'You know you're no longer CEO when you get into the back of your car and it doesn't move,' ' said 'Oracle of Omaha', Warren Buffet, CEO and the largest shareholder in Berkshire Hathaway.
Featured Trades: (THOUGHTS ON OIL AND THE ECONOMY)
1) Thoughts on Oil and the Economy. If at the beginning of the year I had told you that oil would go well above $100/barrel within two months, there would be a civil war in Libya, and the stock market would hit a new three year high, you would have immediately canceled your subscription to this newsletter and initiated proceedings to have me committed to an insane asylum. Except in Texas, where I would have been taken out and summarily shot, and rightfully so. Not in a vindictive way, but in a humanitarian attempt to put me out of my misery, like a thoroughbred race horse with a broken leg.
Yet, here we are. Go figure. The transportation index, that prodigious user of all types of fuel, is getting slaughtered. Both sides in the Libyan civil war are threatening to attack the other's oil supplies. The rebels say they have sold a supertanker worth of crude. To whom? How did they accept payment? Where is the contract? Who would you contract with? If true, why doesn't Khadafi sink it? It's not like it is a small target. While all western companies have eased oil shipments from Libya, Chinese and Indian companies are picking up the slack on the spot market.
In the meantime, US naval ships are steaming through the Suez Canal in a show of force, and we are days away from Saudi Arabia's 'Day of Rage.' If you think this is just talk, see what the Arab cable news network, Aljazeera, has to say about it by clicking here . I can easily see a carrier group sitting in the Gulf of Sidra, declaring a 'No Fly Zone', and then shooting down any plane that leaves the ground. Remember, our air-to-air missiles have a 100 mile range, and we know that the Libyans don't know how to use theirs. Hey, if you can't win two Middle Eastern wars, maybe the third time is the charm? It couldn't happen to a nicer guy.
If oil stays at the current triple digit altitude, some $70 billion gets lifted out of consumers' pockets, knocking 0.5% off of US GDP this year. Keep in mind that there is absolutely no dearth of oil in the US. Private storage facilities at the Cushing, Oklahoma hub are bulging, and the government's strategic petroleum reserve is chock full. It is fear and speculative buying by hedge funds that is driving prices up, not physical shortages.
Former Chairman of the Federal Reserve, Alan Greenspan, made some interesting comments this morning as to why dear oil wasn't having a bigger impact on the financial markets. Energy conservation has become far more pervasive than any of us realize. All of those subsidized solar panels and hybrid cars are starting to have a major impact on our energy consumption.
Also, thanks to the Great Recession, companies held back investment in productivity increases and cost cutting that have only recently been unleashed. What is one of the biggest of these investments? Spending on energy conservation measures across a vast array of industries.
Remember that busted home heater that I told you about yesterday? I had the engineer take apart both the outgoing and incoming units, and I couldn't believe what I saw. The 20 year old one was a simple gas fired affair. The new one included a built in radiator that sucked every bit of heat out of the apparatus, greatly improving its efficiency. These tiny, incremental sorts of savings are going on in a million imperceptible ways around the world every day, all adding up into something really big.
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Khadafi's New Negotiating Strategy?
Featured Trades: (UPDATE WITH TECHNICAL ANALYST CHARLES NENNER)
2) An Update with Technical Analyst to the Stars, Charles Nenner. If you have not made your year by now, you are dead meat. Many of 2011's big moves have occurred, and there aren't going to be many fireworks for the rest of the year. Many asset classes are about to settle down into boring, predictable trading ranges.
That was the gist of my conversation with my old friend, Charles Nenner, who flew over from Europe to spend a weekend jamming with fellow musicians in the Big Apple. The wily Dutchman is looking forward to a week of media appearances and consulting with his major hedge fund clients.
Charles is not yet ready to short the US stock market. While the rally is definitely showing advanced signs of age, the upside momentum is impressive, so he would rather stand aside. His extreme, best case target for the S&P 500 is 1356.
Nenner caught a short play in gold earlier in the year, on which I was able to ride the coattails. Now that we are back up to all times highly he is looking for a repeat. Ditto for silver. I'll let you know when he pulls the trigger.
Charles is looking for further weakness in bonds, but doesn't see a crash. His preferred play is a short volatility one whereby he shorts puts on both the 10 year and 30 year September bond futures contract at the 110 level. That equates to a yield of 4.2% on the 10 year and 5.2% for the 30 year. If yields don't get that high, he keeps the entire premium from the short put trade. If he goes in the money, he is quite happy owning bonds at these levels, which he can then sell on the next rally.
He agreed with my own view that we are in the midst of a major long term bull market for the grains and commodities. His next target is $4.84 for copper, up 5.6% from today's level of $4.49. The food sector is getting an assist from high oil prices, as all types of farming have substantial energy inputs. He promised to get back to me on specific targets for corn, wheat, and soybeans. Suffice it to say, that you better be stockpiling your seven years of plenty.
We agreed that our previous bet over Cisco (CSCO) was a push. I was right, in that I was able to capture a quick double of my capital on my call spread, and then scampered. He was right when an earnings disappointment ultimately caused the stock to crash once again. We may well put on the same bet again, for the fiery case of the Dutch liquor, Bols, when I strap this trade on again after the next generalized equity sell off.
I always end every one of our conversations by pinning Charles down on the one trade he would pull the trigger on today with new money. Wait for the Euro to hit $1.40 against the dollar, and then go short, with a $1.4050 stop. At that point the European currency will have had an impressive 12 cent rally against the greenback and will be well overdue for a correction. European Central Bank president Jean Clause-Trichet has shot his wad with his promise today of rate hikes, and from here traders will want to see the color of his money. But break the $1.4050 stop and you should run for the hills, as the next target is $1.46.
I promised to take him wave hopping in my plane on his visit to the West coast. He agreed, as long as I promised not to do it upside down.
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Oops, Forgot That Promise!
Featured Trades: (FEBRUARY NONFARM PAYROLL)
3) The February Nonfarm Payroll. President Obama's political advisors were no doubt popping the champagne bottles on Friday morning when the February nonfarm payroll showed a gain of 192,000. It was the best report in two years. The headline unemployment rate handily dropped from 9.0% to 8.9%. The December and January reports saw revisions upward of another 50,000 jobs.
Private sector hiring leapt by 222,000, with big gains in manufacturing (33,000) and construction (33,000). The good news was partially offset by 30,000 job losses by state and local authorities, a trend which I expect to continue for decades to come. There are still 13.7 million unemployed in the US, including 6 million for six months or more.
I think that best case, the unemployment rate will drop to the 7% handle by the next recession, which will probably begin sometime in 2012. Then we will rocket to new post Great Depression highs. The 25 million jobs we shipped to China and other emerging markets during 2000-2010 are never coming back.
Many of those who lost their jobs then, some 10% of the work force, may be permanently frozen out of the economy and are now part of the structural unemployed. We saw the same thing happen in Germany during the seventies and eighties. This is why I have studiously avoided retail stocks during this bull market. When one tenth of the population permanently drops out of the economy, consumer spending is not going to come roaring back, especially at the low end. This may be what the stock price of Wal-Mart may be telling us.
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'The direction of interest rates is up. There is only one direction in the future and it is up. It's a timing thing,' said Kevin Ferry of Cronus Futures Management.
Featured Trades: (OIL'S BIG PUSH ON CORN), (CORN), (DBA), (ADM), (JJG)
2) Oil's Big Push on Corn. You would think that with oil crisis levitating over $100/barrel and gasoline continuing its relentless march towards $5/gallon, farmers would be wringing their hands, wondering how they can afford the fuel for their machinery. Not so.
The burgeoning demand for energy has spilled over to the corn market, where demand for feedstock by ethanol refiners is going from strength to strength. Nearly 40% of the country's corn crop is being diverted to ethanol production. Margins at the big ethanol producers, like Archer Daniels Midland (ADM), once nonexistent, are now widening rapidly.
I have been a huge bull on the whole food complex since I put out my watershed piece last May (click here for 'Going Back Into the Ags' ). Now that we are into the planting season, you might expect the volatility of food prices generally to increase. There are still drought conditions in many of the world's major producing areas. Stockpiles are near record lows. Much of the unrest in the Middle East is over rapidly rising food prices, where they are huge importers.
Notice that once the S&P 500 bounced, the first thing that traders poured back into were the ags, soaking up ETF's (JJG) and (DBA) as fast as they could click their mice. I think we are one year into a decade long bull market for food, and that investors should be buying every substantial dip in the sector.
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Featured Trades: (THE SWORD HANGING OVER THE HOUSING MARKET)
3) The Sword Hanging Over the Housing Market. Some 97% of the financing for the housing market is about to disappear. That is how much bankrupt federal agencies Fannie Mae and Freddie Mac are taking down in loan guarantees to the residential housing market.
Created in the wake of the Great Depression (the last one, not this one), these agencies were created to provide subsidies to the homeowners to revive a moribund market. These agencies entered prime time by accepting the securitization of these loans in 1968.They worked in quite obscurity in Washington for decades, quietly fueling successive postwar real estate bubbles. Much of their debt was sold to foreign investors looking to pick up a small premium over Treasuries.
That was until they went one bubble too far, funding the explosion of borrowing that took place during the early part of the 2000's. In 2004, a deregulation move resulting in the dropping of rules against using government guarantees to finance predatory, high cost lending to subprime borrowers.
It was all over but the crying. Once the market broke, default rates skyrocketed, and it suddenly became abundantly clear that these agencies had been grotesquely underpricing risk for decades. Borrowers starting making claims on their guaranties en masse, wiping out their entire capital. In 2008, the two agencies entered a conservatorship administered by the Federal Housing Finance Agency (FHFA), a de facto bankruptcy.
These lenders have been operating in limbo ever since. Like the other sacred cows of entitlements and defense spending, federal home financing is an issue our leaders would rather keep their heads in the sand over. It is clear they need to be recapitalized. But the chance of this congress, fueled by populist, libertarian fantasies, providing another $100 billion in bail out money for a federal agency is zero. That leaves the possibility that they will be eventually be phased out, leaving the private sector to take up the slack.
What will a fully privatized home loan market look like? Try a lot more expensive. That is where you find the jumbo market, which is already fully privatized, as there was never a government mandate to finance the homes of millionaires.
If you have a FICO score over 750, move all of your assets to you lender, including your IRA, 401k, 529 plan, and all of your securities business, you might get a jumbo loan for a 100 basis point premium over a convention FHA loan under $729,750. If you don't jump through all these hoops and refuse to offer your first born child up as collateral, expect to pay a premium of up to 250 basis points, or 7.5% at today's rates. This is why abandoned McMansions have soared across the land like a great blight, and can be rented for 30% of the cash flow demanded by an outright purchase.
What does this mean for residential real estate prices? I'll attempt some quick, back of the envelop calculations here. Raise the cost of financing by 40%, and you can knock 40% off the value of your property. That is off of today's prices, which are already down 40%-60% from the 2007 peak, depending on your neighborhood.
This will inevitably lead to a secondary banking crisis and another stock market crash. If you are wondering about those Armageddon type forecasts that have the Dow plunging down to 3,000, this is the intellectual foundation behind them. That is when we find out how much freedom really costs.
Rent, don't buy. If the roof leaks, the furnace breaks, and the toilet blocks, you just call the landlord, as I have done with my wonderful new rental here in sunny California.
Damn! Should have Refied When I could
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Could This Be a Shorting Opportunity?
Featured Trades: (MILLENIAL VOTERS)
3) Watch Out for the Millennial Voter.? I have been banging the table for years now about the importance of demographic trends for the economy, the financial markets, and the housing market. Well, politics is no different, as the table below of Obama's approval rating shows.
Millennials, who are now aged 18-29 (I have three of them) are suspicious of government, have a strong anti-business bias, are opposed to new regulation, are highly conscious of environmental issues, and give the president his highest marks. They also happen to care the least about health care, and put a high value on ethics. We also have learned that they don't bother to vote in midterm elections. This is important because the Millennium Generation surpassed in size 80 million baby boomers last year.
No wonder the last election focused so much energy on Internet campaigning and fund raising. Is the outcome of future elections to be determined by clicks and bandwidth? The data effectively means that the population of liberals is growing, while that for conservatives is shrinking. Politician planners and makers of campaign tchotchke take note.
Age??????????????????????????????? Approve???????????? Disapprove
Millennials? 18-29??????? 60%?????????????????????? 40%
Gen X? 30- 46??????????????? 56%?????????????????????? 44%
Baby Boomers 47-63?? 56%??????????????????????? 45%
Featured Trades: (MY TAKE ON THE EURO), (FXE), (SPY)
1) My Take on the Euro. Entering 2011 as the currency that everyone loved to hate, the Euro has staged a dramatic comeback, much to the chagrin of hedge fund managers and traders alike. Since January, the troubled currency has rallied ten cents from $1.28 to $1.38. Is this the beginning of something big? Or has it shot its wad and headed for a spill?
I vote for the later. The euro is essentially winning the best deck chair on the Titanic contest, the fastest horse at the glue factory, and the prettiest girl at the ugly ball. It's really all about interest rate differentials. At the end of last year, the US economy was growing gangbusters, while Europe was in intensive care. That sent medium and long term American interest rates skyward, while those in Europe languished.
Now the tables have turned. High oil prices are starting to act as a drag on the US, causing economists to rapidly pare back forecasts. Treasury bonds have come back from the dead, bringing the yield on the ten year from 4.70% down to 4.4%. In the meantime, European Central Bank officials have been jawboning the Euro up, threatening interest rate hikes to deal with imagined inflation, no matter that such a policy would be insane to pursue. Hence, we are seeing Euro strength and dollar weakness.
There is another wrinkle to the Euro story here. You would think that high oil prices would be Euro negative, as the continent is a massive importer from that troubled part of the world. But what do Arabs do with the dollars they get for this oil? They buy Euros in order to keep their reserves in a diversified spread. That is why the lurch in crude to $112 in Europe was accompanied by the Euro move to $1.38. This is why the traditional flight to safety bid for the dollar failed to show this time, as it has in all previous oil crises. Some of this spill over buying also explains why the Japanese yen has recently been strong, holding on to the ?81 handle, despite its dismal fundamentals.
How does this party end? US stocks rally once again, US bonds tank, and oil takes a rest, falling well back into the nineties. That could then take the Euro back down to the bottom of its ten dent trading range. A put on the Euro has become a de facto call on US stocks. That's when we test the lower end of the European currency's recent trading range.
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This Party Will Not End Well for the Euro
Featured Trades: (GOLDCORP COINS IT IN THE GOLD TRADE)
3) Goldcorp Coins it in the Gold Trade. I managed to touch base with Canadian miner Goldcorp's CEO, Charles Jeannes, who's stock I have been shamelessly pushing for the last three years (click here). When I last spoke to him two and a half years ago, back when the yellow metal was trading at $950, he made the then outrageous claim that gold would soon break $1,050 to make an all-time high.
Some $450 later, and you never saw a happier man. The company has been aggressively cutting costs, making acquisitions, and disposing of non core assets. This will lead to a production increase of 60% to 4 million ounces a year over the next five years.? Goldcorp is currently extracting the barbarous relic in Canada, the Dominican Republic, Guatemala, Mexico, Argentina, and the US. Both physical and investment demand are soaring. This will continue, as all the gold and gold backed instruments in the world only add up to 1% of global financial assets.
Goldcorp's average cost is $274/ounce, giving it elephantine profit margins that enabled it to bring in a net $791 million in profits last year. Costs are growing at 6% a year, well below the 15% industry average. The company just doubled its dividend. Talk about a license to print money.
I have been a huge bull on gold since I put out my call to buy it more than three years ago at $800. While I continue to believe that we will steadily appreciate in coming years to the old inflation adjusted high of $2,300, I also think the glory days are behind us. We'll probably only see single digit, or small double digit annual returns getting us there. My only trading play this year was on the short side, which proved immediately profitable. That is on par with high yield junk bonds or distressed muni bonds, but nothing like last year's blistering 28% appreciation.
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No Need to Massage the Profits Here