Diary Archives - Mad Hedge Fund Trader

October 21, 2010 - Bring on the Rare Earth Wars

Featured Trades: (RARE EARTHS), (MCP), (AVARF), (LYSCF)

2) Bring on the Rare Earth Wars. One of my many former employers, the Singapore Straights Times, reported yesterday that China planned to cut rare earth export quotas by 30% next year. The story comes on the heels of a voluntary ban of exports to Japan on September 21, after their arrest of a Chinese fishing boat captain (click here for 'Have You Seen Molycorp Lately').

Traders went apoplectic, taking my lead stock, Molycorp (MCP), up a mind boggling 30% in three days, matched by a 27% pop in Canada's Avalon Rare Metals (AVARF), and a 10% gain by Australia's Lynas Corp. (LYSCF). Lynas is now up an unbelievable 473% since I first recommended it five months ago (click here for 'Rare Earths Are About to Become a Lot More Rare'). This is like hitting four back-to-back home runs (I'm using baseball metaphors this week, since the hometown San Francisco Giants are in the play offs).

As China controls 97% of the world's rare earth production, and consumers are desperate to lock in supplies so they can build everything from hybrid cars to iPods to heat seeking missiles, you can expect to hear a lot more about this space. I have already seen the odd story showing up in the mainstream media. Not only that, in the future I expect to see similar developments across the entire resource space, including precious metals, copper, iron ore, molybdenum, tin, nickel, aluminum, and all of the food groups. We are on the eve of the era of The Great Resource Shortage.

October 21, 2010 - Get On Board With Mongolia Mining

Diary

Featured Trades: (MONGOLIA), (IVN), (RTP), (975:HK), (MONGOLIA MINING)

3) Get On Board With Mongolia Mining. The 3:00 am phone call was scratchy, broken, and barely intelligible. Would I be willing to accept a collect call from Ulan Bator, the capital of Mongolia? My man on the ground there was on the line with a stock idea that I absolutely had to get involved with. Mongolia Mining (975:HK) had just listed its shares on the Hong Kong Stock Exchange at $7, had already moved up to $8.30, and was headed for higher altitudes.

Mongolian Mining is the country's major producer of metallurgical coal, which it sells to neighboring China to stoke the insatiable demand of its steel mills. The deal came out at a rich 13.6 times 2011 forecast profits, and 9 times 2012 earnings. The issue was led by JP Morgan, lending it some extra credibility with wary foreign investors. It raised $700 million for the company, which plans to invest the funds in road and rail upgrades to its open pit at Ukhaa Khudag in Southern Mongolia.

This is expected to take output from 1.8 metric tonnes in 2009 to 15 million tonnes by 2013. Mongolia has a major price and shipping advantage over existing suppliers of coking coal in the US and Australia, so the Middle Kingdom is expected to take everything Mongolia Mining can produce.

I have written extensively about Mongolia in the past as one of the one great 'pre-emerging' markets now coming on to the scene (click here for 'I Told You to Buy Mongolia!'). Until now, investors have been limited to indirect plays, like Ivanhoe Mines (IVN) and Rio Tinto (RTP). The great thing about Mongolian Mines is that being a local company with substantial government ownership, it will get first priority of essential licenses, permits, and approvals, putting it at the head of the queue, in front of foreign competitors. In developing economies, who you know is often more important than what you know.

I keep hearing things that are incredibly bullish for Mongolia. It has the world's biggest unexploited coal reserves and the richest untapped copper deposit. It is poised to become the fifth leading gold producer. It has large latent oil fields in the south, which begin production next year. And it has the world's largest customer sitting on its doorstep. With emerging markets, natural resources, and hard assets definitely the flavor of the decade, there is an easy double in Mongolia Mines --once this market picks up a head of steam.

Fill Her Up. It's a Long Way to China

October 18, 2010 - The Gold Rush in Iraq

Diary

Featured Trades: (IRAQI OIL), (SLB), (HAL), (BHI), (WFT)

2) The Gold Rush in Iraq. There is a Gold Rush Underway in Iraq, with major implications for the rest of us. The success of the recent oil auctions in Iraq is creating a windfall for American oil services companies.

Schlumberger (SLB), Baker Hughes (BHI), Weatherford (WFT), and Halliburton (HAL) have committed to drilling 2,500-3,000 new wells per year and building new pipeline and shipping terminal infrastructure that could make Iraq the world's largest oil exporter. The value of these contracts may reach a massive $60 billion over the next six years, and could generate $1 billion in new revenues for each company per year.

Two offshore terminals are already under construction, and another two are on the drawing board. If successful, the project will boost the country's oil production from the current 2.5 million barrels a day to 12 million b/d by 2016.

Iraq's oil production peaked at 3 million b/d in 1979, and then went to nearly zero after it invaded Iran. I remember those days well, as I was issued a visa to accompany Saddam's troops to Tehran, only to see it cancelled when the Iranians were able to mount a counter offensive. I still have the dessert camos and telephoto lenses need to cover the desert war, although the pants, regrettably, no longer fit.

Iraq's oil industry never recovered. UN sanctions limited the regime to minimal 'official' exports that covered humanitarian imports like baby food and drugs. Tanker trucks smuggled out through Jordan what they could, with the proceeds going directly to Saddam's family. When the US invaded, bails of hundred dollar bills were found stashed in private homes, the proceeds of these black market deals.

American oil engineers were shocked by the poor state of Iraq's energy infrastructure after 40 years of neglect. It all has to be rebuilt from scratch. If the new Iraqi government can provide the necessary infrastructure, and stabilize the political and security environment, it will become one of the largest changes to the landscape for international trade in decades.

Those are all very big 'ifs'. It will dump another Saudi Arabia's worth of crude on the market. It will also go a long ways towards meeting China's insatiable demand for oil, as well as that of other emerging economies, and put a long term cap on prices.

Of course, this is the scenario that antiwar activists and conspiracy theorists feared eight years ago, but no one thought it would take so long to play out. With an oil man as president, a vice president from Halliburton, and a secretary of the army from Enron, who can blame them.

Early in the planning of the war there was an expectation the US could defray some cost of the war with newly freed oil exports. I know, because I was there, my eight years in the Persian Gulf earning me an appointment as an outside consultant. I bailed when I saw the whole project was hopeless. Ever notice that Iraq's oil industry was never targeted during either gulf war? These are usually prime targets in modern warfare.

This is so important that I can't believe no one else is talking about it. Yes, I know you'll feel guilty making money off of a pariah stock like Halliburton, but you can always donate your profits to the Sierra Club.

Iraqi Oil No Longer a Roman Candle

October 18, 2010 - The Big MarketView From 30,000 Feet

Diary

Featured Trades: (IAN BREMMER OF THE EURASIA GROUP),
(GOOG), (SPX), (EZU), (FXI), (FXE), (EWA), (EWC), (EWY), (EWT), (THD), (IDX), (EWS), (EWZ), (ECH), (EWW), (RSX)

4) The Big MarketView From 30,000 Feet. There is a new war underway between two forms of capitalism. The traditional type is driven by the big global multinationals we all know and love which are being aggressively challenged by a new form of state capitalism, of which China is the prime practitioner. While it is too early to predict the outcome of this conflict, it is clear that western style multinationals are currently on the defensive. Witness the all out assault on Google (GOOG), whose business was so attractive that the Chinese government launched a concentrated hacker attack to grab technology and market share, both from within, and from outside the company.

I gleaned these incredibly useful insights from Ian Bremmer, president of the Eurasia Group, one of the top independent political research and analytics firms in the world. Ian received a BA at Tulane and a PhD from Stanford in political science. He has been at the forefront of bringing together the once disparate worlds of international investment and political science, a space once inhabited only by a few globetrotting journalists like myself, and commands a religious following among the large hedge funds and mutual fund groups.

Ian gave me a tour de force of the international investment landscape, where to put your money, and where to avoid. The US (SPX) is the smartest kid in the 'dumb class', and is clearly losing out in this new global competition. But it is still in the game, with the world's largest economy and an overwhelming lead in technological innovation and higher education. But the future GDP growth rates will be shadows of their former selves and, at 17.2%, real unemployment will remain chronically high. You might as well take any forecast now flogged by the major research houses and cut it in half.

Europe (EZU) is in dire straits, with economic growth rates plummeting. The big question is whether Germany pulls out of the EC, not Greece. Having nearly busted its own economy with the reunification with East Germany two decades ago, it doesn't want to replay that movie. The bad news: we won't know the outcome for five years. There is no visible support for the euro (FXE) anywhere. Take that newly cheapened European summer vacation, sip all the latte you want, and enjoy those topless beaches, but keep your investment capital in friendlier climes.

While the Middle Kingdom (FXI) is now ascendant, it is not without its challenges. They lag in local innovation, suffer a nightmarish environmental crisis, and down the road, will endure a demographic shortfall that will mirror Japan's. But Ian thinks that Jim Chanos's prediction of a crash in China is 'farcical', and that the country has at least a good five year run ahead of it.

The best places in the developed world to park your money and forget about it are in Canada (EWC) and Australia (EWA), which prosper from bounteous commodity and energy exports, stable political regimes, small populations, the rule of law, and conservative banking and financial regulation. Canada enjoys having the world's largest customer on its doorstep without any of the overheads.

While South Korea (EWY) has an economy that is the envy of many, it runs a gigantic 'fat tail' risk from North Korea, which could blow up at any time. The outlaw regime recently sank a South Korean warship and executed its minister of finance. A total collapse could stick the south with a massive reunification bill it can ill afford, and don't forget those loose nukes. Taiwan (EWT) looks like a no brainer as a takeover target by an acquisitive China, the financial, and not the military kind.

The fate of the monarchy in Thailand (THD) is now a hard fought battle, and it is better to fish elsewhere until the fires burn out. Indonesia (IDX) is nearly a model country these days, and should be the fifth country in 'BRIC', with huge energy and commodity exports and a rapidly growing middle class. Singapore (EWS) also looks great, with an incredibly well managed population of only 3.5 million, massive reserves, a high educational level, and sophisticated manufacturing base.

On the other side of the world, South Africa (EZA) is not just a gold story with a great structural foundation, it will also cash in on the rise of a consumer class in the rest of Africa. Brazil (EWZ), long a hedge fund darling, still looks good, but its glory days are behind it as it transitions to a more conservative government. Other enticing Latin American picks include Chile (ECH) and Mexico (EWW). Russia (RSX) is not just an oil story, but also a consumer one, but faces daunting demographic challenges.

Ian is also a prolific author, bringing out two new books in the past year, which are a must read for any serious global macro investor. They include The Fat Tail: The Power of Political Knowledge for Institutional Investing, and The End of the Free Market: Who Wins the War Between States and Corporations. To prove he is not a total wonk, Ian openly admits to being a card carrying member of the Stanford bowling team. Entirely composed of Russian speakers, they were appropriately known as the 'Bolsheviks

Readers can purchase their own copies of The End of the Free Market at a big discount through Amazon clicking here. To buy The Fat Tail, please click here.

October 15, 2010 - Last Chance to Meet the Mad Hedge Fund Trader at the San Francisco Strategy Luncheon

Diary

Featured Trades: (SAN FRANCISCO STRATEGY LUNCHEON)

1) Last Chance to Meet the Mad Hedge Fund Trader at the San Francisco Strategy Luncheon. Last April, I predicted that a huge demographic push would send the prices of commodities soaring, that the economy would threaten a double dip, but not actually do it, and that emerging markets were a great place in which to invest. I also advised that gold, silver and other precious metals, along with the Canadian and Australian dollars would be a great place to hide out. Finally, I foresaw a major long term bull market in the food group.

Come join me for lunch at The Mad Hedge Fund Trader's semiannual Global Strategy Update, to find out what happens next. I will be conducting it in San Francisco at 12:00 noon on October 22, 2010. A three course lunch will be followed by a 30 minute PowerPoint presentation and a 45 minute question and answer period.

I'll be giving you my up to date view on stocks, bonds, currencies commodities, precious metals, and real estate. And to keep you in suspense, I'll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $199.

I'll be arriving two hours early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at the Marines' Memorial Association at 609 Sutter Street, San Francisco, CA 94102. The club is only two blocks from the city center at Union Square and the Powell Street cable cars.

I look forward to meeting you, and thank you for supporting my research.

October 15, 2010 - Time to Double Up on China

Diary

Featured Trades: (CHINA), (SHANGHAI), (FXI), ($SSEC)
iShares FTSE/Xinhua China 25 Index ETF
South Korea iShares Index ETF
Thai Capital Fund, Inc.
Singapore iShares ETF
iShares MSCI Turkey Investable Market Index Fund ETF
iShares MSCI Chile Investable Market Index Fund ETF
Brazil iShares ETF
PowerShares India Portfolio ETF
Market Vectors Russia ETF Trust ETF

2) Time to Double Up on China. Last week, I posted an extensive piece on my evening with the Chinese Intelligence Service, concluding that it was time to get back into the Middle Kingdom (click here for the piece). It proved to be a timely call, as QEII has since gone global, taking the Shanghai index up 11% since then, the move this week being particularly explosive. Yesterday, we blasted through the 200 day moving average, suggesting that this move may have the legs of Secretariat.

I really like the idea of increasing my weighting in China here. Both the Chinese, and the many trading partners I talk to, tell me that things are going well there, that inflation is under control, and rumors or its imminent demise are premature by at least a decade. Jim Chanos, please widen your circle of contacts.

The recent international action has been predominantly in the second tier emerging markets which I have been aggressively pushing, including Indonesia (IDX), Chile (ECH), Thailand (TF), Singapore (EWS), and South Korea (EWY), while the mainline BRIC's slept. Many of these 'emerging, emerging' markets are now up 50% or more on the year. I can really see cash rotating out of these virile, young sprinters back into the established BRIC long distance runners as a great risk control measure. That way, if you get a sudden risk reversal, and markets can turn on a dime these days, your downside will be much less.

With Ben Bernanke fitting both turbochargers and superchargers to the printing presses in Washington as I write this, I loathe to tell anyone to sell anything, even their Beenie Baby collection. So use any new cash inflows from new and existing clients to add to positions on dips not only China (FXI), but Brazil (EWZ), India (PIN), and Russia (RSX) as well. If you have been following the advice of this letter all year, you should have new cash pouring in through the transome.

No! No! Don't Sell Me!

October 15, 2010 - Indonesia is On Fire

Diary

Featured Trades: (INDONESIA), (IDX), (EIDO)
Market Vectors Indonesia Index ETF
iShares MSCI Indonesia Investable Market Index ETF

3) Indonesia is On Fire. Who said quantitative easing wouldn't work? The only problem is that you have to speak Bahasa, eat nasi goreng, and live South of the equator, to take full advantage of Uncle Ben's munificence. Since the rumblings about a global, synchronized QEII began in September, $2 billion a day has been flooding into emerging markets, and Indonesia has been at the top of the list.

Some of the happiest days of my life were spent in this bucolic tropical backwater during the seventies. My investment in the ETF (IDX) on launch day has made me happier still, soaring by 360% since inception (click here for the call). A rupiah that has been steadily appreciating against the dollar has added a nice double leveraged effect to the upside.

Despite the triple digit return, it could still be early days for the world's largest Muslim country. Some $9 billion in foreign capital has poured into the local rupiah denominated bond market, and a further $2.5 billion has been plopped down in the stock market. Multinationals have made a further $8 billion in direct investments, a capital flow you know I always love to follow. The prices for its largest commodity and energy exports have been rising.

The government has been targeting almost Chinese levels of GDP growth of 7%-8%, and private analysts say than that 6.5% will be achieved this year and next. Stocks are not cheap at a 13.5 multiple, but how much should you pay for earnings that are growing 25% a year? Next month, President Obama will visit the land of his childhood to highlight stable relations between the two countries, to help sew up some trade deals, and no doubt, to visit his former pet monkey

IDX has had the field to itself until now, as local Indonesian stocks are not easy to buy for US based online traders. Then in May, BlackRock launched its own entrant in the field (EIDO), which has basically since gone straight up. While Indonesia is no longer as cheap as it once was, it still deserves a place in every emerging market portfolio. This could be the next China.

Not a Bad Place to Park Some Cash

October 14, 2010 - The Solar Boom in California

Diary

Featured Trades: (CALIFORNIA'S SOLAR ENERGY BOOM),
(FSLR), (SIRE), (HOKU), (TSL)

1) The Solar Boom in California. There is a gold rush of a different kind going on in California, the solar variety. There is a stampede by 49 alternative energy projects, including nine solar ones, to get final approval from the California Energy Commission before massive federal incentives offered by Obama's 2009 stimulus package expire at the end of the year.

One massive 392 MW plant, the Ivanpah project by BrightSource Energy (click here for their site) near blasting hot Blythe, California promises to deliver nearly as much solar power as the entire 481 MW in generation installed in the US in all of 2009.? That is enough to provide electricity for 300,000 homes. It will involve harnessing an impressive 173,500 heliostats spread over one square mile of virgin desert to superheat water to produce steam in a closed cycle. Expect this company to be a red hot IPO some day.

The combined projects involve $30 billion in investment that will generate 15,000 jobs, an understandably sensitive issue in this election year. Many are located in the state's huge baking deserts, where temperatures frequently exceed 120 degrees, and you can literally fry an egg on the sidewalk. The economy there has long been structurally depressed, and employment opportunities have been few.

The golden state has set a goal of obtaining 33% of its electric power from alternative sources, up from the current 11%, by 2020, the most ambitious anywhere in the world. The driver has been state law AB32, which is expected to generate a staggering $104 billion in energy investment over the next decade. Only China can match these numbers for sheer scale. It is hoped that these plans will hold global carbon dioxide levels stabilize at 450 ppm by 2050. Oil industry attempts to water down the law in the November election are expected to fail.

The intention is not only to wean ourselves off of expensive polluting foreign oil, but also to make the state a hot house for developing new energy technologies that can be exported to the rest of the world. Possibly half of the venture capital presentations I have attended this year promised to deliver new carbon free sources of energy.

I have been pushing solar for a long time as a national security issue. If you add in the cost of maintaining our military in the Middle East, the true cost of imported oil is not $82 a barrel, but $112. Solar is also a great investment opportunity, since I believe that rising oil prices will drag the breakeven points of these companies to unimaginable heights (click here for 'Solar Energy is About to Achieve Cost Parity').

As with all emerging technologies, there is always a dearth of investable securities at the beginning. Microcaps like Spire (SPIRE) and Hoku (HOKU) have enjoyed huge spikes in recent days. Better take another look at more stable and established first solar (FSLR), which offers cutting edge thin film technology. You also might tale a peak at Trina Solar (TSL).

October 14, 2010 - Beating the Market With Demographics

Diary

Featured Trades: (DEMOGRPHIC INVESTING)

2) Beating the Market With Demographics. Regular readers of this letter know that I rely on long term demographic trends to predict the direction of the global financial markets. Let me approach this topic from a different angle, measuring the number of retirees a population must support versus the anticipated burden in 20 years, and its implications.

I start with the basket cases. Japan's problems on this front are well know, with a retiree population of 30% today growing to 56% by 2030. That means every worker will be saddled with the costs of maintaining a senior citizen. Italy is worse, with the retiree load soaring from 30% to 60%. The rest of developed Europe is posting similar numbers. This is why you rarely hear me issuing 'BUY' recommendations on European companies, especially in the retail sector.

The US is stuck in the middle. Some 21% of our 310 million souls are retired today, and that is growing to 48% in 20 years. If you think our social security funding problems are bad now, wait. On our current trajectory, bankruptcy is assured. Our saving grace is the large number of young immigrants who are continuously entering the country, legal and otherwise, and ethnic groups and other minorities, like the Mormons, who are still having large families.

China is in a unique situation because of its 'one child' policy, which has reduced population growth by 400 million over the last 30 years. This guarantees that the country will undergoing a slow 'Japanization' that raises its ratio of retirees from 14% today to 42% by 2020. You can count of the Chinese economic miracle to hit a wall in about ten years as a vast share of resources have to be redirected to supporting long lived senior citizens, who live on a healthier diet than your or I.

Other emerging markets are in a far healthier position. Only 8% of India's 1.2 billion are retirees today, and that will only reach 20% in 20 years. Vietnam, Brazil, Mexico, Indonesia, and Malaysia are looking at the same numbers. One of the reasons that these countries don't have to suffer the crushing expense of western style social safety nets is that they don't need them. This is the basis for my constant table pounding that this is where you need to be overweighting your equity exposure.

I'll be going into this subject in more depth next week, when I explain why demographics is so important. Until then your homework assignment is to read the excellent book, Boom, Bust, and Echo by David K. Foot, which you can buy by click here.

The bottom line message here is to be nice to your cleaning lady. She may be supporting you someday.

The 'Japanization' of China

They're Not Making Italians Anymore

This is Where You Want to Put Your Money

October 13, 2010 - Why My Shorts Are Missing

Diary

Featured Trades: (SHORT POSITIONS), (FXY), (YCS), (TBT), (TMV)

1) Why My Shorts Are Missing. I have always been an aviation enthusiast, flying every rare, antique plane I could get my hands on. My adventures have taken me from flying a 1929 Norwegian spruce and Irish linen constructed Belgian Stampe to a MIG-25 Soviet fighter to the edge of space at 90,000 feet (check out the curvature of the earth in the cool picture below).

The Author Flying a MIG-25 at 90,000 Feet

So when a WWII era B-17 heavy bomber came on the market a few years ago, I had to buy it. The previous record price for a B-17 was $1.5 million, and this faded warplane needed at least $3 million worth of work, not flying since it appeared in the TV series, Twelve O'clock High, during the sixties. During the war, my dad volunteered as a tail gunner on one of these because he was 'bored', not learning until later that the position incurred the greatest number of fatalities of any in the Army Air Corps. It seems they always had openings.

Bombs Away from a B-17

I dropped out when the price hit $2 million. I learned later that I was bidding against Paul Allen, Bill Gates' former partner and a co founder of Microsoft (MSFT), who paid $3 million, and was willing to do anything to get this one aircraft. Of the 12,275 built, there were only 17 left in flying condition, and this specific plane was built at the factory in Seattle where Paul was building a museum dedicated to local aviation.

I heard he ended up spending $6 million on repairs, returning it to the condition the day it rolled off the assembly line in 1943. I consoled myself to logging a few hours in a similar plane as the pilot in command, impressing every subsequent flight examiner of mine to no end. These things were built to carry 10,000 pounds of bombs, so when you take off empty, with quarter tanks, they rise like giant box kites, the huge wings delivering lazy sweeping turns. Moral to the story' never bid against Paul Allen.

Today, I find myself up against another big spender with unlimited funds named Ben Bernanke of the Federal Reserve. The amount of money he is willing to inject into the economy is thought to range up to $2 trillion, to be disbursed in convenient, bite sized $500 billion chunks. Rumors swirl daily in the Treasury pits that the money is already hitting the market, emboldening traders to take the ten year to a mind boggling 2.36% yield yesterday.

I often get asked the question that, if I am a hedge fund trader, where are my shorts? I haven't been short the S&P 500 since May, when the flash crash took me out of my position for a tidy profit. I ran a short for a while in the for-profit education stocks which turned into a home run (click here for 'Hedge Funds Are Now Targeting For Profit Education'). My other shorts turned out to be bombs of a different sort, stopping out of my positions in the yen and the (TBT) as losers, reminding me of how mean, short, and brutish life can be.

Given the insane prices now being paid for 30 year bonds and the Japanese currency (FXY), I have to admit to being tempted daily to reestablish my shorts there (click here for 'A Visit to the Insane Asylum'). I wouldn't mind taking a bite of the big money center banks, as they are carry more toxic waste on their books than the Love Canal. Constant new natural gas discoveries make this energy source a perennial loser. But as long as the Paul Allen of the Federal Reserve is bidding against me for all asset classes, I am not inclined to short anything. There is no law that says you always have to have a position, no matter what your broker tells you. Tell me that QEII has been cancelled, or that the recovery is starting on its own without any assist, and then we'll talk.

You Won't Catch Me With Any of These!

Over the weekend, I took the kids to the Berkeley Hills to watch the Blue Angles execute their daredevil maneuvers as part of the Fleet Week festivities. What did I see through the binoculars moored at Treasure Island, but Paul Allen's yacht, the Octopus, a 413 foot monster boasting two helicopters and rated as the world's ninth largest private vessel. It made the Oakland Bay Bridge nearby seem like a toy Erector Set in comparison. It then struck me that there is no better sound that four gigantic 1,200 horsepower supercharged Wright Cyclone engines rattling your teeth on a takeoff roll in a B-17. I hope to see that plane on my next trip to Seattle.

Meet the 'Octopus'