February 11, 2013

Global Market Comments
February 11, 2013
Fiat Lux

Featured Trade:
Apple Inc. (AAPL)
Microsoft Corporation (MSFT)
Google Inc. (GOOG)
PowerShares QQQ (QQQ)
Bank of America Corporation (BAC)
JPMorgan Chase & Co. (JPM)
Exxon Mobil Corporation (XOM)
Caterpillar Inc. (CAT)
Procter & Gamble Co. (PG)
Netflix, Inc. (NFLX)

Is It Time to Buy Technology Stocks?

Call it the shot heard round the world. David Einhorn?s lawsuit against tech goliath Apple (AAPL) has focused a giant spotlight on what has been one of the worst performing stock market sectors of 2013-- large old technology stocks. Could this be the set up for the biggest sector rotation of the year?

Most of the price action in this year can be divided into kinds: big cap banks and industrials, and what I call garbage. So the shares of Bank of America (BAC), JP Morgan (JPM), Caterpillar (CAT), Procter & Gamble (PG), and Exxon (XOM) have been going through the roof. Garbage stocks, best represented by Netflix (NFLX) have done even better, largely driven by the desperate short covering of big hedge funds.

The Einhorn suit resonated with many of the long suffering owners of Apple, which has seen the value of their holdings plunge 38% since the September $706 peak. His basic message is that the company?s many past near death experiences have fostered a depression mentality where there is no such thing as too much cash.

As a result, $130 billion sits in T bills and money market funds earning nothing, the largest such accumulation in history. Just this hoard, alone, would rank as America?s 19th largest company by market capitalization.

Such conservatism in management is laudable. But Einhorn argues that it has been taken to such extremes at Apple that it has crossed the boundary into mismanagement and malfeasance. The activist shareholder wants the company to return money to shareholders in the form of high dividends and stock buybacks. Such action could trigger a rapid doubling in the value of the stock.

The litigation was enough to ignite a 10% in Apple stock last week. I think David is interested in far more than just this. Is this the final bottom for the beleaguered company? Is it time to buy? The NASDAQ Index certainly things so. Check out the chart below and you?ll see that the action in Apple enabled it to bust out of its recent torpor to the upside.

The really interesting possibility is that the rebirth of Apple could have major implications for the market as a whole. Survey the landscape these days, and you find shares that are either extremely overbought, or extremely oversold. If money shifts from the leaders to the laggards, it could give the indexes enough juice to take another, and possibly final leg upward.

I just thought you?d like to know.


AAPL 2-8-13

MFST 2-8-13


Apple: More Than Just a Bounce?

An Afternoon With California Governor Jerry Brown

On my last trip to my lakefront estate at Lake Tahoe, I stopped off at the state capital, Sacramento, to look in on my old friend, Governor Jerry Brown. It is crucial that readers across the country, and indeed, around the world, know what Jerry is thinking. California has always been a ?pathfinder? state, and what starts here is often adopted across the country. This little chat could be a hint of what?s headed your way.

As I bounded up the steps of the marble capitol building, the first thing I noticed was the absence of the previous governor, Arnold Schwarzenegger?s, smoking tent. The governator had it erected on the lawn so he could enjoy long puffs on his stogies and not be in violation of the state ban on indoor smoking. This was in the state that invented the anti-smoking movement.

I have trod a very long path with Jerry Brown. His dad, then Governor Pat Brown, ordered teargas dropped on me from a helicopter while I was at a Berkeley anti-war march nearly half a century ago. He was Secretary of State while I attended the University of California, often going head to head against then governor Ronald Reagan.

I was in Asia during his first two terms as governor from 1975-83, when his girlfriend, Linda Ronstadt, called him the ?moonbeam governor?, a nickname he has yet to live down. Warning: don?t call him that to his face.

I ran into him at the Democratic convention in New York in 1980 when he mounted his second run for the presidency. After he retired and was considered a political has-been, I bumped into Jerry once again when he studied Zen Buddhism in Japan.

In 1999, he was elected mayor of Oakland, a mostly black Bay Area slum near bankruptcy, which many considered ungovernable. He did a spectacular job, fighting corruption, rebuilding the school system, and sparking an economic renaissance. It was like he had nothing left to lose.

To the amazement of many, Jerry ran and won a third term as governor in 2011, taking over the wreckage left by the disastrous reign of Arnold Schwarzenegger. He has been raising eyebrows nationally ever since.

He immediately launched a crash campaign to raise taxes and cut spending. His Proposition 30 succeeded at the polls, raising sales taxes for everyone and boosting income taxes on those earning more than $500,000. The Golden State now has the highest combined federal and state taxes in the country, at 51.5%. The proceeds of the tax hike are solely dedicated to increasing $6 billion in spending on education.

State leaders learned a long time ago that people will pay a premium to live here. They pay double for housing, so why not double taxes? The sunshine has value. As I explain to guests at my strategy luncheons, high earners don?t mind paying an extra dollar in tax when it means they can make and extra $10, or $100, in profits. That has been the case with a technology industry here that has been booming almost non-stop since WWII.

Brown originally studied at a seminary school to become a catholic priest. To this day, he frequently quotes from the Bible, and he gave my Latin a real workout. Citing Luke, Chapter 12, verse 48 with regards to the sharing of the tax burden, ?to those who are given much, much is required.? The seven-year sunset provision for the new income tax also comes from the ?seven years of plenty?, found in the Old Testament.

He argues that this is only fair, since the top 1% of state earners have seen their income increase by 165% since 1980, while the bottom 80% have seen an 8% drop. The top 1% took 10% of state incomes in the seventies. Now it is 22%.

To say Jerry is iconoclastic is a disservice to the word. He is a combative 75 year old who says what he thinks at the drop of a hat, no matter whom it offends, be they friend or foe. He is a mix that is all too rare in this country, a flaming liberal on social issues, while an ironclad conservative on fiscal matters.

He is a staunch advocate for the environment. He appointed the first gay judge in the US. He is about to deliver the toughest anti-gun legislation in the country. He has been a lifelong cheerleader for the alternative energy industry.

Brown has also completed the most ambitious cuts in social spending in the state?s history, including grants for the disabled, child welfare, and Medical. Some 40,000 non-violent inmates were released from prisons into probation to save money. The University of California saw its budget cut by a massive 25%. State employment was chopped by 50,000, and some 50 redundant state boards were eliminated.

Jerry told me that the state?s problems were caused by two bubbles; the Internet one in 2000, and the indiscriminate mortgage lending that followed. That created a budget deficit that ballooned to $27 billion by the time he returned to office, which cut the California?s credit rating to the lowest of the 50 states. In a short 18 months, Brown balanced the budget, and state debt is now rapidly seeing upgrades, reducing borrowing costs.

The governor says that the spending cuts have been very tough to swallow. Even the carpet in his office is falling apart, and he confesses to eating day old tuna sandwiches. On the tax front, he says that ?when you have more in the cookie jar, you have more cookies to give.?

Jerry says his goals as governor were threefold. He eliminated false accounting gimmicks, which shuffled the state?s financial problems under the carpet, where they festered. He only implemented new taxes if people voted for them. And he returned decision making to cities and counties on schools, because the entities closest to problems have best ability to solve them, a policy he calls ?realignment?. Decentralization and devolution of power to local authorities isn?t something you hear about from liberals very often.

He points out that the big growth in state spending didn?t arise from some idealistic social agenda. Three strikes law mandating extremely long sentences caused an explosive growth of the prison system, which expanded from 3% to 11.5% of the state budget since the seventies. ?An aging population is also prompting a substantial increase in medical spending. These two items alone account for the entire increase in state spending for the past 40 years on a GDP adjusted basis.

I asked Jerry what he thought about the efforts by other tax-free states, particularly Texas, to lure business away. He erupted into a tirade. He argued passionately there was absolutely no evidence that people moved to avoid taxes, which amount to only a few thousand dollars a year for millionaires.

The economy here is booming. The best and the brightest minds in the world are pouring into the most creative and innovative place on the planet. There have been 300,000 private sector jobs created during his current tenure. Exports are up 17%. The state draws 50% of global venture capital investment, and files for four times more patents than runner up New York. The one-ton truck now driving around Mars was built in Pasadena.

My obvious last question had to be ?what?s next? for the energetic governor. Might his tax raising, spending cutting habits have a national audience? ?Do I have more offices in mind? I?m not telling,? he answered, with a twinkle in his eye. That is a lot to say for someone who has already held every high office in his home state.

I got a call from my car telling me it was time to get moving if we were going to make it over Donner Pass before it iced up. I said, ?see you next time? to Jerry. There always seems to be a next time with Jerry.

Jerry Brown

Jerry Brown 2

?What a Long, Strange Trip It?s Been.?

February 8, 2013

Global Market Comments
February 8, 2013
Fiat Lux

Featured Trade:

SPDR S&P 500
S&P Large Cap Index
Power Shares QQQ

How This Bull Market Will Die

The universal question in the market today was ?Why is it down? when all the news was good? The weekly jobless claims dropped 5,000 to 366,000, near a five-year low, confirming that the jobs recovery is still on track. Activist shareholder, David Einkorn?s, lawsuit against Apple (AAPL) to unfreeze its cash mountain should have boosted the market?s major buzz kill.

Sure, ECB president said that European growth would continue to slow. No news there, and certainly not enough to prompt a triple digit decline in the Dow.

The harsh truth is that after the near parabolic move we have seen since the beginning of the year, you don?t need a news event to trigger a market sell off. The mere altitude of the (SPX) at 1,515 should, alone, be enough to do it, a mere 3.8% off the all time high.

The fact is that almost every manager has seen the best start to his track record in decades. Prudence requires that one book some profit, deleverage, reduce risk, and take some money off the table at these euphoric highs.

That especially applies to myself. If I make any more than the 22% I have clocked so far in 2013, nobody will believe it anyway. So why risk everything I?ve made just to make another 20%. Who wants to start over again if the wheels suddenly fall off the market?

That is what prompted my flurry of Trade Alerts at the Thursday morning opening, which saw me bail on my most aggressive positions in the (SPY) and the (IWM), taking profits on my nearest money strikes. I did maintain the bulk of my portfolio, which is still in much farther out-of-the-money strikes, and in short positions in the Japanese yen. I also added to my short positions, buying out-of-the-money bear put spreads on the (SPY), betting that even if we continue up, it won?t be in the ballistic, devil may care fashion that we saw in January.

There are, in fact, real reasons out there for the market to fall. You need look no further than the calendar, which I eloquently outlined the dangers of, in my piece ?February is the Cruelest Month? (click here).

On March 1, the sequestration cuts hit. The 2% increase in payroll taxes has yet to be reflected in slower consumer spending. Federal income taxes have already gone up on those earning over $450,000 a year. This is important, as the top 20% of income earnings account for 40% of consumer spending, and consumer spending delivers 70% of all consumption.

Although it has been postponed by three months, we have a debt ceiling crisis looming that will have to result in spending cuts across the board. My favorite stealth drag on the economy, the paring back of major tax deductions, will be the next big issue to be fought over publicly (the oil depletion allowance versus alternative energy tax credits, and so on, and so on).

All of this adds up to a 1.5% reduction in US GDP growth this year. When you are starting with a feeble, tepid, and flaccid 2% rate, that does not leave much for us to live on. This is how disappointments turn into recession. IT is no empty threat, as many US corporations are seeing earnings slow, and could well disappoint with the next quarter?s results.

This is why I predicted an ?M? shaped year in my ?2013 Annual Asset Class Review? which I am still standing by (click here). We are already well into the heady run up to construct the left leg of the ?M?. Next comes the heart rending ?V? in the middle. Some analysts are amazed that we have gone this far in front of such daunting challenges and haven?t already collapsed. I think that is going to be April or May business, given the humongous cash flows we have witnessed.

SPX 2-6-13

INDU 2-6-13

SSEC 2-5-13

QQQ 2-6-13

DJUSAU 2-6-13


This Bull May Not Have Long to Live

The Cruel Truth About Government Statistics

There have been complaints about the quality of government data as long as there have been stock markets. The US is not much better than emerging markets, like China, where numbers are subject to huge, after the fact revisions. A broker friend of mine emailed the conversation below, which has been circulating around the street. Enjoy.

: I want to talk about the unemployment rate in America.
Abbott: Good subject. Terrible times. It's 7.8%.
Costello: That many people are out of work?
Abbott: No, that's 14.7%.
Costello: You just said 7.8%.
Abbott: 7.8% unemployed.
Costello: Right 7.8% out of work.
Abbott: No, that's 14.7%.
Costello: OK, so it's 14.7% unemployed.
Abbott: No, that's 7.8%.
Costello:?Wait a minute. Is it 7.8% or 14.7%?
Abbott: 7.8% are unemployed. 14.7% are out of work.
Costello: If you are out of work, you are unemployed.
Abbott: No, Congress said you can't count the "out of work" as the unemployed.?You have to look for work to be unemployed.
Costello:?But they are out of work!!!
Abbott: No, you miss his point.
Costello: What point?
Abbott: Someone who doesn't look for work can't be counted with those who look for work. It wouldn't be fair.
Costello: To whom?
Abbott: The unemployed.
Costello: But?all?of them are out of work.
Abbott: No, the unemployed are actively looking for work. Those who are out of work gave up looking and if you give up, you are no longer in the ranks of the unemployed.
Costello: So if you're off the unemployment roles, that would count as less unemployment?
Abbott: Unemployment would go down. Absolutely!
Costello: The unemployment just goes down because you don't look for work?
Abbott: Absolutely it goes down. That's how they get it to 7.8%. Otherwise it would be 14.7%. Our government doesn't want you to read about 14.7% unemployment.
Costello: That would be tough on those running for reelection.
Abbott: Absolutely.
Costello: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?
Abbott: Two ways is correct.
Costello: Unemployment can go down if someone gets a job?
Abbott: Correct.
Costello: And unemployment can also go down if you stop looking for a job?
Abbott: Bingo.
Costello: So there are two ways to bring unemployment down, and the easier of the two is to have people stop looking for work.
Abbott: Now you're thinking like an economist.
Costello: I don't even know what the hell I just said!
Abbott: Now you're thinking like Congress.

Abbott & Costello

So, Who?s on First?

February 7, 2013

Global Market Comments
February 7, 2013
Fiat Lux

Featured Trade:

ETFS Physical Palladium Shares (PALL)

Apple Inc. (APPL)

iShares MSCI Sweden Index (EWD)


How Much to Go With Palladium?

Palladium has caught absolutely on fire in recent months. The ETF (PALL) for the hedge fund darling has soared by 34% since the September low, and shows no sign of slowing. The CFTC announced that speculative positions in palladium futures leapt 12% last week to an all time high.

Also known as the ?poor man?s platinum,? demand for palladium for jewelry in China has been soaring with the growth of the middle class. On top of this, you can add huge new investment demand from the palladium ETF, which launched three years ago. As of yesterday, it boasted $500 million in assets, which amounts to a breathtaking 9.3% of 2011?s 7 million ounce global production.

Car manufacturers consume huge amounts of the white metal to make catalytic converters, which are used to scrub the emissions of vehicle air pollution. They could turn out as many as 15.5 million cars this year, up from a paltry 9 million annual rate during the dark days of 2009. Remember cash for clunkers?

Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by 5.5 million units a year from the lows.?That is a lot of palladium, and platinum (PPLT), the substitute metal.

Some 80% of the world?s palladium production comes from Russia and South Africa, dubious sources on the best of days. So a long position in this white metal gives you a free call on political instability in these two less than perfectly run countries. Last year, Russia cut the amount of palladium released from stockpiles from 1 million ounces to only 100,000. Strikes in South Africa have recently crimped supply there.

For traders, it is kind of late to get involved in (PALL) here from the long side. What is of value now is the predictive power palladium has recently achieved. It perfectly called the bottom of all risk assets in August. It ducked the Federal Reserve?s QE3 head fake in September and kept going up. It then ducked a second head fake in November with the tax loss selling that ensued after the presidential election, maintaining its appreciation. It was off to the races once again at the beginning of January.

The message here is that if you are ever in doubt about the short-term direction of the markets, check out palladium. If it is still going ballistic it means buy every dip. If it isn?t, you should sell everything.

PALL 2-6-13

Canadian Coin


February 6, 2013

Global Market Comments
February 6, 2013
Fiat Lux

Featured Trade:

Why You Should Care About the Iran Rial Collapse

The Iranian Rial (IRR) has just suffered one of the most cataclysmic crashes in the history of the foreign exchange markets. It is off a mind numbing 75% since the beginning of 2011. One dollar now buys 12,200 Rials. Watch out Zimbabwe!

When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, do you think I talk to all of those generals because I like their snappy uniforms, do you?

The word is that the despotic, authoritarian regime in Syria is on the verge of collapse, and is unlikely to survive more than a few more months. The body count is mounting, and the only question now is whether Bashar al-Assad will flee to an undisclosed African country or get dragged out of a storm drain to take a bullet in his head a la Gaddafi. It couldn?t happen to a nicer guy.

The geopolitical implications for the US are enormous.? With Syria gone, Iran will be the last rogue state hostile to the US in the Middle East, and it is teetering. The next and final domino of the Arab spring falls squarely at the gates of Tehran.

Remember that the first real revolution in the region was the street uprising there in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The anti-government sentiments that provided the spark never went away and they continue to percolate just under the surface.

At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy IPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have failed to cater to these desires.

When Syria collapses, the Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process. The new Secretary of State, John Kerry, will stiffened his rhetoric and work tirelessly behind the scenes to bring about the collapse of the Iranian economy.

The oil embargo is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain in this oil producing country. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 25%.

Iranian banks have been kicked out of the SWIFT international settlements system, a death blow to their trade. That is what the Standard Chartered money laundering scandal last year was all about. Sure, you can sell oil one truckload at a time for cash. Try doing that with 3 million barrels a day of which should fetch $270 million. That?s a lot of Benjamins. Forget the fives and tens.

Let?s see how docile these people remain when the air conditioning quits running because of power shortages. With their currency now worthless, it has become impossible to import anything. This is causing severe shortages of everything under the sun, especially foodstuffs, which in some cases have more than doubled in price in months.

What does the government in Tehran say about all of this? Blame it on the speculators. Sound familiar?

Iran is a rotten piece of fruit ready to fall of its own accord and go splat. The Obama administration is doing everything it can to shake the tree. No military action of any kind is required on America?s part. Think of it as victory on the cheap.

The geopolitical payoff of such an event for the US would be almost incalculable. A successful Iranian revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.

Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming oversupply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic $1.66 trillion tax cut for not just the US, but the entire global economy as well (87 million barrels a day X 365 days a year X $100 dollars a barrel X 50%).

Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare. Commercial office space in Houston may not do so well either, as imports account for 80% of the oil majors? profits.

At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.

The implications for the financial markets will be enormous. The US will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom.

A collapse in oil imports will cause the US dollar to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the US government gone as a major new borrower, interest rates across the yield curve will fall further.

A peace dividend will also cause US GDP growth to reaccelerate from a tepid 2% rate to a more robust 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food. The Dow will soar to 30,000, the Euro collapses to parity, gold rockets to $3,000 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60-year bull market in bonds ends in a crash.

Some 1 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak right up these well-trained and motivated. We will enter a new Golden Age, not just at home, but for civilization as a whole.

Wait, you ask, what if Iran develops an atomic bomb and holds the US at bay? Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime and boost their own budget allocations. The head of the miniscule effort they have was assassinated by Israeli intelligence last year (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!). What nuclear infrastructure they have is being decimated by computer viruses as I write this.

If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.

I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.

If the collapse of Iran was going to lead to a global multi decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, offering no substantial pullbacks for latecomers to get in. That is exactly what they have been doing since mid-November.

WTIC 2-4-13

USO 2-5-13

XLE 2-5-13

Iranian Women

Bashar al-AssadHere?s The Next Big Short

RialNot Worth So Much Today