Banks "A's"

Diary

Featured Trades: (EUROPEAN BANK STRESS TESTS),
(EURO), (FXE)
Currency Shares Euro Trust ETF

1) Give All the European Banks 'A's'. A favorite ploy of poorly managed school districts in California is for the teachers to simply give all their students 'A's'. That way the state and federal money keeps rolling in, and demanding parents can be assured that their over protected children are performing. That seems to be what is happening with the stress test given to European banks, the results announced on Friday, which most passed with flying colors. French banks were found to be the healthiest. Only 7 out of 91 banks in 20 countries were sent to the markets to raise more capital. One German bank flunked the test, one from Greece, and five from Spain. Having been a banker in Europe myself for a decade, I can tell you first hand that they have never been big on transparency. The test assumes that banks will be able to maintain a minimal 6% tier one capital ratio, even after another economic or sovereign debt crisis wipes out $700 billion in new losses. Healthy banks generally have 10% capital ratios. Many analysts suspect that the European Union reverse engineered the test, setting the standard by calculating the lowest capital ratio that would pass the most banks. Eyebrows were further raised when the German banks refused to disclose their sovereign debt holdings, which are believed to already carry huge losses. Still, there has been a sigh of relief in the global capital markets, as credit spreads tightened all week. Add one known, scratch one unknown. The news is considered good enough to allow the rallies in US stocks and the Euro a few more days of life. We'll find out for sure when the next round of disclosure comes our way in two weeks.

Europeans Have Never Been Big on Transparency

July 23, 2010 - Turkey Is On The Menu

Diary

Featured Trades: (TURKEY), (TUR), (TKC), (TURKISH LIRA)
iShares MSCI Turkey Investable Market Index Fund ETF

1) Turkey Is On The Menu. The boarding of a Turkish ship by Israeli commandos and the international brouhaha that it sparked has thrown a searing spotlight on that emerging nation. Several hedge fund friends and now a few readers of this newsletter in Istanbul have urged me to explore this intriguing nation further. So I thought I would use this otherwise slow news day to do exactly that.

I first trod the magnificent hand woven carpets of the Aga Sophia in the late sixties while on my way to visit the rubble of Troy and what remained of the trenches at Gallipoli, a bloody WWI battlefield. Remember the cult film, Midnight Express? If it weren't for the nonstop traffic jam of vintage fifties Chevy's on the one main road along the Bosporus, I might as well have stepped into the Arabian Nights. They were still using the sewer system built by the Romans.

Four decades later, and I find Turkey among a handful of emerging nations on the cusp of joining the economic big league. Q1 GDP grew at a blazing 11.4% annualized rate, second only to China, exports are on a tear, and the cost of credit default swaps for its debt is plunging. Prime Minister Erdogan, whose AKP party took control in 2002, implemented a series of painful economic reform measures and banking controls which have proven hugely successful. Since the beginning of this year, Turkey's ETF (TUR) has outperformed BRIC poster boy China's ETF (FXI) by a whopping 11.8%.

Foreign multinationals like general Electric, Ford, and Vodafone, have poured into the country, attracted by a decent low waged work force and a rapidly rising middle class. The Turkish Lira has long been a hedge fund favorite, attracted by high interest rates. With 72 million, the country ranks 18^th in terms of population and 17^th in terms of GDP, some $615 billion. It has a near perfect population pyramid; with young consumers greatly outnumbering expensive retirees (click here for more depth in my 'Special Demographic Issue').

Still, Turkey is not without its problems. It does battle with Kurdish separatists in the east, and has suffered its share of horrific terrorist attacks. Inflation at 8% is a worry. The play here long has been to buy ahead of membership in the European Community, which it has been denied for four decades. Suddenly, that outsider status has morphed from a problem to an advantage.

Growing economic power brings political influence with it. The last year has seen Turkey broker settlements in the Balkans and facilitate the Iranian uranium swap with Russia. Some analysts claim this new flexing of diplomatic muscle has a pronounced Islamic, anti American bent. Remember, Turkey refused transit rights to US forces during the invasion of Iraq.

The way to play here is with an ETF heavily weighted in banks and telecommunications companies, classic emerging market growth industries (TUR). You also always want to own the local cell phone company in countries like this, which in Turkey is Turkcell (TKC). Turkey is not a riskless trade, but is well worth keeping on your radar.

US Dollar/Turkish Lira Inverse Chart

A Turkish Population Pyramid to Die For