1) My guest on Hedge Fund Radio this week is David Gurwitz, the engaging and highly entertaining managing director of Charles Nenner Research, and a long time hedge fund industry veteran. Charles graduated from the famous Bronx High School of Science, and promptly tried out as a professional baseball player for the Montreal Expos. He struck out there, but did later play professional basketball in Europe. His financial career began in 1981 when he became an international tax expert for the big 8 accounting firm, Coopers & Lybrand. He spent another 20 years as a financial consultant and merchant banker. He went into the research business with the famed Dutch technical analyst, Charles Nenner in 2002. David is also an accomplished concert pianist and is about to launch his second commercial CD, making him a true renaissance man. Hedge Fund Radio is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For the online link to the live show, please go to www.bizradio.com, or click here , click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.?? For archives of past Hedge Fund Radio shows, please go to my website by clicking here.
1) OK guys. I get the message. Yesterday?s letter elicited no less than 100 out-of-office replies. So I?m going to take the hint and disappear for a few days. It?s two days until Christmas, and I haven?t even put my outside lights up yet. I?ll be doing my research with my little kids while watching the Princess and the Frog, and with my older kids while viewing Avatar.? The mandarin oranges are ripe and due for picking, the raccoons have broken a hole through the back fence, and there?s a load of firewood to chop and stack. I guess I?ll take my Lionel train set out, the same steel cast one I played with myself 50 years ago, and see if I can interest my girls. I hope you all enjoy your Christmas festivities, where ever you are in the world. At last count, this letter was being read in 100 countries. My next letter will be sent on December 28, and I?ll be putting out an annual asset allocation review on January 4. Until then, please enjoy the hard hitting, one on one, tell all interview with Santa Claus I conducted just yesterday.
2) I managed to catch up with my old friend, Santa Claus, the other day, before he took off on his global gift giving rounds. I have had a rocky relationship with old Saint Nick over the years, usually getting coal or potatoes in my stocking, as one who lives a feckless life might expect. But one year I found a Mercedes S600 V-12 under the tree! I ended up giving it away because I didn?t like the cup holders, but hey, it was a nice thought! Things are not good at the North Pole. The cost of the software upgrade needed to switch from children?s handwritten letters to email has been a killer. And what the hell is Twitter? The First National Bank of the North Pole won?t let him roll over his debt because snow appraisals aren?t coming in like they used to. Labor costs are rocketing. Elves used to work for a few pieces of candy cane a day, but no more. Now they want black snowmobiles with chrome wheels, big screen TV?s, and Blue Ray HD players. There are rumors of a strike over health care costs, which are bleeding him snow white. The Amalgamated Confederation of Elves must be the only union that gets Viagra with their benefits, besides the United Auto Workers. And now they want free mistletoe, to boot! He?s going to have to skip the unfortunate children of Afghanistan and Iraq again because Obama?s budget cuts won?t allow the US Air Force to provide needed fighter cover. The price of reindeer food is going through the roof, thanks to Chinese hoarding, and Donner and Blitzen are down with the swine flu. Rising costs, lower revenues, and an unruly workforce are not a good business model. Since the government forced that TARP money down his throat, the green eye shades from the Treasury have been camping out in accounting. To top it all, compliance is telling him he?s being investigated for backdated stock options in Santa Claus Inc. All this while the debate rages on over whether he even exists. Tell that to the SEC! Coming on top of all the shareholder carping about his ten figure compensation package, and unlimited use of the corporate sleigh, he needs this like a hole in his head! To be honest, he would have retired by now if he had not invested so much of his savings with Bernie Madoff. Sure, it?s a brave new world out there, but no one ever said being Santa Claus was easy.
QUOTE OF THE DAY
?Gold does not have a heart, nor does it have a soul,? said Mama Odie, a 200 year old sorceress in the Disney film The Princess and the Frog
Global Market Comments December 22, 2009 Featured Trades: (JOHN BRADY?S 2010 STRATEGY), (SPX), (TBT), (GOLD, (EWZ), (EZA), (XOM), (XTO), (CAP & TRADE), (A CHRISTMAS STORY)
1) MF Global?s strategist for interest rate products, John Brady, sees the S&P 500 rocketing 18% to 1,300 during the first half of 2010, driven by enormous productivity gains that are creating historic profit margins. A flood of money should hit the market just after the New Year. Let there be no doubt that the world is in risk accumulation mode. However, while monetary policy will stay on hold for possibly all of next year, long rates will start to rise because of the sheer volume of Treasury issuance. Think the (TBT). Investors will then start taking profits into June, prompted by the uncertainties of the midterm congressional elections and a possible ?W? recession. John thinks that emerging markets will keep devaluating their currencies to keep exports competitive and stock markets flying, but watch out for the volatility. China is a special situation. By tying the Yuan to the dollar, they are letting Washington set their monetary policy, and guess what? Bubbles are contagious. Like the rest of the planet, John loves Brazil (EWZ), and also South Africa (EZA), where gold, a rising middle class, and an international trade hub are the motivating stories. We are in a secular bull market for the barbaric relic, with a rise to $2,200 feasible, but don?t be surprised if we tick at $800 first. Commodities look great long term as a synthetic short dollar trade. But the buck could rally until mid year before a new big down leg renews. He is also a peak oil believer, and thinks the recent Exxon/XTO Energy deal speaks volumes about the shortage of supplies. It?s cheaper to drill on the floor of the New York Stock Exchange than 30,000 feet down in the Gulf of Mexico. To hear the full 40 minute interview, please go to Hedge Fund Radio by clicking here
2) You are about to be pounded senseless by competing sets of data arguing that global warming is accelerating, not changing, or like Santa Claus, doesn?t exist at all. You will be offered truckloads of contradictory, apple and orange comparisons which sound relevant to non-scientists, but with which it is impossible to reach any meaningful conclusions. With health care out of the way, cap & trade, alternative energy, and the restructuring of our energy infrastructure will move to the head of the queue as the next battleground in Washington. A stubbornly high unemployment rate and a potential double dip recession means that Obama could lose control of the house in November. So he has no choice but to ram through his most radical legislation in 2010. The president certainly made no secret of his desire to wean the country off of imported oil during the election, which means that we have to come up with 20 million barrels a day of crude in energy equivalent or savings somewhere. The problem I have with all of this is the environment is first and foremost an engineering issue. The last time I checked, both parties, even their most radical wings, agreed that the boiling point of water was 100 degrees C, the atomic number of carbon was 6, and the formula for carbon dioxide was CO2. That won?t stop politicians from hijacking,?? emotionalizing, and clouding the issue. At stake is nothing less than the 10% of America?s GDP that the energy industry accounts for, and the moving of substantial economic activity out of Texas, Oklahoma, and Louisiana to the East and West coasts. Don?t expect this to happen without a knockdown, drag out fight. Since I believe that alternative energy will be one of the dominant investment themes of the coming new decade, and have the luxury of a science background, I will be wading through this morass attempting to provide readers with whatever insights I can. Watch this space.
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3) A CHRISTMAS STORY
When I was growing up in Los Angles during the fifties, the most exciting day of the year was when my dad took me to buy a Christmas tree. With its semi desert climate, Southern California offered pine trees that were scraggly at best. So the Southern Pacific Railroad made a big deal out of bringing trees down from much better endowed Oregon to supply holiday revelers. You had to go down to the freight yard at Union Station on Alameda Street to pick them up. I remember a jolly Santa standing in a box car with trees piled high to the ceiling, pungent with seasonal evergreen smells, handing them out to crowds of eager, smiling buyers for a buck apiece. Watching great lumbering steam engines as big as houses whistling and belching smoke was enthralling. We took our prize home to be decorated by seven kids hyped on adrenalin, chugging eggnog. A half century later, the Southern Pacific is gone, the steam engines are in museums, anyone going near a rail yard would be mugged or arrested for vagrancy, and Dad long ago passed away. Dried out trees at Target for $30 didn?t strike the right chord. So I bundled the kids into the SUV and drove to the primeval, foggy coastal redwood forests of Northern California. Five miles down a muddy logging road, it was just us and a million trees. The kids, hyped on adrenalin, made the decision about which perfect eight footer to take home. I personally chopped it down, tied it to the roof, and drove us the three hours home. With any luck, these memories will last until the next century, and long outlast me.
QUOTE OF THE DAY
?If I only has enough food, defeating the Russians would be child?s play,? said Napoleon in 1812.
Featured Trades: (BUREAU OF LABOR STATISTICS), (CHINESE NUCLEAR PROGRAM), (CHINESE SECURITIES REGULATION)
1) Those of you counting on getting your old job back on the assembly line in Detroit better look at the eight year jobs forecast published today by the Bureau of Labor Statistics. The table shows that 4.19 million jobs will be gained in the US in professional and business services, followed by 4 million health care and social assistance jobs, while 1.2 million will be lost in manufacturing. This is great news for website designers, Internet entrepreneurs, and registered nurses in California, but grim tidings for traditional metal bashers in the rust belt manufacturing states like Michigan, Indiana, and Ohio. The real challenge for we aged advise givers is that probably half of these new service jobs don't even exist yet, and if they can be described, it is only in a science fiction novel. After all, who heard of a webmaster 40 years ago? Where are these jobs going? You guessed it, China, and other lower waged, upstream manufacturing countries like Vietnam, where the Middle Kingdom is increasingly doing its own offshoring. These forecasts assume that Americans can continue to claw their way up the value chain in the global economy, and not get stuck along the way, as Japan has been since the nineties. China can have all the $20 a day jobs it wants. But if China is able to move up the value chain faster than it has, as it clearly aspires to do, then America is in for even harder times. I'll be hoping for the best, but preparing for the worst. Keep taking those Mandarin lessons, with some Vietnamese thrown in for good measure.
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2) The New York Times did an excellent update on China's incredibly ambitious nuclear program last week (click here for the full story). The Middle Kingdom currently has 11 operational plants generating 11 gigawatts accounting for 2.3% of the country's power. It plans to add ten a year for the next decade, taking them up to 70 Gigawatts by 2020, and a staggering 400 gigawatts by 2050. That's nearly the total power generated in China today. This will also make China the world's largest consumer of yellow cake (U3H8) for fuel. Canadian, American, and Australian uranium miners please take note. The goal is to sate the country's insatiable demand for more electricity, as well as making a major dent in new greenhouse gases contributing to global warming. The China Guangdong Nuclear Power Group in the Southern part of the country is using imported French designs with proven track records. But the China National Nuclear Corporation in the North is using riskier Russian designs, and its president was recently arrested on corruption charges (see below). One wonders if these plants will perform as badly as the country's poorly constructed school buildings when an earthquake hits. As nuclear plants are sited next to major cities, an accident could make Chernobyl look like a cake walk.
3) Why don't we try Chinese style securities regulation? Former stock trader, Yang Yanming, was executed by lethal injection last week for embezzling $9.52 million from Galaxy Securities during 1997 to 2003. The move was part of a broader effort by the Mandarins in Beijing to crack down on rampant corruption in the securities industry. Yanming never revealed where the money went, according to the Beijing Evenings News, one of my daily reads. SEC take note. If we adopted similar enforcement measures here in the US, we'd save the $65,000 a year it costs to lock up miscreants like Bernie Madoff in high security facilities. With both state and federal prosecutors now on a holy war against the securities and real estate industries, the combined savings could be huge. Some $80 billion will be spent incarcerating America's 3 million prisoners this year. Still, the more people they execute in the Middle Kingdom, about 10,000 this year, the more they remain the same. Great for the human organ business, but not so good for white collar crime prevention.
QUOTE OF THE DAY
'If you don't believe in global warming, fine, that's between you and your beach house,' said Tom Friedman, a columnist for the New York Times.
Featured Trades: (DBA), (MOO), (PHO), (FIW), (INTERNET BANKS), (BUREAU OF LABOR STATISTICS)
1) I spent an evening with Lester Brown, president of the Earth Policy Institute and a winner of the coveted MacArthur Prize, for some long term thinking about the environment and its investment implications.? Global warming is causing the melting of ice sheets in Greenland and Antarctica, glaciers in the Himalayas, and the Sierra snowpack. Water tables are falling and fossil aquifers are depleting. In the coming decades this will cause severe shortages of fresh water that could lead to crop failures in India, China, where one billion people depend on mountain runoff to irrigate crops, and even California, which delivers 80% of America?s fresh vegetables. . The fresh water inputs in one person?s food and materials consumption works out to some 2,000 liters a day. That is no typo. As a result, all food prices will rise. To head off the greatest threat to the global food supply in human history, we need to cut carbon emissions by 80% before 2020, not 2050, as is being discussed in Copenhagen. This can only be accomplished by redefining food and the environment as national security issues and launching a wartime mobilization. These difficult goals are achievable. Enough sunlight hits the earth in a day to power the global economy for a year. Texas alone has 20 gigawatts of wind power operating, under construction, or planned, enough to take 5% of our 250 coal fired power plants offline. Electricity demand could be cut by 90% purely through greater efficiencies, like switching from incandescent bulbs to LED?s. Europe could get its entire 300 gigawatt power supply from solar plants in North Africa at current market prices. Cars powered by wind generated electricity would bring fuel costs down to an equivalent 75 cents a gallon, as electric motors are three times more efficient than internal combustion engines. While Brown?s predictions are a little extreme for many, they mesh perfectly with my long term bullish cases for food and water plays. Take another look at the food sector ETF?s, (DBA) and (MOO), and the water space ETF?s (PHO) and (FIW).
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2) Is your bank giving you the cold shoulder on your last loan application, not retuning your phone calls, or asking for interminable documentation? Just bypass them. Try an online peer to peer bank, the Internet?s answer to the financial crisis. With massively expensive branch networks, 19th century loan processing, inches of closing documents, and a boatload of regulation, banks are ripe for cannibalization by low cost predators. I had a chance to speak to several of these entrepreneurs in San Francisco. The simplest model matches a one page online loan application and FICO score with a single lender at interest rates of around 9%, plus a small fee. More advanced organizations pool borrowers and lenders, and offer secondary markets for loans, if you want to cash out before maturity. Prosper has been around the longest, and unfortunately was early enough to get sucked into the subprime debacle. They have since relaunched their product with tightened lending standards. Lending Club came next, followed by Pertuity Direct and National Retail Fund. People Capital is pursuing a niche market matching up student borrowers with lenders. We are not far off from the sector being viewed as a new alternative asset class, with the total loan book now exceeding several hundred million dollars. With online fixed overheads near zero, the potential to compete on margins is enormous. While this is purely a venture capital play at the moment, watch this space.
3) My guest on Hedge Fund Radio this week is John Brady, senior vice president for interest rate products at MF Global.?? You will know John well from his frequent appearances in the global business media. He will give us his surprisingly bullish views for 2010 for US and foreign stocks, bonds, commodities, and currencies. John comes to us via a career at Harris Futures, JP Morgan, and nine years as a strategist at MF Global. And no, John did not bump into Professor Barrack Obama when he was getting his MBA at the University of Chicago. Hedge Fund Radio is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For the online link to the live show, please go to www.bizradio.com or click here , then click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.??? For archives of past Hedge Fund Radio shows, please go to my website by clicking here .
QUOTE OF THE DAY
?Food is the weak link in the global economy,? said Lester Brown, president of the Earth Policy Institute.
Global Market Comments December 17, 2009 Featured Trades: (FXI), (EWH), (COPPER), (GOLD), (F), (BA), (GE)
1) I confess that I am a total agnostic when it comes to specific investment philosophies, and a complete whore when it comes to trying out any new analysis that walks by. Maybe it?s because of my science and math background, but for me, raw data trumps opinion and hype any day of the week. So when someone I respect with a great track record argues that my core longs are setting up for a great short, I have to sit up and pay attention. No lesser being than famed short seller Jim Chanos of Kynikos Associates (?Kynikos? is Greek for cynic), says that China?s (FXI) much vaunted 8% GDP growth is being massively inflated. The game will continue as long as there is easy access to credit, but when reality sinks in, the resulting crash will equal the subprime crisis in its severity for the global economy.? China is Dubai times 1,000. While shorting ?A? shares on the mainland is illegal, Jim can short ?H? shares in Hong Kong (EWH)? as well as the growing roll call of US listed ADR?s, ETF?s and futures contracts. Jim is also looking at shorting the derivative commodity plays like copper (see my recent copper warning by clicking here ), cement, and yes, gold. I agree with Jim in that China is the best place to be long in rising markets, and the worst place in falling ones. This is why I have recently put out several global risk alerts, as the level of risk in all asset classes, not just China, is clearly much higher than it was just nine months ago. Jim also dislikes the auto industry, which is still facing backbreaking legacy costs, specifically Ford (F), and Fiat. EADS, the European airbus manufacturer, has myriad problems, and will eventually need a state bailout. Jim is neutral on banks, which are merely kicking the can down the road on bad loans and securities valuation.
2) I know that airline service is pretty poor these days, but isn?t a two year wait for a flight a little extreme? I?m talking about the inaugural flight today of Boeing?s (BA) 787 Dreamliner, which was plagued with manufacturing glitches, like safely attaching the wings to the fuselage. Boeing has bet $13 billion on the next generation aircraft, which is a great leap forward, using advanced carbon fiber technology to produce lighter planes that improve fuel efficiency by 40%. The plane is clearly a make or break for the airline industry, especially if fuel prices rise substantially, as I expect. Some 840 have been ordered, making it far and away the most pre ordered commercial plane in history. That takes the order backlog to 2016, and Boeing is opening a second factory in Charleston, North Carolina to accommodate an ambitious ten plane per month production schedule. The first 787, which can carry up to 320 passengers, will be delivered to Japan?s All Nippon Airways (ANA) in Q1, 2011. To read my initial call to buy Boeing, as well as my family?s long history with the fabled company, click here .? I believe this is a classic case of buying the rumor and selling the news, so it may be time to take some profits here, as the 112% run from the March lows have far outrun the broader market. It looks like the company?s chances of getting a major Air Force tanker contract have been torpedoed yet again, and it will lose money on the first 200 Dreamliners delivered.
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3) I met Jack Welch last night, the legendary retired CEO of General Electric (GE). ?Neutron? Jack gets the credit for boosting the market cap of GE from $13 billion to $400 billion in 20 years, turning it into a Wall Street darling in the process. The ?hedge fund that makes light bulbs? is the last big industrial finance company standing, and when the market turns it will make a fortune, because there is no competition left. Jack is currently on the board of a private equity firm, several Internet media start ups, and is advising me on the start up of this newsletter. He gives Obama an ?A? for leadership and communication, but believes his economic policies are seriously flawed. They are based on a 4% annual growth assumption for the next decade. We never managed to achieve that rate during the go go days of the eighties and nineties, let alone attempt it during a new age fraught with deleveraging and frugality. If we get only 2.5% instead, the deficit will explode from $13 trillion to $30 trillion, at which point ?we will be cooked.? Who knew Jack was a closet gold bug, dollar bear, and inflation hawk? Jack was passing through San Francisco at the end of a national tour promoting his wife Suzy?s new book ?10-10-10?, which is about how to create a ?values driven life.? In his heyday, Jack was considered the best manager in the country. Never one to mince words, he is an absolute terror now that shareholder feelings are no longer a consideration.
TRIVIA OF THE DAY
The genealogy website, Ancestry.com, says that president Obama and Warren Buffett share great grandfathers, making them seventh cousins. See the resemblance?
Global Market Comments December 16, 2009 Featured Trades: (SPX), (TBT), (GLD), (FXA), (UNG), (INDONESIA)
1) The S&P 500 (SPX) is going to plunge 10-20% from early January, Treasury bond interest rates are going to soar (TBT), and gold (GLD) will peak out, all starting in January. There are tradable shorts setting up in all three of these markets that will run for the first half of 2010. Or so says Charles Nenner, of the Charles Nenner Research Center in Amsterdam (visit his site at www.charlesnenner.com by clicking here ). Charles was my guest on Hedge Fund Radio, and has a long career that includes stints at medical school, Merrill Lynch, Rabobank, and ten years as a technical analyst at Goldman Sachs. He has spent three decades developing his proprietary Cycle Analysis System, which generates calls of tops and bottoms for every major market in the world. Charles sees a trading rally in the dollar setting up which could deliver a strong greenback until May, when we should then re-establish shorts, especially in his favorite, the Australian dollar (FXA). The scientist turned technical analyst argues that major bull markets in wheat, corn, and soybeans will begin next year, sectors for which I am also hugely bullish. He sees natural gas (UNG) retesting the old lows at $2.40. Longer term, Charles sees a new major bear market beginning in 2013 that will take both stocks and bonds to new lows. To hear my interview with Charles in its entirety, please go to my website by clicking here .
2) You probably won?t be surprised to hear that I believe that alternative energy will be one of the dominant investment themes of the next decade. While a good journalist never reveals his sources, I?m happy to disclose this one. One of my favorite sources of information to mine on this topic is Greentech Media (click here for their website at http://www.greentechmedia.com/ ) which has published their top predictions for 2010. Here they are:
1) Private capital investment into alternative energy soars to a new record, filling in the gap that opened up in 2008. 2) This will be the year of the ?non-carbon? commodity. Every aspect of the world economy will be reviewed for its total carbon footprint. 3) Energy efficiency gains will become more important than solar. Dump those incandescent light bulbs! 4) The solar industry will scale up from small model facilities to large industrial plants. 5) IPO?s and takeovers will enter the smart grid space, sucking in more capital. 6) The industry will give up on biofuel because of its lack of scalability. I didn?t want to live near an algae factory anyway.
3) If you are looking for another emerging market to add to your list of things to buy on dips, then take a look at Indonesia. The world?s largest Muslim country offers a combination that I love, a population with great demographics that is also a major energy and commodities exporter. The archipelago is the biggest country in Southeast Asia and a huge exporter of oil and LPG to Japan on long term contracts (An old friend of mine torched their Borneo fields at the beginning of WWII, and spent four years in a Japanese prison camp for his troubles). Other big exports include marvelous textiles, rubber, and increasingly rare tropical hardwoods. The global financial crisis only knocked their growth rate from 6.1% to 4.5%, and now it is back above 6%. No doubt, $63 billion of direct foreign investment into the country helped. A series of tax reforms promise to keep the train moving, cutting the top corporate rate from 30% in 2008 to 28% this year, and 25% next year. Wisdom Tree had the ?wisdom? to launch the country?s first ETF (IDX) in January (what timing!), which became one of the best performers this year, rocketing over 310% from the lows to $62.50.? Islamic inspired terrorism is still a lingering concern. I keep Indonesia in the category of highly volatile, high risk, high return frontier markets that you only want to buy on a big dip. Keep it on your radar.
QUOTE OF THE DAY
?Cleantech, greentech, and energy technology has to be the next great global industry. China gets it,? said Pulitzer Prize winner tom Freidman, author of Hot, Flat, and Crowded.
December 15, 2009 Featured Trades: (XTO), (XOM), (BIDU), (BYDDF), (NTES), (CQQQ), (TAO), (HAO), (YAO), (CHIHUAHUAS)
1) Wow! Talk about instant results! It was only last Thursday that I recommended to readers a buy in XTO Energy at $40.50 (click here for the call). A 2:00 am call rousted me out of my sleep this morning informing me that Exxon (XOM) is taking them over at a 25% premium, all stock deal worth $31 billion. The bid values XTO?s natural gas assets at a bargain $3/MCF, compared to a spot price of $5.50. I have been extolling the virtues of this independent oil and gas producer since August (click here for my first report) because they had enough oil production to hedge their exposure in the collapsing natural gas market, and had hedged their gas by selling much of their production forward on the futures market. I guess XOM finally woke up to what I was shouting at them, as well as to Chevron and any other major who would listen. The great luxury the majors enjoy is that they can take the ten and twenty year view, unlike me, whose investors want to know what I did for them yesterday. Of course, natural gas futures soared on the deal. It also triggered an orgy of speculation that the entire rest of the independent energy sector is now in play, including Transocean (RIG), which I also recommended three days ago, Chesapeake (CHK), Devon Energy (DVN), and Anadarko Petroleum (ADC). The bidders, the oil majors, certainly have cash coming out of their ears and plenty of motive. For me, the annoying thing is that XOM will get the next triple in XTO?s value, not me. But I guess a 25% premium is better than a poke in the eye with a sharp stick. Thanks for the early Christmas present, Exxon.
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2) Long time readers of this letter have been harangued to buy Chinese Internet stocks so frequently, they probably are fluent in Mandarin by now, drink only hot?? Oolong tea, and eat egg foo young at least once a week. They have been the star performers in my hedge fund this year, with Baidu (BIDU) up 420%, BYD (BYDDF) up 175%, and Netease (NTES) up 215%. Now Claymore Securities is bringing out their Claymore China Technology ETF (CQQQ), which includes the Hong Kong and US listed securities of these names among their top holdings. The firm believes this story has much further to run, even though they have had spectacular runs so far. Some $54 billion of the Middle Kingdom?s $585 stimulus package targets technology, and they are certainly darlings of the hedge fund industry. The Chinese have also showed no signs of backing off from the protectionist policies that shelter their domestic businesses. The guys that put this fund together aren?t rocket scientists, and certainly don?t speak any Chinese dialects themselves. However, they are doing yeoman?s work assembling a basket of interesting stocks that offer a convenience to those too lazy to chase down individual foreign executions. Claymore has already had success with earlier launches in China, like their real estate (TAO), small cap (HAO), and all cap (YAO) ETF?s. My only proviso on this sector is that you better be quick fingered with your mouse, because when hedge funds go back to risk reduction mode, these names will be thrown out with the bathwater.
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3) I would be woefully remiss in not mentioning the impressive five cent rally Uncle Buck has pulled off against the euro since last week, from $1.51 to $1.46. Call it yearend profit taking, attempts to beat higher taxes in 2010, or a bump up against a key technical level, if you like. The reality is that when too many traders sit at the same table for a free lunch, the table has a nasty tendency to upend, and the food goes flying in everyone?s face. This is the sort of unpleasant thing I had in mind when posting six global risk alerts since October. It is absolutely no coincidence that dollar surrogates like gold and oil, have also been rolling over like the Bismarck. The long term fundamentals for the dollar still look as ghastly as ever. But they looked just as bad during the height of the financial crisis, when the greenback shot up from $1.60 to $1.20, in a heartbeat. I don?t think this snap back rally will be anywhere near as forceful as the last one. Hot money trades are like a wild beast that has to breathe. Just make sure you stand clear when it exhales, and hold your nose.
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4) Last week I wrote about the Nevadan wrinkle in the housing crisis where distressed homeowners are letting their horses go wild to make their mortgage payment (click here for the full report ). Now California is facing a Chihuahua glut, where evicted homeowners are handing over their pets to the pound. The diminutive Mexican canine enjoyed a boom in popularity in recent years, thanks to movies like Beverly Hills Chihuahua and Legally Blonde.?? Celebrities, like Paris Hilton, have also helped promote the breed. Animal shelters in the land of fruits and nuts have been so overwhelmed they have had to ship the ultra cute animals to pounds as far away as Toronto. Will the unintended consequences of Greenspan?s low interest policy never end? Give the poor chihuahua?s a break!
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QUOTE OF THE DAY
?If real wealth is to be created, it has to be invested generationally,? said Scott Minerd, chief strategist at Guggenheim Partners
1) Feed the ducks when they're quacking. That's the refrain I heard endlessly on the trading floor at my alma mater, Morgan Stanley. If the clients want something, give it to them in spades, whether it makes any sense or not. So the sky must be darkened with uncountable flocks of our flying friends when I see two of the biggest equity issues in history in the same week, $25 billion for Bank of America (BAC) and $20 billion for Citigroup (C). Besides diluting the daylights out of the existing shareholders, the great problem I have with these issues is the terrible fundamentals that still bedevil the industry. You know these guys are engaging in blatant window dressing to get this paper out the door, extending and pretending until their noses grow to Uzbekistan. Their willing co-conspirator is the Federal Reserve's Ben Bernanke, who used the almighty weapon of zero interest rates to engineer one of the greatest stock rallies in history to get bank shares off the floor. Revenue quality is terrible, earnings visibility is nonexistent, home foreclosures are still accelerating, and commercial defaults may not crest for another three years. You know whatever capital they are raising now will be consumed by write offs next year, and more capital raisings will have to follow. Napoleon's 1812 retreat from Moscow comes to mind. If someone is pointing a gun at your head forcing you to buy bank shares on pain of death, only look at the small ones, like Hudson City Savings (HCBK), Westamerica (WABC), and Bank of Hawaii (BOH). Given the dreadful fundamentals, you'd think traders would be flooding to the leveraged short financials ETF (SKF) by now, which is down a humbling 92% from its high. You can still buy it for a hat size, which is ironically, where the bank shares themselves were trading in March. With the stock market possible at the top of a multiyear range, I'm afraid that the investors in these big issues will end up as dead ducks.
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2)It's been at least a week since I poured abuse on US treasury bonds, the world's most overvalued asset, so I'm overdue for another go. In the wake of jitters about sovereign debt in Dubai, Greece, Spain, Ireland, Japan, and Portugal, Moody's is actually talking about a ratings downgrade for the US. Not that we should give that disgraced institution any credibility whatsoever. But the numbers are adding up. It's just a question of how many sticks it takes to break a camel's back. The Federal debt ceiling has to be raised again, requiring a Congressional vote, which will no doubt bring on much bloviating and hand wringing about our profligate ways. Last week's ten year auction went over like a wet blanket, bumping the yield up to 3.49%. That inspired the TBT, short Treasury ETF, to rise above its 50 day moving average, and now the shorter dated ETF for short Treasuries, the PST, is starting to look interesting. I bet John Paulson's cockles are warming.
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3) Having trouble raising capital for your new hedge fund? Just list Warren Buffet as your 'Honorary Chairman.'That's what California prison guard Ottoniel Medrano did. To help his marketing efforts, he also claimed that he had $4.8 billion in assets under management as well as massive real estate holdings in Asia. Medrano's International Realty Holdings managed to raise $700,000 from individuals?? with this scam, which he promptly shipped to offshore bank accounts, before the Feds shut him down. When you think you've heard everything, something like this pops up. Unbelievable. You would think that people have heard of 'due diligence' by now. It all brings back unpleasant memories on the one year anniversary of the Bernie Madoff discovery.
QUOTE OF THE DAY
'You hand us a plate of food that is on fire, and now you complain that the meat is overcooked,' said Austan Goolsbee, an administration spokesman on the Economic Recovery Advisory Board.
Global Market Comments December 11, 2009 SPECIAL NUCLEAR POWER ISSUE
Featured Trades: (NUCLEAR ENERGY), (CCJ), (NLR), (WIND TURBINES), (GE), (HEDGE FUND RADIO)
1) The seventies are about to make a comeback. No, don?t drag your leisure suits, bell bottoms, and Bee Gee?s records out of your storage facility. I mean the nuclear industry, which has been in hibernation since the accident at Three Mile Island in 1979. There is absolutely no way we can deal with our energy crunch without a huge expansion of our nuclear capacity, which sits at a lowly 20% of our power generation. France has already achieved 85%, followed by Sweden at 60% and Belgium at 54%. Unless you?re a nuclear engineer, you are probably unaware how far the technology has moved ahead in the last 30 years. The first generation produced the aging behemoths we now see on coasts and rivers, which used high grade fuel that would melt down if someone forgot to flip a switch. Think Chernobyl. Generations two and three never got off the drawing board. Generation four is known as a pebble reactor,? which relies on a new form of fuel embedded in graphite tennis balls that is just hot enough to generate electricity, but too weak to allow a disaster. This eliminates the need for four foot thick, steel reinforced concrete containment structures, which accounted for 50% of the old design?s cost. Low grade waste can be stored on site, not shipped to Nevada or France. I?ll write more about this fascinating technology later. The permitting process is being shortened from 15 years to four by confining new construction to existing facilities instead of green fields, urged on by a less fearful public and even some CO2 conscious environmentalists. At least 30 new reactors are expected to start construction in the US over the next five years, and over 90 in China. There is a great equity play here, and I would use any substantial dip in the market to scale in.? The Market Vectors Nuclear Energy ETF (NLR), which has jumped an impressive 78% to $25 since March, is the easiest way in. You can also buy its largest components, like Cameco (CCJ) (click here for their website), the world?s largest uranium producer, which has seen its stock clock a nice double this year. And you might start practicing your ?hustle? once again.
2) On my recent trip to Oregon I met with venture capital investors in NuScale Power, which is trailblazing the brave new world of ?new? nuclear. Their technology has been pioneered by Dr. Jose Reyes, dean of the School of Engineering at Oregon State University in Corvallis. This is definitely not your father?s nuclear power plant. The company has applied for design certification with the Nuclear Regulatory Commission for a mini light water reactor with a passive cooling system rated at 45 megawatts. The idea is to site a dozen of these together which in aggregate can generate 540 Megawatts, little more than half the size of the old 1 gigawatt monsters. Running a dozen small reactors instead of one big one makes for vastly easier operation and maintenance, as individual units can be brought on and offline as needed. Small size also eliminates the need for gargantuan, expensive containment structures. This power source runs at night, when solar and wind plants are offline. Modular design makes mass production of these units economical. Once certification, approval, permitting, and construction are complete, we can expect to see the NuScale plants running by 2018. After all, if something similar works in nuclear powered submarines and aircraft carriers, why not in industrial zones on the outskirts of town? For more on NuScale?s innovative efforts visit their website by clicking here .
3) Deal of the Day??General Electric (GE) has sold 529 wind turbines to Caithness Energy for $1.4 billion for construction of the largest wind farm in the US. The Oregon facility will generate 757 megawatts of power, almost the size of a conventional nuclear power plant. The power will come online from 2011 and will be sold to California. This will no doubt help local utilities like Pacific Gas & Electric (PGE), which has a state mandate to obtain 20% of its power from renewable sources by 2017. Europe has a 20% target by 2020, and China has a similar goal, but the US has no fixed objective, although 30 individual states do. America currently gets a miserable 6% of its energy from renewable sources. The long term trend towards renewables hit a violent air pocket in 2008-2009 as the financial crisis dried up funding. Just ask T. Boone Pickens about this and you?ll get an earful. Conditions are now easing, as this deal shows, but there are still huge obstacles, like the needed upgrade of the national transmission grid (click here for more background on the crucial Tres Amigas project). GE originally got into this business by buying the wind assets of Enron for pennies on the dollar. If you had any doubt that alternative energy is THE NEXT BIG THING, this is the proof in the pudding.
4) My guest on Hedge Fund Radio this week is Charles Nenner of the Charles Nenner Research Center in Amsterdam. Charles hails from Holland, and has a long career that includes stints at medical school, Merrill Lynch, Rabobank, and ten years at Goldman Sachs. He has spent three decades developing his proprietary Cycle Analysis System, which generates calls of tops and bottoms for every major market in the world. Charles developed a huge following after 2007, when he accurately nailed the top in the Dow at 14,500 and urged his clients to put on short positions when everyone else was predicting that the market would keep grinding higher. I have been following Charles daily research reports myself for two years, and found them to be uncannily accurate. Today, Charles Nenner counts major hedge funds, banks, brokerage houses, and individuals among his clients. You can find out more about Charles? work at his website at www.charlesnenner.com. Hedge Fund Radio is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For the online link to the live show, please go to www.bizradio.com or click here , click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.?? For archives of past Hedge Fund Radio shows, please go to my website by clicking here.
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QUOTE OF THE DAY
?Ben Bernanke is not going to take the punchbowl away, but he may turn the music down,? said Bernie McSherry, senior VP of strategic initiatives at Cuttone & Co., a New York prime broker.
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