April 2012

Is France the Next PIIG?

All eyes are now focused on Spain, where last week?s failed bond auction took yields back over 6% for ten year paper, and the pain is clearly not confined to the plain. But longer term focused analysts are wondering if France is really the next big over ripe piece of fruit to fall in Europe. Is France really a PIIG in sheep?s clothing?

The structural economic data are not good. Public debt is now at a nosebleed 90% and rocketing. Public spending soaks up 56% of GDP, more than any other Eurozone country.? Banks are severely undercapitalized. The unemployment rate has been stuck over 7% for more than 30 years. Nor has the country had a balanced budget for three decades. Exports are feeble compared to robust Germany. When was the last time you bought a Renault, a Hermes scarf for your significant other, or an Yves Saint Laurent suit for yourself?

The presidential election, which will be held in two rounds on April 22 and May 6 is not giving investors any cause for comfort. The embattled incumbent, Nicolas Sarkozy, wants to ramp up protectionism, soak French tax exiles, restrict immigration, and withdraw from Europe?s passport free Schengen zone.

Socialist Fran?ois Hollande, who is now ahead in some polls, wants a larger government, to hire 60,000 teachers, cut the retirement age from 62 to 60, and raise the maximum tax rate to 75%. Communist Jean-Luc M?lenchon is picking up support and insists that France should withdraw from NATO, instantly raise the minimum wage by 20%, and raise the top tax rate to 100%.

Please excuse me if I sound like I am stupide, an imb?cile, or a b?te, but aren?t all of these proposals guaranteed to send French deficits soaring, requiring them to dramatically increase their international borrowing? Don?t you think the LTRO has its hands full enough bailing out Portugal, Italy, Ireland, Greece, and Spain? This would be hugely equity negative.

Is it possible that the candidates are willing to sacrifice the French stock market in order to get elected? That has already been the case in the bond market, where investors have been fleeing en masse, sending yields spiking once more. Perhaps this is in response to Moody?s yanking of the country?s AAA status earlier this year.

This all sets up the land of Gitanes and Gauloises chain smokers as an enticing short for global fund managers. The easy play for US based investors is the France iShares ETF (EWQ), which you can sell short on margin, or buy puts. Wait for a rally to get a decent entry point.

For those amphibian readers who wish to debate my long term outlook for Gaul further and perhaps throw some stale croissants and some overage camembert at me, please buy a ticket to my July 17 Paris strategy luncheon by clicking here. Hopefully, you will be over your Bastille Day hangovers by then.

Are These Potential Shorts?

Turbulence at Boeing (BA)

Diary

Boeing Aircraft (BA) is one of the great icons of American manufacturing, and also one of the country?s largest exporters. I was given a private, sneak preview of the new Dreamliner at the Everett plant days before the official launch with the public, and I can tell you that this engineering marvel is a quantitative leap forward in technology. No surprise that the company has amassed one of the greatest back order books in history.

I can also tell you that my family has a very long history with Boeing (BA). During WWII, my dad got down on his knees and kissed the runway when the B-17 bomber in which he served as tail gunner (two probables) made it back, despite the many holes. It was only after the war that he learned that the job had one of the highest fatality rates in the in the services.

Some 40 years later, I got down on my knees and kissed the runway when a tired and rickety Boeing 707 held together with spit and bailing wire, which was first delivered as Dwight Eisenhower?s Air Force One in 1955, flew me and the rest of Reagan?s White House Press Corp to Tokyo in 1983 and made it there in one piece.

I even tried to buy my own personal B-17 bomber in the nineties for a nonprofit air show I was planning, but was outbid by Paul Allen on behalf of his new aviation museum. Note to self: never try to outbid Paul Allen, a cofounder of Microsoft, on anything.

So it is with the greatest difficulty that I examine this company in the cold hard light of a stock analyst. There is nothing fundamentally wrong with the company. But its major customers around the world are suffering from some unprecedented stress.

US airlines are getting hammered by the high cost of fuel. Delta even resorted to the unprecedented move of buying its own refinery to assure fuel supplies. Europe, where Boeing competes fiercely against its archenemy, Airbus, is clearly in recession. Government owned airlines there are in ferocious cost cutting mode.

China, another one of Boeing?s largest customers, is also slowing down. As for Japan, the economy there is going from bad to worse. All Nippon Airways was awarded the first Dreamliner for delivery because it is such a large customer. It is just a matter of time before this harsh reality starts to put a dent in the company?s impressive earnings growth.

Take a look at the chart below and you?ll see what I mean. Despite having a tailwind of one of the strongest bull markets in history, (BA) shares have continuously bumped up against an invisible ceiling at $76/share. Now that we have some general market weakness, I think the stock is ripe for probing some serious downside.

If the selloff continues for another week or two, we could take a run at the 200 day moving average at $68.75. Break that, and the next support is at $60. Touch $60, and the August, 2012 $70 puts that I picked up for $3.45 could hit $9. Even half of that move would produce a great trade. But you may have to suffer some turbulence to get there. This is not for the weak of heart.

They Build Those Boeings to Last

An Afternoon With Boone Pickens

Diary

Reformed oil man, repenting sinner, and borne again environmentalist T. Boone Pickens says that ?When we turn the US green, it will have the best economy ever.? I met the spry, homespun billionaire at San Francisco?s Mark Hopkins on a leg of his self-financed national campaign to get America to kick its dangerous dependence on foreign oil imports.

For the past 30 years, the US has had no energy policy because ?no one wanted to kick a sleeping dog? while oil was cheap. Production at Mexico?s main Cantarell field is collapsing, and will force that country to become a net importer in five years. Venezuela will be shifting exports of its sulfur laden crude to China for political reasons, once refineries in the Middle Kingdom are completed to handle it.

Unfortunately, unstable energy prices and the disappearance of credit have put alternative energy development on a back burner. If the US doesn?t make the right investments now, our energy dependence will simply shift from one self-interested foreign supplier (Saudi Arabia) to another (China).

Wind and solar alone won?t work on still nights, and can?t power an 18 wheeler. Don?t count on the help of the big oil companies, because they get 81% of their earnings from selling imported oil, and don?t want to kill the goose that laid the golden egg. The answer is a diverse blend of multiple alternative energy supplies from American only sources.

Although Boone now has Obama?s ear, it?s a long learning process. Boone has donated $700 million to charity, and says the 20,000 trees he has planted should offset the carbon footprint of his Gulfstream V private jet.

I worked with Boone to organize financing for a Mesa Petroleum Pac Man oil company takeover in the early eighties, when it was cheaper to drill for oil on the floor of the New York Stock Exchange than in the field. Now 82, he has not slowed down a nanosecond.

82 and Still Sharp as a Tack

April 17, 2012 - Quote of the Day

Quote of the Day

?If you add up all the stimulus that expires at the end of the year, like the Bush tax cuts, the jobs bill, and so on, it adds up to 4% of GDP. It?s a major factor that no one is focusing on?.yet,? said Larry Kantor, chief strategist of Barclays Capital.

Trade Alert - (FXE) April 16, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

Trade Alert - (GLD) April 16, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

China GDP Data Sends Bulls Fleeing

Newsletter

The market hung on tenterhooks all last week, waiting for the Chinese Q1 GDP figure. As recently as Thursday, rumors swept the market that the number could be as high as 9%, well above the consensus figure of 8.4%, taking the Dow up a red hot 181 points. When the flash hit in the afternoon Beijing time confirming 8.1% the equity futures flipped into sell mode. By the time the crying was over on Wall Street, virtually all of the day?s previous gains had been wiped out.

There are a few lessons to learn here for the aspiring trader. Never believe rumors, especially when they are supposed to originate from governments on the other side of the world. They are almost never true. They often originate from someone trying to unload an unfavorable position. Whoever dumped their portfolio of US stocks Thursday afternoon at the close did exceedingly well.

The second is that all is not well with the global economy. I heard China experts speculating that this quarter might be the bottom of the Middle Kingdom?s slowdown. But they are China experts to the extent that the probably ate in a Chinese restaurant once and watched one Bruce Lee movie. So much of what you hear about China in this country is nothing more than guesswork and I never pay attention to it.

I have a somewhat different take. There is no sign whatsoever that China?s growth recession is ending. Sure, domestic loan growth this month rose from ?700 billion to ?1 trillion, but much of that increase is due to carry over demand from the lunar New Year holiday of the previous month.

The biggest problem is that China?s main export customers are in distress. Its biggest, Europe, is in a serious recession and we have no idea how long that will last. The weakness of the Euro certainly says longer. Japan is falling off a cliff. Demand from a weak, 2% a year growing US is recovering, but is a shadow of what it once was. You can see that is the rapidly improving American trade surplus, which dropped from an eye popping $51 billion to $46 billion last month.

Think of the Chinese economy as a battleship. It is not going to turn on a dime. To complicate matters, China is only at the opening stages of a serious real estate bust. You can count on low end housing starts to plunge from 15 million to 5 million this year as the air comes out of the real estate bubble. That why copper has been so dead this year.

Two small easings of reserve requirements since November are not going to halt this slowdown. In fact, I think that Q2 could be even slower than the last. This is a big reason what I am looking for a prolonged ?RISK OFF? scenario over the summer.

Perhaps my old friend, Steven Roach, the former chairman of Morgan Stanley Asian and now in retirement as a Yale professor, put the best lipstick on this pig. The 8.1% report is down only 3.2% from the peak 11.3% growth rate. The 2008 crash saw the growth rate fall 8.2% from the top. We are a long way from that, thankfully.

There is a far more important message in the quarterly figure. This is not a temporary slowdown; it is a permanent one. There is never going to be a return to a continuous, white hot 11% GDP growth rate of the past. Recent years have seen the Middle Kingdom lose many of its competitive advantages.

Runaway wage inflation is rapidly eroding the country?s cost advantage. Oil over $100 a barrel is probably hurting China more than any other country. Remember, much of America?s infrastructure was built at $1 a barrel. This is why ?onshoring? will become the new economic trend of the decade (click here for ?Onshoring: The New Global Trend?).

But, as I never tire of pointing out in my meetings with the Chinese government, slowing the country down to a steady 8% rate is a good thing. This is a more sustainable and achievable rate that the country can live with. It reduces the volatility of the economy, not just for China, but for the world as a whole. Still, I often get back concerns about the country?s ?bicycle? economy that has to move forward quickly or risk falling over. These are leaders well aware that their country has a history of retirement in front of a firing squad instead of at at country club.

The whole affair also shows how important foreign developments have become for US financial markets. Look at the news flow driving markets these days and it all about China and Europe, with 5 minutes left over to wonder about whether Ben Bernanke is going to bring us QE3. That?s why you have to pay attention to someone like me who has been playing the game for 40 years and has pipelines straight into the key foreign ministries.

I think there is going to be a great buy in China sometime this year. Right when traders are jumping out of windows, managers are rending their hair, Merrill Lynch puts out a call to sell everything, and the Dow is down 2,000 pints? you want to back up the truck and load up on Chinese stocks.

This excursion should include international names like Caterpillar (CAT), Freeport McMoRan (FCX), BHP Billiton (BHP), and Rio Tinto (RIO), as well as domestic ones like China Mobile (CHL), China Telecom (CHA), and Baidu (BIDU). These are the companies that will far outperform everyone else in any sustainable Chinese recovery. You will also want to pick up some ETF?s like (FXI) and (CAF). But that time is definitely not now.

China?s Bicycle Economy

Another Call From Texas

Diary

I received another one of those scratchy, barely audible cell phone calls from my buddy at the Barnet Shale in Texas this morning.

Cheniere Energy (LNG) is has obtained three of the four permits it needs to begin construction of a gas liquifaction plant in Louisiana. This will enable the company to export natural gas (UNG) to Asia, where it is selling for prices eight times higher that here in the US. The project will be a major step towards dealing with the enormous glut of natural gas dumped on the market by the new ?fracking? process that has taken prices down to under $2/MM BTU?s, a new 12 year low.

Today we learned that (LNG) made it on to the calendar for a Federal Energy Commission (FERC) hearing on April 19 to consider this last license. That news alone was enough to drive the share up 7% today to a new high for the year. There the company will be opposed by the usual anti carbon alliance of environmentalists.

You may recall that I recommended this stock to readers back March 7 when it was trading at $16.10 a share (click here for ?Take a Look at Cheniere Energy (LNG)?). Today, the stock hit a high of $17.48, a gain of 8.6% since then. If Cheniere get the permit, as it is likely to do, the shares are likely to double. If it doesn?t, it will halve. I?ll leave it up to you to decide how best to play this.

Check Out These Cool Lightening Pics

Diary

From my mountain top aerie in the Oakland Hills I had a front row seat to the spectacular lightning storm that hit San Francisco last week. I saw both towers of the Golden Gate Bridge get hit simultaneously. I just thought I would pass on some of the more amazing pictures. It is all part of life?s rich tapestry. Enjoy.

I'm at the second strike from the left!

April 16, 2012 - Quote of the Day

Quote of the Day

?The VIX right here is unsustainably low. I think China has more of a downside surprise. Analyst expectations for earnings are overly aggressive. There are just a few too many things that can go wrong out there,? said Vadim Zlotnikov, chief market strategist at Alliance Bernstein.