Diary Archives - Mad Hedge Fund Trader

December 30, 2010 - The Big Hedge Fund Killing in For Profit Education

Featured Trades: (FOR PROFIT EDUCATION)

3) The Big Hedge Fund Killing in For Profit Education. Hedge funds have made huge profits this year by shorting the for-profit educational sector.

The industry was ripe for the taking. For two decades, for-profit schools have lured gullible students with inflated promises of impressive sounding degrees which they pay exorbitant tuition to obtain. In education's version of the subprime crisis, creative financial aid departments obtained cheap government loans to finance the entire program.

There are now over 2 million attending these institutions, accounting for 10% of all higher education in the US, and the profits that have poured in have been absolutely massive. Early investors rode the IPO train all the way to the bank. The problems arose when few students ever achieved these laudable goals.

According to Department of Education statistics, 55% of US college students obtain a degree within six years. At the University of Phoenix (click here for their website at http://www.phoenix.edu/ ), with 400,000 students, the largest for-profit university, only 36% meet this deadline, only 6% at some campuses, and a mere 4% of online students. Dropouts end up defaulting on loans that can amount to as much as $100,000 for a worthless, incomplete bachelor's degrees, and up to $200,000 for advanced degrees.

It now looks like the gravy train is about to end. Secretary of Education Arne Duncan has promised a crack down on the industry, bringing in more regulation and prosecutions of deceptive marketing practices, where degree programs are sold like time shares. The leading accreditation organizations are also having second thoughts about the for-profits, where 95% of the instructors are part time and tenure is unknown. Complaints are rife about shoddy teaching standards and missing doctorates.

The government has funded $750 billion in student loans, and while 10% of public university loans go unpaid, the default rate at for profit schools is thought to be as high as 50%. Starve these schools of subsidized government funding, and their shares are history. And just try and get a job with one of these Mickey Mouse degrees.

Some of the worst offenders have already seen cataclysmic declines in their share prices this year, like Apollo Group (APOL), -37%, Capella Education (CPLA), -45%, and DeVry (DV), -37%. And a Republican win of the House of Representatives in November has enabled these stocks to rally in the hope that this will cause some heat to disappear.

There is no trade in these stocks here, as they have already fallen too far to make them attractive shorts, and I don't want to touch the long side with a bargepole. However it is a great example of how the hedge fund industry performs a public service by ferreting out corrupt practices and crooked management and taking their capital away by crashing their stocks. Making a few hundred million dollars along the way is nice too. Call it creative destruction with a turbocharger.

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December 28, 2010 - Take a Look at Occidental Petroleum (OXY)

Diary

SPECIAL ENERGY ISSUE

Featured Trades: (OXY), (BP), (OIL)

1) Take a Look at Occidental Petroleum (OXY). As a follow up to my trade alert for Macro Millionaires to buy the double leveraged oil major ETF (DIG), I thought you'd like to know what my second choice was. There are a lot of belles at the ball, but you can't dance with all of them.

While a student at UCLA in the early seventies, I took a World Politics course which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, crawling out of the desert half starved, lice ridden, and half dead.? I concluded that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10.? I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg?? egg on his desk. He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians? I told him everything I knew, including the two weeks in an Algiers jail for taking pictures in the wrong places. His parting advice was to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

Some 40 years later, while trolling the markets for great buying opportunities set up by the BP oil spill, I stumbled across (OXY) once more (click here for their site at http://www.oxy.com/ ). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005. (OXY's) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. It has raised its dividend for the eighth year in a row, by 15% to 1.60%. Need I say more?

The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. I decided to add it to my model portfolio. Energy is one of a tiny handful of industries I am willing to put my money in these days (technology and commodities are the others), and BP has handed me a rare opportunity to get in as the tightwad that I truly am.

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

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A Faberge Egg

December 23, 2010 - The Great Race for Battery Technology

Diary

Featured Trades: (SPECIAL BATTERY ISSUE),
(XIDE), (BYDFF), (SQM), (SNE), (GM), (XOM)

FOR PAID SUBSCRIBERS ONLY

1) The Great Race for Battery Technology.

The End is Near for the US

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Tesla

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Nissan Leaf

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Toyota Prius

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Meet My New Laptop

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I Don't Look 151 Years Old, Do I?

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BYD F3

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Karma

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Anything for a Green Card

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Its Easy, Just Read the Manual

December 22, 2010 - A Nice Update on Cisco Systems

Diary

Featured Trades: (CISCO SYSTEMS), (CSCO)

3) A Nice Update on Cisco Systems. For those of you who caught my trade alert to buy the Cisco Systems (CSCO) $20-$22 bull call spread last week and where hoping to get it at lower prices can forget about it. I spoke to an analyst today whose outlook for the networking giant was even more optimistic than mine.

The company has announced an incredibly aggressive buy back program that will soak up 17% of its outstanding shares on any further dip in prices. Cash on the balance sheet has ballooned from $38 billion last year to a staggering $45 billion today. Its fundamental business is rock solid, which it has successfully moated against any potential competitor. All of the mega trends currently in play in the online world, like cloud computing and the upgrade to video streaming, play directly into Cisco's hands. The income statement and cash flow couldn't be healthier.

He believes that the current 30% dip from the April high was purely sentiment driven and creates the buying opportunity of a lifetime. According to his estimates, CSCO is currently selling at 12 times next year's earnings. Get a multiple expansion on the upside, and you could see the shares rocket from today's $19.55 to as high as $28 in the foreseeable future. If for some reason you are unable to employ the options strategy here, the outright stock is a huge buy here.

Just thought you'd like to know.

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Cisco is Looking Impenetrable

December 20, 2010 - The Bull Market in Mustangs

Diary

Featured Trades: (MUSTANGS)

4) The Bull Market in Mustangs. The Western US has found a new wrinkle in the housing collapse, where homeowners are desperately struggling to cut living costs to meet the next doubling of their adjustable rate mortgage payments on their underwater houses.

Raising horses can cost more than children, so Nevadans are turning them loose to join herds of wild mustangs, to dodge the $30,000/year it costs to board and care for these voracious animals. Local populations are exploding, eating local ranchers out of house and home, who depend on public grazing lands to feed commercial livestock.

Recently, the Bureau of Land Management held hearings on where to place 25,000 excess animals. Mustangs are the feral descendents of horses which escaped the conquistadores, and there are now thought to be 30,000 running wild, down from a 19th century peak of 2 million. The BLM has another 30,000 in pens, and is making 10,000/year available for adoption at $125/each.

The problem is that many adopt 'pets' who then flip them to Canadian slaughterhouses, which cater to the odd French taste for horseflesh. To see how this works, watch Clark Gable, Marilyn Monroe, and James Dean's last film, The Misfits.

Madeleine Pickens, the wife of famed oil trader T. Boone Pickens, has offered to take the BLM's entire herd and put them out to pasture at an undisclosed million acre location. If there is anyone who could have an undisclosed million acres, it is Boone. I have frequently run into majestic and beautiful mustang herds over the years while camping in the remote desert (no, I don't go to Burning Man). Reminding me that there is still some 'wild' in the 'West', I will miss them when they are gone.

December 17, 2010 - Why I'm Avoiding Japan Like the Plague

Diary

Featured Trades: (SPY), (EWJ)
Japan iShares ETF

2) Why I'm Avoiding Japan Like the Plague. Now look at the world's worst population pyramid, that for Japan (EWJ). These three graphs show that a nearly perfect pyramid drove a miracle stock market during the fifties and sixties which I remember well, when Japan had your textbook high growth emerging market economy. That changed dramatically when the population started to age rapidly during the nineties. The 2007 graph is shouting at you not to go near the Land of the Rising Sun, and the 2050 projection tells you why.

By then, a small young population of consumers with a very low birth rate will be supporting the backbreaking burden of a huge population of old age pensioners. Every wage earner will be supporting one retiree. Think low GDP growth, huge government borrowing, deflation, collapsing bond markets, a depreciating yen, and terrible stock and housing markets. If you are wondering why I believe that a short position in the yen should be a core position in any portfolio for the next decade, this is a big reason. Dodge the bullet. Enjoy their food and hot tubs, but not their stocks.

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December 16, 2010 - Panic Buying Hits the (TBT)

Diary

Featured Trades: (PANIC BUYING OF THE TBT), (TBT)

2) Panic Buying Hits the (TBT). Buy the rumor, sell the news. That is one of the oldest adages one hears on trading desks, and it was never more true than today. Yesterday we learned that the ratings agency, Moody's, is considering a downgrade of US government debt in the wake of the tax compromise, as it should, the first time ever. The Producer Price Index came in at a healthy 0.8%, much better than expected, suggesting that the economy is far more robust than people realize. Retail sales popped 0.8% as well, telling us that people are falling back into their old habits of Christmas shopping with reckless abandon. You could not image more bond negative news hitting the tape, or more positive developments for the (TBT). And of course, the tax compromise was the gasoline that hit the fire.

We've had a great run here for the (TBT), tacking on and impressive 35% since the August bottom. The yield on the 30 Year Treasury bond has soared from 3% to 4.6% during this time. Those lucky few who signed up with Macro Millionaire immediately and executed every trade that I suggested are now up 10.25% in two weeks in their initial position. In a zero return world, that is much better than a poke in the eye with a sharp stick. Don't count on every one of my trades to deliver such stellar returns so quickly.

I am taking a quick profit here and selling my entire position. That will enable me to duck the carrying costs for the (TBT) over the holidays, which are now running at nearly a very heavy 1% a month, one of the highest in ETF land. It will allow more time for this ETF to grind through the 200 day moving average, which has clearly presented a short term ceiling on prices. And it gives me some dry powder I can use to take advantage of any dips in the New Year. My long term target for the (TBT) is still $200, but you have to allow the market to breathe along the way. And no one ever got fired for taking a profit.

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Give Me My TBT!

December 15, 2010 - Copper Turns Into Gold

Diary

SPECIAL COPPER ISSUE

Featured Trades: (COPPER), (CU), (JJC), (ECH), (FCX)

FOR PAID SUBSCRIBERS ONLY

1) Copper Turns Into Gold.

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Want to Race for Pink Slips?

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December 14, 2010 - The Upgrade Fever Pandemic

Diary

Featured Trades: (ECONOMY UPGRADE FEVER),
($SSEC), (SSO), (X), (CU), (COPPER)

1) The Upgrade Fever Pandemic. I knew it, I knew it, I knew it. As soon as Bill Gross at bond giant, PIMCO, announced that it was off to the races with a 1% mark up in his GDP forecast for 2011, upgrade fever would break out all over.

I look no further than my alma mater, Morgan Stanley, which followed suit with their revision for economic growth from 2.9% to 4.0%. David Greenlaw thinks that the tax deal Obama cut with the Republicans, to the chagrin of his own party, is great for exports, consumer spending, and capital spending. A sudden fall in weekly jobless claims by 17,000 to only 421,000 suggests he may be right. A sleigh full of more economic releases arrives this week, and I expect them all to surprise to the upside, leading to a further surge in corporate profits. Needless to say, this is all hugely bullish for equities.

The other big development is that China (FXI) postponed its next interest rate rise by a few weeks, delivering a nice pop for the Shanghai market ($SSEC), and triggering a global melt up in commodities. Copper (CU) hit a new all time high today, and steel names, like US Steel (X) were on fire. I have a very heavy weighting in the sector in my long term portfolio, but my short term trading book is out for the moment, as the overheating is starting to scare me.

The 'FEAR' to 'CONFIDENCE' trade is on, and Santa Claus is mixing steroids into the reindeer feed as we speak to deliver a continued rally. Did I mention this is all hugely bullish for equities? It all makes my (SSO) position, the 200% leveraged bet that the S&P 500 is going up, smell like roses.

Optimism is Breaking Out All Over

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My (SSO) Position is Smelling Like Roses

December 14, 2010 - The Nissan Leaf Roll Out

Diary

Featured Trades: (NISSAN LEAF), (NSANY)

2) The Nissan Leaf Roll Out. With great fanfare and celebration, Nissan Motors (NSANY) at long last delivered its first all electric, 100 mile range Leaf to an ecstatic customer at San Francisco city hall today. Long time readers of this letter know that I have been banging the table on this technology for some time, starting with my now ancient recommendation to buy Sociedad Quimica Y Minera (SQM), Chile's largest producer of lithium (click here for the piece).

Offering a car which effectively uses no fuel, requires no maintenance, at a heavily government subsidized price could only be a blow out success. One of the most aggressive and ambitious adverting campaigns in history assured that even Neolithic consumers living in caves in Borneo would know about it. Nissan is confidently betting the company that the project will be a blow out success, ramping global production up to 500,000 annually by the end of next year. My local utility, PG&E, (PGE) has since upped the ante by cutting prices for electric vehicle recharges between 12:00 midnight at 7:00 am from their peak rate of 40 cents per kilowatt hour to only 3 cents, a 92.5% discount. That works out to buying all the gasoline equivalent I want at 14 cents a gallon.

I predicted that these developments would conspire to drive the shares of Nissan Motors ever Northward. Nissan has been in my model portfolio for a while as a play on the recovery of the global auto industry. Those who piled into my initial recommendation to buy the stock last July are now up a handy 30% (click here for the 'Making a New Home for My Nissan Leaf').

For those of us who have been involved in the alternative energy space, this has been a very long time in coming, some 40 years in my case. Since I am neither a movie star nor a lucky lottery winner, I will not get delivery of my own Leaf until March, 2011. But the dealer has already called, asking which options I wanted. Fully loaded with all the bells and whistles, even with the $1,200 solar cell roof that looks cool more than it is functional, it will cost me $38,000. When I do get what will undoubtedly be the most enviable wheels on the block, you'll be the first to hear about it. Buy a new two year subscription to my letter, and I might even give you a ride.

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