March 2011

March 22, 2011 - Tesla: Sell the Sizzle, Then Buy the Steak

Featured Trades: (TESLA MOTORS), (TSLA)

2) Tesla: Sell the Sizzle, Then Buy the Steak. So far, the most successful thing Tesla Motors (TSLA) has done is sell stock. The IPO was an absolute blowout success, far and away the best this year, with book building at $14-$16, the size increased by 20%, pricing at $17, and then trading up to $32 on the third day, giving it an impressive market capitalization of $3.3 billion. It fell back to $16 the following week, but then mad a run to $26. Now, here we sit again at $23.

It pulled this off with virtually the entire auto industry and its pet analysts pissing all over the deal from the greatest height possible, as the entire concept of a Silicon Valley based car industry is the greatest affront possible to the Detroit establishment.

I love this company, and I think Elon Musk is incredibly brave. Hell, if I had a billion dollars to throw away, I would probably do the same thing. But much about the new issue reminds me of the Apple IPO some 30 years ago, when it ran up to $21 before its nosedive to $4 (click here for the story). The ill-fated DeLorean Motor Company also comes to mind. All the focus was on the products, which consumers loved, not the business model or the bottom line.

By its own admission, (TSLA) will not make any money for two years or longer, and won't even commit to hard production dates for its crucial S-1 model. I think the way to play this stock is to skip all the hype associated with the stock floatation, as most of the buyers aren't looking for a profitable investment, but bragging rights at the country club.

Just wait for the next meltdown in the stock market to call out the weak holders. The time to buy will be in the PR ramp up to S-1 mass production, which will be just as intensive as the IPO.

There is also a political risk associated with the stock. If the Republicans retake the presidency in 2012 they may trash all alternative energy subsidies as unaffordable luxuries, which Tesla is hugely dependent on for making its S-1's $50,000 price competitive. Always be careful when making investments totally dependent on government subsidies for profitability. Here today, gone tomorrow. If that happens, the Tesla will be joining the Tucker, the DeLorean, and the Pontiac in the dustbin of history.

Oh, and Elon, a little fatherly advice. Don't tell a divorce court that you're broke a week before the market values your holdings in TSLA at $2 billion. You're supposed to impress your new shareholders with the depth of your judgment. Not good, not good.

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March 22, 2011 - Pssst! Have You Heard About'..?

Diary

Featured Trades: (RHODIUM), (AAUKY.PK), (PAL), (SWC)

3) Pssst! Have You Heard About'..? When I was at the New York Hard Asset Investment Conference, every hour someone would stop by my table, mention the word 'rhodium', and walk away. My interest piqued, I decided to look into this mysterious metal.

Rhodium (Rh) is in fact the rarest precious metal in the world, and is also the most valuable. The white metal is used primarily as a catalytic convertor by the auto industry as a much more efficient alternative to platinum and palladium (click here for my outrageously profitable calls on platinum and click here for palladium). It is also used in jewelry, the plating of mirrors, and in neutron flux monitors in nuclear power reactors.

South Africa produces 80% of the world's meager 25 metric tonne annual supply, and therein lies the angle. Rolling power shortages in the country has lead to the same intermittent mining stoppages that have affected the other metals.

On the demand side, you can count on a US auto industry that is boosting production from 9.5 million units last year to 15 million units over the next five years to maintain a firm bid. So far, then are running at a 12.5 million annualized rates this year. As a result, rhodium has nearly tripled in the past year to $2,460/ounce, but is still well shy of its $10,000 record high.

Rhodium is not exactly easy to buy. There are no futures contracts, and most of the physical production is tied up in long term contracts. Since the metal is so unbelievably hard, it is difficult to work with, and only one company, the Cohen Mint, is offering .999 fine coins and bars (click here for their website).? But expect to pay a hefty spread over spot, up to 20%, that is standard for a single source supplier.

A more liquid option can be found through buying the shares of the largest rhodium miners, which often appears alongside platinum, like Anglo American (AAUKY.PK), North American Palladium (PAL), or Stillwater Mining (SWC). Granted, prices here are vastly overheated, as they are for so many commodities. But it is something to keep on your list when we get a substantial sell of in 2011.

And don't tell anyone I told you.

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March 22, 2011 - A Poolside Report from City Center

Diary

Featured Trades: (LAS VEGAS CITY CENTER)

4) A Poolside Report from City Center. I write this to you from my poolside cabana at the Aria at City Center, the newest and hottest hotel in Las Vegas, against a background of blaring rock music and helicopters buzzing overhead every five minutes. It's amazing what passes for a swim suit these days, and some of the tattoos I saw were nothing less than shocking.

I'm here because at a throw away rate of $120/night for a room that is worth at least $500, and discount fares offered by the airlines, it is cheaper to spend a weekend in Sin City than it is to stay home. Hotel flacks glibly tell reporters that with an 80% occupancy rate, they are near profitability. But staff tell me those numbers are achieved only because 20% of those rooms have been mothballed and taken off the market.

The glitzy, ultra-modern, Cesar Pelli designed, 16.8 million square foot, 63 acre complex occupies a quarter mile on the city's fabled Strip between the Bellagio and the Monte Carlo Hotels, and will unquestionably become one of the hedonist Wonders of the World. It includes the Mandarin Oriental, Aria, Veer, Vdara, and Harmon Hotels, offering 4,000 rooms and 2,600 condos. They will be adorned by two casinos, a convention center, a new theater for an Elvis themed Cirque du Soleil show, and parking for 6,900.

I wandered in amazement though the gargantuan 'Crystal' shopping mall, where half of the retail space was boarded up in the most tasteful way possible, and marquee luxury names like Fendi, Ermenegildo Zegna, Tiffany, and Louis Vuitton were manned by elegantly dressed and earnest staff, but bereft of a single customer. Despite hiring 12,000 since opening in December, service at the Aria is still glacially slow. My inside guy in Vegas, a blackjack dealer at Caesar's, tells me this is because it is an all-union house. The city is also rife with rumors that the oddly titling Harmon will have to be torn down and rebuilt due to construction flaws.

I spent my free time looking at condos that were initially offered at $600,000, but now could be had for $200,000. To see them, I had to drive through 'ghost suburbs', blighted with dusty, abandoned strip malls and tumbleweed blown office parks that might have been a scene out of a Twilight Zone episode.

Still, how can you hate Vegas? The French toast at hotel Paris, France was to die for, and my masseuse at the Aria, Monique, is clearly God's gift to mankind.

You really have to wonder what MGM-Mirage's Kirk Kerkorian, Dubai World, and their long suffering lenders were thinking when they ponied up $8.5 billion for this venture. Excess is in abundant over supply here, and they clearly thought the good times would go on forever. Instead, they created the worst commercial real estate disasters in human history.

Thanks for the great weekend, Kirk!

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March 18, 2011 - Stopped Out of My Yen Short

Diary

Featured Trades: (STOPPED OUT ON MY YEN SHORT), (FXY), (YCS)

2) Stopped Out of My Yen Short. My standing stop loss order to cover my short in the Japanese yen got triggered right as it dipped under ?80, a new all-time high. The massive flight to cover huge yen carry trades is the cause, as the world rushes to cover short positions in the yen and sell everything else. These positions have been building up for 20 years, ever since interest rates for the yen fell below those for the rest of the world.

If you are going to lose money, this is the way to do it. Of the 21 positions taken on by the Macro Millionaire program since inception, this has been the smallest one. As it fell, I never doubled up, fully aware of the potential of the Japanese yen to make this kind of spike move against us in the wake of the Great Sendai Earthquake.

The government tried valiantly to stem the appreciation with massive intervention in the currency markets, buying some $186 billion on Monday alone. But it was to no avail. I can imagine that the guy in charge of yen intervention is sitting outside the prime minister's office stewing, while the leadership tries to figure out how to extinguish the nuclear fires. The country is truly not functioning now.

If anything, the yen at ?76, the high so far, will cause more damage to Japan's economy that the earthquake did, making the argument for a weak Japanese currency even stronger. But as the great economist, John Maynard Keynes, said so eloquently, 'the markets will remain irrational longer than you can remain liquid'.? But at this stage, I would rather watch from the sidelines than ride this bucking bronco until those in charge make the right decision.

So it is better to stop out and live to fight another day. Let's just hope the next battle isn't a Waterloo.

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March 18, 2011 - My Shopping List of Technology Stocks

Diary

Featured Trades: (MY SHOPPING LIST OF TECHNOLOGY STOCKS), (AAPL), (CSCO), (HPQ), (ORCL), (GOOG), (INTC), (JDSU), (QQQ), (ROM), (XLK)

3) My Shopping List of Technology Stocks. Hedge fund managers are smacking their lips, maneuvering to take advantage of the recent sharp sell off by technology stocks. They are building shopping lists of where to pounce
at the first sign of another upside breakout, much like a famished tiger might behave. Some of the highest quality names have had the biggest falls, some more than 20%, and they are now flaunting dividend yields greater than the 3.2% found on 10 year Treasury bonds.

Here are the names that I am hearing is on the list:

Apple (AAPL)
Cisco (CSCO)
Hewlett Packard (HPQ)
Oracle (ORCL)
Google (GOOG)
Intel (INTC)
JDSU Uniphase (JDSU)

Look at Intel (INTC), which at $20 is selling at a paltry 11 times earnings and a 3.5% dividend yield, and generates the bulk of its sales in the highest growth sectors of the global economy. After the dotcom bust of 2000, these bad boys spent nearly a decade in the penalty box, shunned by the investing world as the poster boys for wild excess. Think Robert Downey, Jr. on steroids. During this time, cash balances doubled, free cash flows soared, outstanding shares shrank, and multiples fell to a tenth of their bubblicious peaks.

I started recommending this group at the absolute bottom of the market in March, 2009 (click here for the call), and it was no surprise to me when they outperformed almost every sector on the upside. With 60%-80% of their earnings coming from abroad, primarily Asia, I saw them really as foreign stocks wearing cowboy hats, pearl snap buttoned shirts, and Ray Ban aviator sunglasses. They did not need banks, as they are almost entirely self-financed, immunizing them from the credit crunch.

They avoided many of the management errors that torpedoed so many other US firms, like derivatives books, leveraged real estate exposure, and LBO debt, and outright stealing. While their American customers were getting poorer, their two billion overseas customers were getting much richer.

The industry represents the last, best hope that America has for competing globally, as it is our only means of staying on top of the international value added chain. It seems that in addition to bulk commodities like corn, wheat, soybeans, coal, timber, aircraft, weapons, movies, and porn, tech companies are among the few that make things foreigners actually want to buy from us.

The lessons of the bubble made them ultra-conservative in their capital spending, which will lead to product shortages and much higher prices in any recovery. There are short squeezes developing for a whole range of tech components. Memory, for example, has seen no capex at all for three years. They are surfing the wave of innovation, and will cash in big time from the mobile computing revolution, cloud computing, and the virtualization of data centers.

During the last tech bubble, the industry did not have the global market that it does today. Now, demand from the rising emerging market middle class is kicking in, as it is for commodities. The two year tech rally we saw from the 2009 lows could just be the down payment of a decade long bull market in these stocks, which will then end with another bubble down the road. When John Chambers, a first class manager, discusses Cisco's (CSCO) long term outlook, he is so effusive, he sounds like he is on ecstasy.

If you don't want to make any bets on single names, you can look at the Technology Select Sector SPDR (XLK), the PowerShares QQQ (QQQQ), or the leveraged ProShares Ultra Technology (ROM). I'll shoot out a trade alert FOR 'Macro Millionaire' readers when I pull the trigger.

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Better Get More Apples

March 18, 2011 - Quote of the Day

Diary

'The seller has an upper hand, as a girl might if she were the only female at a party attended by many boys. That lopsided situation would be great for the girl, but terrible fort the boys,' ' said 'Oracle of Omaha', Warren Buffet, CEO and the largest shareholder in Berkshire Hathaway.

March 17, 2011 - QE2 Just Ended Early

Diary

Featured Trades: (QE2 JUST ENDED EARLY), (DIG), (JJG), (AAPL)

1) QE2 Just Ended Early. Many observers believe that the massive sell off that we have seen in global equity markets are purely the result of the Great Sendai Earthquake. Fat chance. I think the earthquake is masking the true causes of the liquidation, the end of Ben Bernanke's quantitative easing.

When the market would start discounting the demise of this free lunch for all asset classes and the hedge funds that trade them has been one of the great guessing games this year in the financial markets. Up until last week it was thought that the weakness since February was just another dip to buy into the great liquidity bubble. But no more.

You can see this in the violence and the severity of the sectors that have sold off the most. The ones that flaunted the biggest gains since QE2 started in August are now suffering the worst of the damage. Look no further that my favorite sectors, which were all heavily owned by hedge funds, and now being mercilessly dumped.

In a mere two weeks, my energy play (DIG) plunged 16%, the grain ETF (JJG) is off 17%, while technology bellwether Apple (AAPL) has taken a 7% hickey. The double top in the Apple chart is particularly ominous. And look at Cisco Systems (CSCO) where we snagged a double on a call spread and exited post haste. My friend, Dr. Copper, seems to have taken and extended vacation, with its ETF (CU) off 20%. Ouch!

Regular readers of this letter know that I have been expecting this and have been judiciously scaling out of long since the end of January.

The implication is that this sell off may continue longer and go farther than many traders realize. What will be the next driver to take stock prices skyward? QE3? You must be smoking something. The political balance in Washington will permit no more support for the economy. Tax cuts? We have already gorged ourselves on these for the next two years.

Rising earnings? Coming off a great quarter, forecasts going forward are being ratcheted downward, thanks to the earthquake. I think people will be amazed when they discover how much US manufacturing is dependent on high value added, irreplaceable Japanese parts, from autos to electronics.

I don't think the abundant 'crash' gurus are going to get any satisfaction this year either. The news is bad, but it is not that bad. We are far more likely to die of ice than fire. Sounds like it may be a good time to sell out of the money calls on equities everywhere.

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More Likely to Die from Ice That Fire

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Watch Closely. He's About to do a Disappearing Act

March 17, 2011 - The True Story on Nuclear Power

Diary

Featured Trades: (NUCLEAR POWER STOCKS), (CCJ), (NLR), (GE)

2) The True Story on Nuclear Power. Having once worked for the Atomic Energy Commission at the Nuclear Test Site in Nevada, I do have some insights into the melt down at Fukushima. The media is wallowing in an orgy of misinformation that is approaching epic proportions. This is what happens when you rely on journalism and English majors for your analysis of nuclear physics, and throw in a dollop of fear and emotion for good measure.

For a start, the General Electric (GE) design of the six Fukushima plants succeeded. With the earthquake now upgraded to a 9.0 on the Richter scale, these facilities withstood an earthquake ten times greater than their maximum design specification. Thank goodness for Japanese engineering. The design of these plants, lacking a graphite core, makes a Chernobyl type disaster impossible. Nothing is going to explode; the fuel used is too diluted.

The four foot thick reinforced concrete containment structures for three of the six reactors have blown up after a buildup of hydrogen of gas. After pumping sea water in to cool the reactors, these facilities are toast and will never be used again. It is likely that fuel rods have melted together, as they did at Three Mile Island. All that means is a very expensive, multi billion dollar cleanup for operator Tokyo Electric Power, the largest utility in Japan. Remote robots will have to be used. But that is tough luck for the shareholders in this unlucky company, whose stock has cratered some 60% since the disaster started, not you are or, or China or India.

The initial cooling system failed when the earthquake knocked out the power grid in Northern Japan. Then the backup diesel generators that kicked in where flooded by the tidal wave. The amount of radiation released so far has been insignificant, just some low emitting particles of cesium, iodine, and strontium. Almost all of this will get rained into the ocean and dissipated.

While it is true that some of this will be measurable on roof tops in the US in a few days, keep in mind that these instruments are so sensitive the can capture a single atom. I laugh when I hear of panic buying of iodine tablets by the public, as is going on in the San Francisco Bay area today. You are more likely to suffer from the radon radiation in your basement.

The obvious question to ask is whether this will lead to a huge buying opportunity in the nuclear industry. There is understandably concern about the risks of nuclear power in the US in the wake of the Fukushima melt downs. But the US is not the market for responsible for the growth of nuclear power and its fuel. China and India are. China alone plans to build 100 new reactors over the next ten years to become the world's largest producer. If anything, they are accelerating their nuclear program, thanks to higher oil prices. Its energy demands are so immense, they have little choice.

Could it be that nuclear phobia has driven these stocks far below their economic value? I think so. Take a look at Cameco (CCJ), the world's largest listed uranium producer, and the ETF (NLR). The next headline coming out of Japan could be that the fires are out and the threat neutralized, which could send these stocks soaring.

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Is This a Buy Signal?

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Looks Like Utilities Were Not as Safe as You Thought

March 17, 2011 - The Volatility Spike

Diary

Featured Trades: (THE VOLATILITY SPIKE), (VIX)

3) The Volatility Spike. For those of you who have not seen a volatility spike happen before, this is what it looks like up close and ugly. This is why many hedge funds keep a long volatility position on their back book as a kind of diaster insurance. Well, the rainy day have arrived.

Those who took my advice to buy the volatility index (VIX) in January at $17, your day has arrived. It is time to take profits and sell you calls, call spreads, and outright long positions, if you have not already done so. Once the (VIX) spikes, it doesn't live up here forever.

And whatever you do, don't go short. Once this thing gets the bit in its teeth there is no telling high high it will go. Last year's high was 49% on the 'flash crash' day, and we saw 89% at during the March, 2009 stock market collapse.

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March 17, 2011 - Quote of the Day

Diary

'ECB president Jean-Claude Trichet is dangerous. It is ridiculous to talk about raising rates when these countries are so weak. You really only have a recovery in one country, and that is in Germany,' said my old mentor, Barton Biggs, founder and managing partner of the giant hedge fund Traxis Partners.