'The jobs that we gained over the last two decades were the jobs that led to over consumption, jobs like finance, insurance, real estate, and consumer cyclicals,' said my old buddy, David Gerstenhaber, President of Argonaut Capital Management.
Featured Trades: (YEN), (YCS), (TM),
(NSANY), (SNE), (EUROYEN CROSS)
1) Cash in Your Yen Shorts. Paid subscribers who took my advice to clamber into short yen positions at ?88.5 on March 4 were richly rewarded with a major breakdown in the Japanese currency today to ?92.5 (click here for the call in my March 5 letter). Repatriation of yen by Japanese banks and institutional investors magically levitated the yen in a narrow sideways trading range around ?90 for the past two weeks. However, as we approach that April 1 deadline, support is falling away like a dress off a prom date. There is another development that will work to your advantage with this short position. The recent risk reversion in the global markets drove the yen to artificial highs, as hedge funds unwound their carry trades by buying yen and selling everything else. This has driven the premiums on calls to unnaturally high levels, and left puts ridiculously cheap.? Now the hedge funds are going the other way. When the Japanese yen starts to burn down, this will add a lot of fuel to the fire. This also makes the euro/yen cross a decent buy here at ?123. I don?t have to tell you that the Japanese government absolutely hates the yen at this level because it is killing exporters like Toyota Motors (TM), Nissan Motors (NSANY), Sony (SNE), and Nippon Steel. They?ll move Mount Fuji if they have to in order to get their currency lower. I understand that Bank of Japan governor Masaaki Shirakawa is taking private lessons from Alan Greenspan on how to collapse a currency (Alan, baby, you were so good at it!). There is another vulture circling over the yen. When all of the angst about Greece resolves itself, the world?s credit sharks are going to hunt for a new victim. They?ll be looking for a country whose soaring debt equals 100% of GDP, suffers a terrible demographic outlook, and pays zero interest rates. Using these criteria, Japan looks like an incredibly ripe piece of fatty blue fin tuna sushi. This is why credit default swaps on Japanese debt have doubled since last summer. Of course, I only speak Japanese, spent a decade living in Japan, another decade running a Japanese prop desk, a third decade managing a Japanese hedge fund, and published three books on the Japanese financial system, so what do I know? But if I?m right, there is a baseball sitting on top of a T-ball stand just begging to be smashed out of the park. Look for the yen to move to ?95 very quickly, then ?100 to the dollar in months, followed by ?120, and ultimately ?150. If you want to get into the beginning of a major trend, instead of the middle, or the end, like everyone else, this is your big chance. Buy the short yen ETF (YCS).
Featured Trades: (POT), (MON)
2) Agricultural Commodities Are the Steal of the Century. I managed to catch an interview with Charlie Rentschler at New York boutique investment bank, Morgan Joseph, one of the top agricultural analysts in the industry, known as the ?Farmer from Harvard.? He says that investment in the sector is a frustrating and unpredictable mix of bugs, weeds, and weather, tossed in with capricious government policy and volatile commodity prices. The industry is enjoying enormous productivity increases, thanks to new genetic seed varieties, narrowing rows for planting which accept more corn seeds in the ground,? automatic GPS steered tractors, and farms requiring less tillage, enabling more acres to be planted. Ethanol now accounts for a staggering 10% of the arable land in the US and one third of the corn crop, and is having a huge upward push on prices. It has ratcheted corn up from the $2 to $4/bushel range, and soybeans from $4 to $10/bushel. His first pick is Saskatchewan fertilizer producer Potash (POT), which is benefiting greatly from rising prices and soaring demand from China, followed by Monsanto (MON), which I, myself,? have been pushing for a year. After a period of weakness triggered by the government?s January crop report predicting huge increases in corn plantings this year, which is cutting the knees from under prices, I expect to see a long term bull market in food prices. Wait for the markets to price in another perfect year, buy, and then wait for the weather to turn bad, as it invariably does.
Featured Trades: (PCY), (LQD)
3) Sovereign Debt is a Great Place to Hide. I am constantly asked where to find safe places to park cash by investors understandably unhappy with the risk/reward currently offered by the markets. Any reach for yield now carries substantial principal risk, the kind we saw, oh say, in the summer of 2007.
I have had great luck steering people into the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY) for the last nine months, which is invested primarily in the debt of Asian and Latin American government entities, and sports a generous 6.44% yield. This beats the daylights out of the one basis point you currently earn for cash, the 3.86% yield on 10 year Treasuries, and still exceeds the 4.70% yield on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single 'BBB', or better, US corporates.
The big difference here is that PCY has a much rosier future of credit upgrades to look forward to than other alternatives. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality went down like a bad fish taco. No doubt a history of defaults in the region going back to 1820 is in the backs of their minds.
You would think that a sovereign debt fund would be the last place to safely park your money in the middle of a debt crisis, but you'd be wrong. PCY has minimal holdings in the Land of Socrates and Plato, and very little in the other European PIIGS. In fact, the crisis has accelerated the differentiation of credit qualities, separating the wheat from the chaff, and sending bonds issues by financially responsible countries to decent premiums, while punishing the bad boys with huge discounts.?? It seems this fund has a decent set of managers at the helm.
With US government bond issuance going through the roof, the shoe is now on the other foot. Even my cleaning lady, Cecelia, knows that US Treasury issuance is rocketing to unsustainable levels (she reads my letter to practice her English). Moody's has been rattling its saber about a downgrade of US debt on an almost daily basis, and it is just a matter of time before this once unimaginable event transpires. When it does, there could be a stampede into the debt of other healthier countries, potentially sending the price of PCY through the roof.
A price appreciation by PCY of 170% to $26.19 a share in the past year tells you this is not exactly an undiscovered concept. Since my initial recommendation, money has been pouring into PCY, taking it up to a record $500 million in assets. Still, it is something to keep on your 'buy on dips' list.
I lived through the Latin American debt crisis of the seventies. You know, the one that almost took Citibank down? Never in my wildest, Jack Daniels fueled dreams did I think that I'd see the day when Brazilian debt ratings might surpass American ones. Who knew I'd be trading in Marilyn Monroe for Carmen Miranda? But that day is coming.
'A CEO must not delegate risk control. It's simply too important,' said Warren Buffet, CEO of Berkshire Hathaway.
Featured Trades: (THE HEALTH CARE BILL)
1) Here Comes Health Care. Well, the sun rose this morning. After driving around Washington State listening to talk radio while the health care vote was counting down, I wasn't so sure I would see it again. With this single vote, Obama has torn up the constitution, deprived America of freedom, and signaled the end of our country as a power on the world stage. The Democrats will lose control of the House and the Senate in seven months, and impeachment proceedings will begin against our 44th president immediately. A tectonic shift has broadened the gap between the two parties wider than the chasm of the Grand Canyon, and 30 states are planning to secede to keep socialized medicine outside their borders, sparking a second civil war. So I thought it would be timely to invite my friend Pat from across the border in Vancouver to lunch, where national health care has been in force in some form since the fifties. Pat and I survived the 1968 Paris student riots together. He managed to keep his front teeth. I didn't. He managed to get the girl and take off for Greece. I didn't get that either. Pat thought the people south of the border were mad. For $125 a month he gets outstanding health care for himself and his wife. When his significant other broke her leg skiing at Whistler a few years ago, they couldn't helicopter her off the slopes fast enough. The doctors did a fabulous job taking care of her, and it was all free. Sure, there are plenty of Canadians heading to the US for medical care, but they are mostly for face lifts and boob jobs not covered by the Canadian plan, or for procedures so advanced that the technology doesn't yet exist in the Frozen Wasteland of the North. There are far greater numbers of Americans flocking North to buy subsidized prescription drugs. Nor has the plan taken Canada to hell in a hand basket, with the Canadian dollar (FXC) among the world's strongest currencies, and the Toronto Stock Exchange (EWC) one of the most bullish. After the harangues from the car radio became redundant, I switched to a golden oldies station and had a much more enjoyable drive. Maybe the country that gave birth to Buddy Holly, Patsy Cline, and Chubby Checker will survive this after all.
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Featured Trades: (LUMBER), (SUGAR), (PALL), (PPLT)
2) Lumber Futures Are On Fire. When I recommended that you take profits on lumber in my February 25 piece (click here ), after pleading with you to buy it for the past year, I hope you were all in a coma in intensive care, spending a weekend in Paris with your mistress, or on a long distance hike on the Appalachian trail (Is that redundant?). Lumber futures have been far and away the top performing asset class of 2010, bringing in a blistering 39.9% year to date, and a healthy 16% gain since my call to take the money and run. Please check out the chart below of asset class returns this year, which I lifted off of Paul Kedrosky?s Infectious Greed website. All of the reasons to own the aromatic commodity kept coming through by the rail car, including decades of production downsizing, huge Chinese buying, and waning competition from Canada because of a strong loonie. No one ever got fired for taking a profit, but they do get sacked for being an idiot, or worse these days, being too conservative. At least I avoided the temptation to buy sugar, now down 31.7% YTD, the year?s worst performing investment. And I did catch palladium (PALL), the year?s number two performer, with a 14.7% gain, and platinum (PPLT) (Remember that killer pair of lowriders?), up 9.1%.
Featured Trades: (THE US EDUCATION SURPLUS)
3) The Huge US Balance of Payments Surplus in Education. I spent the weekend attending? a graduation in? Washington state, a stone?s throw from where the 2010 Winter Olympics were recently held. While sitting through the tedious reading of 550 names, and listening to the wailing bagpipes, I did several calculations on the back of the commencement program. I came to some startling conclusions. Higher education has grown into a gigantic industry, with a massively positive impact on America?s balance of payments, generating an impact on the world far beyond the dollar amounts involved. There are 671,616 foreign students in the US (90,000 from China alone) paying an average out-of-state tuition of $25,000 each, creating a staggering $16.8 billion of payments a year. On a pro rata basis, that amounts to a serious part of our total receipts in services in Q4 2009 of $131.6 billion, not far behind financial services (click here for the Bureau of Economic Analysis site ) . A fortunate few, backed by endowed chairs and buildings built by wealthy and eager parents, land places at prestigious Universities like Harvard, Princeton, Yale, and UC Berkeley. The overwhelming majority, however, enroll in the provinces in a thousand rural state universities and junior colleges that most of us have never heard of. The windfall has enabled once sleepy little schools to build themselves into world class institutions of higher learning with 30,000 or more students, boasting state of the art facilities, much to the joy of local residents and state education officials. Furthermore, this dominance of education industry is steadily Americanizing the global establishment. I can?t tell you how many times over the decades I have run into the Persian Gulf sovereign fund manager who went to Florida State, the Asian CEO who attended Cal State Hayward, or the African finance minister who fondly recalled rooting for the Kansas State Wildcats. Those who constantly bemoan the impending fall of the Great American Empire can take heart by merely looking inland at these impressive degree factories. It also might give them an explanation of why the dollar is so strong in the face of absolute gigantic and perennial trade deficits.
'Inflation steals from savers, and inflation is the logical consequence of printing too much money,' said Oracle of Omaha, Warren Buffett.
Global Market Comments
March 23, 2010
(SPECIAL TEXAS ISSUE)
Featured Trades: (JOHN MAULDIN), (SPX),
(XEU), (EEM), (GLD), (CMGTX), (TBT),
(JAMES BAKER, III)
1) Son of Texas and financial seer, John Mauldin, believes the stock market could shed 40% in the near future (SPX). John is the president of Millennium Wave Advisors, LLC, a Dallas, Texas based investment advisor, with $600 million in assets under management. John worries that the velocity of money, an indicator of how many times a dollar is reused in the economy, is collapsing. This ratio, which is defined by the GDP divided by the money supply, bottomed at 1.15 in 1946. It peaked at a breathtaking 2.2 times in 1997, near the top of the Dotcom bubble. The ratio has been retreating ever since, has recently accelerated down to the 100 year mean, but still has much farther to fall to get to the bottom of the 100 year range. The collapse of velocity signals the end of a 50 year super cycle in lending. For you and I, this means lower economic growth for perhaps another decade. It is partly the result of banks getting generous funding from the Treasury, and then sitting on it. The bucks simply stop there. It suggests that no matter how much money the government pumps into the economy, it might as well be pushing on a wet noodle. The gold bugs have got it all wrong, simply focusing on money supply growth and expecting hyperinflation. A lot of money can sit and go nowhere. The inflation will come back with a vengeance when the economy revives and banks finally resume lending. With so much new money being created in the last two years, the chances of the Fed being able to head this off are close to nil. Similarly, the bond vigilantes may have to wait a couple of years for their big move down in the 30 year Treasury bond (TBT). When the bond markets call ?times up,? the US will be forced to embark on some highly deflationary spending cuts. If this happens during a recession, it could be a disaster. John thinks there will be a substantial slowdown in growth in Q3 and Q4. With anticipated federal tax increases of 2% of GDP in 2011 added to a further 1% in state tax hikes, the recovery will be strangled in its crib. That?s when the risk of a double dip recession explodes. Over 3-4 years higher taxes could add up to a burdensome 9% drag on GDP. John says that emerging markets (EEM) will decouple from the US and keep powering up, as this is where the real economic growth is (EEM). He has been a gold bull since 2002 (GLD), when it was below $300/ounce, and isn?t backing off from that position, but prefers to own it against Euros at this point. He thinks the entire premise for the existence of the European currency (XEU) is questionable, and sees it eventually moving to parity against the dollar. John doesn?t manage money directly himself, but outsources assets with market timers employing a number of different models. One firm he has particular success with is CMG in Philadelphia (CMGTX). He really only selects individual stocks in the biotech area, which he thinks have the potential to develop into a bubble, and has a variety of small cap and microcap holdings. Not pulling any punches, John said that the Republican leadership of the last congress was ?criminally incompetent? in the way they unnecessarily squandered surpluses and spent their way into oblivion, leaving us without dry powder to fight the current crisis. John has an incredibly diverse past, which includes a degree from Rice University, a stint at divinity school, and time spent running a check printing company which led him into newsletters. Today, his two letters, Outside the Box and Thoughts From the Frontline, go out on the Internet to 1.5 million readers a week. John is the publisher of three investment books, The Millennium Wave, Just One Thing, and Bulls Eye Investing. To learn more about John?s many activities in the markets, please visit his website at http://johnmauldin.com/ . To catch my entire insightful interview with John Mauldin on Hedge Fund Radio, please go to www.madhedgefundtrader.com/ and click on the ?Today?s Radio Show? menu tab on the left.
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2) ?We have 3,500 nuclear weapons left over from the cold war we don?t need, they take 20 seconds to re-aim, we?re not afraid to use them, and by the way, they?re already aimed at you.? That is the approach James Baker III thinks America should take with Iran, Ronald Reagan?s Chief of Staff and Secretary of the Treasury and George H.W. Bush?s Secretary of State. At the same time we should be talking to the regime in Tehran, while doing everything we can to support the reformers, tighten sanctions, and enlist Europe?s help. Baker does not see a military solution in Iran, even though their potential to create instability in the region is enormous. This was one of dozens of amazing insights I gained spending an evening chatting with the wily Texas lawyer during an evening in San Francisco. Baker is happy to take on the ?America Bashers?, pointing out that the US still plays a dominant role in the UN, NATO, the IMF, and the World Bank. It still accounts for 25% of GDP, and its military is unmatched. The US spread globalization, and the spectacular growth of China and India is largely the result of open American trade policies, raising standards of living globally.? But the US can?t take its leadership role for granted. The biggest threats to American dominance are the runaway borrowing and entitlements. US debt to GDP will soar from 93% to 100% in three years, the highest level since WWII. This is unsustainable, is certain to bring a return of inflation, and unless dealt with, will lead to a long term American decline on the world stage. Massive trade and capital flow imbalances also have to be addressed. The 80 year old ex-Marine, who confesses to being the only Treasury Secretary in history who never took an economics class, believes that the advantageous rates that the government now borrows at are not set in stone. Baker is the man who engineered an end to the cold war with a whimper, and not a bang. He thinks that ?even our power has its limits,? and that there is a risk of strategic overreach.?? While conditions in Iraq still look dicey, there is a good chance that we can pull out combat troops by August, and all troops by 2011, and leave a stable country. With the US politically evenly divided, Congress has degenerated from debating teams into execution squads, and consensus is impossible. The media are partly to blame, especially bloggers who propagate wild conspiracy theories, as confrontation sells better than accommodation. Regarding the financial crisis, we need to end ?too big to fail? and embark on re-regulation, not strangulation. All in all, it was a fascinating few hours spent with a piece of living history who still maintains his excellent contacts in the diplomatic and intelligence communities.
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QUOTE OF THE DAY
Early in the political career of James Baker, III, when he was campaigning in the Texas panhandle, a voter approached him with a question. ?Does anyone ever tell you that you look a lot like James Baker, III?? he asked. Baker answered, yes, I get that a lot.? The man responded, ?that must really piss you off.?