July 2012

Why Ben Bernanke Hates Me

I don?t just think he hates me. He truly despises me. In fact, he does everything he can to put me out of business.

Take next week, for example, when the Federal Reserve Open Market Committee meets, and he will attempt to give my views and me a complete thrashing. I doubt he?ll launch a QE3 because he needs to keep some dry powder as a last resort. But he probably will announce some minor back door easings, like expanding his ?operation twist? to include mortgage backed securities for the first time, or ceasing interest rate payments on deposits from private banks. Just the mere prospect of this is forcing me to stay entirely in cash, preventing me from making more money than I already am.

It?s not that I am not an all right guy. I am kind to children and small animals. I donate generously to many charities. I send my mother cards on her birthday (happy birthday mom!), even though she is 84 and not expected to last much longer. I even occasionally escort little old ladies across the street, although this is a holdover from my days as an Eagle Scout.

It?s just that Ben Bernanke and I don?t see eye-to-eye on a lot of important issues. He wants stocks to go up. As a hedge fund manager who plays from the short side more often than not when the economy is growing at a paltry 1.5% rate, I want them to go down. He wants bonds to go up too, as he clearly elicited with his ?twist policy? last year when he bought long term Treasury bonds and shorted overnight paper against it. I, on the other hand, want bonds to sell off because I know that when the bill comes due for all of this monetary easing, the crash will be momentous.

These are not the only matters we differ on. He wants to create jobs. He can wish this until the cows come home but he?s not going to get them because of the gale force demographic headwinds the country is now facing and the massive deleveraging by the public and private sector. The 25 million jobs we exported to China are never coming back.

However, all he has to do is make a mere mention of his desires, or even just mention the letter ?Q?, and asset prices go through the roof, forcing me to stop out of my shorts at losses. This is why I was in such a foul, acrimonious, and detestable mood during the first quarter, when stocks went up almost every day.

My problem is that Ben Bernanke isn?t the only person who dislikes me. President Obama doesn?t think much of me either. He talks about jobs too. He frequently speaks about the need to improve our education system, even though I know he is poised to slash the budget for the Department of Education as part of some deal with the Republicans. Ditto for Social Security.

Fortunately for me, I wrote off any prospect of getting a retirement check a long time ago and have made other arrangements, like becoming a hedge fund manager. Either the payments will be too small to live on, or they will be made in Zimbabwean dollars and will be effectively worthless.

I get along with Treasury Secretary, Timothy Geithner, OK, which keeps me on his ?must see? list whenever he stops in San Francisco on his way to Beijing to ask to borrow more money. But we go way back. There are only four people in US history who can discuss Japanese monetary policy of the 1920?s in depth, and do it in Japanese just for laughs (it was clearly too easy). Two of them, Senator Mike Mansfield of Montana and Harvard professor, John K. Fairbank, died ages ago. So he is kind of limited on choices. Besides, there are not a lot of people out there who can give him a 40 year view on the global economy, and I am one of them.

There are plenty of others who don?t think I am so hot, too. Try making a fortune in a market crash when everyone else is losing their shirt. While others in the locker room at my country club are slamming doors, tearing their hair out, and breaking golf clubs in half when they see the price feed on CNBC, I am chirping happily away about selling short at the top. I might as well be letting out a loud fart in Sunday church service. This explains why I stopped getting invitations to dinners ages ago.

It?s not that my relationship with Ben Bernanke is totally hopeless. When the demographic picture turns from a headwind to a tailwind and individuals and corporations cease deleveraging and return to releveraging, we?ll probably be reading from the same page of music. But according to the US Census Bureau, the earliest this can happen is 2022. By then, he probably won?t be the Fed governor anymore and I won?t care if he likes me or not.

Besides, I may be able to make a new friend or two in the meantime. If Mitt Romney wins the presidential election he says he?ll fire Ben Bernanke on his first day in office. He can?t really do that, but Ben?s term does expire a year later. His two most widely rumored picks to fill the post are president of the Federal Reserve Bank of Dallas, Richard Fisher, and Stanford University professor, John Taylor.

These two are not in the least bit interested in all this quantitative easing malarkey. They are much more similar in philosophy to Herbert Hoover?s Treasury Secretary, Andrew Mellon, who popularized the ?let the chips fall where they may? approach to economic policy. Kick the props out from under this market and all of a sudden Dow 3,000 is on the table, as argued by Global strategist and demographics maven, Harry Dent.

They might even go as far as unwinding the Fed?s hefty $2.7 trillion balance sheet. That would give the Chinese, who hold $1 trillion of these bonds, a heart attack. But who cares? It would create the mother of all trading windfalls for me. Hell, they might not even care if I torture small animals, beat children with a switch, and leave little old ladies in the middle of onrushing traffic. I think we would get along just great.

Screw Social Security, and Ben Bernanke too.

Report From Paris

Diary

The full force of soaring oil prices really hit home when I arrived in Paris yesterday. As we passed a gas station, I mentioned to the driver that I didn?t know that they sold gas by the gallon in France. He answered that they didn?t. Those were the prices in liters I was seeing. He then voiced concerns about the future of his taxi business as fuel prices ratcheted up from $10 to $15 a gallon! It makes our own bleating that our prices at $3.50 a gallon appear somewhat detached from reality.

The Paris strategy luncheon, held at the Cercle National des Armees, or the French Army Officers Club, was one of the best yet. You know, the place where Napoleon used to hang out? I gave my talk under the watchful eyes of the portraits of Charles de Gaulle, President Francois Hollande, and the French Foreign Legion. Renditions of the battle of Waterloo were nowhere to be seen.

When I gave my event here last year, Internet access was only available in the lobby. Perhaps that?s why the French lost Vietnam? At the table on my right a group of French Air Force officers were planning the next air strike on Libya. On my right several Chinese admirals were negotiating to buy an aircraft carrier from the French Navy. It was some of the most fascinating eavesdropping I have ever done.

The event turned in to something of a reunion for me, with my former institutional clients from the 1980?s dropping by, as well as some of my French staff from the London office of Morgan Stanley. A gentleman from Warsaw, Poland won the prize for the greatest distance traveled. Spend your Zimbabwe dollars wisely. Maybe you can offload your holding to Bashar Assad, who may soon need them.

The big question at all of my recent lunches is ?Will there be a QE3? I offered the simplest of all possible explanations. Asset classes that prospered mightily from the $600 billion infusion of the Federal Reserve during QE2, like stocks, commodities, precious metals, and oil, will suffer the most from its demise. Asset classes that suffered from the rapid expansion of the monetary base this encouraged, like the US dollar, should see a rebound. The political balance in Washington makes a QE3 impossible, unless the stock market crashes first, vaporizing Ben Bernanke?s wealth effect. So don?t hold your breath. It would be a last desperate act.

Not All is Well in the City of Light

Everyone present complained that the Euro was in freefall at $1.22, but conceded that momentum could take it as low as $1.00 before it sees a reversal. I brought an extra suitcase to Paris, hoping to fill it with goodies for those on the home front at the department store Gallarie Lafayette, Mon Dieu! But prices were still so high that I only purchased a few postcards, knowing I could buy the same products at home on the Internet for half the cost, with free shipping and no import duties.

I spent the weekend playing tourist and visiting my old favorites, such as the Louvre, the Musee d?Orsay, Sacre Coeure, Montmarte, the Eiffel Tower, and a fine dinner floating down the Seine on the Bateaux Parisienne. The food is so good that even the local corner brasserie produced a meal to remember. A stylish people make it impossible to be overdressed, no matter where you go. In Paris, even the homeless have taste. A search for my front teeth on the Left Bank, which I lost in a riot there in 1968 when a flying cobblestone hit me in the mouth, yielded no results.

My next report will be from Frankfurt, Germany.

July 27, 2012 - Quote of the Day

Quote of the Day

?Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,? said Andrew W. Mellon, President Herbert Hoover's Secretary of the Treasury. The Republicans did not win a presidential election for 20 years after that comment.

Trade Alert - (FXY) July 26, 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 - (TLT) July 26, 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

Apple Just Gave You a Gift

Newsletter

Steve Jobs? creation dropped a real bombshell on the market Tuesday when it announced Q2, 2012 earnings that were rotten to the core. The timing could not have been worse for a market that was on the verge of complete nervous breakdown. Of the 53 brokers who provided research coverage of the Mountain View, California firm, 27 rated it a ?buy?, 21 ?outperform?, and precisely zero ?underperform?. And you wonder why retail has bailed on Wall Street.

The numbers made grim reading. Sales, which had been targeted at $37 billion came in at only $35 billion. Profits amount to $8.82 billion, taking earnings per share to $9.32, well down from the $10.37 expected. Estimates for iPhone sales had run as high as the low 30 millions. The actual figure was 26 million. In overnight trading, the shares opened down a gob smacking $40, instantly vaporizing $37 billion in market capitalization.

Apple is suffering from the mother of all delayed consumption headaches. Consumers love their products so much they have gone on strike until the vastly upgraded and better performing iPhone 5 is launched in the fall, yours truly included. So the dip in profits will reappear as a spike in profits in the next one or two quarters. This means that if you missed the 50% run up since the beginning of the year, you may have a chance to take another bite at, well, the apple.

Apple is not just an iPhone story. The mini iPad is expected out soon. Apple TV is expected to be huge next year. Apple has only just scratched China?s market of 600 million cell phone users. Its six stores are regularly the scene of long lines, and occasional riots by consumers desperate to buy their products. Droves are crossing the border by train from Shensen to Hong Kong, where Apple products are more easily available.

In the spring I lead readers into the August $400-$450 call spread which became one of our most profitable trades of the year. I took them out a month ago because we had already squeezed out most of the profit, and because I thought that exactly this kind of disappointment might occur.

The intelligent thing to do here is to wait for the current shock to work its way through the system. You also want the present melt down in the broader market to exhaust itself. That could take us well into August. The best-case scenario here is that you get back in when the stock falls all the way down to its June low at $525. If it then drops below $500, double up. This would be a once in a lifetime gift.

If you are cautious, you will then want to put the $400-$450 (AAPL) call spread back on with a January 2013 expiration. The more aggressive could roll up to the $450-$500 call spread. Or you could just buy the stock outright for longer-term accounts. All of the arguments that I made two years ago that the shares were headed for $1,000 are still valid (click here for the link).

Report From London, Part III

Diary

The city is now the most crowded that it has been at any time since WWII. Most hotels have tripled their rates, forcing traveling students on a budget to sleep in doorways and under bridges everywhere.? My usual abode here, The Naval Officers Club near Piccadilly, honored their regular price since I have been such a long term and loyal guest. However, I was the only one in the building not participating in an Olympic event, as the teams of several nations booked every room two years ago. The American team arrived today in their spiffy blue blazers. After randomly driving around London, the hapless bus driver broke down and admitted that he didn?t know where the Olympic Village was. And enterprising athlete whipped out his iPhone, Googled the address, Mapquested the directions, and they finally arrived four hours late. Still, they fared better than the Australian sailing team, whose sales were lost by Qantas Airlines. I decided to flee the madness in London for a day and visit some old friends in the countryside, the 8th Earl and Countess of Carnarvon. The late 7th Earl was an early investor in my first hedge fund and I have kept in touch with the family ever since. ? His grandfather, the 5th Earl gained fame and fortune from his co-discovery of King Tut?s tomb in Egypt?s Valley of the Kings in 1922. His early death, shortly thereafter, was the origin of ?The Mummy?s Curse? of depression era horror film fame. Many of his discoveries today make up the bulk of the Egyptian collection in New York?s Metropolitan Museum of Art, which the family sold to pay estate taxes. Recently, the family has been renting out their 350 year old home, a 15-minute taxi ride south of Newbury, the spectacular Highclere Castle, for use as a film set. The period drama series that resulted, ?Downton Abbey,? unexpectedly became a blockbuster in the US where viewers stupefied by endless low budget reality shows were starved for quality, thoughtful content and adult writing. It also sent 100,000 visitors a year their way, as well as $25 million in ticket fees. This windfall enables to maintain the house and the magnificent gardens in immaculate condition. The cash flow enabled them to ramp up the other family business, breeding racehorses for the queen. Portraits of past winners adorned almost every room. After tea with my hosts and a personal tour of the estate, I picked up some tea towels for friends at home who are into this kind of thing. I also saw a display of some spectacular early Egyptian relics, which the family found bricked up behind a wall 60 years after the Met sale. ? ? The train has just emerged from the tunnel and we are now racing our way across the Norman countryside. Everyone?s cell phone has simultaneously started bleeping, mine with a text message welcoming me to France and informing me that I will be allowed unlimited data transfer, but will be billed $1.29 per minute for voice. Is that in English or French? Is there a surcharge for speaking foreign languages in France? The medieval red rick farmhouses whip by in a blur. The steward has arrived with my dinner tray, so I?ll sign off for now. I?ll report again after Paris. John Thomas

My Visit to Obama?s House

Diary

During my recent quick run through Chicago, I stopped by Obama?s house on Greenwood Avenue and 50th street in up and coming Hyde Park to say hello. I was thwarted by two concrete crash barriers, 16 cop cars, and army of elderly Chicago police happily pulling overtime. Shifty looking characters wearing long overcoats and sprouting wires out of their ears were everywhere. Needless to say, I did not get invited in for tea and cookies.

Every neighborhood bird nest, flagpole, and chimney sported video cameras, and Google Earth has wiped the block off the map. No wanting to risk my valued Secret Service clearance, I scuttled out of there before anyone started asking questions. Instead, I settled for a visit to the delicious Valois Cafeteria around the corner, the president?s favorite diner, and his preferred bookstore at 57th Street Books. They carried all of his publications. Amazing!

I managed to run into someone, who knew someone, who once babysat Obama?s kids. Need, a presidential pardon, a cushy ambassadorial appointment, a new alternative energy program, or a juicy government contract? I?m now your ?go to? guy! Just make a discreet donation to my favorite 501 (3) (c) and it?s a deal.

June 26, 2012 - Quote of the Day

Quote of the Day

? The modern Olympic Games are orgies of lachrymose nationalism. War by other means, warrior-athletes, watched by men in suits and uniforms?.rogue California chemists running their eye popping, vein-clustered, vest stripping robots against degendered state laboratory freaks,? said author, Ian Sinclair, and outspoken critic of the Olympics.

Farewell to Barton Biggs

Diary

It is with a great sense of sorrow that I learned of the passing of industry legend, Barton Biggs. He was 79. I was speaking to him only a few weeks ago when I passed through New York for my strategy seminar, attempting to decipher the medium term trends for these fractious and conflicting markets. It is a reminder of how temporary and fleeting life can be.

Barton was a pioneer in the international investment arena and founding father of the modern hedge fund industry. He became famous for calling market bottoms in 1982, 1987, and 2008. He was a colorful and masterful writer who regularly titillated investors with his iconoclastic and out of consensus ideas. Sound familiar?

Barton grew up as a member of the East coast establishment, his father being the chief investment officer of the Bank of New York. He graduated from Yale in 1955 in creative writing and then did a brief stint in the Marine Corps. He next turned to Wall Street and joined E.F. Hutton as a junior broker (remember ?When E.F. Hutton speaks, people listen??).

In 1965 he spun off to create Fairfield Partners, one of the early long/short US equity hedge funds. After several prosperous years, the fund crashed and burned with the collapse of the ?Nifty 50?. He later told me that was when he first learned of the six standard deviation move. ?The biggest mistake you can make in a bear market is to cover your shorts too soon? he said.

In the mid seventies, he was recruited by a small, white shoed, private partnership called Morgan Stanley & Co. to build up an asset management division from scratch. Barton became my friend and mentor when I joined the firm in the early eighties, and I spent the better part of the decade debating every pebble of the investment landscape with him.

Together, we fought a major uphill battle trying to convince a cautious and blinkered management that the firm?s future lies in international and emerging market equities. Getting them to focus on Toyota and Matsushita instead of General Motors and IBM, we felt like Sisyphus endlessly rolling the boulder up a steep mountain.

Barton persevered, and in the following three decades the business grew to $1 trillion in assets along with a world-class global research department. After Morgan Stanley went public, he became a billionaire in his own right. I bailed to start my own hedge fund a few years later.

In 2003, Barton left (MS) to start a new hedge fund, Traxis Partners. We all thought he was crazy at the time, as it was the last thing you would expect a 71 year old to do. This is a business where 30 year olds regularly drop dead of heart attacks from the stress. That was pure Barton. I heard at one point he reached $5 billion in assets.

He became a regular fixture in the media, offering his wisdom and insights in his characteristic gravelly voice. Always the independent thinker, I know he voted for Obama in the last election, at odds with much of Wall Street.

To listen to my last extended interview with Barton where he gave his global view a few years ago on Hedge Fund Radio, please click here. He was tiring even then, and we had to record the show in 15-minute segments so he could rest in between sessions. But he made the extra effort to give my readers an edge on the market. That was pure Barton too.

Barton will be missed by many.

Sysiphus