'There are people who can't get used to the idea that the country is being run by a black guy living in public housing. Obama is only half black, so I guess that makes him our 'starter Negro,' said political commentator Will Durst.
(SPECIAL FOOD ISSUE)
Featured Trades: (CORN), (WHEAT), (SOYBEANS),
(POT), (MOS), (AGU)
Teucrium Agricultural Trust Corn Fund
PowerShares DB Multisector Commodity Trust Agriculture ETF
1) My Best Trade of the Year. I was having a good 2010 until the grain trade came along. Now I’m have a fabulous year. Since my initial call to buy on June 24 (click here for the piece), soybean meal has risen by 15%, Corn (CORN) has jumped by 25%, and wheat has rocketed by a mind boggling 100%. The fertilizer stocks of Potash (POT), Mosaic (MOS), and Agrium (AGU) have done just as well. Even the sleepy ag ETF (DBA) has done great. Believe me, I have paid my dues in this market I probably put out more data on agricultural products than a macro newsletter, with the obvious exception of Dennis Gartman’s heroic effort in The Gartman Letter. I’m sure that most of this work goes for naught, as these commodities are so far off the radar, that most readers quickly skip over it in search of the truly juicy stuff. After all, wheat does not have a PE multiple, a book value, or pay a dividend. But there are times when ags work and nothing else does. Finally, all those hours speaking to Agricultural Coop mangers in Kansas, analyzing weather models, and visits the docks in Benicia to check on grain loadings to China have paid off. The futures give you great leverage, and as we have seen in recent weeks, truckloads of volatility. A tip off from an ex-KGB friend in Russia that conditions were far worse than the media and the trade rags were hinting at also helped (click here for the piece). The truly amazing thing about this year is that domestic grain traders, seeing nothing but rows of corn, wheat, and soybeans at home as far as the eye could see, were caught totally flat-footed. Much of the buying that took us limit up in wheat the last few days was panicked short covering by desperate locals. This crop disaster was totally foreign in its original. I first spotted trouble with the canola crop in Canada. It then rippled from there to Australia, Western China, the Ukraine, and then to Russia, big time. My strategy is the same every year. Just wait for the market to price in perfection, buy it, and wait for the weather to turn bad, which it inevitably does. Who are the big winners in this mess? Not you or me, but American farmers, who stand to make a bundle selling to a starving world at prices double from when they planted. Oh, and by the way, I stopped out of my wheat on Friday, August 6th. A double is better than a poke in the eye with a sharp stick, especially when returns everywhere else are so miniscule. And, as any farmer will tell you, pigs get slaughtered.
'Analysts don't know preferred stock from livestock,' said Gordon Gekko in the classic film Wall Street.
Featured Trades: (JULY NONFARM PAYROLL)
1) Job Creation is Still on Vacation. If I have learned one thing from 40 years in the financial markets, it’s that traders demand instant gratification. So when the July nonfarm payroll showed a loss of 131,000 jobs, an unchanged unemployment rate at 9.5%, and total unemployment of 14.6 million, you can count on them to head for the exits.
You can blame the government, as usual, which chopped 202,000 jobs, including 143,000 census workers. The state and local governments are emerging as a big problem, which cut 50,000 jobs, including 38,000 teachers, and are shoveling money out of the economy faster than the feds can shovel it in. Just when our leaders are pointing to education as our economic salvation, we are packing 45 kids into classrooms with broken computers, missing textbooks, and depleted teaching supplies. Should I be surprised that the girl in my local FedEx office doesn’t know that Tokyo is in Japan?
The scary thing is that the drag from the states and municipalities is a long term structural issue that has only made a few halting baby steps towards solution. In terms of management efficiencies and pension benefits, they are about where corporations were in 1980. Decades of cutting and reorganization are ahead of them. Some analysts see 250,000 in further cuts from them just in the next 18 months.
Of course companies don’t want to hire in front of a diminished long term GDP growth rate of 2% which I have been advertising ad nauseum in these pages.? Just emerging from the near death experience of the century, they will only hire a few temps which they can jettison at the first sign of trouble. What’s the point of ramping up production when there are no new customers? This is why we saw a pitifully small increase in private sector jobs from 31,000 in June to 71,000. Forget about uncertainty. That is the political red herring of this election year.
I think we are suffering from permanent unemployment at the current levels, much like Germany saw in the eighties and nineties. If you are out of this economy, you are out for good, not exactly inspirational news for business. There is nothing either political party can do about this but blame each other, which we will hear a lot of in coming months.
My pet solution is for the government to borrow $1 trillion for ten years at the current, impossibly low interest rate of 2.88% and rebuild our entire aging, dilapidated interstate system. When I drive across the Oakland Bay Bridge into San Francisco it is a little disconcerting to see the blue water below shimmering through the cracks in the road. Using conventional multipliers, this would create 35 million jobs heavily weighted at the blue collar end of the skill spectrum where we need them the most. These jobs can’t be exported to China, and all 50 states will be in for some serious dosh.
This is an easy, efficient way to solve our employment nightmare. It is affordable, as it would only add $28.8 billion to our budget deficit, mere pocket change these days.? I therefore don’t ever expect the idea to see the light of day.
Featured Trades: (SUGAR), (SGG), (CZZ),
iPath Dow Jones-UBS Sugar Subindex Total Return ETN
3) I'll Take Two Lumps, Please. It's just a matter of time before global buying of the grains spills over into the sugar market. A combination of torrential rains in Brazil, the source of 54% of the world supply, and draughts in India, sent prices to a 35 year high of $31 cents a pound last year.
Since then, prices plunged by 52% to 14 cents on rumors of new bumper crops, making sugar the world's worst performing asset. But new shortages are looming on the horizon. It's raining again in Brazil, causing a major shipping bottleneck. Thailand, the world's second largest exporter, will flip to a net importer. Blasting heat in Europe is killing off a large part of the sugar beet crop there.
The International Sugar Organization says that global supplies are at a 30 year low, while the US Department of Agriculture claims our stockpiles are at a 40 year nadir. Major consumers, like the soft drink and food industries, are already marking up product prices. To top it all, China is developing a sweet tooth, a rising standard of living enabling them to increase their own consumption of richer, higher calorie foods.
When I get involved in this commodity, I do so through the sugar contract on ICE or NYBOT. There is also an exchanged traded note for sugar to look at (SGG). Equity investors should study Cosan ADR's (CZZ), Brazil's top cane producer. While it's clear that the train has already left the station, we're already back up to 20 cents a pound, it is something to entertain on dips. It certainly beats the hell out of buying ten year treasury bonds at a ridiculous 2.88% yield.
Featured Trades: (HIROSHIMA ANNIVERSARY)
4) A Hiroshima Memorial. Friday was the 65th anniversary of the Hiroshima atomic bomb, an event that that has touched me in many ways.
I never had any doubt for the need to use the bomb in 1945. My father had orders to join his third marine division in Okinawa for the invasion of Japan when it was dropped. If the plan had gone ahead, I would not be writing this letter today. My biochemistry major and math minor at UCLA landed me a summer job as a research assistant at the Nevada nuclear test site in the late sixties where I got to know the men who worked with Dr. Robert Oppenheimer to build the bomb. There, ‘yields’ meant millions killed, not interest paid.
When I first landed in Japan, I made a beeline straight to the Atomic Bomb Victims Hospital to interview survivors 30 years after the attack. I listened to stories about people vaporized, but whose image was etched into solid granite, and the rivers that were choked with countless bodies. Textile patterns were permanently burned into human skin, the light colors reflecting radiation, while dark ones absorbed it. Some 50 of the city’s 150 doctors were killed instantly, and the rest were seriously injured. They were futilely left to treat gamma rays and beta particles with only mercurochrome, or traditional Japanese folk remedies like moxabustion. Tens of thousands showed up at hospitals with no visible injuries, only to die agonizing deaths within the day.
Two weeks after the bomb, everyone’s hair started falling out and immense welts called keloid tumors appeared, classic symptoms of then unknown radiation poisoning. American scientists descended on the city by the hundreds measuring every imaginable parameter with grim precision, such as the heat at ground zero that reached an unbelievable 6,000 degrees, and the melting of ceramic roof tiles to a radius of 1,300 yards. They told the Japanese that no one could live there for 20,000 years. The residents ignored them and moved back in to rebuild as soon as the fires abated.
I met one spry Japanese American woman who grew up in Fresno, California and spoke perfect 1930’s English, but was sent home to Hiroshima to avoid the war. I’ll never forget the massive scars on her forearms where her summer yukata cut off. A barking dog caused her to briefly look away from the curious descending parachute from a lone B-29 overhead, thus saving her face and her eyesight. Her three young children didn’t make it.
For me the experience converted an interesting physics experiment into the greatest source of human misery of all time. As the years went on I met many more Hiroshima survivors, known as bakusha, who after a third shot of Suntory whiskey would talk about the artificial weather the bomb created, the gale force winds and the black rain. Every type of plant strangely flourished after the bomb, but men and women were left sterile, and birth defects skyrocketed. In later years I attended memorial ceremonies where 140,000 candlelit paper boats were placed in the Motoyasu River at night to symbolize the lost souls.
Ironically, those who survived the bomb now have the greatest lifespan of any group in Japan. I guess that if you can survive an atomic bomb, you can handle anything. I’m sure free health care for life and pensions helped too. There was also that one dose of radiation treatment, courtesy of the US government.
Today Hiroshima is a major focus of international pacifist and disarmament groups. The effort is being led in the US by former secretary of state, George Schultz, who has played a key role in cutting American nuclear stockpiles by 75% to 5,113 today. Some 20% of America’s nuclear power is currently generated by plutonium from recycled warheads from the former Soviet Union.
You can learn more about his efforts by visiting the Plowshares Fund at http://www.ploughshares.org/ .To buy John Hersey’s Pulitzer Prize winning Hiroshima, which describes the doomed city immediately after the attack in all its horrific detail, please click here. It is not a light summer beach read, but is enlightening and sobering.
'There is no fuel left in the tank' said Carter Worth, a technical analyst about the likely failure of the stock market rally.
Featured Trades: (THE SACK OF ROME), (TBT), (TMV)
ProShares Ultra Short Lehman 20+ Year Treasury ETF
Direxion Daily 30 Year Treasury Bear 3X Shares ETF
1) Get Ready for the Sack of Rome. I traded the great Japanese bull market during the eighties at Morgan Stanley, from the very bottom all the way up to the peak. The firm’s fundamental analysts railed against the tide for years, claiming that stocks were liquidity driven, overvalued, and headed for a huge fall. Every time they made that call, their offices got moved ever closer to the elevator, and eventually, the men’s bathroom. When the turn finally came, I had already taken off on an extended vacation, and the ignored analysts had moved on to hedge funds, where they proceeded to make vast fortunes. When someone at last threw the switch on Japan, it got dark amazingly fast. Tokyo went out at an all time high of ?39,000 on the last day of 1989, and then dropped a staggering 45% in January. Yesterday’s close, 21 years later, was ?9,489. These days, I feel like those Japanese analysts, except the market that is driving me nuts is the one for US Treasury bonds (TBT), (TMV). The more arguments I find that they should fall, the faster they go up (see charts below). I probably would have fired myself by now, if I weren’t my own boss, as nepotism is always a powerful force. Now I hear that PIMCO’s Mohamed El-Erian says that there is a 25% chance of real deflation hitting the US, after telling us it won’t for so long. Again, this reminds me of Japan, where the higher it went, the more imaginative the explanations became as to why it should continue. Ignore those 100 PE multiples, just focus on the damn Q-Ratios! I believe that we are witnessing the final blow off top in the great 30 bull market in bonds. A decade from now, it will not be stock investors complaining about a lost decade, but owners of bonds. Could it go on for another six months or a year? Sure. Like gold in 1979, technology stocks in 2000, the absolute tops of these parabolic moves are impossible to predict, both on a time and price basis. But when the turn comes, it will resemble the Sack of Rome.
Featured Trades: (EMERGING MARKETS ARE HOT),
(EPOL), (IDX), (ECH), (EWS)
iShares MSCI Poland Investable Market ETF
Market Vectors Indonesia ETF
Singapore iShares ETF
iShares MSCI Chile Fund Index ETF
2) Emerging Markets Are on a Tear. Regular readers of this letter know that I have been going on about emerging markets like a broken record (as my kids ask ‘What’s a record?’). My favorite investment targets have been on an absolute tear lately. In July, Poland (EPOL), (click here for ‘Where to Play the Dead Cat Bounce in Europe’ ) soared by 25%, Chile (ECH) rocketed by 17% (click here for ‘Chile is Looking Hot”), Singapore popped 13% (click here for ‘Singapore Sizzles’), and Indonesia jumped 11% (click here for that call). Portfolio managers are voting with their feet, unsurprisingly choosing to invest in the portion of the global economy that will account for 90% of growth for the next decade, and giving a cold shoulder to the home market that will only provide 10%. They are capturing a double whammy in that appreciating currencies and rising share prices create a leveraged, hockey stick effect on trading profits. If you want to run with the bulls, make sure your passport is current.
Keep Your Passport Current if You Want to Run With The Bulls
Featured Trades: (YEN), (FXY), (YCS)
Currency Shares Japanese Yen Trust
ProShares UltraShort Yen ETF
3) What’s Behind the Yen Strength. My old friend Peter Tasker (we both wrote for the late Far Eastern Economic Review in the seventies), ran an interesting editorial in the Financial Times today (click here for the piece). He examines the only two assets that have gone up in price over the past three years, gold (GLD) and the yen (FXY), (YCS). While clearly not a gold bug, he does advance some interesting arguments on the Japanese currency. If the ten year JGB is at a 1.1% yield, and the deflation rate is 1.5%, then the real rate of return for investors is a mostly tax free 2.6%. But government statistics understate the case, as usual, and the real deflation rate is probably closer to 3%, taking the real yield to 4.1%, among the world’s highest. Nobody owns yen and therefore can’t sell it. Ditto also for JGB’s, which are almost entirely held by Japanese institutions because they have been so low yielding for so long. This is why a recent miniscule redirection of new reserve purchases away from US Treasuries into JGB’s cause bond prices there to rocket, and the yen to take a run at a 15 year high at ?84.8. A new all time high at ?79.8 is not out of the question. The yen strength will eventually end, because while gold cannot be created out of thin air, currency can, through a massive quantitative easing that sends the printing presses into triple overtime.