August 2010

August 19, 2010 - BHP Billiton Develops an Appetite for Potash

Featured Trades: (POT), (BHP), (VALE), (MOS), (AGU)

1) BHP Billiton Develops an Appetite for Potash. BHP Billiton's (BHP) low key, South African CEO, Marius Kloppers, has announced that he is making a hostile takeover bid for Potash (POT) for $39 billion, or $130 a share, a multiple of a mere 13 times earnings. POT immediately shot up to $147, a 32% premium to yesterday's close. POT's CEO described the bid as grossly inadequate, which it obviously is, and said he would take whatever measure necessary to deflect the bear bug.

BHP follows Vale (VALE) as the world's second largest iron ore producer, and is attempting to use a cash mountain earned from its massive and hugely profitably sales to China. Why not buy another product that the Chinese are voracious consumers for? POT is the world's largest fertilizer producer, and with the global population expected to grow from 7 billion to 9 billion over the next 40 years, they decided this would be a great area to diversify into.

BHP is no doubt attempting to position itself for the secular long term bull market in food which I have been detailing at great length in these pages (click here for 'The Bull Market in Food is Only Just Starting' ). The recent doubling of the price of wheat in a mere eight weeks has been a shot across the bow of investors everywhere that it is time to get on the train before it leaves the station (click here for 'Going Back Into the Ags' and click here for the follow up piece 'The Best Trade of the Year').

During economic downturns, people don't need to buy steel, but they still have to eat. BHP actually explored setting up its own potash operation in Saskatchewan next door to POT, but decided that buying the Canadian company was the cheaper and faster route. At the height of the last commodity boom, POT peaked at $240.

I have mixed feelings about the deal. I have been recommending POT since the inception of this letter, and it's always nice for the old P&L to get a shot in the arm in an otherwise dull summer. On the other hand, it means that BHP is going to make all the money going forward, robbing me of a core holding. POT is probably going to be worth $1,000/share someday.

BHP's move suddenly makes other ag companies I have been recommending takeover bait, like Mosaic (MOS) and Agrium (AGU), which have both seen serious pops today. Expect BHP to raise their bid, and everyone else to raise their exposure to this key sector. Hey, Marius, why don't we split the difference and pay to $185 for my POT shares?

Is it Worth $130 a Share, $185, or $1,000?

August 19, 2010 - Hedge Fund Managers Head for the Frontier

Diary

Featured Trades: (FRONTIER MARKETS), (GXG), (FRN), (FFD), (TFMAX)
Claymore/BNI Mellon Frontier Markets ETF
Global X Interbolsa FTSE Columbia ETF

2) Hedge Fund Managers Head For the Frontier. No, they are not donning a Stetson, cowboy boots, and a six gun to fight Indians in the Wild West, where I live. Their never ending reach for yield is taking them beyond junk bonds and high dividend stocks to small, sub-emerging markets so far off the radar that many don't even have stock indexes. Checked your weighting in the Ivory Coast lately? How about Sri Lanka, Tanzania, or Kuwait? I think not.

So far this year, frontier funds have taken in $1.1 billion in new investment, compared to the previous record of $443 million in 2007. Many of these markets are extremely cheap using conventional valuation metrics. They boast rock solid balance sheets, ironically because many never rated high enough to borrow in public markets.

In exchange for higher returns, managers are accepting higher risk, which in these places may involve the odd expropriation, government overthrow, insurrection, revolution, and terrorism.? They also don't have much liquidity to offer. They are definitely your 'Roach Motel' market; you can check in but you can't check out. Where markets exist, there are frequently heavy weightings in single sectors, like banks.

Expect a lot of volatility. The MSCI Frontier Markets Index plunged 55% in 2008, compared to 32% for the S&P 500. You can't buy these stocks online, and opening local brokerage accounts often involves wading through a morass of tedious capital and foreign exchange regulations. How many Dong (Vietnam) do you want to keep on your position sheet?

Claymore offers an ETF (FRN), while mutual fund alternatives are available through Morgan Stanley (FFD) and Templeton (TFMAX). Some countries, like Columbia (GXG) already have dedicated ETF's and have been among the best performing markets of 2010. I have written about frontier markets in the past (click here for 'Frontier Markets Beckon') and similar investment themes like the N-11 (click here for 'Goodbye BRIC's, Hello N-11'). Expect to hear a lot more from these quiet back waters of the global capital markets.

I'm Lookin' for a Few Good Longs, Pilgrim

August 19, 2010 - Quote of the Day

Diary

'Bull markets are born on pessimism, grow on skepticism, mature on optimism, and they die on euphoria,' said my late friend, Sir John Templeton, over lunch at his home at Lyford Cay in the Bahamas.

August 18, 2010 - For Profit Education Jumps From the Frying Pan to the Fire

Diary

Featured Trades: (FOR PROFIT EDUCATION),
(APOL), (DV), (CPLA), (COCO), (STRA),

1) For Profit Education Jumps From the Frying Pan to the Fire. On Friday, the Department of Education released data showing that the student loan repayment rate at some schools was as low as 25%, and that it would take action to disqualify these schools for future student loans. That amounts to the taking away the punch bowl from a highly leveraged, overpriced industry, a hedge fund manager's dream come true. This is turning into a major home run for those who took my advice to sell the sector on June 2 (See 'Hedge Funds Target for Profit Education' by clicking here, and my follow up "The Smoking Gun on For-Profit Education" by clicking here). I knew I was on to a great trade here because of the torrent of emails I received from these schools threatening litigation or worse. For profit schools have made a killing from naive aspiring students taking out $5 billion in Pell grants and $20 billion in federal subsidized loans. A few weeks after my initial report, the General Accounting Office reported the results of an undercover investigation showing widespread fraud and abuse in the sector, with some financial aid officers advising students to lie on their applications. Today was the day when the chickens came home to roost. Since my call, lead stock Apollo Group (APOL) of University of Phoenix fame has fallen 27%, DeVry (DV) 33%, and Capella Education (CPLA) 35%. Those who cast a wider net caught Corinthian Colleges (COCO) down a spectacular 62% and Strayer Education down 30%. The management of Strayer said they where shocked, shocked that repayment rates were so low, as Claude Raines might have said in the classic film, Casablanca. I've had some friends get their eyes ripped out by these guys through running up $50,000 in debt to obtain useless degrees, so this couldn't be happening to a nicer bunch of people. Although these stocks have already gone down a lot, there may be more to go. It is safe to say that the Obama administration hates these predatory schools, and that criminal prosecutions are certain to follow. Still, if you prefer to sleep at night, you might want to book some profits now.

I'm Shocked, Shocked, That

Student Loan Repayment Rates Are So Low!

August 18, 2010 - Why Can't We Be More Like Chile?

Diary

Featured Trades: (CHILE), (ECH), (CU)
iShares MSCI Chile Index Fund ETF
First Trust ISE Global Copper ETF

2) Why Can't We Be More Like Chile? I just want to pass on some data forwarded to me from my extensive band of Chilean readers in response to my recent piece, 'Chile is Looking Hot' (click here for the piece). In 2007, the government dissolved the old Copper Stabilization Fund and rolled windfall profits from sales of the red metal into a sovereign wealth fund called the Economic and Social Stabilization Fund. Today that fund has $11.7 billion, a lot for a small country like Chile, which only has a GDP of $161 billion and a population of 17 million. The fund will be used to increase government spending during economic downturns, thus eliminating the need for any borrowing during times of distress. This is one of the reasons why the Chilean ETF (ECH) never sold off in the wake of the massive 8.8 magnitude earthquake that struck in February. I had hoped to use the natural disaster to gain a good entry point to the country, to no avail. Imagine that! Counter cyclical Keynesian spending financed out of savings, instead of debt. Too bad they didn't think about that here! If I've piqued your fancy, another way to play Chile is to buy the copper industry ETF (CU), which has extensive holdings in this incredible well managed country. Since I recommended Chile only two weeks ago, the ETF has risen by 5% during otherwise dismal global trading conditions. And my American Chilean readers, who thank the heavens the day they decided to retire there, also recommend long positions in the country's outstanding wines, including a mature Viva Almaviva, a Carmin de Peumo, and a Viva Concha y Toro.

August 18, 2010 - It's Official: China is Number Two

Diary

Featured Trades: (CHINA), (TAIWAN), (JAPAN), (FXI), (EWJ), (EWT)
iShares FTSE/Xinhua China 25
Japan iShares ETF
Taiwan iShares ETF

3) It's Official: China is Number Two. With China's (FXI) economy rocketing at 8%-13% quarterly growth rates, and Japan (EWJ) plodding away with meager 1%-2% rates, it was only a matter of time before the Middle Kingdom bumped the Land of the Rising Sun from its number two position in national GDP rankings. Chinese officials will be quick to point out that, according to IMF figures, their $3,600 per capita nominal GDP still qualifies them for emerging market status, compared to $39,731 for Japan, $46,381 in the US, and an amazing $104, 512 for Luxembourg. It is highly unlikely that China's standard of living will ever approach that of the US, although it will narrow the gap, possibly rising to $20,000 over the next 20 years in today's dollars. One country that might pull this off is?? Taiwan (EWT), which offers investors a way to play China though the back door, and already has a per capital GDP of $16,392. China bumped its errant, breakaway province closer to achieving this last week when its Taiwan Affairs Office said it will honor Taiwan's bilateral trade agreements for the first time. One is already in the works with Singapore, and deals with others in the Asian region are expected to follow.

Japan is Not Carrying Its Weight Any More

August 18, 2010 - Trashing CNBC on a Slow Day

Diary

Featured Trades: (CNBC SPOOF)

4) Trashing CNBC on a Slow Day. With trading volume dropping through the floor the market has gotten so boring that I have run out of things to write about. So I can either pump out a mediocre piece of crap that you will probably lose money on, like the other newsletters do, or I can give you something frivolous and useless, but really funny. I vote for the latter. Below find a link to a YouTube video of a bizarre spoof of CNBC listing the countless shortcomings of its personalities, as seen in an imaginary interview between Larry King and Sarah Palin. My apologies in advance to Bob Pisani, Rick Santelli, Erin Burnett, Mark Haines, Trish Regan, Melissa Francis, Jim Cramer, Larry Kudlow, Sue Herera, John Maynard Keynes, and Michelle Caruso-Cabrera's breasts. Yes, I know, don't shoot the messenger. And don't miss the shameless plug for Zero Hedge at the end. Hurry up and watch it before the libel lawyers take it down. Here it is at http://www.youtube.com/watch?v=T9CEqhmU0Pg

August 18, 2010 - Quote of the Day

Diary

'A slave with three masters is a free man,' said guru, Peter F. Drucker, in his classic tome on management, The Essential Drucker.

August 17, 2010 - The Fed Makes Its Move

Diary

Featured Trades: (QUANTITATIVE EASING)

1) The Fed Makes Its Move. Man, I go on vacation of a couple of days and the world turns upside down. I'm talking about the arrival of the QE II. No, I'm not talking about the docking of a new cruise ship, or even the ruling member of the House of Windsor. It's round two of quantitative easing I'm referring to, the Federal Reserve's attempt to head off a double dip recession by flooding the system with liquidity. After watching retail sales shrivel, the housing market roll over for dead, again, and unemployment tenaciously flirting with double digits, Bernanke & Co. are admitting that there might just be a little problem with the economy. As far as the markets are concerned, he might as well have pulled the fire alarm, hit the panic button, and set off distress flares. Of course, avid readers of this letter have been aware of this scenario since January, when I predicted a 'square root' shaped recovery, generating growth that is feeble at best at 2.0%-2.5% (click here for the call). This is why I have avoided equities like a new form of venereal disease all year, except for the rifle shots in technology, energy, commodities, precious metals, and a few special situations. Too bad I didn't reach the second derivative conclusion earlier that this would cause bond prices to fly. After seeing optimism shoot to the upside in Q1, we shall see pessimism over do it on the downside in Q3. PIMCO's BSD, Mohamed El-Erian, is talking about a 25% probability of a double dip, while Yale economist Robert Shiller sees a 50:50 chance. The upcoming November election promises to muddle the picture further in coming months. The crystal clear waters of Lake Tahoe beckon. Maybe I should take a second summer vacation this year.

Can QE 2 Save Our Economy?

August 17, 2010 - ConocoPhillips Looks Like a Steal

Diary

Featured Trades: (COP), (BP), (OIL)

2) ConocoPhillips Looks Like a Steal. Since I am a permabull on energy of all types, I am constantly trolling the markets for cheap energy plays, and ConocoPhillips (COP) popped up on my radar. The large cap integrated oil major has announced a $20 billion restructuring that has whetted my appetite. Specifically, they are allocating $10 billion to retire debt and a further $10 billion to buy back their own stock. With a PE multiple of 8.5 X and a dividend yield of 4%, some 1.3% higher than ten year Treasury bonds, you can hardly blame them. COP has long been a favorite of Oracle of Omaha, Warren Buffet, (click here for the tip). Bring them back to their peer group valuation, and that takes the stock up to $75, some 36% higher from here. I'm not the only hedge fund manager looking for these kinds of plays, which is why I was able to grab a quick 38% profit in British Petroleum (BP) in a matter of weeks (click here for the call). Look at the chart and try to buy at the bottom end of its recent range. It's nice to have some insurance for that day you know is coming when you wake up and find oil suddenly up $10 because of some unexpected shenanigans in the Middle East.

Waking up to ConocoPhillips