Featured Trades: (LUMBER), (TBT), (ZIMBABWEAN DOLLARS), (GOLD), (SILVER) (HEDGE FUND RADIO)
1) Sometimes I think I?m the only guy who follows lumber futures. But they are a great ?tell? on the direction of wide swaths of the economy. Today, I?m not alone. Chart watchers have gone apoplectic because they think the five year downtrend for this most unloved of commodities was broken yesterday with an impressive limit up move (see my April call to buy this aromatic commodity by clicking here ). The move is telling us that either (a) new home construction is slowly reviving, (b) the Chinese have stepped up their buying of natural resources, (c) hard asset investors are rotating into the laggards after running up everything else, (d) the economy is recovering faster than we realize, or (e) all of the above. Better take a look at top lumber producers Weyerhaeuser (WY) and Louisiana Pacific (LPX), or the Timber ETF (CUT). If you want to know how to get involved in the futures, please email me at madhedgefundtrader@yahoo.com.
2) I want to thank the many readers who have been mailing in gold and silver coins in appreciation of my efforts to get them in at the beginning of the year at $800/ ounce for gold and $10/ounce for silver. Gold hit a new high today of $1,155, while silver tickled $18,75. The guys who leveraged up made an absolute killing, and they have numbers like $1,300, $2,300, and $5,000 dancing in their dreams. Hardly a day goes by without the mailman knocking on the door, a heavy but compact package in hand, smiling and winking while I sign. I also want to thank the reader who I got into the TBT in January. He had never heard of the thing, the ETF that bets on falling Treasury bond prices, but managed to ride this bucking bronco from the high thirties to $60 before pulling the ripcord. He sent me $300 trillion Zimbabwean dollars in cash in three crisp new $100 trillion banknotes hot of the printing press. He gave that amount because that is what it now costs to buy a cup of coffee in the hopelessly mismanaged African country. I see the TBT is back down to $45 handle again. Hmmm, looking at Obama?s latest deficit spending plans, I wonder if it is time to take another bite out of the apple?
3) There will be no letter on Monday, as I will be speaking at the San Francisco Hard Assets Investment Conference. No doubt things will be hopping this year. They say they have fascinating metal called ?gold? which magically levitates without the aid of hidden wires and pulley?s. I can?t wait to learn all about it. I?ll be reporting back. MHFT
QUOTES OF THE DAY
?The real problem is that the subprime foreclosure crisis is mutating faster than our ability to keep ahead of it. You have not just a second wave, but a third wave coming, as well,? said Howard Glasser of the Glasser Group, a real estate consultant.
?Forget the stock market. I am putting everything into whisky, gold, and ammo,? said a reader of the Diary of the Mad Hedge Fund Trader to me yesterday.
Featured Trades: (EUROPE), (JGB), (JNK), (PHB), (HYG)
1) The US is turning into Europe. Think backbreaking taxes, chronic high unemployment, government involvement in everything, less innovation, and much lower growth, in exchange for a social safety net, more debt, and better coffee. That is the message the markets told us by retreating to the 6,000 handle in March, levels not seen since 1996, and down 54% from the 2007 peak. Equity prices have to shrink to multiples in line with permanently lower long term growth rates of maybe 1%-2%, a shadow of the 3% average rate seen for much of this decade. Hint: that analysis gives you a stock market lower than here. Perhaps this is what aging sclerotic economies are supposed to look like. Once Ben Bernanke stops spiking the punch with ecstasy and Viagra by raising interest rates, this is where the resulting hangover could leave us. If someone is holding a gun to your head and you must buy American stocks, only select names that are really foreign stocks in disguise. Microsoft (MSFT), Intel (INTC), Oracle, (ORCL), Cisco (CSCO) all get 60%-80% of their profits from overseas, where up to 90% of the real economic growth will come from for the next decade. Commodity, agricultural, materials companies, and their ETF?s also fit this picture. As for me, I think I?ll move to Tahiti and live off of coconuts and freshly speared fish, wearing only a loin cloth. Anything is better than becoming French.? And before you ask, that is not my behind in the picture below, but I wish it was.
2) The bond market vigilantes are gathering up for a lynching in Japan. Five year credit default swaps have jumped from 38 to 78 basis points since September, a move similar to the one that took AIG down last year, as institutions scramble to buy insurance before the house burns down. The rating agency Fitch?s is reaching for the Dramamine, threatening to downgrade Japan?s AA-?? rating as it sees the beleaguered country?s national debt soar from the current 180% to 227%, thanks to the new Hatoyama government?s policies. That would inflict a body blow on the bond market, and send the yields on ten year bond soaring from the current 1.42%. The big hedge funds are circling, with Greenlight Capital?s David Einhorn accumulating a major short in Japanese government paper. Remember him? He?s the guy who almost single handedly drove Lehman into bankruptcy a year ago. For more depth on the fundamentals behind this trade please, check out my ?End of Japan? piece? by clicking here. The only way to take advantage of this is to put on a short futures trade in Tokyo or Singapore, which trade from 6:00 pm to 3:00 am Chicago time, or to short the yen. If you want to know how to do this, e-mail me at madhedgefundtrader@yahoo.com, and I?ll get you set up.
3) One of my flock of canaries in the coal mine is the junk bond market, which is a great leading indicator of global risk taking. At the beginning of the year I stampeded readers into junk bond ETF?s like (JNK), (PHB), and (HYG), because the market was discounting a default rate of 18%, while I was expecting only 12% (click here ). These highly leveraged securities always overshoot on the downside when panic grips the herd. Believers reaped substantial returns, with JNK bringing in 65% since then. Now what? If you don?t get a double dip recession that default rate could fall to as low as 4%, as yield hungry institutions pile into the most leveraged companies with long term bonds yielding as high as 9.5% to 28%. That would cause JNK to double again from current levels. If we do plunge back into the Great Recession, as many hedge fund managers believe, then we could give up a chunk of this year?s gains. Let me know which one it is, will you? Even with the worst case scenario, I don?t think we will hit new lows. There was, after all, only one Lehman.
QUOTE OF THE DAY
?The ?new normal? never went away, it just went into hiding, and now it?s back,? said Vince Farrell, CIO of Soleil Securities.
CROSS CULTURAL MIX UP OF THE DAY
When Obama reviewed the troops during this week?s state visit, the Chinese Army Band played ?I Just Called to Say I Love You? by Stevie Wonder.
Featured Trades: (CALIFORNIA DEMOCRACY ACT OF 2010), (VCV), (NCP), (NVX), (LITHIUM), (SQM), (CVX), (BIOFUEL), (XOM)
1) I finished my indoctrination on how to overthrow the government last weekend. Specifically, I attended a grass roots meeting of activists in Berkeley, California planning to collect 450,000 signatures by April to put the ?California Democracy Act of 2010? on the November ballot. The measure seeks to amend California?s broken constitution by permitting passage of budget and tax measures with a simple majority. The current two thirds requirement, which California shares only with the miniature states of Rhode Island and Delaware, is widely blamed for the legislative impasse in Sacramento that has driven the state to financial ruin. Overdependence on capital gains-up to 40% of revenues in good years-enabled the state to just barely balance the budget at stock and real estate market tops, but death spiral into gigantic deficits during the inevitable busts that followed. Furthermore, since proposition 13 capped real estate taxes at 1.25% 1978, the state?s population has grown by 16 million to 38 million, placing a backbreaking strain on all services. Only six obstinate, conservative legislators are holding hostage the world?s sixth largest economy, right after France. Decades of relentless gerrymandering have made virtually every seat in the state safe, so elections offer no solutions. I sat down with Daryl Steinberg, president of the California Senate, who says that people of all political stripes are fed up. Once boasting the best public education system in the country, California now ranks 47th in spending/pupil and 49th in pupils/teacher. The University of California, the top public university in the world and a veritable PhD and Nobel Prize factory, has endured two 20% back to back budget cuts. Schools, police and fire departments, parks and aid agencies are closing throughout the state. Antiquated infrastructure is falling apart, with the San Francisco Bay Bridge closed for five days this month, forcing the local economy to take a huge hit. The barbaric prison system, which has been ruled by a federal judge as inflicting ?cruel and unusual punishment,? is letting 24,000 prisoners out early, since it can?t afford to house or feed them. The public outrage is so violent the initiative will almost certainly pass. When it does, taxes are going to go up a lot. Target numero uno: property taxes and the top 5% of income earners. Expect a battle royal, as the top 1% of taxpayers already pay a marginal state tax rate of 10.3%, the second highest in the country after Vermont, generating 50% of state revenues. This will make our sunshine the world?s most expensive. That will be great news for the Golden State?s beleaguered bond holders who will love to see new sustainable sources of revenue. Take a look at the California municipal bond funds (VCV), (NCP), and the (NVX). If California were a stock, I?d be buying it now. If you want to join the revolution, or just learn more about the issue, go to www.CAMajorityRule.com by clicking here.
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2) It?s 1910, and I?m trying to get you to buy a company that refines gasoline, just before the number of cars in the world explodes from 1.3 million to 250 million. That?s what I?m trying to accomplish when I pile investors into Sociedad Quimica Y Minera (SQM), the Chilean company that is the purest play on lithium production (click here for their website). Early believers have booked a 60% gain so far, and there is a lot more to go (click here for my call). The Electrification Coalition, an industry trade group, says that the number of electric cars on the road is about to go ballistic, with a dozen companies planning all-electric model launches in the next two years.?? The first 120 million vehicles will shrink our oil imports by 8 million barrels a day to nearly zero, cutting our bill by $250 billion annually, and no doubt putting a major dent in the price of oil. Fire departments are even training first responders on how to deal with huge lithium batteries in car accidents with ?hazmat? teams. A battery charge is 75% cheaper than filling up a tank with gas, meaning our transportation costs are about to fall dramatically. SQM has to increase its production by a factor of ten, or face a takeover by a much larger company looking to move into the alternative energy space, possibly from an American oil major. Is anyone at Exxon (XOM) or Chevron (CVX) listening?
3) Since we?re on the topic of oil major diversification, let?s take a look at Exxon?s (XOM) biofuel program. As a former research biochemist at UCLA, I have long viewed biofuel as a huge waste of time, because there are not enough hamburger stands in the whole world to generate the needed grease for recycling. Ethanol was never more than expensive pork for corn producing swing states, and it?s no surprise they are going bankrupt, even with large subsidies. That?s ignoring the fact that they were burning food to power our chrome wheeled Cadillac Escalades, driving up prices for the starving masses in emerging markets. But when the progeny of John D. Rockefeller (I knew his grandson David) commits $600 million to move algae from the realm of science fiction to mass production, I have to sit up and pay attention. This is not a company that is interested in tree hugging or saving the world, but in the hardnosed business of finding and selling energy for a profit. There is no law confining them to the oil business, and it is wise for them to find alternatives while they have the bucks to do it. Never underestimate the power of pond scum. Algae have been used for centuries to produce agar and additives for food, cosmetics, and medicines. You?re probably already eating more than you realize. According to Exxon, one acre of algae also has the ability to produce 2,000 gallons of fuel per year, compared to 650 gallons from palm trees, 450 gallons from sugar cane, and 250 gallons from corn. As any marine biologist will tell you, these simple organisms accomplish this by absorbing massive amounts of carbon dioxide and turning it into oxygen, killing two birds with one stone, from an environmentalist?s point of view.? The catch is that no one has ever tried to do this on an industrial scale, and the production problems are certain to be formidable, with enormous inputs of water and nutrients required. You probably wouldn?t want to live next door to where this is happening either. But if we have to hold our nose to beat the next energy crisis, so be it.
QUOTE OF THE DAY
?There is still that great sucking sound of liquidity coming out of the market,? said Meredith Whitney of the Meredith Whitney Advisory Group, an independent research boutique, who is recommending aggressive sales of bank stocks.
1) I don't care how many times you ask me, I'm not going to replace Ken Lewis as the new CEO of the Bank of America (BAC). I will not accept if nominated and?? I will not serve if elected (sorry General Sherman). Sure, it would look great on my resume, I'd get invited to all the right dinner parties, and unlimited use of the corporate jet has its appeal, especially if I get to be the pilot. Of course, there are those oodles of cheap stock options you are offering me. But with the shares now at $16, and the chart looking a little green around the gills and on the verge of puking, it will take so long for them to achieve any real value that my kids, or even my grandkids, are the most likely beneficiaries. Really, who wants to work for the government? There will be all of those chinless federal pencil necks second guessing my every decision. I do have a tendency to explode like a drill sergeant with a torrent of four letter words when submitted to media glare. Heaven forbid if I wanted to have a three martini lunch. Dinner at Elaine's with CNBC's muckraking Charlie Gasparino? You've got to be kidding. And who would want to live in Charlotte, North Carolina, anyway? The summers there make Hell seem like an island paradise. Best I could do would be a commute from Manhattan at company expense. With the bank about to get swamped with another tsunami of home mortgage foreclosures, I don't want to be there when the sushi hits the fan, offering lame excuses.?? Isn't it really a fall guy you are looking for? Certainly, there are others infinitely more patient and qualified for this job than The Mad Hedge Fund Trader? Why not John Corzine? I hear he's available. He did a great job with the State of New Jersey, didn't he? It's not his fault the Great Recession demolished his state's finances. Come on, John, I'm sorry I accidently drank out of your wine glass when you tried to recruit me for Goldman Sachs over lunch 20 years ago. Get me off the hook on this one and we'll call it even. Come to think of it, maybe I should be shorting BAC here. Any company the wants me as its CEO must have something seriously wrong with it.
2) Gold punched through to a new all time high today of $1,137/ounce. Occasionally I hit the nail on the head so precisely, it's worth a replay. So here is my September 10, 2009 story, which turned out to be the day that it was off to the races for the barbaric relic. For the link, click here . Yes, I know that a broken clock is right twice a day, that if you fire buckshot long enough you will eventually hit a barn, and even a blind man finally pins the tail on the donkey, but look at the chart of the yellow metal's move since then.
'The precious metals markets were stunned with Barrick Gold's (ABX) announcement that it will float a $3 billion public offering to retire its gold hedges in the futures markets. This means that the world's largest producer is cashing in its downside protection and gearing itself for a ballistic move up in the price of the barbaric relic. The timing of the announcement, the day that the yellow metal broke $1,000 for the first time since February, couldn't have been more auspicious. I have been a huge fan of Peter Munk's ABX all year, cajoling readers into the stock at $27 in January before its 56% run (click here for report ) . South Africa's largest gold miner, AngloGold Ashanti's CEO, Mark Cutifani, says his company put its money where its mouth is, taking off its hedges some time ago. 'People are doing what they have been doing for 5,000 years, and that is buying gold as the only hard currency,' opines Cutifani. In the meantime, the Street Tracks gold ETF (GLD) announced that it has $34 billion of gold holdings, making it the largest ETF of all, and the fifth largest owner of gold in the world after four central banks. If you want to buy gold bullion or coins for the tightest spread over spot, check out Millennium Metals by clicking here.'
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QUOTE OF THE DAY
' The oil era will end in 30 years, as it is replaced by alternatives, offshore, and tar sands,' said Ahmed Zaki Yamani, the former Saudi oil minister, who invited me on his private jet for a trip to the kingdom so I could conduct an exclusive interview during the seventies.
1) I have long sat beside the table of Mckinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom. So I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director Dominic Barton when he passed through San Francisco visiting clients. These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up, sadly letting my bacon and eggs grow cold and congeal. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China's GDP will triple relative to our own from current levels. A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this doesn't work, they have another $500 billion package sitting on the shelf. But with GDP of only $4.3 trillion today, don't count on China bailing out our $14.4 trillion economy. China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC's, and to live in big cities. Asia has a huge edge over the West with a very pro growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75 story skyscraper is going up there every three hours! Some 1,000 years ago, the Silk Road was the world's major trade route, and today intra Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths. Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth. To me this all adds up to big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.
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2) When people ask me for a potential ten bagger, I point them to the Chinese electric car company 'Build Your Dreams' (BYDDF) (check out their website by clicking here ) . I started following the company last year, and my early readers have already tripled their money on this pick. CEO Wang Chuan-Fu, who Charlie Munger describes as a combination of General Electric's (GE) legendary manager, Jack Welch, and inventor Thomas Edison, scraped up $300,000 from relatives to start a knock off cell phone battery company in Shenzhen in 1995. He grew the company into a massive, vertically integrated conglomerate, employing 130,000 highly motivated workaholics at 11 factories, including those in Hungary, Romania, and India (interesting choices). BYD bought a defunct car company in 2003 and re-engineered it to launch the $22,000 F3DM sedan last year, an old technology ferrous oxide based plug-in hybrid that gets 62 miles on a charge. General Motors' (GMX) Volt and Toyota's (TM) plug in Prius, which won't come out until next year, will only get 40 miles per charge and cost a lot more. All-electric BYD models are coming out this year. Warren Buffet was so impressed, he made a rare foreign investment last year, asking for 25%, and settling for a 10% stake for $230 million. In characteristic fashion, Buffet has already quadrupled his money. Wang, who has earned himself a place on the Forbes 400 list, intends to build BYD into the world's largest automaker, and quickly. Why do I feel like this war is over before the first shots were even fired?
3) If you need further proof of where the future growth in the global economy is coming from, take a look at the Chinese Internet firm Baidu (BIDU), the Google of China, which I strongly recommended on March 6 (click here for the call ). It soared 450%, then gave back a quarter of the gain in a single day with a change in some accounting practices (see my call to buy the dip by clicking here ) It has since recovered to the old highs. You should keep this ticker glued to your desktop, as it has become the canary in the coal mine for global volatility and hedge fund risk taking. In the meantime, our Google (GOOG) rose by only 130% to $575. These two hedge fund darlings are best of breed companies, but the Chinese one outperformed the American counterpart by a factor of nearly three to one. The cruel truth here is that American companies with the drag of a mature economy will never command the same multiples of Chinese ones. Google certainly thinks so, as it also owns a chunk of BIDU. If you like Chinese takeout for lunch, also look at these other high growth Internet names from the Middle Kingdom, including Netease (NTES), Sina (SINA), and Sohu (SOHU), which have done as well as BIDU, and who are going to eat our lunch.
QUOTE OF THE DAY
'People are finally starting to realize that 'extended period' means 'extended period,' said former University of Chicago professor and former Fed governor Randall Kroszner, about future interest rate expectations.
Featured Trades: (SPX), (RWR), (FRI), (VNQ), (COMMERCIAL REAL ESTATE)
1) If I've told you once, I've told you a thousand times, stay out of those crummy neighborhoods, where the street corners are crowded with high priced stocks of dubious moral character wearing stiletto heels, fishnet stockings, miniskirts, and shoulder handbags. Sure, I know you young traders have needs, think with your hormones, and believe you can live forever. But if you absolutely have to go slumming, at least use some cheap protection. I noticed today that the January 1030 S&P 500 puts were selling at a bargain $19 today. That means for a mere $950 you can buy some decent downside protection for a $55,000 portfolio that takes you all the way out to January 15, 2010. That is bang on the support level that held in the last sell off. If you double top here on the charts and go down for a retest, you double you money. If yearend profit taking causes us to sell off going into the holidays, and we break that support, you make more. If the market melts down the day after we flip the calendar page to 2010, a distinct possibility, then you hit a home run. If the lemmings keep driving this market up every day for two more months, then you lose $900, or 1.72% of your portfolio, pennies, really, against the huge returns you have booked so far this year. It's a win, win, win, lose pennies trade. I know that the pros that have done for a long time put these trades on without even thinking about it. It's all about risk control. Since I am a cheapskate, I only like strapping on trades that have a risk/reward ratio overwhelmingly in my favor, and with the volatility index today a bargain 23%, this fits the bill nicely. Buy your storm insurance when the sun is shining.
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2) The commercial real estate industry is going to need $500-$700 billion to recapitalize, according to William Mack, CEO of Mack-Cali realty, a major REIT investor. Domestic investors don't have this amount of cash to allocate to this sector, and US tax policies are preventing foreign capital from filling the void. This means that it is going to take up to a decade for the sector digest the current massive inventory glut. Values are down 25%-75% from the top, with undeveloped land, hotels, and retailers hardest hit. Multifamily residential (apartment buildings) has been the least affected. The government is giving the banks a free pass for now, letting them 'amend, extend, and pretend', and carrying properties on their books at unrealistically high values, until they can write off losses slowly over the next dozen quarters.?? Real recovery won't come until you see healthy job growth, which looks way beyond the horizon. Real estate mogul Sam Zell sees, commercial least rates stabilizing at 30% below 2007 levels, who could be a wildly unrealistic owner talking his own book. Another major player in the sector, Richard Lefrack, president of the Lefrack Organization, thinks as many as 1,000 regional banks could be dragged down by the industry's troubles. One of the great puzzlements for me is how well the listed REITS have performed, with the iShares Real Estate ETF (IYR) up a staggering 130% from the March lows.?? Maybe there's a great short opportunity here next year. Take a look at the Vanguard REIT Vipers (VNQ), the SPDR Dow Jones Wilshire REIT (RWR), and the First Trust S&P REIT (FRI).
3) Walking around San Francisco's financial district the other day, I couldn't help but notice the colorful, but huge 'for lease' and 'space available' signs wrapped around entire buildings. The San Francisco Chronicle produced some current market figures for the wasteland that is now the commercial real estate market. Rents have crashed 24% in a year, with Class 'A' office space plunging from $50.92 to $38.80 a square foot, the biggest drop since the dot com bust in 2001. Tenants are downsizing, consolidating, or disappearing altogether.?? The West coast financial center has been particularly hard hit by the consolidation of the financial industry, which has seen some major tenants, like Washington Mutual, disappear all together. Macy's and Charles Schwab are vacating a combined 500,000 square feet this year, with more than half of all Bay Area companies expected to shed staff in the next six months. Purchases of office building have ground to a complete halt because of the absence of financing. Not helping are the city's notoriously high operating costs, labor rules that would make Bolsheviks blush, and a tax rate that is about to jump from 8.75% to 9.75% to help bail out the state. It's a lot to pay for a great view. Will the last one leaving please turn out the lights?
QUOTE OF THE DAY
'Stocks have reached a permanently high plateau,' said Irving Fisher in 1929, one of the founders of the science of economometrics. Fisher lost a $10 million personal fortune in the 96% collapse in the market that ensued.
Featured Trades: (SUPER FREAKANOMICS), (BERLIN WALL)
2) I spent a delightfully entertaining evening with University of Chicago economics professor Steven Levitz and journalist Stephen Dubner, authors of the wildly popular Freakanomics, and the just released 'frequel' Super Freakanomics. I love these guys, because they do the same thing as I for a living, looking at raw data, absent of preconceived notions, and drawing iconoclastic, out of consensus conclusions that cause a huge public ruckus. No surprise that they are pals with New Yorker magazine columnist, Malcolm Gladwell (see my interview with him by clicking here ). I learned that Chicago prostitutes are like department store Santa's because they greatly raise prices during periods of seasonal high demand, like around the fourth of July. And while on that theme, I also learned that pimps add far more value than real estate agents, about 25% more. Furthermore, Ford Motors fought mandatory seat belt legislation in the fifties because they were afraid it would advertise the dangers of driving. Drunken walkers suffer eight times more injuries and five times more fatalities than drunk drivers. Also, child car seats offer no safety advantage over conventional seat belts whatsoever, and are just a racket created by the sellers of such seats. The safest thing you can do with a baby is simply place them on the floor of the back seat (They did the crash dummy tests to bear this out). While 100% of hospital doctors admit they should wash their hands, only 73% admit to doing so, while covert monitoring reveals that a scant 9% actually do it, leading to untold numbers of often fatal infections. The evening brought home a truth that I have been pounding into my trainee research analysts for decades; that raw data and facts will trump opinion and spin every time.
3) The anniversary of the fall of the Berlin Wall, the 20th of which passed yesterday, has always been an emotional time for me. I lived in the American Sector in Tiergarten, a mile from the hated wall at Brandenburg Gate, and recall with some dread being kept awake at night by the angry growl of AK 47's wasting desperate, but helpless families as they attempted to flee to the West. To make extra money, I used to escort small groups of nervous Americans across Checkpoint Charlie into East Berlin for a day of lunch, a visit to Queen Nefertiti at the spectacular Pergamon Museum, and the opera, all paid for with Ostmarks purchased at a huge discount on the black market, and smuggled in my boots. That was my first currency arbitrage, and led to a pattern of ever greater risk taking that could eventually lead nowhere else but the hedge fund industry. About one third of East Berlin still awaited reconstruction from the Allied bombing and the 1945 Russian invasion that laid waste to the city, with every East facing wall still standing absolutely pock marked with bullet holes. That was at least until the Stasi caught me trying to sneak in a copy of the banned Berliner Zeitung, which landed me in the communist lock up for a day. The hapless people I met there!?? Thank goodness they let me out because I was only 16! Some 21 years later, tears streamed down my cheeks as I watched the wall fall on a TV at a Swiss Bank Corp trading desk in London. As much as I wanted to fly over and join in the party, I was running a pretty sizeable book then, and if you recall, 1989 was a year with some pretty awesome volatility. It turned out to be the first domino that led to the end of the Soviet Union, and two thirds of the world's population joining the global economy. That created the peace dividend, which contributed to the nineties dotcom bubble, and opened up new international trading opportunities on which hedge funds feasted to the point of gluttony. Ahhh! Those where the days.
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QUOTES OF THE DAY
'The train has not only left the station, it has reached its next destination,' Paul McCulley, portfolio manager at PIMCO, warning about maintaining long equity positions at these lofty levels.
'I'm dating Debbie Downer. Our country is about to experience a transformation from a country with debt growing faster than incomes, to a nation with incomes growing faster than debt,' said Doug Kass of Seabreeze Partners Management, in his take on the future of the stock market.
1) There's a short letter today. I'll be putting on my tattered and faded Marine Corps desert camos, pinning on my captain's bars, and attaching my Purple Heart, Southwest Asia Service Medal, decorations from the Kuwaiti and Saudi governments, and my good conduct medal, all earned the hard way in Desert Storm, and leading the Veteran's Day parade in our local community. I will be pushing my 84 year old uncle in a wheelchair, a World War II Navy vet with a Bronze Star (USS El Paso, Battle of Leyte Gulf). I will be joined by my Vietnam era companions, wearing their ragtag collection of mismatching old uniforms and campaign ribbons, bearing scars both physical and mental, singing marching songs in unison. I am a veteran of six wars in Algeria, Cambodia, the First Lebanon War, Iran-Iraq, Yugoslavia, and Desert Storm. I got credit for one, and for the other five my contribution was 'unofficial', 'off the record', 'classified' and bereft of paperwork. That doesn't stop the metal detectors from whining whenever I pass through an airport (they would let me in the United Nations in Geneva at all!). Sadly, my advice on Iraq was ignored, so I have watched the present war from the sidelines. Afterwards, I am going to score my free dinner at Applebee's. Semper Fidelis.
Featured Trades: (GOLD), (EEM), (TAIWAN), (EWT), (TBT)
1) I have worshipped at the altar of? the legendary Paul Tudor Jones for the past 25 years, since he was a client of mine at Morgan Stanley. A once savvy, boy cotton trader from the South, I rate him as the best natural talent in the industry. We all knew he would do well, but the $17 billion he has amassed in a stable of macro hedge funds boggles the mind. Paul?s Greenwich, CT based Tudor Investment Corp. has had one of the bigger sticks in the market for a long time now. I perused his most recent letter to investors to get his current world view, which to my relief, I find remarkably similar to my own. ?The Great Liquidity Race? is the dominant theme of the markets today, with hot money pouring into gold, emerging markets, and commodity stocks. Taiwan is a particular favorite, greatly benefiting from closer relations with the mainland. Incredibly aggressive monetary and fiscal policy could drive US GDP growth as high as 3.5% in Q4 2009 and 5.5% in Q1 2010. Then the recovery runs out of gas and we fall off a cliff. If stock markets discount economic activity six months in advance, doesn?t that mean they should be topping out about??.now? We are about to relive the stagflation of the 1970?s. Central banks will begin a global tightening by next summer, knocking Treasuries off their perch, and giving some insight into timing for the legions of investors in the TBT, the leveraged bet that long interest rates are going to rise. There are few investments now with attractive risk/reward ratios. Bravo! Dollar weakness may accelerate as we approach year end, and that could prompt another run up in equities. While Paul?s growth forecasts for Q4 09 and Q1 10 are a tad high, and project a more vertical ?V,? before a collapse, I happen to know that Paul does his spadework. But it would not be the first time that Paul was right and I was wrong about a trade. It?s amazing how articulate you can be when you are backed by 345 in-house research traders, research analysts, and support staff. At least if I?m wrong, I?ll have distinguished company.
It?s Back to the Seventies
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2) Paul nicely summed up the fundamental argument in favor of gold.? The yellow metal is accumulated, and not consumed, and is the ultimate store of value. Gold does particularly well during times of excessive monetization, inflation, and instability of the banking system, as we are seeing now. Central banks, which have been consistent sellers for the last 20 years, are about to flip to net buyers. If non G7 central banks, like China, want to increase their gold holdings from the current 20% of reserves to the 35% weighting now owned by the G7, it will require 1.3 billion ounces of new purchases, or 20% of the total world supply. Certainly they are getting fed up with their ever depreciating dollar holdings. Witness last week?s Bank of India purchase of 200 metric tonnes. ETF?s now own $50 billion worth of the barbaric relic, about 3% of the world total, making them the sixth largest holder in the world, and retail demand for these gold proxies is expected to explode in coming years. Private investors, mutual funds, and pension funds are all underweight gold. This is all happening in the face of declining production from traditional gold suppliers like South Africa. It all adds up to a whole lot of new gold buyers and a shrinking body of sellers. Paul didn?t give any specific price targets other than ?up.? Long time readers of this letter know I have been banging the table about gold all year. Time to salt away more American eagles for those college funds and grandkids.
3) The handful of Chinese army officers I huddled with in the underground bunker all stared intently at their watches. Three, two, one, then KABOOM! At exactly 12:00 noon, the blast of distant artillery sent a five inch shell screaming over our heads and exploded into the hill above us, shaking the ground under our feet and causing dust to drift down from the concrete ceiling above us. It was 1976, and The People?s Republic of China just let lose its daily symbolic protest against its errant rebellious province, known locally as the Republic of China, and to you and I, as Taiwan. Fast forward 33 years later and the Middle Kingdom is sending salvos of money raining down on that prosperous island. China Mobile (CHL), the world?s largest cell phone company, has bought 12% of Far Eastone Telecommunications (4904.Taiwan). Although a small deal, it represented the first ever direct investment from China into Taiwan. The move could trigger a takeover binge by big Chinese companies of their offshore cousins. It was only a few years ago Taiwanese businessmen suffered long prison terms for just visiting, let alone investing in China, which they have done in a major but surreptitious way for 30 years. Readers of this letter are well aware of my aggressive recommendations to buy emerging markets China and Taiwan since the beginning of the year (click here for my April recommendation). Now you have another reason to buy both. Closer ties between China and Taiwan auger well for the stock markets of the two high growth countries. The iShares MSCI Taiwan fund ETF (EWT) at one point were up an impressive 92% from the March lows, so if you see a substantial dip it might be a good idea to double up. I guess Beijing figured out that if you can?t beat them, buy them. The proxy takeover bid is mightier than the sword.
QUOTES OF THE DAY
?I have never been a gold bug. It?s just an asset, like everything else in life, that has its time and place. And now is that time,? said legendary hedge fund manager Paul Tudor Jones.
Featured Trades: (OCTOBER NONFARM PAYROLL), (TRADE SCHOOL), (RESIDENTIAL REAL ESTATE)
1) Ouch! Another 190,000 jobs went down the crapper in October, taking unemployment rate to a new 27 year high of 10.2%. Add in discouraged job seekers, and that puts the jobless rate at gut churning 17.5%, and over 20% in California. Along with yesterday's stunning, gob smacking 9.5% increase in Q3 productivity, the figures point a giant arc spotlight on what is really happening in the economy. Companies are still firing workers en mass to boost profits. After getting blood from a stone, they are returning to the same rock for one more drop. I guess if I fire myself, the profitability of my business would go through the roof too, and maybe even my stock would rise. At least then, I would be rid of my oldest, most expensive, but least productive employee, who is the most difficult to get along with, maxes out his sick and vacation days, and wears the same clothes to work every day, even when there lipstick on the collar. But then who would write this daily letter? Maybe Cecelia, my cleaning lady would do it. She's cheap. You don't mind getting this letter in Spanish, do you? ??Andale! This explains why when you go into Office Depot these days, there is only one minimum waged employee standing at the cash register, the hours on the phone I have to wait to get technical support from Dell, and the endless unmovable lines at Citibank. America's service economy has become all about denying service to customers. The scary thing is, with companies firing their way to prosperity, what happens when we get another dip? My theory is that the US has entered an era of chronically high unemployment that is never going away, no matter what the government does. Goodbye USA, hello Germany!
THERE'S A RECOVERY IN HERE SOMEWHERE, I JUST CAN'T FIND IT!
2) Every few weeks I get a warm and fuzzy feeling when I see my old house for sale in the Wall Street Journal. It was an 8,000 square foot two bedroom white elephant perched on a mountain peak, with panoramic 360 degree views of the San Francisco Bay Area. I picked it up for a song from the Sultan of Brunei in 1998, when crude crashed to $8/ barrel, and he was dumping properties to meet a cash flow crisis. The actor, Steve McQueen, had owned the property once, and the local teenagers used to park out front and make out, taking in the stunning view of the Golden Gate Bridge and shimmering city lights. The parties! Oh, the parties! But one day in 2005, my gardener, Jos??, mention that he had just obtained a $500,000 loan to buy a new place in which to house his seven kids, along with a home equity loan to cover the first year's mortgage payments. How would he make the next year's payments? The broker said the value of the house would go up, and he could then increase his home equity loan to cover that too. I knew I had to sell my home immediately, hitting the bid for a tidy $12 million, along with the rest of my real estate holdings. Regretfully, I had to let Jos?? go. I have been renting ever since. The last price I saw for my former 'Xanadu' was $7 million, or I could lease it for $19,500, which I know is 20% of its carrying cost. I'm not a person who normally wishes ill on people, but really, what were these buyers thinking? When people urge me to buy it back, I lie down and take a nap, and when I wake up, the feeling has refreshingly gone away. And to the pundits and prognosticators who tell me that we are about to launch into a 'V' recovery in residential real estate, just as the stock market has already done, I tell them I have this really neat bridge in Brooklyn that I'd like to sell them. And no, I won't be uttering the word 'rosebud' on my deathbed.
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4) Trade School
I am asked daily about my favorite financial books by the legions of subscribers who are using my blog to educate themselves about the markets. That is one of my goals. Below are my picks, which are entertaining, if not insightful. I have left out books about specific trading systems guaranteeing windfall profits, because they all eventually blow up. The good books on the current financial crisis have yet to be written. The best trading strategies will never be written about, but only whispered after work in poorly lit bars , the kind where your feet stick to the floor restrooms are foul. Successful traders are a notoriously secretive bunch who don't want copy cats hanging on to their coattails, spoiling their markets. When I do hear about these, I pass them on to you through my newsletter. Give yourself an edge as well as a decent education and foundation by reading the list below.
Security Analysis by Benjamin Graham and David Dodd The Bible of security analysis. If you are only going to read one book, make this it.
A Random Walk Down Wall Street by Burton G. Malkiel The history of risk analysis on Wall Street.
The Black Swan by Nassim Nicholas Taleb An iconoclastic, rock throwing, in your face rebuttal to convention risk analysis theory.
The Snowball: Warren Buffet and the Business of Life by Alice Schroeder The biography of the greatest investor of our time.
Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay The history of bubbles, from tulip mania, to the South Sea bubble, to the 1929 crash. Boy, does history ever repeat itself!
The Crash by John Kenneth Galbraith A must read history about the big one. You'll be amazed by the parallels today.
Reminiscences of a Stock Market Operator by Edwin Lefevre Biography of one of the most famous speculators of the roaring twenties, who sadly committed suicide in a public bathroom in 1941. You won't believe what they did in the pre-SEC days.
The Strategic Bond Investor: Strategies and Tools to Unlock the Power of the Bond Market by Tony Crescenzi The bond side of the equation. You need to know where interest rates are going and how they will get there
Economics by Paul Samuelson What you missed by not going to the Harvard Business School. Your classic education about Keynesian economics that lets you ignore all that fluff in the broker reports. He got a Nobel Prize for this.
Hot Commodities: How Anyone Invests Profitably in the World's Best Market by Jim Rogers The former George Soros partner tells you why you've been buying all that copper.
Crash Proof: How to Profit from the Coming Economic Collapse by Peter Schiff Nicely outlines the rationale for moving out of the dollar and into foreign stock mar
kets, gold, and silver, although he is a little extreme in his views of the future on the US.
Market Wizards: Interviews With Top Traders by Jack D. Schwager How the pros do it.
The Complete Guide to Investing in Commodity Trading and Futures: How to Earn High Rates of Return Safely by Mary B. Holihan The ABC's of commodity investing.
When Genius Failed: The Rise and Fall of Long Term Capital Management by Roger Lowenstein Why you're not shorting deep out of the money volatility in big size.
Against the Gods: The Remarkable History of Risk by Peter L. Bernstein How ancient trade routes grew into the global financial system we all know and love.
Liars Poker: Rising through the Wreckage on Wall Street by Michael Lewis My friend's first book, what it is like to work at Goldman Sachs, except then it was Salomon Brothers. When it first came out many thought I had written this book with a nom du plume.
Beat the Dealer: A Winning Strategy for the Game of Twenty-One. by Edwin O. Thorp How to win at Black Jack by card counting. I put myself through college on this book, and so did Pimco's Bill Gross. Not so easy now. Every trader at Morgan Stanley was required to read this book. A nice introduction to probability analysis under stress.
The Money Game by Adam Smith How Wall Street Works. A peek into the Wall Street I grew up in during the sixties. How little has changed.
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The Little Book that Beats the Market by Joel Greenblatt The traditional value approach to picking stocks
QUOTE OF THE DAY
'It's amazing how the hawks got de-taloned going into the last meeting at the Fed,' said Yra Harris at Praxis Trading, about the agency's reluctance to raise interest rates for the foreseeable future.
MOST IDIOTIC QUOTE OF THE DAY
'Many economists think that rising unemployment benefits create rising unemployment,' said Larry Kudlow at CNBC. Most unemployed people I know would give their left arm to get a job. Maybe this is an insight into who Larry hangs out with.
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