November 2010

November 5, 2010 - I'm Singing "Waltzing Mathilda" Again

Featured Trades: (AUSTRALIA), (FXA), (FXE), (EWA)
Currency Shares Australian Dollar Trust ETF
PowerShares Indio Portfolio ETF
Currency Shares Euro Dollar Trust ETF

3) I'm Singing 'Waltzing Mathilda' Again. Many readers made a killing last February when I recommended they buy Australian dollars and short the euro against it (click here for the call). A lot of the hottest hedge fund money then poured into The Land Down Under, while the Euro has crashed. The outright Aussie/US Dollar (FXA) jumped from $AUS.85 to $AUS1.01, while the cross soared from AUS$.63 to AUS$1.41.

Last week, the Reserve Bank of Australia surprised observers and raised overnight interest rates to 4.5%. Ben Bernanke's QEII is triggering simultaneous quantitative tightening in the best managed, but inflation prone commodity producing or emerging countries of the world, like the Land Down Under, India, and of course China. All this does is widen the yield spread between their currencies and the dollar, making them even more attractive to speculators. You might as well be waving a red flag at a bull

I still think Australia is blessed, with that perfect combination of huge resource and energy exports, a strong economy, rising interest rates, a small population to support, and great looking women. Australian stocks (EWA), which have gained a mind blowing 45% since July, should be at the top of your list too.

Another Reason to Invest in Australia

November 5, 2010 - Silver Blasts Through to a New 30-Year High

Diary

Featured Trades: (SILVER), (SLV), (CDE), (SLW), (HL)
SPDR Gold Trust Shares
iShares Silver Trust

4) Silver Blasts Through to a New 30-Year High.? Those transfixed by gold (GLD) topping the $1,368 level again have been missing the real action in silver (SLV). The white metal has soared 45% to $18.46 since the July low, compared to a more modest 18% move for the barbaric relic, an outperformance of three to one.

I have been a raging bull on silver for two years now, grabbing you by the lapels and shaking you until your dentures fell out if you didn't buy it. It is nothing less than owning gold with a turbocharger. Silver gives you a nice double play. Its qualities as a precious metal are giving it a major boost from a weak dollar, always a risk that is out there. It is also an industrial commodity, which unlike gold, is consumed, and therefore gives you a call on the recovering economy.

If you don't think this move is real, check out my picks in the sector. Coeur D Alene Mines (CDE) has rocketed by 58% July, while Silver Wheaton (SLW) is up a staggering 75% and Hecla Mining (HL) has soared by 61%. To accumulate .999 fine Silver Eagles or silver bullion, click here.

All of a sudden, my $50 an ounce target is not looking so insane when I first made it two years ago. That is a mere double from here. How long will it take to get there? William Herbert Hunt, who engineered the 1980 squeeze with his brother Nelson with a 100 million ounce long position that last took it that high, could tell you, but only from the grave.

November 4, 2010 - My Analysis of the Election

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SPECIAL ELECTION ISSUE

Featured Trades: (MY ANALYSIS OF THE ELECTION)

1) My Analysis of the Election. Won the World Series, but lost the Speaker of the House. I guess San Francisco can't have everything. My expectation that demographic trends would limit Democratic losses turned out to be wrong. The kids stayed home and texted each other, partied, or watched MTV, and didn't go to the polls. I thought that if the Republicans won the House of Representatives, it would be by handful. They ended up taking 62 seats. Good thing my market calls are better than this, or I'd be washing windshields for a living at Park Avenue and 42^nd Street. I nailed the Senate, which I correctly predicted the Tea Party would blow for the Republicans. I even called the spoiler states, Delaware and Nevada.

The West coast turned out to be a clean sweep for the Democrats, as I expected. Meg Whitman spent $35 per vote, versus 60 cents for Jerry Brown, and still lost by 13 percentage points. She probably would have done better if she just sent everyone a check. The sleeper that no one is paying attention to here is that simple majority rule for the legislature passed, dumping the 2/3 requirement. California taxes are about to go up a lot.

Still, without the presidency and the Senate, all conservatives have really won is the right to determine the House agenda, make speeches, and conduct investigations, which I am sure there will be a lot of. One newly elected conservative has even promised to hold McCarthy style un-American activities hearings. You can forget cooperation with the administration. These are not your father's Republicans. They have been rewarded for obstruction, the Senate setting an all time record for filibusters, so you can expect it to continue, or intensify. Bring on gridlock.

New Venue for the World Wrestling Federation

November 4, 2010 - What The Election Means for Economic Policy

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SPECIAL ELECTION ISSUE

Featured Trades: (WHAT THIS MEANS FOR ECONOMIC POLICY)

2) What The Election Means for Economic Policy. Let's put the economic polices the voters chose under the microscope and see what we got. It is not a pretty picture. The bottom line is that my scenario of a lethargic 2-2.5% GDP growth rate continues for the foreseeable future. Here are the reasons why:

1) The party with the worst job creation record in a century is now in charge of job creation. There were 23 million jobs created from 1992-2000. There were only 1 million created during 2000-2008 when the population grew by 22 million.

2) The party that presided over the biggest increase in the deficit in history, from $5 trillion to $10 trillion during 2000-2008, is now charged with reducing the deficit.

3) Republican deregulation policies favor large multinationals that have been the most profitable, because they have been the most aggressive exporters of jobs. Small businesses that generate the most jobs don't show up anywhere in this picture.

4) Without any further assistance from Washington, the states and municipalities are going to have to take an extra sharp hatchet to budgets for teachers, police and firemen, the most junior claims on local resources. The drag on the healthy parts of the economy increases.

5) Much of the campaign focused on cutting the deficit by reducing spending. Below, please find the six largest expenditures in the $3.5 trillion 2010 Federal budget:

$687 billion - Social Security
$655 billion - Defense
$564 billion - Unemployment and Welfare Payments
$448 billion - Medicare
$287 billion - Medicaid
$162 billion - Debt service

Notice, first of all, that you did not see these numbers anywhere during the campaign. They should have been posted at every ballot box along with a Sharpie marking pen. Looking at the list, I see three untouchable Republican sacred cows, social security, defense, and Medicare, taking up the bulk of the spending. Debt service is untouchable. That leaves unemployment and welfare payments and Medicaid as big fat targets.

But even if you completely end this spending, close the agencies involved, and sell off the buildings, as many conservatives have proposed, you have only cut spending by $851 billion, or 61% of the current budget deficit. Some $549 billion of deficit remains. And this assumes the tax rates remain the same. Cut taxes, and the Medicare, unemployment, welfare-free budget deficit rockets to $1.2 trillion, while at the same time slowing GDP growth substantially further. Did I mention that falling spending causes job losses? Talk about jumping out of the frying pan and into the fire.

The mostly closely guarded secret of this election is what spending the Republicans cut in their first budget. I am waiting with baited breath to see how they do this.

Looking for New Office Space

November 4, 2010 - What the Election Means for the Markets

Diary

SPECIAL ELECTION ISSUE

Featured Trades: (WHAT THE ELECTION MEANS FOR THE MARKETS),
(SPY), (TBT), (YCS)
S&P 500 SPDR ETF
ProShares Ultra Short Lehman 20+ Year Treasury ETF
ProShares Ultra Short Yen ETF

3) What the Election Means for the Markets. Who really won this election? I did! It is setting up trends in the global financial markets that will be easy to identify and cash in on. If you want to jump on my bandwagon and get a peak at some market timing, then keep reading this letter.

While voters may be enthralled with empty promises, platitudes, spin, and sound bites, markets clearly aren't. Like a huge, dumb animal, they respect only the remorseless mathematics of supply and demand. QEII is still the principal driver, the first $600 million of which we got today. This promises to lift all boats, especially the yachts, to year end, and possible through Q1, 2011 (click here for 'Contemplations on Risk'). When it ends, the full impact of this election will bite. This will be the outcome:

1) There will be a major sell off next year, not just in stocks, but in all asset classes. The election results increase the certainty and the severity of this event. Volatility (VIX) will rise across the board.

2) The deficit will rise faster. The debt markets' breaking point will be reached sooner. This means we will get a collapse in bond prices, no matter how much liquidity floods the system. Whether this happens with the national debt at $15 trillion, $18 trillion, or $20 trillion is anyone's guess. We are headed towards all of those numbers trapped in a runaway Toyota with the accelerator stuck on the floor.

With the administration and congress gridlocked, the Federal Reserve is the sole functioning branch of government, and creating inflation is virtually the only thing they know how to do well. This nicely sets up my (TBT) trade, one of my core shorts for the coming decade.

3) A flight to safety will trigger an extended period of dollar strength. This is bad for stocks, commodities, emerging markets. Flip the 'RISK OFF' button. This sets up the crash in the yen, my other core short of the decade, and bodes well for the (YCS).

4) Since many conservatives believe that global warming is a leftist hoax, you can expect more favorable policies and tax treatment for oil, natural gas, and coal. Expect dependence on foreign energy sources to rise and crude prices to rocket. The congressman who apologized to BP for it harsh treatment is now the chairman of the House energy committee. The Bush administration took oil from $20/barrel to $150. Expect something similar going forward. The giant target on our backs in the Middle East stays there. Buy your electric car now.

Sorry, guys, but read it and weep. As with a World Series umpire, I call them as I see them. This is the letter where hard data and facts trump uninformed opinion every day of the week. There are thousands of letters out there whose primary goal is to make you feel better. This isn't one of them.

November 3, 2010 - How Big is QEII?

Diary

Featured Trades: (HOW BIG IS QEII?)

1) How Big is QEII? Speculation is rife in the Treasury markets on if quantitative easing has already started, and if it has, how big it is, or whether it will happen at all? Goldman Sachs has opened more than a few eyes when they put their $2 trillion forecast out there. The low-end estimate is $100 million between Fed meetings every six weeks.

Let me tell you how big that is. This month the Fed will buy $30 billion as part of its regular refunding efforts. The mean of these two predictions is $117 billion a month, or $1.4 trillion a year. That means that the Fed will buy the entire amount of debt created by the 2010 budget! This is why all asset classes are going up, even the wheezing, arthritic ones, like US stocks.

There are two great unknowns here. When does the Fed take the punch bowl away, and what will the markets do when it senses this is happening. My guess is that QEII will end sooner than later, because private investors have already done so much front running.

When it does end, the markets will sell off much more than in the past. The new, post crash risk control regime has a much finer hair trigger than before. Investors will no longer sit back and willingly take a 50% hit to their net worth. Buy and hold is dead, and the markets know it.

Alan Greenspan used to spike his punch with a surreptitious flask of Ron Rico rum. Ben Bernanke uses crystal meth, ecstasy, and steroids, and the hangover will be monumental. What will lead the downturn??? Wheezing, arthritic assets, like US stocks.

What's Really In There?

November 3, 2010 - Palladium Hits a Seven Year High

Diary

Featured Trades: (PALLADIUM), (PALL)
ETFS Physical Palladium Shares ETF

2) Palladium Hits a Seven Year High. Palladium has soared by 60% since my recommendation in January, hitting a seven year high yesterday, making it one of my better calls of the year (click here for the piece).? Double dippers beware! Moves like this by industrial commodities do not occur in the face of a collapsing economy.

It's looking like the car manufacturers, which consume huge amounts of the white metal to make catalytic converters, could turn out as many as 12.5 million cars this year. This could rise to 15 million by 2015. The 2008 nadir was a paltry 8.5 million vehicles. You can forget seeing the drug induced haze of 20 million annual units free money brought us, returning in our lifetime. Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by another 1.5 million units a year.
Some 80% of the world's palladium production comes from Russia and South Africa, dubious sources on the best of days. This means that a long position in this white metal gives you a free call on political instability in these two less than perfectly run countries.

Also known as the 'poor man's platinum,' demand for palladium for jewelry in China has been soaring with the growth of the middle class. On top of this, you can add huge new investment demand from the palladium ETF (PALL) this year. The fund is thought to be bumping up against its position limit of 1.29 million ounces, which amounts to a breathtaking 18% of global production in 2009.

If you are looking for something to stash in your gun safe, bury in the backyard, or give to the grandkids on their college graduation, get physical. You can buy 100-ounce bars at $50 over spot, or Royal Canadian Mint one ounce .9995% fine palladium Maple Leaf coins at $50 over spot. And yes, you can even buy them on Amazon by clicking here.

November 3, 2010 - From Junk to Gold

Diary

Featured Trades: (JUNK BONDS), (JNK)
SPDR Lehman High Yield Bond ETF

3) From Junk to Gold. Investors who bought beat up jalopies at the going out of business sale 18 months ago, ended up getting delivered a Rolls Royce. I piled readers into the junk bond ETF (JNK) 18 months ago because the market was discounting a future default rate of 17%, which I thought was extremely unlikely (click here for the call). What have we actually realized? A minimal 0.3%.

As a result, yield seeking, risk averse buyers have been piling into the fund, taking yields down from 18% to 6%. We could have a little more upside to go. As absolute returns have plunged, spreads over Treasuries have also been shrinking, but have yet to reach historical minimums. I am not a buyer here, but would not be surprised to see others chase this market further.

Investors in past years would have been laughed at as neophytes or suckers for taking on extra junk risk with such little potential upside. In this low return world, they are now considered all-seeing sages. It is a perfect example of how zero interest rates are skewing investment decisions everywhere.

November 3, 2010 - Special Subscription Offer From The Mad Hedge Fund Trader

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4) SPECIAL SUBSCRIPTION OFFER FROM THE MAD HEDGE FUND TRADER. Any Texas residents who take out a two year subscription to The Diary of a Mad Hedge Fund Trader this week will get a free 'San Francisco Giants World Series Champions' knit hat. For proof of residence, please send me a stuffed armadillo. Cheap Chinese imports not accepted. There is a rumor on the Internet today that the conservative Texas Rangers deliberately threw the World Series last night so liberal San Franciscans would be too hung over to vote today. It's working. Five minutes after the winning 7^th inning home run, Yahoo's main server for the Bay Area crashed. My best trade of the year? Buying two tickets for $1,300 for one of the only two games played at home.

November 3, 2010 - Quote of the Day

Diary

'A lie can travel half way around the world before the truth gets its boots on,' said the 19^th century humorist, Mark Twain.