June 2011

June 2, 2011 - 'RISK OFF' Returns With a Vengeance

Featured Trades: (RISK OFF RETURNS WITH A VENGEANCE)

2) 'RISK OFF' Returns With a Vengeance. I have not seen a day this ugly in quite a long time. From the second that a dismal ADP report came out in the pre-market, it was a steady slide, right up until the close. The S&P 500 couldn't rally even five points on the day, and closed down a stomach churning 30.66 points.

I knew that risk markets had to be peaking yesterday when several hedge fund managers called me to review my logic behind my current short positions, right after the S&P Case Shiller U.S. National Home Price Index showed that residential real estate had returned to free fall mode.

The Challenger-Grey ADP report, an indicator of employment trends, could not have been worse. Consensus expectations hovered around 190,000, but came in at only 38,000. Then the May ISM index plunged from 60.4 to 53.5, the lowest point in nearly three years. Moody's threw fat on the fire with several sovereign debt downgrades.

All of this comes on top if negative economic reports from China, Australia, and South Korea. The big picture is one of a global slowdown, with the US economy dragging the rest of the world into the ditch. Many were puzzled by a steady drip, drip of worsening economic news producing rising stock prices for most of last week. But I knew that once you reached the tipping point, the sell orders would pour in like a breached Hoover Dam. That is exactly what we got today.

Of course, it was a great day to follow a particular newsletter that has been pounding the table about the 'RISK OFF' trade for the past six weeks. Once the selling in stocks accelerated, it spilled over to commodities, foreign currencies, oil, junk bonds, and silver, pretty much anything that still had a bid. Treasury bonds and the dollar skyrocketed. It all added up to a one day, 3.5% pop in the value of the Macro Millionaire model portfolio.

All of this makes this coming Friday's May nonfarm payroll even more interesting, with economists back peddling their estimates so fast, they could well be Lance Armstrong racing in reverse. Goldman Sachs cut their number by a whopping 50,000. Confidence is melting by the second.

-

Thar She Blows!

-

Which Way Now, Lance?

June 1, 2011 - Rare Earths Are About to Become a Lot More Rare

Diary

Featured Trades: (RARE EARTHS ARE ABOUT TO BECOME A LOT MORE RARE),
(REMX), (MCP), (AVL), (REE), (LYSCF)

2) Rare Earths Are About to Become a Lot More Rare. Interest in Rare Earths is starting to heat up once again, and it something you should keep on your radar. China's Baotou Steel has announced its intention to start up the world's first rare earths exchange. The move is expected to increase the liquidity and visibility of these valuable elements while reducing their trading costs.

So named because they were hard to get in the 18th and 19th century, these once obscure elements have suddenly become the focus of several converging trends in the global economy, as they are the key ingredient of magnets. There are 17 in all, divided into light (cerium, Ce, lanthanum, La, and neodymium, Nd) and heavy (dysprosium, Dy, terbium, Tb, and europium, Eu). Since the beginning of the year, the price of 99% pure cerium oxide has rocketed by 650% to $11.50 a pound.

It turns out that you can't build a hybrid or electric car, a wind turbine, thin film solar, LED's, high performance batteries, or a cell phone without these elements. One Prius uses 25 kilograms of the stuff. You also can't fight a modern war without rare earths, being essential for radar, missile guidance systems, navigation, and night vision goggles.

That's where things get interesting. China now produces 97% of the world's rare earth supplies, much of it coming from small mines operating by criminal gangs where it is safe to say, concerns about environmental damage are nil. In 2009, China announced that would start restricting rare earth exports, possibly banning several, it is thought, in order to force foreigners to buy more of their downstream electronic products.

Such a ban was temporarily enforced against Japan last fall, when they arrested a hapless Chinese fisherman (spy) who drifted into disputed territorial waters. The ban was lifted when the man was released. Thus, rare earths made their debut at a Chinese political weapon. Similar restrictions could be enforced against the rest of us as early as 2012.

The world market for rare earths is tiny now, amounting to only $4 billion a year. But Toyota intends on doubling its production of Prius's from one million to 2 million units in the near future, while China and South Korea want to boost their combined electric and hybrid production by 1 million units by the end of next year. Nissan is ramping up global manufacturing of its all electric Leaf to 500,000 by next year.

America was once the world's largest producer of these elements, until it was undercut on prices by China (see chart below), and all US production ceased. The threatened Chinese supply squeeze has prompted a group of investors to reopen Molycorp's (MCP) Mountain Pass California mine, a jackrabbit ridden, rattlesnake infested pit an hour southwest of Las Vegas. The mine was the world's largest producer of cerium and neodymium, and provided the europium that was used to produce the first color televisions.

Last August, Molycorp? raised $500 million through an IPO to reopen the mine and a nearby refinery at $15 a share. It briefly dipped to $12.50 where I got everybody in, and then soared to $79, making it the top performing IPO for 2010. Further fuel was added to the fire with the launch of the first rare earth ETF, Market Vectors Rare Earths/Strategic Metals (REMX) in November.

Now congress wants to get involved, proposing a rare earths strategic stockpile for the military, and offering subsidized loans to fund it. Remember what that did for oil? The price has already started with cerium doubling to $4/pound since 2007, and neodymium up 500% to $23/pound during the same period.

So it might be wise to use the next generalized equity sell off to dip your toe back into the rare earths pool. The best way to get involved is through the miners themselves, which involves an added element of risk. Take a look at the established players, which include Molycorp (MCP), Avalon Rare Metals (AVL), Rare Element Resources (REE), and Lynas Corp (LYSCF).

-

June 1, 2011 - The One Economic Indicator You Can Rely On

Diary

Featured Trades: (THE BIKINI WAX INDICATOR)

3) The One Economic Indicator You Can Rely On. There is no end to which I am willing to go to understand the future direction of the world economy. So when I learned that the price of Brazilian bikini waxes was going through the roof, I had to sit up and take note. Last month, the price of the popular beauty treatment soared by 16.6% to 35 Reals, about $22.

This is no joke. The Brazilian government includes the removal of body hair in the most strategic of places in a basket of consumer services that it uses in calculating the country's inflation rate, now estimated at 6.5%. An economist in Rio de Janeiro assured me that this has nothing to do with the opposite sex. It is one of the few measures they track which can't be clouded through the surreptitious altering of its quantity or quality. You either get it, or you don't.

The big picture here is that inflation is worsening, not only in Brazil, but other emerging markets, like China, India, and Vietnam. This is why the yields on one year Brazilian debt are at sky high double digits, a hedge fund favorite. It is also why the People's Bank of China's efforts to stanch inflation through higher interest rates and tightened bank reserve requirements are likely to get worse before are gets better.

What can I say? An economic indicator in the hand is worth two in the bush? And I won't even get into the implications of 'Stealth' inflation.

-

June 1, 2011 - Quote of the Day

Diary

'I think the price of oil is high here. There is still some panic because of Libya. We prefer to have it around $70-$80 a barrel. Our goal is the find an equilibrium between our needs and your needs' said Prince Al-Waleed bin Talal of Saudi Arabia, the largest foreign investor in the US.