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'

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.

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?

Featured Trades: (THE MEANINGLESS NONFARM PAYROLL)

1) Why the Nonfarm Payroll Figures are Meaningless. Let me warn you that reading this analysis about the September nonfarm payroll is a complete waste of your precious time. But since it's a holiday, and you don't feel like mowing the lawn, raking the leaves, or washing the car, please read on.

First, the dismal numbers. The Department of Labor reported a net loss of 95,000 jobs, leaving the unemployment rate at a lofty 9.6%. Private sector job gains were run over by the steamroller of 159,000 government job cuts, mostly at the state and local level. There was no change in average hourly earnings. There were gains in health care, business services, and leisure and hospitality, while there were cuts in construction, as always, and manufacturing. Some 14.8 million Americans remain unemployed, 6.1 million for six months or longer.

Now, for the reason I never bother to follow these numbers any more. If you add in discouraged workers, the underemployed, and those working part time who would rather be working full time, the true number of unemployed is closer to 30 million, or about one in five Americans. Never mind the statistics that the government pumps out monthly are meaningless. They have been for decades.

The real problem is that the economy is obliterating jobs far faster than anyone realizes. My guess is that over the past decade as many as 25 million jobs were exported to China and other low waged emerging markets by globally adept, bottom line oriented corporations. Tens of millions more have been vaporized by the relentless march of technology. How many elevator operators, radio repairmen, gas station attendants, or telephone operators have you met lately? Add to that a structural over employment by states and municipalities that will take a decade or two to unwind. The net is that none of these jobs are ever coming back.

My old UC Berkeley economic professor and friend, Robert Reich, told me a fascinating story the other day. After enticing a major European company with huge tax incentives, infrastructure gifts, zoning holidays, and who knows what else, a Midwestern state landed a new manufacturing plant. Since Bob was Clinton's Labor Secretary, the governor invited him to the ribbon cutting ceremony. But before the festivities began, Bob ran inside for a quick tour. There were only 13 workers, all technicians, who manned the computers that operated the machinery. This facility replaced an earlier one that had once employed thousands. Bob threw up his hands and walked away.

What all this means is that the unemployment rate in the US is never going to recover to the heady 4%-5% rate of our youths. At best, we can grind down to maybe 7%-8% in coming years as the economy slowly recovers. Then, when the next recession hits, official unemployment will spike up to 15%, and the unofficial one to 25%-30%. This is why you'll never hear a recommendation to buy retail or consumer spending stocks pass my lips. I watched Germany suffer through long term structural unemployment for a decade, and it is not a pretty picture, and that was with a huge social safety net in place which we lack.

Let me mention an inconvenient truth here. There is nothing either political party can do about this, despite the blustery promises made by all sides. You can offer all of the tax incentives and job training programs you want. It's not going to make a bit of difference. The $250 billion in infrastructure in Obama's stimulus package last year will at best employ a few tens of thousands and add a mere 0.5%-1.0% to GDP growth, hardly a dent in a $14 trillion economy. Even construction companies are becoming efficient in their labor management. You might as well be pissing in the ocean.

Bob gave me another insight into our jobs future. He recently compared at a list of job categories when he was Labor Secretary to the current one, and noticed that about a quarter of today's jobs did not exist 20 years ago. Eventually, labor and jobs will come into balance through the acceleration of new technologies that create entire new industries, slowing population growth, and imported inflation depriving emerging markets from their cost advantage. That is how our jobless headache is going to end, but it is a decades long process, and certainly not worth losing sleep over the first Friday of every month. By then, I'll be collecting social security, if it hasn't gone broke. That's why reading this article was a total waste of time.