Featured Trades: (REPORT FROM EUROPE, PART IV)

 

3) Report From Europe, Part IV. Milan, Italy appears to be a city entirely populated by fashion models riding bicycles on the city's frenetic streets. That is one's first impression coming out of the monolithic Milano Centrale train station, built by Mussolini to reaffirm faith in his state. Despite years of allied bombing during WWII, the building is as imposing as the day it was built.

You Think It's Easy Fitting into a Size 0?

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I came to this medieval city to speak at another strategy luncheon, which was attended by readers from throughout Europe, from the surgeon hailing from Trondheim, Norway, to the Hungarian hedge fund manager. The Westin Hotel provided a spectacular lunch, as only the Italians can.

Much of the conversation revolved around the Euro, which everyone in the room to a man believed was grotesquely overvalued, given the continent's economic outlook. Still, as long as the European central bank pursues its mindless policy of raising interest rates to control commodity driven inflation, it will remain firm.

We discussed various breakup scenarios for the EC which come into vogue every time Greek debt gets downgraded, which is often. This is unlikely, given the modern European's dislike for open conflict. Bring nationalism into the equation, and things could deteriorate quickly. Germany could bail, unwilling to refinance the debt of lazy, tax avoiding, garlic eaters. Southern Europe could do a disappearing act, unwilling to pay their debts to the sauerkraut eaters up North.

Yes, I Can Be Bribed

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In either case, the European currency bloc shrinks, or disappears completely. It is just a matter of time before an opportunistic political party rides this fast track into power. The Germans will tell you from hard earned experience that this always ends badly.

I cautioned that the risk of nationalism was probably greater in the US now than in any other major country. Of the dozen republicans now vying for the presidential nomination, at least three could be described as extremist, pandering to conservative America's worst fears (high taxes, immigration, cap and trade, gay marriage, the rise of minorities).

An isolationist America would withdraw from international organizations, like the United Nations, the World Bank, and the IMF. Bush's wars in Iraq and Afghanistan would be stepped up, while we would probably walk away from Obama's war in Libya. It would adopt a more threatening posture towards Russia and China. Remember, Sarah Palin threatened to launch a nuclear war against Russian for its invasion of Azerbaijan. We laughed, the Russians, not so much.

I had exactly one free afternoon to spend in this amazing city. I visited Michelangelo's Last Supper at Santa Maria della Grazie monastery, looking for evidence of the conspiracy theories long ascribed to this masterpiece. I did a quick run through the Galleria and stepped on the bull's balls, conducting three clockwise rotations to bring good luck. Looking at my performance since then, it obviously worked. The impact of the fashion industry on Milan is enormous, with every conceivable brand imaginable on show.

I managed to scoot into the main Brioni store just before closing. There, I watched two Russian Mafia types in their thirties buy a half dozen exquisitely tailored, 200 thread count suits each for $6,000 apiece. That's $72,000 worth of clothes'?. for guys! Alas, they don't carry an American size 48 long in stock, it would have to be a custom order, so I left with only a couple of Leonardo ties in hand. In any case, I happen to know that I can get the identical suit at the Brioni shop Caesar's Palace in Las Vegas for half, thanks to flaccid Uncle Buck, plus they likely have my size. And I will be there in two months for a strategy luncheon (see above).

The next morning found me in a mad dash back to the train station, my taxi driver artfully weaving in and out of traffic, where I boarded a first class Eurostar train. The engine powered North towards the Italian Alps, passing through the Milan slums. Retracing the route seen in the classic Frank Sinatra war flick, Von Ryan's Express. Next stop: Zermatt, Switzerland, and the Matterhorn.

To be continued.

Featured Trades: (BRING BACK THE SMOKE FILLED ROOMS), (SPX), (TBT)

2) Bring Back the Smoke Filled Rooms. I write this from poolside at the historic Claremont Hotel in Berkeley, California. The weather couldn't be more perfect, and the local beauties, many coeds on summer break from the university, are strutting their wares, or the lack thereof. It is shocking what some people will tattoo on their bodies these days, and where they will do it. The blue sun umbrellas array themselves around the water like a postmodern impressionist painting.

I am sending out the letter late today in the hope that I will get some insight into the debt ceiling negotiations before the markets open. So far, no joy. The (SPX) opened down 15 points in Asia, oil is tanking, Treasury bonds (TBT) are getting beat up on a prospective downgrade, and Uncle Buck is getting mugged. Fortunately, my long in equities is partially hedged by my short on the bonds. Is it possible that I have underestimated the stupidity of congress?

In days of old, when such impasses presented themselves, Speaker of the House, the rosy cheeked Tip O'Neil, would meet his counterpart in the Senate for a night of poker. Several bottles of Scotch later, a deal would get struck, and the two would be photographed together shaking hands the next morning, talking about the good of the country. The process moved on.

That doesn't happen anymore. Speaker John Boehner is new at the job, with a mere six months in the post, and he is learning through trial and error, mostly the latter. He is up against a world class constitutional law professor. I can't imagine Boehner playing cards with Harry Reid, Obama, or anyone.

Even if he does come to an agreement, it is unlikely that he can make it stick by getting his own party to follow him. Many of the new junior house members are from the Tea Party, whose understanding of economics, financial markets, and the law making process is shaky at best. In another six months they have to start campaigning again, going to their supporters and financial backers with a list of what they have achieved. Raising the debt ceiling is not on that list.

If Tip O'Neal faced recalcitrant members of his own party, he would threaten a cut off of all pork barrel projects in their district, banish them to the least popular committees, and kill any bill they brought to the floor. But at least if Tip cut a deal, you knew he could deliver the votes. Today, rebellious republicans won't even take a call from Boehner, who view him with almost as much hostility as they do Obama.

What we are seeing here is sausage making in public, in all its odiferous ugliness. It is negotiation out in the open, never a good idea, especially when both sides believe the other is doing so in bad faith.

All of this leads us to bemoan the passing of the Reagan republicans, who you could work with and get a few laughs along the way. It also means that the volatility that I promised you last week will be arriving by the boatload in coming days. I still believe a deal will get made in the coming nine days, so I will use the sharp dips to add selective risk exposure. Watch this space.

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Featured Trades: (TIME TO FLIP TO THE SHORT SIDE ON THE TREASURY BOND MARKET), (TBT)

2) Time to Flip to the Short Side in the Treasury Bond Market. The first thing that I noticed this morning is that the long end of the bond market was getting absolutely creamed. 'RISK ON' has returned with a vengeance, at least for a few weeks.

If you assume that the real inflation rate is close to 3%, then most of the Treasury bond spectrum is paying negative interest rates, including two, five, and ten year paper. Only the 30 year is offering a small single digit real return. That is amazing, given the huge inflationary prospects that Ben Bernanke has created with his vast money printing exercise, on top of the huge price increases we have seen in food, commodities, energy, and metals this year. This makes Treasury bonds terrible investments, and great shorts.

Today's terrible price action puts a chink in the armor of the bull market in Treasuries which has now run for nearly five months. I have been milking this for all it has been worth, but it is now time to get more aggressive on the other side. It sets up a double top on the long bond charts. The flipside of that is a double bottom for the (TBT), the double short inverse ETF that profits when longer dated Treasury bond prices fall.

I will increase this position when I see another entry point, as I believe that falling bond prices will be one of the key developments running up to the year end. They don't ring a bell at the top, so it's now or never. This could be the banner trade for the rest of 2011.

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Time to Flip to the Short Side in the Treasury Market

2) Apple's Next Stop: $1,000. When I took a young, cocky, long haired, Levis wearing Steve Jobs around to meet Morgan Stanley's institutional investors to pitch an Apple share offering 28 years ago, I vowed never to buy anything from the man. He was such a great salesman, and possessed such a messianic devotion to his product, the risk of getting legged over had to be great.

This proved a good strategy for the next 18 years, when the company nearly went under three times, and the stock repeatedly plunged from its initial listing price of $22 down to $4. Disastrous products like the Apple Newton came and went, and then poor Steve got fired. Ouch!

Living in the San Francisco Bay Area, I was also creeped out by the fanatical cult following that Steve enjoys. Criticize an Apple product here, and you risk getting attacked, ostracized, deleted from address books, and chopped off Christmas card lists. There was also no end of abuse from my IPod and Imac addicted kids.

I have to confess now that my prior prejudices lead me to miss the boat on Apple for the last decade, when the stock soared from $4 to $275, eventually topping Microsoft (MSFT) with a $238 billion market capitalization last week. To see the company bring out a ground breaking, high end $499-$829 product like the IPad and sell 2 million units in a short two months during unstable economic conditions is nothing less than amazing.

The recent stock performance has also been miraculous, bouncing back from a flash crash low of $195 to challenge its old high in a matter of weeks, while the rest of techland lies in ruins. Forecasts for the global smart phone market are ratcheting up by the day on the back of surging demand from emerging markets. Sales could reach 250 million units annually by 2012, of which 17% currently is sold by Apple.

The company has become a monster cash flow generator, spewing out $12 billion over the last 12 months. It sits on a cash mountain of $23 billion, or $45/share. Apple now has the envious problem in that sales of several of its products are going hyperbolic at the same time. Some analysts have Apple's earnings skyrocketing from the current $12/share to $30 over the next two years, which at the current 22 multiple would take the share price up to $675.

If the company's multiple expands to its pre-crash average of 35 X, that would take the stock to a positively nose bleeding $1,073, giving it a 400% return over the next two years. I'm not saying that you should rush out and load up on stock today. But it might be worth taking a stake on the next wave of fear that strikes the market. Note to readers: (originally published June 3, 2010).

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What a Long and Winding Road It's Been

Featured Trades: (INTEGRATING AMERICA'S POWER GRID)

 

2) Integrating America's Power Grid. Until now, America's power grid has been divided into three unconnected chunks, making transnational transmission impossible, leading to huge regional mispricing. While California and New York suffered from brown outs and sky high prices, electricity was given away virtually for free in Texas.

A group of power companies is now proposing to build the $1 billion Tres Amigas superstation in Clovis, New Mexico that would connect all three grids. The plant would use advanced superconducting technology that will send five gigawatts of power down cables cooled at 300 degrees below zero.

The facility would solve a major headache of alternative energy planners, and will no doubt accelerate development. It would allow the enormous wind farms on the drawing board in the Midwest to ship energy to the power hungry coasts. Ditto for the mega solar projects proposed in the Southwest deserts, and the big geothermal plants being built in Nevada.

With Obama sending tidal waves of government cash towards the sector, the timing couldn't be better. It is also great news for major alternative suppliers like First Solar (FSLR). Some of these projects might now actually make some sense.