October 2010

October 15, 2010 - Time to Double Up on China

Featured Trades: (CHINA), (SHANGHAI), (FXI), ($SSEC)
iShares FTSE/Xinhua China 25 Index ETF
South Korea iShares Index ETF
Thai Capital Fund, Inc.
Singapore iShares ETF
iShares MSCI Turkey Investable Market Index Fund ETF
iShares MSCI Chile Investable Market Index Fund ETF
Brazil iShares ETF
PowerShares India Portfolio ETF
Market Vectors Russia ETF Trust ETF

2) Time to Double Up on China. Last week, I posted an extensive piece on my evening with the Chinese Intelligence Service, concluding that it was time to get back into the Middle Kingdom (click here for the piece). It proved to be a timely call, as QEII has since gone global, taking the Shanghai index up 11% since then, the move this week being particularly explosive. Yesterday, we blasted through the 200 day moving average, suggesting that this move may have the legs of Secretariat.

I really like the idea of increasing my weighting in China here. Both the Chinese, and the many trading partners I talk to, tell me that things are going well there, that inflation is under control, and rumors or its imminent demise are premature by at least a decade. Jim Chanos, please widen your circle of contacts.

The recent international action has been predominantly in the second tier emerging markets which I have been aggressively pushing, including Indonesia (IDX), Chile (ECH), Thailand (TF), Singapore (EWS), and South Korea (EWY), while the mainline BRIC's slept. Many of these 'emerging, emerging' markets are now up 50% or more on the year. I can really see cash rotating out of these virile, young sprinters back into the established BRIC long distance runners as a great risk control measure. That way, if you get a sudden risk reversal, and markets can turn on a dime these days, your downside will be much less.

With Ben Bernanke fitting both turbochargers and superchargers to the printing presses in Washington as I write this, I loathe to tell anyone to sell anything, even their Beenie Baby collection. So use any new cash inflows from new and existing clients to add to positions on dips not only China (FXI), but Brazil (EWZ), India (PIN), and Russia (RSX) as well. If you have been following the advice of this letter all year, you should have new cash pouring in through the transome.

No! No! Don't Sell Me!

October 15, 2010 - Indonesia is On Fire

Diary

Featured Trades: (INDONESIA), (IDX), (EIDO)
Market Vectors Indonesia Index ETF
iShares MSCI Indonesia Investable Market Index ETF

3) Indonesia is On Fire. Who said quantitative easing wouldn't work? The only problem is that you have to speak Bahasa, eat nasi goreng, and live South of the equator, to take full advantage of Uncle Ben's munificence. Since the rumblings about a global, synchronized QEII began in September, $2 billion a day has been flooding into emerging markets, and Indonesia has been at the top of the list.

Some of the happiest days of my life were spent in this bucolic tropical backwater during the seventies. My investment in the ETF (IDX) on launch day has made me happier still, soaring by 360% since inception (click here for the call). A rupiah that has been steadily appreciating against the dollar has added a nice double leveraged effect to the upside.

Despite the triple digit return, it could still be early days for the world's largest Muslim country. Some $9 billion in foreign capital has poured into the local rupiah denominated bond market, and a further $2.5 billion has been plopped down in the stock market. Multinationals have made a further $8 billion in direct investments, a capital flow you know I always love to follow. The prices for its largest commodity and energy exports have been rising.

The government has been targeting almost Chinese levels of GDP growth of 7%-8%, and private analysts say than that 6.5% will be achieved this year and next. Stocks are not cheap at a 13.5 multiple, but how much should you pay for earnings that are growing 25% a year? Next month, President Obama will visit the land of his childhood to highlight stable relations between the two countries, to help sew up some trade deals, and no doubt, to visit his former pet monkey

IDX has had the field to itself until now, as local Indonesian stocks are not easy to buy for US based online traders. Then in May, BlackRock launched its own entrant in the field (EIDO), which has basically since gone straight up. While Indonesia is no longer as cheap as it once was, it still deserves a place in every emerging market portfolio. This could be the next China.

Not a Bad Place to Park Some Cash

October 14, 2010 - The Solar Boom in California

Diary

Featured Trades: (CALIFORNIA'S SOLAR ENERGY BOOM),
(FSLR), (SIRE), (HOKU), (TSL)

1) The Solar Boom in California. There is a gold rush of a different kind going on in California, the solar variety. There is a stampede by 49 alternative energy projects, including nine solar ones, to get final approval from the California Energy Commission before massive federal incentives offered by Obama's 2009 stimulus package expire at the end of the year.

One massive 392 MW plant, the Ivanpah project by BrightSource Energy (click here for their site) near blasting hot Blythe, California promises to deliver nearly as much solar power as the entire 481 MW in generation installed in the US in all of 2009.? That is enough to provide electricity for 300,000 homes. It will involve harnessing an impressive 173,500 heliostats spread over one square mile of virgin desert to superheat water to produce steam in a closed cycle. Expect this company to be a red hot IPO some day.

The combined projects involve $30 billion in investment that will generate 15,000 jobs, an understandably sensitive issue in this election year. Many are located in the state's huge baking deserts, where temperatures frequently exceed 120 degrees, and you can literally fry an egg on the sidewalk. The economy there has long been structurally depressed, and employment opportunities have been few.

The golden state has set a goal of obtaining 33% of its electric power from alternative sources, up from the current 11%, by 2020, the most ambitious anywhere in the world. The driver has been state law AB32, which is expected to generate a staggering $104 billion in energy investment over the next decade. Only China can match these numbers for sheer scale. It is hoped that these plans will hold global carbon dioxide levels stabilize at 450 ppm by 2050. Oil industry attempts to water down the law in the November election are expected to fail.

The intention is not only to wean ourselves off of expensive polluting foreign oil, but also to make the state a hot house for developing new energy technologies that can be exported to the rest of the world. Possibly half of the venture capital presentations I have attended this year promised to deliver new carbon free sources of energy.

I have been pushing solar for a long time as a national security issue. If you add in the cost of maintaining our military in the Middle East, the true cost of imported oil is not $82 a barrel, but $112. Solar is also a great investment opportunity, since I believe that rising oil prices will drag the breakeven points of these companies to unimaginable heights (click here for 'Solar Energy is About to Achieve Cost Parity').

As with all emerging technologies, there is always a dearth of investable securities at the beginning. Microcaps like Spire (SPIRE) and Hoku (HOKU) have enjoyed huge spikes in recent days. Better take another look at more stable and established first solar (FSLR), which offers cutting edge thin film technology. You also might tale a peak at Trina Solar (TSL).

October 14, 2010 - Beating the Market With Demographics

Diary

Featured Trades: (DEMOGRPHIC INVESTING)

2) Beating the Market With Demographics. Regular readers of this letter know that I rely on long term demographic trends to predict the direction of the global financial markets. Let me approach this topic from a different angle, measuring the number of retirees a population must support versus the anticipated burden in 20 years, and its implications.

I start with the basket cases. Japan's problems on this front are well know, with a retiree population of 30% today growing to 56% by 2030. That means every worker will be saddled with the costs of maintaining a senior citizen. Italy is worse, with the retiree load soaring from 30% to 60%. The rest of developed Europe is posting similar numbers. This is why you rarely hear me issuing 'BUY' recommendations on European companies, especially in the retail sector.

The US is stuck in the middle. Some 21% of our 310 million souls are retired today, and that is growing to 48% in 20 years. If you think our social security funding problems are bad now, wait. On our current trajectory, bankruptcy is assured. Our saving grace is the large number of young immigrants who are continuously entering the country, legal and otherwise, and ethnic groups and other minorities, like the Mormons, who are still having large families.

China is in a unique situation because of its 'one child' policy, which has reduced population growth by 400 million over the last 30 years. This guarantees that the country will undergoing a slow 'Japanization' that raises its ratio of retirees from 14% today to 42% by 2020. You can count of the Chinese economic miracle to hit a wall in about ten years as a vast share of resources have to be redirected to supporting long lived senior citizens, who live on a healthier diet than your or I.

Other emerging markets are in a far healthier position. Only 8% of India's 1.2 billion are retirees today, and that will only reach 20% in 20 years. Vietnam, Brazil, Mexico, Indonesia, and Malaysia are looking at the same numbers. One of the reasons that these countries don't have to suffer the crushing expense of western style social safety nets is that they don't need them. This is the basis for my constant table pounding that this is where you need to be overweighting your equity exposure.

I'll be going into this subject in more depth next week, when I explain why demographics is so important. Until then your homework assignment is to read the excellent book, Boom, Bust, and Echo by David K. Foot, which you can buy by click here.

The bottom line message here is to be nice to your cleaning lady. She may be supporting you someday.

The 'Japanization' of China

They're Not Making Italians Anymore

This is Where You Want to Put Your Money

October 13, 2010 - Why My Shorts Are Missing

Diary

Featured Trades: (SHORT POSITIONS), (FXY), (YCS), (TBT), (TMV)

1) Why My Shorts Are Missing. I have always been an aviation enthusiast, flying every rare, antique plane I could get my hands on. My adventures have taken me from flying a 1929 Norwegian spruce and Irish linen constructed Belgian Stampe to a MIG-25 Soviet fighter to the edge of space at 90,000 feet (check out the curvature of the earth in the cool picture below).

The Author Flying a MIG-25 at 90,000 Feet

So when a WWII era B-17 heavy bomber came on the market a few years ago, I had to buy it. The previous record price for a B-17 was $1.5 million, and this faded warplane needed at least $3 million worth of work, not flying since it appeared in the TV series, Twelve O'clock High, during the sixties. During the war, my dad volunteered as a tail gunner on one of these because he was 'bored', not learning until later that the position incurred the greatest number of fatalities of any in the Army Air Corps. It seems they always had openings.

Bombs Away from a B-17

I dropped out when the price hit $2 million. I learned later that I was bidding against Paul Allen, Bill Gates' former partner and a co founder of Microsoft (MSFT), who paid $3 million, and was willing to do anything to get this one aircraft. Of the 12,275 built, there were only 17 left in flying condition, and this specific plane was built at the factory in Seattle where Paul was building a museum dedicated to local aviation.

I heard he ended up spending $6 million on repairs, returning it to the condition the day it rolled off the assembly line in 1943. I consoled myself to logging a few hours in a similar plane as the pilot in command, impressing every subsequent flight examiner of mine to no end. These things were built to carry 10,000 pounds of bombs, so when you take off empty, with quarter tanks, they rise like giant box kites, the huge wings delivering lazy sweeping turns. Moral to the story' never bid against Paul Allen.

Today, I find myself up against another big spender with unlimited funds named Ben Bernanke of the Federal Reserve. The amount of money he is willing to inject into the economy is thought to range up to $2 trillion, to be disbursed in convenient, bite sized $500 billion chunks. Rumors swirl daily in the Treasury pits that the money is already hitting the market, emboldening traders to take the ten year to a mind boggling 2.36% yield yesterday.

I often get asked the question that, if I am a hedge fund trader, where are my shorts? I haven't been short the S&P 500 since May, when the flash crash took me out of my position for a tidy profit. I ran a short for a while in the for-profit education stocks which turned into a home run (click here for 'Hedge Funds Are Now Targeting For Profit Education'). My other shorts turned out to be bombs of a different sort, stopping out of my positions in the yen and the (TBT) as losers, reminding me of how mean, short, and brutish life can be.

Given the insane prices now being paid for 30 year bonds and the Japanese currency (FXY), I have to admit to being tempted daily to reestablish my shorts there (click here for 'A Visit to the Insane Asylum'). I wouldn't mind taking a bite of the big money center banks, as they are carry more toxic waste on their books than the Love Canal. Constant new natural gas discoveries make this energy source a perennial loser. But as long as the Paul Allen of the Federal Reserve is bidding against me for all asset classes, I am not inclined to short anything. There is no law that says you always have to have a position, no matter what your broker tells you. Tell me that QEII has been cancelled, or that the recovery is starting on its own without any assist, and then we'll talk.

You Won't Catch Me With Any of These!

Over the weekend, I took the kids to the Berkeley Hills to watch the Blue Angles execute their daredevil maneuvers as part of the Fleet Week festivities. What did I see through the binoculars moored at Treasure Island, but Paul Allen's yacht, the Octopus, a 413 foot monster boasting two helicopters and rated as the world's ninth largest private vessel. It made the Oakland Bay Bridge nearby seem like a toy Erector Set in comparison. It then struck me that there is no better sound that four gigantic 1,200 horsepower supercharged Wright Cyclone engines rattling your teeth on a takeoff roll in a B-17. I hope to see that plane on my next trip to Seattle.

Meet the 'Octopus'

October 13, 2010 - The Frenzy to Buy Corn

Diary

Featured Trades: (CORN), (DBA)

2) The Frenzy to Buy Corn. I have managed to catch a few limit up moves in my career, but never two consecutive back to back moves. That is what we got yesterday when panic buying swamped traders in the wake of Friday's USDA report showing that corn yields plunged from 162.5 bushels per acre to 155.9 bushels. I can only recall two earlier episodes of such price action in the commodities markets, the Russian 'Great Grain Robbery' in the seventies, and when mad cow disease hit the cattle market in the nineties. Maybe market historians with better memories than mine can cite further examples.

Indiana took the biggest hit, with yields down a stunning 14%, followed by Iowa (-10%), and Nebraska (-95). The USDA now figures that this year's total corn crop will fall to 902 million bushels, well below the crucial 1 billion figure needed for suppliers to meet their contractual obligations. It is now every man for himself.

Suffice it to say, if you didn't follow my advice and get into corn earlier, it is way too late to get involved here (click here for 'Going Back Into the Ags'). I think corn has broken out to the upside, and the door is now open for substantially higher prices. But to buy on top of two limit up moves would be shear lunacy. Better to wait for a major pull back before you develop a new appetite for corn.

October 13, 2010 - Goldman Sachs Bursts Out of the Penalty Box

Diary

Featured Trades: (GS)

3) Goldman Sachs Bursts Out of the Penalty Box. Let's say that quantitative easing ensues, the global financial system is flooded with money, and the price of everything rises in unison. What is the one company that would benefit most from this scenario, whose hand on the pulse beat of the market is so fine that it senses the movement of money anywhere, anytime, and is perfectly positioned to extract the maximum amount for its own bottom line?

You just described Goldman Sachs (GS) to a T, the Vampire Squid that is able to suck the life out of the markets, regardless of the borders they must cross, their denominations, or the orientations of the asset classes involved. GS has been in the shareholders penalty box long enough after paying a record $550 million settlement for indiscretions during the real estate bubble, which amounted to little more than a pat on the hand (click here for 'Way to Go, Goldman').

Yesterday a large block of GS stock changed hands, which often presages major price moves. Take a look at the chart below, and if you took the name off it, you would be convinced that it was about to break out to the upside. And let's face it, a Republican win would be great for Goldman, as it would leash the regulatory dogs that have been hounding it so severely for the past two years.

The Mad Hedge Fund Trader Interviews Marc Chandler of Brown Brothers Harriman

Podcasts

Featured Trades: (MARC CHANDLER ON FOREIGN EXCHANGE)
South Korea iShares ETF
Singapore iShares ETF
Market Vectors Indonesia Index ETF
Thai Capital Fund, Inc.

1) Marc Chandler of Brown Brothers Harriman on the Foreign Exchange Market. My guest on Hedge Fund Radio this week is Marc Chandler, the global head of currency strategy at the esteemed Wall Street firm, Brown Brothers Harriman.

Marc says that the next big focus in the foreign exchange markets will be a strengthening US economy and another slow down in Europe.? After one last gasp, that could take the euro as high as $1.45, and a great shorting opportunity will set up that could take it as low as $1.10-$1.15 next year. We won't see parity until the Fed announces a convincing exit strategy from its monetary easing, which is some time off. Read more

October 12, 2010 - Rio Tinto (RTP) is Firing on all 16 Cylinders

Diary

Featured Trades: (RTP), (IRON ORE), (DIAMONDS)

2) Rio Tinto (RTP) is Firing on all 16 Cylinders. I managed to catch an interesting interview on TV the other day with Tom Albanese of Rio Tinto (RTP), the planet's second largest producer of iron ore. It is one of the companies at the nexus of the global economy which I have long been following, and is at the sweets spot of several global macroeconomic trends at once.

There is a two tier global economy today, with the Asian powerhouses delivering classic 'V' shaped recoveries, while the US and Europe lag behind in the dust. China has managed its tightening well, as there is no sign of a bubble in the main economy, and has reached the 'Goldilocks' point in the supply/demand equation. It is moving 'from strength to strength.'

For RTP, the net net has been to drive iron ore prices higher to the point where steel companies are moaning about resource costs. Most RTP mines are running at full capacity, and the way to further riches for the company is through further expansion of vast open pit mines in Australia's Pilbara region.

RTP is also the world's fourth largest diamond miner, which thanks to a 92% jump in demand from China, is also enjoying boom times. It's amazing how the simple adoption of a western custom, presenting a bride with a wedding ring, can have such global implications for international trade (click here for 'Diamonds are Still an Investor's Best Friend').

RTP is also the world's top producer of bauxite, no 2 in alumina, no. 3 in uranium, no. 5 on copper, and no. 13 in gold. Its value has been further bolstered by a relentlessly appreciating Australian dollar long chronicled in this letter (click here for 'Australian Dollar Holders Make a Killing').

The only risk that Albanese sees to the whole scenario would be measures that restrained international trade, for whatever reason. So far there has been a lot of blustery talk on the matter, but no action. I have always believed that this is a company that is in a dozen right places at the right time, and that despite a 500% move off the bottom over the past 18 month, should be bought on any substantial dips.

Want to Race for Pink Slips in the Pilbara?

October 12, 2010 - The Big Hedge Fund Killing in September

Diary

Featured Trades: (THE SEPTEMBER HEDGE FUND KILLING)

3) The Big Hedge Fund Killing in September. I was not alone in posting spectacular results in September. Those who foresaw Ben Bernanke's quantitative easing and its implications for all assets posted huge returns for the month, pushing many into positive territory for the first time this year. Jim Simon's $8 billion quant, Renaissance Technologies, jumped by 8%, Paulson & Co.'s $9 billion Advantage Plus fund? raced ahead by 12.4%, and Singapore based Merchant Commodity Fund soared by 14.9%.

After giving up on any hope of a payday this year, performance bonuses are now back on the table. It seems that after a long dry patch, global macro is arising from the dead. The good news for readers of The Diary of the Mad Hedge Fund Trader? October for me is looking just as hot as last month, thanks to positions in gold, silver, copper, rare earths, oil, corn, wheat, and soybeans.

Hedge Funds Are Tuning Up for a Race to Year End