2010 Archive - Mad Hedge Fund Trader

March 8, 2010

Global Market Comments
March 8, 2010

Featured Trades: (FEBRUARY NON-FARM PAYROLL), (YEN), (EUROYEN CROSS), (SPX), (GOOG), (AAPL), (GS),
(BARTON BIGGS),
(OEF), (MSFT), (INTC), (CSCO), (ORCL),
(FXI), (PIN), (EWY), (THD), (EWT), (EWH),
(TUR), (PLND), (RSX), (EWZ), (USO).

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1) Something Amazing is Happening With the Payroll Figures. The February non-farm payroll showed a further loss of 36,000 jobs, versus an expected loss of 75,000, and the unemployment rate remained unchanged at 9.7%. December was revised up by 41,000 and January was revised down by 6,000, so netting everything out there was essentially no change. Those hired now exactly equal those fired, about 3 million a month. There were continued big losses in construction, and decent gains in temps. This month I decided to take advantage of former Labor Secretary Robert Reich?s course on labor statistics which I took at UC Berkeley, and dig through the supporting data at the Bureau of Labor Statistics website (click here for the link at http://www.bls.gov/? ). Something amazing is happening. There is a barbell effect in the labor markets which no one seems to see, which is rendering the aggregate payroll figures meaningless. There is a barbell effect taking place, where the 40% who have been jobless for more than six months, who worked in the bubble industries of real estate, housing, and? construction, are never going to see their jobs come back. The 60% who are short term unemployed, who recently lost jobs in finance, accounting, and health care, are getting rehired very quickly. In fact, 20% of the jobless are getting rehired in only six weeks. There is another effect at work. While the employment rate for those with no high school diploma is 16%, the kind of worker who lost their manufacturing jobs to China, the jobless rate for those with college degrees is only 4.5%. This is proof that the dying sectors of the US economy is delivering the highest unemployment rates, and that America is clawing its way up the value chain in the global race for economic supremacy. It is what America does best, creative destruction with a turbocharger. There is a third influence here, which could be huge. The BLS only contacts existing businesses for its survey. It doesn?t survey companies operating out of someone?s garage in startup mode. Given the huge ongoing dislocations in our industrial structure and the incredible advances in software, the Internet, and cloud computing, this could be one of the biggest job creators of all. So far, it is not being counted at all. The bottom line is that payroll figures are much better than they appear at first glance. Red Alert! The markets don?t know this.

2) Is a Big Global Risk Reversal Underway? Has the Mother of All Carry Trades Begun? The financial markets had been expecting dire payroll numbers, thanks to the huge snow storms that hit the East. I am going to go way out on a limb here and bet that the snow will be gone by June. In fact, without the snow, the February payroll number could have been as high as a positive 100,000, and that we may actually see this in the March figures to be released in a month. I think the current report is spectacularly good news, because it suggests that the rise in jobless claims is now at its apex, and is about to reverse and return to earth. Mind you, we aren?t going back to 5% unemployment anytime soon, but any number showing job gains will have a hugely positive psychological effect. It will be an improvement that the markets don?t expect, don?t believe in, and therefore will catch them seriously off guard. This means that the global risk reversal trade that started on January 11 may be over, and that big hedge funds are about to start adding on positions across the entire range of? financial instruments. That great bell weather of global risk taking, the Euro/Yen cross is telling us as much, having popped from ?120 to ?123.5 on the payroll news. You also see this in the Ausie/Yen cross, and outright yen markets. Those who managed to catch my recommendation to short the yen at ?88.40 on Thursday bagged an instant profit of ?2. This is a trade that could go on for the next year, and you should be selling rallies in the Japanese currency from here. The mother of all carry trades has begun. This is good news for stocks and emerging markets. I?m not expecting anything dramatic here, maybe single digit gains in the indexes, and double that for single stocks. Use Apple (AAPL), Google (GOOG), and Goldman Sachs (GS) as your Sherpas, because they are the current markets leaders. Focus on big cap technology. It will also juice commodities, oil, and precious metals. These numbers put another nail in the coffin of the 30 year Treasury bond, which I have been despising all year.

3) Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, what to do about Japan was the topic of the day, and I was bullish. Today, Barton can say with ?real certainty? that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years. Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT). The easy way in here is to simply buy the S&P 100 ETF (OEF).The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all. Barton sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a ?new normal? of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the la
st decade to only 2.5 % in this one. But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation. Looking at the world as a whole, Barton thinks Asia is the place to be. A bubble may be developing in China, but it is at least 3-5 years off, and there will be plenty of money to be made until then. India is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea, Thailand, H-shares in Hong Kong, and Turkey are also lining up in Barton?s sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland and Russia. Traxis is short Brazil, because it has already had a great run, and because the country still faces some severe social problems. Commodities had their run last year, and won?t do much from here, but they aren?t going to crash either. He sees oil grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds will be deflation driven for the next year, but are definitely not for your ?Rip Van Winkle? investor, as they represent poor value for money. Real estate is dead money. To hear my interview with Barton at length, please click here

QUOTE OF THE DAY

?Rupert Murdoch is very smart and is a great leader, but he?s made a mistake. He?s buried in ink, and in my view, there won?t be any newspaper business ten years from now. Fortunately, we?re buried in television and movies, and they?ll be here forever,? said Sumner Redstone, chairman of Viacom and CBS.

March 8, 2010/by DougD

The Mad Hedge Fund Trader Interviews Barton Biggs of Traxis Partners on Hedge Fund Radio

Podcasts

Featured Trades: (MSFT), (INTC), (CSCO), (ORCL), (FXI), (PIN), (EWY), (THD), (EWT), (EWH), (TUR), (PLND), (RSX), (EWZ), (USO).

Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, what to do about Japan was the topic of the day, and I was bullish.

Today, Barton can say with ?real certainty? that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years. Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT).

The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all. Barton sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a ?new normal? of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the last decade to only 2.5 % in this one. But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation.

Looking at the world as a whole, Barton thinks Asia is the place to be. A bubble may be developing in China, but it is at least 3-5 years off, and there will be plenty of money to be made until then. India is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea, Thailand, H-shares in Hong Kong, and Turkey are also lining up in Barton?s sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland and Russia. Traxis is short Brazil, because it has already had a great run, and because the country still faces some severe social problems. Commodities had their run last year, and won?t do much from here, but they aren?t going to crash either. He sees oil grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds will be deflation driven for the next year, but are definitely not for your ?Rip Van Winkle? investor, as they represent poor value for money. Real estate is dead money.

To hear my interview with Barton at length, please click the ?play? arrow below.

Hedge Fund Radio is a weekly program featuring one-on-one interviews with the titans of the hedge fund industry. The show is hosted by legendary hedge fund manager John Thomas, one of the most seasoned players in the industry. It is broadcast live on station KGOL 1180 AM in Houston, Texas as part of the BizRadio?? network to 100,000 local listeners, and will be streamed online to a further 100,000 national and international listeners.

The show is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For pilots and the military, that is 17:00 Zulu time. For the online link to the show, please go to www.bizradio.com and click on ?Houston 1110 AM KTEK.? For that added insight into the future of the markets tune in, or catch the show in my Hedge Fund Radio archives.

March 6, 2010/by John Thomas

March 5, 2010

Diary

Global Market Comments
March 5, 2010

Featured Trades: (JAPAN), (YEN), (YCS),
(GOLD), (GLD),(NEM),
(NATURAL GAS), (UNG),
(HEDGE FUND RADIO), (BARTON BIGGS)

1) I?m hearing from my buddies in Japan that while things are already quite bad in that enchanting country, they are about to get a whole lot worse, and that it is time to start scaling into a major short in the yen.Australia and China have already raised interest rates, to be followed by the US, and eventually Europe. With its economy enfeebled, the prospects of Japan raising rates substantially are close to nil, meaning the yield spread between the yen and other currencies is about to widen big time. In the case of the Australian dollar, that works out to 4% per annum. Leverage up ten to one, and pile on anticipated capital gains brought in by a weakening yen, and you have a real carry trade on your hands. That will generate hundreds of billions of dollars worth of cascading yen selling as hedge funds dog pile in. It?s macro investing at its finest.Until now, the government has been able to finance ballooning budget deficits caused by two lost decades, but those days are coming to an end. Japan is quite literally running out of savers. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank.

The national debt has rocketed to 190% of GDP, and 100% when you net out government agencies buying each other?s securities. Japan has the world?s worst demographic outlook. Unfunded pension liabilities are exploding. Other than once great cars and video games, what does Japan really have to offer the world these days, but a carry currency?

Until now, the government has been able to cover up these problems with tatami mats, because almost all of the debt it issued has been sold to domestic institutions. Now that this pool is drying up, there is nowhere else to go but foreign investors. With Greece and the rest of the PIIGS at the forefront, and awareness of sovereign risks heightening, this is going to be a much more discerning lot to deal with.

That great bell weather of global risk taking, the Euro/Yen cross is telling us that the mother of all carry trades has already started. On the release of Friday?s surprisingly positive nonfarm payroll numbers, the cross popped from ?120 to ?123.5, sending shorts scampering. You also see this in the Ausie/Yen cross, and outright yen markets. I have been piling clients into short positions since Thursday at the ?88 handle, and they have already bagged an instant profit of ?2.

You could dip your toe in the water here around ?90. In a perfect world you could sell it as it double tops at the 85 level. My initial downside target is ?105, and after that ?120. If you?re not set up to trade in the futures or the interbank market like the big hedge funds, then take a look at the leveraged short yen ETF, the (YCS). This is a home run if you can get in at the right price.

2) If you are wondering where the bull market in gold went, take a look at the chart below of gold priced in Euros. The chart for gold priced in yen look just as healthy. The latest filings with the Securities and Exchange Commission show that the largest hedge funds are still adding to their already substantial positions. Soros Fund Management, with $25 billion under management, tripled its holdings in the gold ETF (GLD) in the fourth quarter of 2009. Tudor Investment Management quadrupled its holding in Newmont Mining (NEM), the largest miner of the barbaric relic in the US. Hedge fund giants, David Einhorn of Greenlight Capital and John Paulson of the Credit Opportunity Fund, have also been boosting substantial positions. These guys are not day traders, and are clearly in for the long haul. With some technical analysts arguing that gold still has several more months to go to digest the massive 80% gain it made off of the October, 2008 $680 low, that may be the wise approach to take.

3)The poster boy for everything that can go wrong with an ETF? is undoubtedly? the one for natural gas, the (UNG). If you had studiously done all of your homework in September and concluded that natural gas was severely oversold and about to go up 40%, you would have been dead right. If you then went out and bought the UNG you would have then lost 40%, as you can see from the chart below. You would think at first glance that this is a chart for an inverse gas ETF, which it isn?t, because such an instrument doesn?t exist. This dreadful state of affairs was brought about by the intricacies of contango, where far month contracts in the futures markets are trading at premiums to the front month. As each month expired, the managers of UNG bought fantastically rich forward contracts, and then rode them all the way down to spot, as they were mandated to do by their prospectus. They then repeated this exercise every month. If the contango continues indefinitely, the UNG will eventually approach zero. Since we are discussing CH4, I have to tell you that the outlook does not look great. We are just coming out of one of the worst winters in history, and NG only managed a rally from the $2.40 low to six bucks and change. Gas in storage is about to rise again, and gas producers are racing to out produce each other in the hope of offsetting falling prices with increased volumes. This is all happening with new discoveries occurring almost daily, thanks to the new miracle fracting technology. It seems that now one only need poke a straw in their backyard to obtain a lifetime supply of clean burning energy. And I read today that Poland is about to lead the charge deploying fracting technology in Europe. They must be sweating bullets in Qatar, which just invested $50 billion in gas exporting facilities. Moral to the story: don?t just punch in a symbol and hit enter. Read the damn prospectus first.

4) My guest on Hedge Fund Radio this week is Barton Biggs, founding partner of mega hedge fund Traxis Partners. Barton is a former colleague and mentor of mine at the Wall Str
eet giant, Morgan Stanley, where we spent nearly a decade sparring with each other over the international investment landscape. Barton is an ex Marine officer (semper fi) who went to business school, earning an MBA from New York University. He started in the business in 1961, when he joined brokerage house EF Hutton, and went on to start one of the first ever hedge funds.? Barton then joined Morgan Stanley in 1973, were he was a managing director for 30 years, founding Morgan Stanley Investment Management. He eventually served on the firm?s board of directors. Barton was rated, more than once, the number one global strategist by Institutional Investor Magazine. He left Morgan Stanley to start Traxis Partners in 2003. Hedge Fund Radio is broadcast 24/7 around the world for free. To access this online program and archives of past shows, please go to my website by clicking here

QUOTE OF THE DAY

?When you have a wave of bank crises, it is often followed by a wave of sovereign debt crises. There are a lot of countries with elevated debt levels, a lot of countries at risk??.It?s amazing how many countries have amnesia about their default rates,? said Dr. Kenneth Rogoff, a Harvard professor and former Chief Economist at the IMF.

March 5, 2010/by DougD

March 3, 2010

Diary

Global Market Comments
March 3, 2010

Featured Trades: (JON NAJARIAN), (OPTIONMONSTER), (AUSSIE/EURO CROSS), (ETHANOL), (CORN)

1)How does an NFL linebacker develop a series of computer algorithms that give him a crucial edge when trading the market? That is the question I hoped to answer when I interviewed Jon Najarian, co-founder of OptionMonster (click here for the site at http://www.optionmonster.com/ ).Jon?s proprietary program, called Heat Seeker ?, monitors no less than 180,000 trades a second to give him an early warning of large trades that are about to hit the stock, options, and futures markets. To give you an idea of how much data this is, think of downloading the entire contents of the Library of Congress, about 20 terabytes, every 33 minutes.

His firm maintains a 10 gigabyte per second conduit that transfers data at 6,000 times the speed of a T-1 line, the fastest such pipe in the civilian world. Jon then distills this ocean of data into the top movers of the day, which he puts up for free on his website, and offers much more detailed analysis through a variety of premium subscription products. Jon is also co-founder of an online brokerage called ?TradeMonster? off the back of this impressive research effort. ?As with the NFL,? says Jon, ?you can?t defend against speed.?

The system catches big hedge funds, pension funds, and mutual funds in the midst of shifting large positions, giving subscribers a peak at the bullish or bearish tilt of the major players in the market. It also offers accurate predictions of imminent moves in single stock and index volatility. Long and short vol traders take note. If anything, the profusion of? dark pools and high frequency trading, now thought to account for 50% of the daily? volume, makes Jon?s tools more valuable because that are exacerbating the quantitative nature of the markets. Some 200,000 traders are believed to be following Heat Seeker?s advice.

Jon started his career as a linebacker for the Chicago Bears, and I can personally attest that he still has a handshake that?s like a steel vice grip. Maybe it was his brute strength and ability to take abuse that enabled him to work as pit trader on the Chicago Board of Options Exchange for 22 years, where he was known by his floor call letters of ?DRJ?. He formed Mercury Trading in 1989, built it into a substantial business, and then sold it to the mega hedge fund, Citadel, in 2004.

Jon developed his patented algorithms for Heat Seeker? with his brother Pete, another former NFL player (Tampa Bay Buccaneers and the Minnesota Vikings), who like Jon, is a regular face in the financial media.

Jon thinks that if China is serious about throttling back its economy, it will have a dampening effect on global financial markets for some time. The S&P 500 is going to stick around the 1100 level, and commodities are going to stay in a big sideways range. Volatility is going to die.

To hear my interview with Jon at length on Hedge Fund Radio, please click here.

2) Last night the Reserve Bank of Australia raised overnight cash rates from 3.75% to 4%, spurred on by a healthy, resource fueled economy and a booming jobs market. The move put a spotlight on the Aussie/Euro cross, which I recommended traders buy a month ago at $AUS 62.5 (click here for the call). With the cross now tickling 67, traders are sitting pretty, with the chart going, as Dennis Gartman likes to say ?from the lower left hand corner to the upper right.? The trade quite simply gets you long a country where everything is going right, and short a region where things are deteriorating by the day. The yield spread between the two currencies is now wide enough to drive a truck through, call that a lorry, and that gap looks to broaden further. Call this ?Cross Trading 101 for Dummies,? but sometimes the easiest trades work the best, because so many investors can understand them.

3) One of my biggest disappointments with Obama so far is his continued support of the ethanol boondoggle. The program was initiated by the Bush administration to achieve energy independence by subsidizing the production of alcohol from domestically grown corn. Add clean burning moonshine (yes, it?s the same alcohol? C2H5OH), whose combustion products are carbon dioxide (CO2) and water (H2O), to gasoline and emissions also go down. The irony is that if you include all the upstream and downstream inputs, the process consumes more energy than it produces. It also demands massive quantities of fresh water, which someday will become more valuable than the oil the ethanol is supposed to replace, turning it into toxic waste. Never mind the image of spendthrift, obese Americans burning food so they can drive chrome wheeled black Hummers to Wal-Mart, while much of Africa and Asia starves. Ethanol consumption of corn has soared from 1.6 billion bushels in 2006 to an anticipated 4.3 billion bushels this year. Ethanol?s share of our total corn crop has skyrocketed from 14% to 33% during the same period. This ignores the reality that Brazil, the world?s largest ethanol producer, can ferment all the ethanol it wants at one third our cost because they make it from much more efficient sugarcane, which has five times the caloric content of corn. However, protective import quotas and tariffs prevent meaningful quantities of foreign ethanol imports. Bush financed all of this wasteful pork, because Iowa has an early primary, giving it an outsized influence in selecting presidential candidates, and has two crucial Senate seats as well. Well, it turns out that Obama needs Iowa even more than Bush, where the Democrats are ahead 3-2 in the House, and have a tie in the Senate (1-1), so the ethanol program not only lives on, it is prospering. Shame, and double shame. Better to drink it than burn it, I say.

QUOTE OF THE DAY

?The dollar hating crowd is hating themselves now. Things in Europe aren?t improving any time soon,? said Jon Najarian of OptionMonster.

March 3, 2010/by DougD

March 2, 2010

Diary

Global Market Comments
March 2, 2010

Featured Trades: (30 YEAR TREASURY BOND), (TBF), (TBT),
(RSX), (IDX), (THD), (PIN),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR)

1) Louise Yamada, one of the most widely followed technical analysts in the market, says the 29 year bull market in Treasury bonds is coming to a close. Looking at the 200 year history of interest rates in the US, such bull markets are historically 22-37 years in length, and this one is definitely looking long in the tooth. Although doubters insist that you?ll never get a collapse in bonds in a deflationary environment, Louise says that all bond peaks occur in such conditions. Yields show prolonged, saucer like bottoms, much like we are seeing now. She also says that retail interest in such paper also surges when interest rates are at multi decade highs, as we saw clearly with last year?s flow of funds. When foreign buyers lose interest in our debt, the 30 year Treasury bond is the first place their lack of interest will show up. The charts for the 30 year are setting up a perfect head and shoulders top, and when the yield break through 4.8%, watch out. The next stop may be 7%. Her advice is that if you are going to stay in the government bond market, shorted your duration as much as possible. My advice? Sell the 30 year bond futures, which today are selling at 119, up 2? points from last week?s low. If Louise?s scenario plays out, it will take the futures well below 100. If you can only sleep at night with less leverage, buy the (TBF) and the (TBT). We are about to enter the golden age for these short bond ETF?s.

2) If you wonder why I recommend a shower after investing in Russia, Bill Browder will give you the reasons at length on his YouTube video (click here for the link ). Bill is the founder and CEO of Hermitage Capital Management, one of the firms that pioneered equity investment in the former Soviet Union in the nineties. After a decade of pursing a campaign of activist investing that brought major changes in corporate governance in big companies like Gazprom and Sberbank, a mafia connected government struck back with a vengeance. It deported Browder in 2005, arrested his lawyer, and pressured him to provide false testimony again his boss, which he refused. A year later, the man died in prison from ?natural causes.? The Russian government then seized Browder?s operating companies, but fortunately for investors, not before he was able to sell off $4.5 billion in holdings and spirit the funds out of the country. Browder, who is of Russian descent, and whose grandfather was chairman of the America Communist Party, says his case is but the tip of the iceberg. Major multinationals like Shell, BP, and Ikea have also been the victims of corruption and faced arbitrary seizure of assets by the well connected. This lawlessness is the reason why Russian companies perennially trade at single digit multiples. They are cheap on paper, but carry hidden, unquantifiable risks. Browder has since refocused his interests, and is now managing $1.2 billion in other safer emerging markets, like Indonesia (IDX), Thailand (THD), and India (PIN). No doubt that investing in Russia is a double edged sword. It offers enormous oil reserves and natural resources, with GDP flipping from a -7.9% rate in 2009 to an expected 3.2% this year. Russia?s stock market (RSX) brought in a blazing 125% return in 2009. But you run the risk of a knock on the door in the middle of the night.

3) If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis. Investment in fresh water infrastructure is undeniably going to be a recurring long term investment theme. One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world?s population, up to 90% of the fresh water is already polluted, some irretrievably so with toxic heavy metals. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% over the next 20 years. Underground water sources in the US, like the Oglala Aquifer, which took nature millennia to create, are approaching exhaustion. Take a look at the photo below, which I pulled off the NASA website, showing dramatic falls in the water tables in the largest food producing areas of India and Pakistan, as measured by the Gravity Recovery and Climate Experiment (GRACE) satellite. While membrane osmosis technologies exist to convert sea water into fresh, they require ten times more energy than current treatment processes, a real problem if you don?t have any, and will easily double the end cost to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of last year?s stimulus package was similarly spent. It says a lot that when I went to the UC Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds! At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which brought in a positively effervescent 46% return in 2009. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world?s greatest per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

March 2, 2010/by DougD

March 1, 2010

Diary

Global Market Comments
March 1, 2010

Featured Trades: (CYB), (YUAN), (AGU), (POT) (MON), (DBA),
(COPPER), (FCX), (CHILE), (ECH)

1) Since I have been setting off distress flairs warning of an inevitable revaluation of the Chinese Yuan, I thought you would be interested to hear about what popped up on my radar on Friday. No lesser authority than the Beijing based 21st Century Business Herald reported that The Ministry of Commerce and the Ministry of Industry and Information Technology have been running computer models to see how much of a Yuan appreciation the textile, shoe, garment, and toy industries could handle without breaking. The result was that these traditionally low margin industries would start to lose money with a Yuan 3%-5% higher than it is today. This is a classic government ploy that I have seen many times before where the government leaks a story to minor media for the sole purpose of gauging international reaction. Call it the opening gambit in the Yuan revaluation negotiations. Of course, 3%-5% is a laughably insignificant bump up. But it does give some basis to the perennial Chinese complaint that the bulk of the profits on their labor are made via mark ups in the US, and not at the factory. If a Chinese manufacturer assembles an IPOD for $20, sells it to Apple for $25, which then retails it for $200, you can understand their distress. Expect more trial balloons like this in the near future, and keep your focus on the ETF, the (CYB).

2) During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields. Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won?t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. In 2009 one of the greatest crop yields in history, brought on by perfect summer weather, delivered one of the largest grain crops in history. Fall rains and an early frost meant that much of this bounty ended up rotting in the field, providing the backdrop for price rises of 30% across the board. The US Dept. Of Agricultural January crop report then predicted that we are going to see a replay of record production this year, slamming prices once again, and delivering limit down moves in the futures markets. But the weather may not cooperate, as it did last year. The net net of all of this is that food prices are going up, a lot. Entertain core long positions in corn, wheat, and soybeans on this dip, as well as the second derivative plays like Agrium (AGU), Potash (POT) and Monsanto (MON). You might also look at the PowerShares Multi Sector Agricultural ETF (DBA). These will all surpass last year?s stratospheric highs at some point.

3) Readers of this letter are aware that I have been recommending liquidation of longs in copper futures and physical ingots from the $3.55/pound January high on down, along with major producer Freeport McMoRan (FCX). When trading resumes at the Shanghai open on Sunday afternoon US time, you can expect prices to open up huge. The 8.8 magnitude which decimated Chile on Saturday morning knocked out 27% of the world?s copper supply. Of the 19.7 million tons of the red metal produced globally in 2009, Chile accounted for 5.3 million tons. The earthquake was the fifth most powerful in history, and was the same magnitude that flattened San Francisco in 1906. While the epicenter is several hundred miles away from the main copper mining regions, Chile?s infrastructure has sustained major damage. There is no way to get the ore to smelters, or ingots to the market. Mines can?t operate without fuel or electric power. Roads, rail lines, bridges, and ports have been damaged. Banks can?t carry out trade finance without communications. If you haven?t unloaded your copper yet, this is an ideal chance to do so. If the markets really get the bit between their teeth and make it as high as $4.00/pound there could even be a shorting opportunity in copper setting up. With the global economy coming off of last year?s sugar high, base metals are looking to go sideways at best in the near future, and possibly down. You can also expect Chile?s stock market to get slammed when it reopens, whenever that is. If we get a major sell off, it could create a great buying opportunity for one of the few countries in Latin America that is doing everything right. I?ll be doing more research on this in the near future.

QUOTE OF THE DAY

?Inventories generate recessions, they don?t generate recoveries,? said my old buddy, David Gerstenhaber, President of Argonaut Capital Management.

March 1, 2010/by DougD

The Mad Hedge Fund Trader Interviews Jon Najarian of OptionMonster on Hedge Fund Radio

Podcasts

How does an NFL linebacker develop a series of computer algorithms that give him a crucial edge when trading the market? That is the question I hoped to answer when I interviewed Jon Najarian, founder and CEO of OptionMonster (click here for the site).

Jon?s proprietary program, called Heat Seeker ?, monitors no less than 180,000 trades a second to give him an early warning of large trades that are about to hit the stock, options, and futures markets. To give you an idea of how much data this is, think of downloading the entire contents of the Library of Congress, about 20 terabytes, every 33 minutes. His firm maintains a 10 gigabyte per second conduit that transfers data at 6,000 times the speed of a T-1 line, the fastest such pipe in the civilian world. Jon then distills this ocean of data into the top movers of the day, which he puts up for free on his website, and offers much more detailed analysis through a premium subscription product.

?As with the NFL,? says Jon, ?you can?t defend against speed.?

The system catches big hedge funds, pension funds, and mutual funds shifting large positions, giving subscribers a peak at the bullish or bearish tilt of the market. It also offers accurate predictions of imminent moves in single stock and index volatility.

Jon started his career as a linebacker for the Chicago Bears, and I can personally attest that he still has a handshake that?s like a steel vice grip. Maybe it was his brute strength that enabled him to work as pit trader on the Chicago Board of Options Exchange for 22 years, where he was known by his floor call letters of ?DRJ.? He formed Mercury Trading in 1989 and then sold it to the mega hedge fund, Citadel, in 2004.

Jon developed his patented algorithms for Heat Seeker? with his brother Pete, another NFL player (Tampa Bay Buccaneers and the Minnesota Vikings), who like Jon, is a regular face in the financial media. Jon thinks that if China is serious about throttling back its economy, it will have a dampening effect on global financial markets for some time. The S&P 500 is going to stick around the 1100 level, and commodities are going to stay in a big sideways range. Volatility is going to die.

Hedge Fund Radio is a weekly program featuring one-on-one interviews with the titans of the hedge fund industry. The show is hosted by legendary hedge fund manager John Thomas, one of the most seasoned players in the industry. It is broadcast live on station KGOL 1180 AM in Houston, Texas as part of the BizRadio? network to 100,000 local listeners, and will be streamed online to a further 100,000 national and international listeners.

The show is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For pilots and the military, that is 17:00 Zulu time. For the online link to the show, please go to www.bizradio.com or click here , click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.? For that added insight into the future of the markets tune in, or catch the show in my Hedge Fund Radio archives.

February 27, 2010/by John Thomas

February 26, 2010

Diary

Global Market Comments
February 26, 2010

Featured Trades: (TOYOTA), (TM), (PALLADIUM), (PALL),
(RESIDENTIAL HOUSING), (XHB)

1) Since I am probably the only person in the country who once worked for Toyota, speaks Japanese, and worked in the White House Press Corps, and am therefore fluent in the ways of Washington, I feel obliged to comment on yesterday’s Congressional hearings on Toyota. There, Akio Toyoda, president of the Toyota parent and grandson of the founder and English speaking Yoshimi Inaba, president of Toyota Motor North America, Inc. faced the firing squad. It was the usual Congressional theater, with the member from Kentucky, where non union Toyota plants are located, listing off the firm’s charitable donations to the community, while the one from Michigan launching a vicious, no-holds-barred attack. The language spoken by the two Japanese couldn’t have been more different. Toyoda spoke the words of inherited wealth, of a ruling shogun, of privilege, and of condescension. Inaba talked like the hardscrabble warrior that he was, who spent 40 years clawing his way up the Toyota organization ladder. I think the entire crisis happened because Toyota management believed in their products to such incredible extremes that any criticism was viewed merely as the unhappy grumblings of competitors. Similarly, the quality of Japanese products became so ingrained in the minds of American regulators that they too fell asleep at the switch, giving the company a free pass on the rising tide of consumer complaints. On top of this, you can pile the Japanese cultural preference against sending bad news up the command chain. This is one reason why Japan lost WWII, and is why the suicide rate in the country is so appallingly high. When the bill finally came due, the price tag was 37 dead in acceleration accidents, and a witch hunt on national TV. Toyota’s management will make sure, literally on pain of death, that every product rolling off the assembly line from here will be models of engineering perfection. The stock has held up amazingly well so far, probably because it is mostly owned by strong hands, with few traders involved. Not only should you buy the stock when global markets return to risk accumulation mode, you should buy a Toyota car as well. It will be the only time in your life that you can find them at a discount.

2) Since the run up to the Toyota hearings began, the palladium ETF (PALL) has dropped about 10%, giving up all of the gains that occurred after my January 27 story on the white metal (click here for the piece). The sell off happened because traders assumed the dent to Toyota’s reputation would mean fewer car sales, less demand for catalytic converters, and less need for palladium or platinum. The crazy thing about this logic is that those dumping Toyotas will buy a vehicle from another car maker instead, maintaining demand for catalytic metals at their current level. Maybe it was the wholesale flight from all hard assets that took the poor man’s platinum down. Watch your screens.

3)I just thought I’d repost my interview with Toyota USA president Jim Lentz in the wake of his testimony in front of congress this week. He looks like he aged about ten years since I saw him in November. In journalism they tell you to always be nice to people on the way up, because you meet them again on the way down. Now there are rumors of a criminal prosecution of Jim.

‘I spent an evening chewing the fat with James Lentz, the president of Toyota Motor Sales, USA, (TM) who let loose some incredibly insightful views on the long term future of the global economy. I have been following Toyota for 35 years, hobnobbing with senior management, touring their factories in Japan, and driving their marvelously engineered products. It is far and away one of the best run multinationals, with awesome research resources, spending $9 billion a year on R&D, but are also one of the most secretive organizations on the planet. If the CIA only kept its secrets so well! Peak oil is going to hit in 2017-2020, making gasoline prohibitively expensive. Toyota is racing to get as many hybrids out there as possible by then, converting a Mississippi factory from Highlanders to the hugely popular Prius. In Japan there is a backlog of 200,000 orders for these cars, and Toyota makes a profit on every one. The plug in version of this car will be fleet tested in the US next year, and sold to the public from 2012. But hybrids, which reduce emissions by 70%, compared to conventional cars, are just a transitional solution until the technology for hydrocarbon free alternatives, like electric only and fuel cells, mature in the 2020’s. The US car market will come in at 10 million units this year, but will rebound to 15-16 million units by 2015. At 9.3 years, the average age of the American car fleet is the oldest on record, and replacement demand will be huge. New car based consumer societies are also emerging in Argentina, Mexico, Thailand, and Indonesia. The American car industry, accounting for 4% of GDP and 10% of total employment, isn’t going away, as many fear. However, it will evolve beyond current recognition. Toyota is certainly putting its money where its mouth is, with an $18.2 billion investment in 14 American factories, directly employing 34,000, and indirectly another 380,000. Long term, I love this stock. James has worked for Japan’s largest car maker for 26 years, but still can only order one beer in that impossible pictographic language. By the time the evening was out, I made sure he could order a second, and a third, in Japanese.’

4) The US Department of Housing and Urban Affairs certainly peed on the parade of those blowing horns and banging drums because they believed the real estate market was recovering. Seasonally adjusted new home sales for January came in at a paltry 309,000, the lowest figure on record, and a gut wrenching decline of 11.2% from the previous month, versus the expected gain of 3.8%. It just doesn’t get any worse than this. Sure, the horrendous weather in the Northeast was a factor. But the harsh reality is that, with enormous federal and state tax incentives soon to expire, the life support that kept this industry alive is about to see the plug kicked out. Once the Fed ends the TALF, mortgage rates are going up, even is overnight rates remain rock bottom, putting another stake through the heart of this market. Unemployment is going to stay pitilessly high, sending consumer confidence into another death spiral. For what it’s worth, I never bought the whole green shoots thing, viewing the enormous gains seen in stocks over the last year as nothing more than one giant dead cat bounce. The XHB, the homebuilders ETF, held up remarkably well. But let’s face it, the life has already been sque
ezed out of this sector. There is nothing left to short. There are going to be so many great trading opportunities this year that you shouldn’t even think about tying your capital up in a house. Rent, don’t buy.

QUOTE OF THE DAY

‘It’s very difficult to navigate a business through a paradigm shift. You must hard wire your system to second guess all the time, questioning what is next, and then what is next. You’ve got to retain optionality for both investment portfolios and the business your run to navigate this well,’ said Mohamed El-Erian, co-chairman of the bond house PIMCO.

February 26, 2010/by DougD

February 25, 2010

Diary

Global Market Comments
February 25, 2010

Featured Trades: (?EUREKA?), (SPX),
(VIX), (USO), (FCX), (GLD), (TBT),(TBF), (CHK),
(UNG), (COAL), (BTU), (LUMBER), (WY),
(HEDGE FUND RADIO)

1) After speaking to a gaggle of economists, portfolio managers, and traders the last few days, I?ve had one of those ?Eureka? moments as the markets have shown their hands. Those that delivered the dramatic, heart stopping moves last year, like stocks, commodities, oil, precious metals, and junk bonds are on the slow boat to nowhere. Last year?s wall flowers, like currencies and Treasury bonds, are trending nicely, delivering plungers some serious coin. What?s more, I think these trends, or non trends, will continue for the next several months. That means that the S&P 500 (SPX) will remain around a tedious 1050-1111 range, and that implied volatilities (VIX) for relevant options will continue to bleed to a lower level. This market is a portfolio manager?s worst nightmare, and a trader?s dream come true. They, the nimble and click happy, can sell into every rally and buy each dip, confident that stocks will neither crash, nor break out to new highs. They say markets have to climb a wall of worry. This one has to climb Mount Everest. Commodities (FCX) , oil (USO), and precious metals (GLD) are showing the same indecisive behavior. The cross trades I have been recommending, long Aussie/euro, Canadian/euro, and short the euro/yen, have been delivering reliably all year. I have also been able to wrest away a couple of points from the 30 year Treasury bond markets (TBT), (TBF). The March futures have peeled back from a 119.5 high on February 5, and fallen as low as 116.5 yesterday. This is all happening because the markets are now transitioning from last year?s parabolic dead cat bounce to the 2%-2.5% growth scenario that I am predicting for this decade. Political gridlock and the attendant noise level don?t help either. Keep selling the rallies, like the one today, because I think we?re on our way to the 112 handle by the summer. You?ve got to work with the market you have, not the one you want, and these trades could be your bread and butter for the next several months.?

2)After my year in the White House Press Corps, I vowed never to return, and took a really long shower, hoping to scrub every last spec of prejudice, self interest, and institutionalized dishonesty off of my battered carcass. But sometimes I see some maneuvering that is so unprincipled, crooked, and against the national interest that I am unable to restrain my fingers from the keyboard. I?m talking about the absolutely merciless hatchet job the coal producers are inflicting on the natural gas industry. Coal today accounts for 50% of America?s 3.7 trillion kilowatts in annual power production. Chesapeake Energy?s (CHK) Aubrey McClendon says correctly that if we just shut down aging conventional power plants over 35 years old, and replace them with modern gas fired plants, the US would achieve one third of its ambitious 2020 carbon reduction goals. The share of relatively clean burning natural gas of the national power load would pop up from the current 23% to 50%. Even the Sierra Club says this is the fastest and cheapest way to make a serious dent in greenhouse gas emissions. So what do we get? The press has recently been flooded with reports of widespread well poisonings and forest destruction caused by the fracting processes that recently discovered a new 100 year supply of ultra cheap CH4. While the coal industry has had 200 years to build a formidable lobby in Washington, the gas industry is a neophyte, their only public champions being McClendon and T. Boone Pickens. But memories in Washington are long, and Obama & Co. recall all too clearly that this was the pair that financed the Swift Boat Veterans for Truth that torpedoed Democrat John Kerry?s 2004 presidential campaign. What goes around comes around. This will be unhappy news for the 23,000 the American Lung Association expects coal emissions to kill this year. Can?t the coal industry be happy selling everything they rip out of the ground to China? There! I?ve had my say. Now I?m going to go have another long shower.

3)Long term readers of this letter know that I, alone in the forest,? have been a huge bull on lumber futures for the past year. The draw was a double play on low interest rates, and a subsidy fueled recovery of new home construction, and a rising tide of imports by China. A soggy greenback was another incentive, as was decades of mill closures, both by environmentalists and economists that left the supply/demand balance so finely tuned that prices could rise on the purchase of a single rail car of two by fours. And up they went, from $1.35 to a high of $2.80 by last week. I also recommended Weyerhaeuser (WY), which managed a double. I have to tell you that the bloom is now coming off the rose. The dollar is strong, eating into exports, and Chinese demand is starting to flag as the Mandarins in Beijing slam on the monetary brakes. And the long awaited homebuilding recovery? With a tsunami of foreclosures about to hit an already distressed market, that is looking more like a 2020 than a 2010 affair. Best case? We grind sideways with other commodities for the reasons that I have listed above. Worst case? We burn to the ground once more. Bottom line? Time to get out of Dodge and leave it for Bambi.

4) My guest on Hedge Fund Radio this week is Jon Najarian, the co-founder of the online trading platforms, OptionMonster and TradeMonster. Jon started his career as a linebacker for the Chicago Bears, and I can personally attest that he still has a handshake that?s like a steel vice grip. Maybe it was his brute strength that enabled him to work as pit trader on the Chicago Board of Options Exchange for 22 years, where he was known by his floor call letters of ?DRJ.? He formed Mercury Trading in 1989 and then sold it to the mega hedge fund Citadel in 2004. OptionMonster uses a patented algorithm developed by Jon called ?Heat Seeker??, which spots unusual tr
ading patterns by monitoring the 180,000 transactions per second that occur in the financial markets. Jon is going to talk to us about the state of the financial markets, online research, and the tricks involved in becoming a winning trader. You can log into Hedge Fund Radio anytime from anywhere in the world for free by clicking here

QUOTE OF THE DAY

?The total breakdown of the system is ahead of us. It may come in four, five, or ten years, and it will devastate the world economy. By bailing out the issuers of derivatives, the Fed actions have only postponed the day of reckoning,? said Marc Faber, publisher of the Gloom, Doom & Boom Report.

February 25, 2010/by DougD

February 24, 2010

Diary

Global Market Comments
February 24, 2010

(SPECIAL JOSEPH STIGLITZ ISSUE)
1) The great thing about interviewing Joseph Stiglitz over dinner is that you don?t have to ask any questions.? You just turn him on and he spits out one zinger after another. And he does this in a kibitzing, wizened, grandfatherly manner like one would expect from a character that just walked off the set of Fiddler on the Roof. The unfortunate thing is that you also don?t get to eat. The Columbia University professor and former World Bank Chief Economist animatedly talked the entire time, and I was too busy feverishly taking notes to ingest a single crouton.

Stiglitz argued that for 30 years after the end of the Great Depression there was no financial crisis because a newly empowered SEC was on the beat, and everything worked. A deregulation trend that started under Reagan began stripping away those protections, with the eventual disastrous repeal of Glass-Steagle in 1999. The philosophical justification adopted by many economists, including Fed chairman Alan Greenspan, was that unfettered markets always lead to efficient outcomes.

This belief was based on simplistic models assuming that markets were always perfect, always open, and that everyone had perfect information. Stiglitz?s own work on ?information asymmetry,? which earned him a Nobel Prize in economics in 2001, pulled the rug out from under this theory, because it showed that one party to a transaction always has more information than the other, often the seller.

The banks used this window to introduce super leveraged derivatives that had never been regulated, studied, or even understood. They then clawed open accounting loopholes that were so imaginative that not only were shareholders and regulators deceived about how much risk was involved, senior management was clueless as well. Instead of managing risk, they created risk.

A 2006 GDP that was 80% derived from real estate transactions and a savings rate that fell to zero meant that a severe crash was a sure thing. President Bush?s response was to unleash an extreme form of ?trickle down economics,? with the banks given $700 billion with no conditions attached. Intended to recapitalize the banks so they could resume lending to the mainstream economy, much of the money ended up being paid out in bonuses and dividends. Of the $180 billion used to rescue AIG, $13 billion went to Goldman Sachs, and much of the rest went to German and French banks. No wonder Main Street feels cheated.

The financial system is now more distorted than ever, with major institutions wards of the state, and smaller banks that actually lend to consumers and small businesses going under in record numbers, because the playing field is so uneven. There are too many structural conflicts of interest. The ?once in a 100 year tsunami? argument is merely a justification for changing nothing. Banks would rather maintain the fiction that the loans on their books are good, than make adjustments, meaning there will be more foreclosures in 2010 than in 2009 or 2008. No financial system has ever wasted assets on this scale, and the end result will be a national debt many trillions of dollars larger.

The $787 billion stimulus package was too small, and should have been at least $1.2 trillion, but there was no way Obama was going to get more out of this Senate. The 40% of the stimulus that was tax cuts will get saved and create no immediate beneficial effects on the economy. More money should have gone to the states, which unable to deficit spend, are now a huge drag on the economy. But even this meager package was able to prevent the unemployment rate from rising from 10% to 12%, as it was set to do. The inadequacy of the first package means a second is almost a certainty. Any major spending cuts will produce ?Hoover? outcomes.

The outlook for the economy is bleak, at best.

Well, I don?t get to chat at length with a Nobel Prize winner every day, so I thought I?d give you the full blast, even though I had to leave a lot out. I?ll talk more about markets tomorrow.

QUOTE OF THE DAY

?The only surprise to me is that so many people were surprised,? said Nobel Prize winning economist Joseph Stiglitz, about the financial crisis he predicted.

February 24, 2010/by DougD

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