October 2010

October 5, 2010 - Contemplations on Oil

Featured Trades: (OIL), (XOM), (CVX), (OXY), (COP), (RSX)

1) Contemplations on Oil.? After a tumultuous 2009, oil has been one of the least volatile assets of 2010, confined to a tortuous $68-$88 range, frustrating momentum players to no end. How many city morgues are packed with the bodies of those who sold every dip and bought every rally, vainly hoping for a break out? By Friday, crude was down 3% on the year, virtually, the only hard asset showing a negative number this year.

Oil traded like it was on Ambien because it spent most of the year discounting a double dip recession. Bloated inventories encouraged hedge funds to build up substantial short positions. Some traders were targeting prices as low as $40.

After last week's sudden burst, it now appears that this crucial commodity is stretching its muscles, limbering up, and getting ready for a serious move. The short position started to go badly wrong in early September. Forecast hurricanes failed to show. Wells in Nigeria, America's third largest foreign supplier, started to explode again. Word has slowly been seeping out that the net effect of the BP oil spill, and the industry curbs that followed, will be a cut of one million barrels a day of Gulf production fairly soon. That is about 5% of the country's total consumption.

Then, Ben Bernanke threatened to launch a hoard of helicopters dumping money on the economy reminiscent of a scene from the classic Vietnam War flick Apocalypse Now, smothering any prospective double dips in the crib. All it took was a surprise plunge in inventories last week, and the short covering was off to the races.

A serious run on the dollar has added fuel to the fire. After running up virtually every hard asset to unimaginable heights in such a short time, investors desperate for returns in a zero return world are now rotating into Texas tea as a laggard. Until Ben Bernanke figures out how to make a barrel of oil with a printing press, money should pour into oil, as it has already into precious metals, industrial commodities, rare earths, and food.

I have always viewed any weakness in oil as temporary, and urged readers to accumulate positions on the cheap on many occasions. This extends to longs in the Russian ETF (RSX), the world largest oil producer and a major exporter (click here for 'Buy Russia When Oil is Cheap').

I must confess that I am an out-of-the-closet, card carrying 'peak oiler', and believe that it is just a matter of time before we punch through the 2008 $150/barrel all time high (click here for 'The Price of Oil is Going Up').

Avoid the ETF here (USO) because the tracking error is so huge. You would be better off buying my picks in the industry on any dips, including Chevron (CVX), ExxonMobile (XOM) (click here for 'Pick up Big Oil While it is Still Cheap'), Occidential Petroleum (OXY) (click here for 'Looking for Value at Occidental Petroleum'), and ConocoPhillips (COP) (click here for ConocoPhillips Looks Like a Steal'.

Pass the Wrench Please, Will You?

October 5, 2010 - Say Goodbye to Your Favorite Teacher

Diary

Featured Trades: (ONLINE EDUCATION), (BBBB)

2) Say Goodbye to Your Favorite Teacher. Don't bother taking an apple to school to give your favorite teacher, unless you want to leave it in front of a machine. The school teacher is about to join the sorry ranks of the service station attendant, the elevator operator, and the telephone operators whose professions have been rendered useless by technology. The next big social trend in this country will be to replace teachers with computers. It is being forced by the financial crisis afflicting states and municipalities, which are facing red ink as far as the eye can see. From a fiscal point of view, of the 50 US states, we really have 30 Portugals, 10 Italys, 10 Irelands, 5 Greeces, and 5 Spains.

The painful cost cutting, layoffs, and downsizing that has swept the corporate area for the past 30 years is now being jammed down the throat of the public sector, the last refuge of slothful management and indifferent employees. Some 60% of high school students are already exposed to online educational programs, which enable teachers to handle far larger class sizes than the 40 students now common in California. It makes it far easier to impose pay for productivity incentives on teachers, like linking teacher pay to student test scores, as a performance review is only a few mouse clicks away. These programs also qualify for government funding programs, like 'Race to the Top.'? Costly textbooks can be dispensed with.

Blackboard (BBBB) is active in the area, selling its wares to beleaguered school districts as student/teacher productivity software. The company has recently been rumored as a takeover target of big technology and publishing companies eager to get into the space.

The alternative is to bump classroom sizes up to 80, or close down schools altogether. State deficits are so enormous that I can see public schools shutting down, privatizing their sports programs, and sending everyone home with a laptop. The cost savings would be enormous. No more pep rallies, prom nights, or hanging around your girlfriend's locker. Of course, our kids may turn out a little different, but they appear to be at the bottom of our current list of priorities.

The Old School Marm Will Be Sorely Missed

October 5, 2010 - Welcome to the Limit Down Move

Diary

Featured Trades: (CORN), (WHEAT)

3) Welcome to the Limit Down Move. Those who are new to trading the agricultural commodity area, the dilettantes, the neophytes, and the wanabees, who have watched in awe as prices trended skyward for the past four months, may not be familiar with how they behave on the downside.

They got a harsh lesson in reality last week, when corn (CORN) posted a limit down move, the first since January. In my last piece on the ag space, I warned that prices were getting superheated, and that we were only one rainstorm away anywhere in the world from a limit down move (click here for 'Wheat Melt Up Warning'). I therefore advised traders to switch from corn to hard red winter wheat, which had already spent a few months consolidating. That is exactly what we got in Russia a few days later, as one piddling little rain storm provided some respite to the hellish conditions there.

The move proved astute, as corn has recently dropped by 12%, while hard red wheat backtracked only 6%. I often remind readers that this is the market where prices take the stairs up, but the elevator down, and sometimes the window. You only need to work in the industry for 15 minutes before you meet a hapless trader who lost everything he had on one trade, because he didn't exercise such caution.

I still believe that this is just the down payment on a major long term bull market for food (click here for my 'Special Food Issue'). However, you always, always keep stop losses in place to protect yourself from the volatility.

You're Only a Rain Storm Away From a Limit Down Move

October 1, 2010 - Double Click on Alibaba

Diary

Featured Trades: (ALIBABA)

2) Double Click on Alibaba. Given my bullish take on China in my September 28^th letter, I'm going to be putting a few more single names out there. Jim Trippon's China Stock Market Digest published a recommendation that caught my eye (click here for my Hedge Fund Radio interview with Jim).

Alibaba (ALBCF) (HKG 1688) is the Middle Kingdom's preeminent e-commerce company, and far and away dominates this fastest growing sector of the economy. In the first half of this year, e-commerce sales in China doubled to $31 billion, and the full year figure is expected to grow to $64.5 billion. So far this year, 36 million have joined the Internet there, bringing the total to 420 million.

Electronics accounted for 44.2% of sales, followed by clothing (17.4%), and jewelry (5.8%). Despite this blistering growth, Internet market penetration stands at only 31.8%, among the lowest in Asia. Deutsche Bank predicts the total market will grow to $220 billion by 2014, while the number of users soars to a mind numbing 812 million, nearly triple the US population! That implies an explosive? 700% growth of the market over a four year period.

Alibaba's profits jumped by 46% in Q2. The stock is not cheap with a PE multiple of 55, but it is almost the only game in town. Despite the amazing outlook for the online industry in China, the stock has fallen for most of 2010, presenting investors with a reasonable entry point. Here is not a bad place to start scaling in. As the ADR's traded on the pink sheets are illiquid, better to buy the Hong Kong traded stock.

More Than All the Clicks in China

October 1, 2010 - Gold is Now At the Deep End of the Pool

Diary

Featured Trades: (GOLD), (GLD)
SPDR Gold Shares Trust

3) Gold is Now At the Deep End of the Pool. For me, the best case scenario which I have been predicting for nearly two years has arrived. But as much as I love gold for the long term, I have to take note when a number of short term technical and momentum models start flashing red lights that it is entering extremely overbought levels. The yellow metal has now risen for 12 out of the past 14 days.

Aaron Regent, Barrack Gold's (ABX) CEO, the world's largest gold producer, says he can't imagine ever needing to hedge the company's output again. Not a day goes by without an emerging market central banks making new purchases, with announcements this week coming from India and Sri Lanka. Gluskin Sheff's permabear David Rosenberg, trotted out his own target for the barbarous relic of $3,000/ounce.

Look at the chart below of the S&P 500 priced in gold, and you can only conclude that gold has to reach $10,000/ounce for the ratio to reach the last trough we saw in 1979. Higher predictions are more common than National Rifle Association bumper stickers at a Sarah Palin rally.

I remember all too well when gold last traded like this in that earth-shaking year. Just as I boarded a flight in Hong Kong, my long futures position ticked $750. By the time I landed in Johannesburg 20 hours later, it was trading at $900. I bailed. The fat lady then sang, and gold then bled for 20 years. Investors married to their positions got wiped out.

Traders who stay involved here should do so only against buying cheap out of the money puts for insurance. Remember, this is the commodity that takes the elevator up and the elevator down, and year end book closings are not far off.