August 2010

August 25, 2010 - It's Off to the Races at Molycorp

Featured Trades: (RARE EARTHS), (MCB), (LYSCF)

2) It's Off to the Races at Molycorp. I just wanted to follow up on the rare earths piece which I recently published (click here for "Rare Earths Are Becoming A Lot More Rare"). Despite lackluster market conditions at best, Molycorp (MCP) managed to raise $394 million through its July IPO at $14/share. The company will use the funds to reopen a rare earths mine at Mountain Pass, California, making it the largest such producer in the world outside of China. The company will start production by the end of the year, and go full scale by 2012.

This is important because China, supplier of 97% of the world's supply of rare earths, has cut back export quotas by 40% this year. These incredibly expensive metals are crucial for the manufacture of a variety of alternative energy hardware, as well as a number of military applications. Since the launch, the stock has risen 11%, making it one of the best performing stocks in the market this summer.

So far, the Australian miner Lynas Corp (LYSCF) has been the big beneficiary of the stampede into rare earths shares, doubling since I first recommended it in May (click here for the call). Lynas offers established production and experienced management, higher grade ore with a 9.7% yield, higher levels of the more valuable rare earths, realizations per ton that are 57% higher, and a book value of 1.87.

MCP is expected to have a 8.24% yield, is easier to trade with a US listing, has better liquidity, and prospects of greater profitability down the road through vertical integration and economies of scale, at the price of a 2.61 book value. MCP may also receive a political boost in the fall if a group of 20 senators and congressmen are successful in getting the Department of Energy to provide $280 million in loan guarantees. Look at these companies as an alternative energy, national defense, commodity play, a win-win-win.

There's Cerium in Them Thar Hills

August 25, 2010 - Thailand Punches Through to New Highs

Diary

Featured Trades: (THD), (TF), (F), (NSANY), (TM)
iShares MSCI Thailand Investable Market Index ETF
Thai Capital Fund

3) Thailand Punches Through to New Highs. With hotel occupancy in the dumps at 20%-30%, and parts of downtown Bangkok still in ruins from the May riots, you would think the call to buy Thailand (THD), (TF) two months ago was a complete bust (click here for the piece).

You would be wrong. Since then, the Thai ETF has tacked on an amazing 20%, the Thai Capital Fund is up 24%, and the Thai Baht has strengthened, making it one of the top performing stock markets of 2010. Even with the collapse of tourism, GDP is expected to come in at a healthy 6% this year, a figure American economists would kill for.

The country's robust manufacturing sector, which accounts for 66% of Thai GDP, versus only 6% for tourism, continues to drive the country onward and upward. Think of Thailand as China, with the infrastructure already built out. Ford Motors (F) has announced the construction of a $450 million plant to build the Focus, while Nissan (NSANY) says it will assemble its compact. Toyota (TM) and GM are expected to follow suit with the expansion of existing facilities.

Carl Van Horne, then the chief investment officer of JP Morgan, once taught me a rule that I have found incredibly useful: follow the direct investment; the stocks markets always play catch up. Thailand continues to be a place where international investors want to be. Buy on dips, if we get any.

August 25, 2010 - Make Another Visit to the Trough for Baidu

Diary

Featured Trades: (BAIDU), (GOOG)

4) Make Another Visit to the Trough for Baidu. Just like buying a drink for an old flame when passing through town, there is no better feeling than revisiting winning trades. I first recommended Baidu (BIDU) at split adjusted $12.5 in December, 2008 (click here for the call). It hit $88 earlier this month, a 700% gain. The current bout of global equity market angst has since knocked 11% off of the shares, and there may still be more downside to go. It may be worth making another visit to the trough. Baidu has incredible momentum selling into the world's fastest growing market for online services, where it has a 65% market share for Chinese language paid search. It has recently expanded into Japan with a powerful Japanese language search engine there. Baidu also brings in peripheral revenues through community based e-commerce, communication, and entertainment. YOY revenues are growing at a 70% rate. No surprise then that Baidu is a favorite trading vehicle for the BSD hedge funds. It is benefiting hugely from the Chinese government's onslaught on rival Google. Sure, a PE multiple of 83 sounds rich, compared to Google's 20, but how much should you pay for a hyper growth company in a country where Q2 GDP came in at 10.3%? Add Baidu to your buy on meltdowns list to get a high beta play in the Middle Kingdom.

August 25, 2010 - Quote of the Day

Diary

'When I look at the Treasury market, I get a really 1998 sort of dotcom feeling. You knew they were going higher, you knew that it would end badly; you just didn't know the timing. At a certain point this becomes a disaster,' said Barry Ritholtz, CEO of hedge fund Fusion IQ.

August 24, 2010 - Why We're on the Slow Boat to Nowhere

Diary

Featured Trades: (THE RANGEBOUND MARKET),
(SPX), (FCX), (VIX), (USO), (GLD)

1) Why We're on the Slow Boat to Nowhere. After speaking to a gaggle of economists, portfolio managers, and traders the last few days, I've had one of those 'Eureka' moments, as the markets have shown their hands. Those that delivered the dramatic, heart stopping moves last year, like stocks, commodities, oil, and precious metals, are on the slow boat to nowhere. Last year's wall flowers, like currencies and their crosses, will trend nicely, delivering plungers some serious coin.

What's more, I think these trends, or non trends, will continue for the next several months, probably until the November election. That means that the S&P 500 (SPX) will remain around a tedious 1010-1140 range, and that implied volatilities for relevant options will continue to bleed to lower levels. The VIX is probably an outright short here.

This market is a portfolio manager's worst nightmare, and a trader's dream come true. Zero interest rates assure that we aren't going to crash any time soon, and flagging economic data and chronically high unemployment guarantee that we are not blasting out to the upside. They, the nimble and click happy, can confidently sell into every rally and buy each dip. Selling out-of-the-money straddles, last year's suicide trade, could be this year's steady earner. They say markets have to climb a wall of worry. This one has to climb Mount Everest.

Commodities (FCX), oil (USO), and precious metals (GLD) are showing the same indecisive behavior. The cross trades I have been recommending, long Aussie/euro, Canadian/euro, and short the euro/yen, have been delivering reliably all year.

This is all happening because the markets are now transitioning from last year's parabolic 5.7% Q4 GDP rate to the more somnolencent 2%-2.5% growth scenario that I am predicting for this decade. Political gridlock and the attendant noise level don't help either.

You've got to work with the market you have, not the one you want, and these short volatility trades could be your bread and butter for the next several months.

Climbing a Wall of Worry

August 24, 2010 - Peabody Energy (BTU), Takes a Hatchet to the Natural Gas Industry

Diary

Featured Trades: (COAL VS. NATURAL GAS),
(BTU), (RTP), (ACI), (CHK), (BNR)

2) Peabody Energy (BTU) Takes a Hatchet to the Natural Gas Industry. After my year in the White House Press Corps, I vowed never to return, and took a really long shower, hoping to scrub every last spec of prejudice, self interest, and institutionalized corruption off of my battered carcass. But sometimes I see some maneuvering that is so unprincipled, crooked, and against the national interest that I am unable to restrain my fingers from the keyboard. For shorthand, let's call them lies.

I'm talking about the absolutely merciless hatchet job the coal producers are inflicting on the natural gas industry. Coal today accounts for 50% of America's 3.7 trillion kilowatts in annual power production. That's a lot of vested interest. Chesapeake Energy's (CHK) Aubrey McClendon says correctly that if we just shut down aging conventional power plants that are over 35 years old, and replace them with modern gas fired plants, the US would achieve one third of its ambitious 2020 carbon reduction goals. The share of relatively clean burning natural gas of the national power load would pop up from the current 23% to 50%. Even the Sierra Club's Carl Pope says this is the fastest and cheapest way to make a serious dent in greenhouse gas emissions.

So what do we get? The press has recently been flooded with exaggerated or untrue reports of widespread well poisonings and forest destruction caused by the fracting processes that was used to recently discover a new 100 year supply of ultra cheap CH4. While the coal industry has had 200 years to build a formidable lobby in Washington, the gas industry is a neophyte, their only public champions being McClendon and T. Boone Pickens.

But memories in Washington are long, and Obama & Co. recall all too clearly that this was the pair that financed the Swift Boat Veterans for Truth that torpedoed Democrat John Kerry's 2004 presidential campaign. What goes around, comes around.

Whose hands are dripping with blood here? Peabody Energy (BTU),? which ripped 200 million short tons of the black stuff out of the ground in 2008, followed by Rio Tinto (RTP) at 140 million tons, and Arch Coal (ARCH) with 134 million tons, poured millions of dollars into Washington to lavishly finance lobbyists. Their mission is to render toothless Cap & Trade legislation, block subsidies for natural gas which both parties seem to agree on, dilute environmental legislation, and promote the myth that the whole global warming thing is nothing more than a leftist hoax, thus keeping hands off King Coal.

Senators and congressmen from the top three coal producing states have been the eager facilitators: Wyoming at 467 million short tons in 2008 (Thanks Dick Cheney!), West Virginia at 157 million tons, and Pennsylvania at 65 million tons. That dinosaur of a union, the United Mine Workers, is another guilty party. You might even blame Warren Buffet's Burlington Northern (BNR), which earns 70% of its revenues from shipping coal across the country for export to China. This is the wellspring for the money that is financing all those conservative initiatives, energy related, or not.

This will be unhappy news for the 23,000 the American Lung Association expects coal emissions to kill this year. How many will clean burning natural gas bump off? None. Can't the coal industry be happy selling everything they rip out of the ground to China? If you are lacking an ounce of conscience and are willing to turn a blind eye to where your trading profits come from, then use the current sell off in all hard assets to pick up (BTU), (RTP), and (ACI). China's demand for our coal remains insatiable, and domestic demand isn't about to go up in smoke overnight either. You can always donate your profits to the Sierra Club. After all, I recommended Russia, why not King Coal.

There! I've had my say. Now I'm going to go have another long shower.

It's a Long Way to Washington

August 24, 2010 - Quote of the Day

Diary

'The good news is that the rash on my penis finally went away,' wrote a child to his parents, about to return from summer camp.

August 23, 2010 - Why Your Next Car May be a Hyundai

Diary

Featured Trades: (SOUTH KOREA), (EWY)
(FXI)
South Korea iShares ETF
iShares FTSE Xinhua China 25

1) Why Your Next Car May be a Hyundai. I have been banging on about South Korea (EWY) for some time now as the 'K' that should be in the acronym 'BRICK', the country that has successfully carved out a niche between the rock and the hard place, China and Japan. So when the recent Vice Minister of Finance for the ROK, Byongwon Bahk, passed through town, I leapt at the opportunity to have dinner.

The wrenching, soul searching rebuilding and re-regulation 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 in a matter of months from a -5% rate to a +5.75% in a quarters, according to the IMF. 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.

South Korea has become a de facto indirect China play, as the country now ships 25% of its exports there, bumping the US from the number one spot, which now only takes 11% of exports. Upwardly mobile Chinese consumers clamor for Samsung and Hyundai products.

I was blown away when I heard that Korea Electric Power won the contract to build four giant 1.4 megawatt electric power plants in the United Arab Emirates for $20.4 billion. The announcement was a thumb in the eye for the deserving French, whose EPR 1600MW reactor was thought to be the hands down winner. No doubt some old fashioned incentives were in play, but the harsh reality is that the KEPCO bid was thought to undercut competitors by as much as 50%. My only regret about this deal is that I will no longer be able to fly my Cessna down a long uninterrupted stretch of the Emirates coast, a restricted area almost certainly about to pop up on? my navigation chart. Last time I checked, those planes didn't carry anti missile countermeasures.

The deal speaks volumes about the direction the global economy is taking. In one fell swoop, South Korea leveraged its low labor cost to take a great leap up the international value chain, using what is basically a simple technology. What is a nuclear power plant, but a fancy way to boil water? Bottom line: South Korea takes a quantum leap ahead in the race for global competitiveness, while the US falls further back into the dust.

There are challenges longer term. Korea has to win the race to develop a service economy, while its elephantine 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. There is also the small issue of the psychotic megalomaniac who lives next door with the starving million man army.

Use this global correction to accumulate the South Korea ETF (EWY). And those who don't see this as a life or death contest for economic survival that we can no longer take for granted, better get their heads out of the sand.

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.

The Only Unknown for South Korea

August 23, 2010 - Quote of the Day

Diary

?'Patience is underrated,' said Steve Wozniak, creator of the first PC and cofounder of Apple.

August 20, 2010 - Don't Buy Anything That Can Be Created With a Printing Press

Diary

Featured Trades: (COMMODITY OVERVIEW),
(FCX), (VALE), (RIG), (JOY), (CCJ), (FSLR), (UNG), (USO), (MOO), (DBA), (MOS), (MON), (AGU), (POT), (PHO), (FIW)

2) Don't Buy Anything That Can Be Created With a Printing Press. I just want to take a moment to provide the long term view of commodities. This is my favorite asset class for the next decade, as investors increasingly catch on to the secular move out of paper assets into hard ones. Don't buy anything that can be manufactured with a printing press.

Focus instead on assets that are in short supply, are enjoying an exponential growth in demand, and take five years to bring new supply online. The Malthusian argument on population growth also applies to commodities; hyperbolic demand inevitably overwhelms linear supply growth. Consumers want to buy stuff tomorrow, but many commodities take up to a decade to bring new production online.

Of course, we're already eight years into what is probably a 20 year secular bull market for commodities and these things are no longer as cheap as they once were. Copper at 85 cents a pound? Oil at $8 a barrel. You could have bought all you wanted 10-12 years ago at these prices, which are distant memories today. There is no doubt the hot money is here in size, so bring on the volatility. You are going to have to allow these things to breathe.

Ultimately this is a demographic play that cashes in on rising standards of living in the biggest and highest growth emerging markets. Some one billion people are expected to join the middle class over the next decade, and 2 billion by 2050. All of them are going to want to buy 'things' made out of natural resources.

You can start with the traditional base commodities of copper and iron ore. The derivative equity plays here are Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE).

Add the energies of oil, coal, uranium, and the equities Transocean (RIG), ExxonMobile (XOM), Occidebtal Petroleum (OXY), Joy Global (JOY), and Cameco (CCJ). Crude (USO) has in fact become the new global de facto currency (along with gold), and probably $30 of the current $75.50 price reflects monetary demand, on top of $45.50 worth of actual demand from consumers. That will help it spike over $100 sometime in the next year.

Don't forget alternative energy, which will see stocks dragged up by the impending spike in energy prices. My favorite here is First Solar (FSLR). Skip natural gas (UNG), because the discovery of a new 100 year supply from fracting and horizontal drilling in shale formations is going to overhang this subsector for a long time.

The food commodities are probably among the cheapest resources around, with corn, wheat, and soybeans coming off the back of bumper crops in 2009 that absolutely killed prices. But growing emerging market appetites for more and better food will send demand soaring, just as the benefits of the 'green revolution' peter out. These can be played through the futures or the ETF's (MOO) and (DBA), and the stocks Mosaic (MOS), Monsanto (MON), Potash (POT), and Agrium (AGU).

Through an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cake walk. Who will need new fresh water supplies the most? China. You can participate in this most liquid of assets with the ETF's (PHO) and (FIW).

The Hard Stuff is in Your Future