Diary Archives - Mad Hedge Fund Trader

February 8, 2010

Global Market Comments
February 8, 2010Featured Trades: (JANUARY NONFARM PAYROLL),
(TBF), (TBT), (ASML), (CSCO), (JDSU), (MU), (JNPR), (SNDK)

1) On your mark! Get set!??.nothing. The January nonfarm payroll report showing a further 20,000 job losses certainly left traders scratching their heads on Friday. (click here for the link to the Bureau of Labor Statistics release )The unemployment rate dropped from 10% to 9.7% on no net hiring. November and December showed a net -5,000 in revisions. But the number of jobs lost in this recession since it started in December, 2007 was revised up from 7.2 million to 8.4 million. There are now 14.8 million ?official? unemployed, a figure absolutely no one believes. Benchmark revisions are to blame. The monthly statistic has become so politicized and so tampered with, that it is rendered it meaningless. Without the annual revisions, the unemployment rate would now be 10.6%, not exactly the headline the Obama administration is looking for. For me the conclusion is unequivocal. Companies aren?t hiring. Maybe that?s what the Dow?s 8% swoon is telling us. Check out these amazing series of graphics sent to me by a reader chronicling the spread of unemployment in the US since the recession began. Just click hereand hit the ?play? button. It shows you the direction future research is heading.?

2) I hate to sound like Chicken Little predicting that the sky is falling, but there is a disaster of monumental proportions setting up in the Treasury bond market. Last year investors fleeing the terror of the financial markets poured some $375 billion into bond mutual funds and virtually nothing into equity funds. It makes you wonder who bought all those stocks that drove the S&P 500 up 60% last year. My guess? Hedge funds, day traders, and hot money punters who will puke at the drop of a hat. The flight to quality since mid January has only accelerated the flow into fixed income funds. Treasury bonds, already the world?s more overvalued asset class, are getting more expensive. This will only end in tears, with the retail end investor, once again, left holding the bag. Use this strength to build a core short in the 30 year T-bond, either through the futures market, ETF?s ( TBF for the 100% short and TBT for the 200% short), our outright borrows. I still think this will be the trade of the decade.

3)When the current risk reversal ends, there is one sector that I am going to jump into with both of my size 14 boots. After the dotcom bust of 2000, technology stocks spent nearly a decade in the penalty box, shunned by the investing world as the poster boys for wild excess. During this time, cash balances doubled, free cash flows soared, outstanding shares shrank, and multiples fell to a tenth of their bubblicious peaks. I started recommending this group at the absolute bottom of the market last March (click here for the call ), and it was no surprise to me when they outperformed almost every sector on the upside. With 60%-80% of their earnings coming from abroad, primarily Asia, I saw them really as foreign stocks wearing cowboy hats, pearl snap buttoned shirts, and Ray Ban aviator sunglasses. They were great weak dollar plays. They did not need banks, as they are almost entirely self financed, didn?t have derivatives books, and had minimal real estate exposure. While their customers here were getting poorer, many more overseas were getting richer. The industry represents the last, best hope that America has for competing globally, as it is our only means of staying on top of the international value added chain. It seems that in addition to bulk commodities like corn, wheat, soybeans, coal and timber, aircraft, weapons, and movies, tech companies are among the few that make things foreigners want to buy. The lessons of the bubble made them ultra conservative in their capital spending which will lead to product shortages and much higher prices in any recovery. Memory, for example, has seen no capex at all for three years. They are surfing the wave of innovation, and will cash in big time from the mobile computing revolution, cloud computing, and the virtualization of data centers. During the last tech bubble the industry did not have the global market that it does today. Now, demand from the rising emerging market middle class is kicking in, as it is for commodities. The nine month tech rally we saw in 2009 could? just be the down payment of a decade long bull market in these stocks which will end with another bubble. When John Chambers, a first class manager, discussed Cisco?s (CSCO) outlook after announcing blowout Q4 earnings, he was so effusive he sounded like he was on ecstasy. Take a look at Juniper Networks (JNPR), JDS Uniphase, (JDSU), Sandisk (SNDK), Micron Technology (MU), and lithography toolmaker (ASML). Long dated call spreads in all of these make sense on a decent dip.

QUOTE OF THE DAY

?People that have complete disdain for government intervention in the economy and markets of the West have complete faith in nine guys in a room being able to figure out the very complex and rapidly growing Chinese economy,? said hedge fund manager Jim Chanos of Kynikos Associates, about foreign investors? unlimited faith in the Middle Kingdom?s politburo.

February 4, 2010

Diary

Global Market Comments
February 4, 2010

Featured Trades: (AUSIE/EURO CROSS),
(ELECTRIC CAR MATERIALS DEMAND),
(ELLIOT SPITZER)

1) If you want to participate in the global carry trade in its purest form, take a look at the Australian dollar/Euro cross. This involves buying the Ausie, where the central bank has been the first and fastest to raise interest rates because of rising commodity prices and booming business with China. You then go short an equal value of the Euro, where dire economic conditions and a serious sovereign debt crisis (see my ?PIIGS? trade by clicking here ) assure that the ECB will be the last central bank to raise interest rates. The cross touched 63.0 on a dip yesterday. For a start, you get a nice yield pickup of an annualized 3.64% by strapping on this trade. Leverage up ten times, and that balloons to 36.4%. That?s what you make if this cross goes nowhere. If more investors pile into this trade after you, or if the yield spread widens, then you can count on a substantial capital gain on top of this. Now you know why so many traders make a living doing this. The easiest way to put this trade on is through the futures market, by balancing long Australian dollar and short Euro June contracts.? If you are a giant hedge fund or a commercial bank, you can achieve the same through the interbank FX market. If you need help on putting this one together, please e-mail me at madhedgefundtrader@yahoo.com. Of course, this trade has been running for some time now, and there are hundreds of billions of dollars ahead of you from the big hedge funds, so there is a risk you could get shaken out, especially if you use leverage. But if you want to know how the big boys are coining it, this is the way.

2) I found this interesting table from the QVM group that listed the impact that electric cars, which will soon be produced at one million units a year, will have on the supply and demand for raw materials. Here are my comments:

Aluminum: Lighter cars need more aluminum for bodies
Coal: Greater electricity needs increase demand from this cheapest of sources.
Copper: Big increase in demand for copper wire from electric motors and the grid.
Corn: Kiss the pork barrel ethanol program goodbye. Demand falls.
Natural Gas: Some 50% of new power generation facilities are gas fueled.
Lead: Older technology batteries still use lots of lead.
Lithium: You can?t lose. If electric car demand doesn?t kick in, then fertalizer demand will.
Nickel: The same batteries use nickel
Oil: Some analysts think gasoline demand could drop by 50% by 2020 because of electric cars, mileage improvements in conventional cars, and flat growth of the total car market.
Platinum: Demand falls from fewer catalytic converters, but this will be offset by growing monetary demand for the white metal.
Uranium: More power demand means more nukes everywhere.

Zinc: Battery demand again

3) I couldn?t for the life of me figure out why New York?s former governor and federal prosecutor, Elliot Spitzer, wanted to invite me to dinner. He wasn?t flogging a book or promoting a movie, and he certainly wasn?t running for office again. But I went anyway, thinking perhaps the notorious ?Client No.9? might let me peek at his famous black book.? Elliot, who showed up wearing a classic New York blue pin stripped suit that seems oddly out of place in San Francisco, is currently teaching at the City College of New York, writing, and running his family?s commercial real estate business. The advantages that the US enjoyed over the rest of the world in 1945, such as a monopoly in skilled labor, are now long gone. The driver of the world economy has switched from America to Asia in the nineties. As a result, income distribution here has morphed from a bell shaped curve to a barbell, with both the wealthy and the poor increasing in numbers, squeezing the middle class. The financial crisis compressed 30 years of change into two, taking us from libertarian Ayn Rand to pay czar Ken Feinberg in one giant leap. Having cut his teeth prosecuting the Gambino crime family in the eighties, Elliot had some views on the need for more regulation. We only need to enforce the laws on the books, not pass new ones. The ?white collarization? of organized crime has been a secular trend since the sixties. He said the ethical lapses in the run up to the crash were best characterized by a quote from Merrill Lynch?s Jack Robins; ?What used to be a conflict of interest is now a synergy.?AIG getting 100 cents on the dollar was the greatest scam in history. The US did not extract a high enough price from highly paid executives and shareholders of financial institutions for failure, and should have let more firms go under. As for his own scandal last year, Elliot admitted that he failed, that his flaws were made publicly apparent, and that other politicians should be smarter than he was. Although Elliot had some good ideas, I was still puzzled over what this was all about as I ploughed through my creme brulee. Perhaps the governor has a pathological need to be in front of the spotlight, even at the risk of flaming out. And no luck with the black book.

QUOTE OF THE DAY

?Screaming from the top of the ramparts is great cardio, but doesn?t give any answers,? said former governor Elliot Spitzer, about the current political debate.

February 3, 2010

Diary

Global Market Comments
February 3, 2010Featured Trades: (SPX), (QQQQ), (COPPER),
(COPA), (TM), (WEEKLY JOBLESS CLAIMS)

1) Groundhog Punxutawney Phil poked his nose out of his hole and saw his shadow this morning, predicting six more weeks of winter. The Mad Hedge Fund Trader poked his reddened proboscis out the door this morning, saw a substantially larger and longer shadow, and forecast at least six more weeks of crappy markets, and maybe a lot more than that. Looking at the charts this morning, it?s clear that risk taking by managers around the world did a sudden about turn on January 11, and now is in full flight.? The ?carry trade? has suddenly become the ?drop trade.? The S&P 500 (SPX) is off 7% from its high, copper has plunged a puke inducing 55 cents to $3.00, crude evaporated $8, and NASDAQ (QQQQ) has rolled over like the Bismark, shattering 50 day moving averages everywhere. Make no mistake; we have definitely flipped from ?buy the dip? mode to ?sell the rally? mode. Please reread the section in my January 4 Annual Asset Allocation Review entitled I?d Rather get a Poke in the Eye with a Sharp Stick than Buy Equities . For my warning on copper, the only commodity that has a PhD in economics, click here ). The best performers are having the biggest drops. Despite having truckloads of free money dumped upon them, traders are turning up their noses and reeling in risk everywhere. A zero return is suddenly looking like a great option. What is scarier is that I don?t see any potential sudden surprises out there than can reverse this sorry state of affairs any time soon. Put on your foul weather gear, don your life jacket, and man the pumps.

SPX-12.png picture by madhedge

2) Nearly 40 years ago, when I was starving in Japan while waiting for the financial journalism thing to start paying off, I took a weekend job in Hakone to teach managers at Toyota Motors (TM) how to speak English. As we approached the hotel I saw a dozen men lined up out front wearing cheap suits, white shirts, and conservative ties. Each one took turns picking up a baseball bat and beating the daylights out of a severely shredded dummy on the ground before them, screaming a maniacal samurai scream. I asked my driver what the hell was going on. He deadpanned: ?They?re beating the competition.? This was back when Toyota made laughably tiny cars that looked like a giant ostrich eggs on wheels and had to get a running start to get up a freeway onramp. By 2006, the company had seized 18% of the US car market, and GM and Chrysler were wearing a toe tags. Today Toyota, the world?s largest car maker, has been slammed by the perfect storm that has taken its share down to 14.7%. They took eight years to find a defect in an American made accelerator component that caused thousands of accidents, and dozens of deaths, forcing a worldwide recall of 8 million vehicles. Unsurprisingly, the ADR?s here plunged 17% in a heartbeat, to $73. To me, this all adds up to a ?BUY.? You can start with the recall, the largest in history, covering eight models, which promises to be speedy, lavish and generous. It prompted a production shut down, an unprecedented measure in auto history. The company is going all out to reinforce customer loyalty. Toyota still makes great cars. And let?s face it, many people would rather die than drive an American car, this author included. It?s usually a great idea to buy when there is blood in the streets, and in the auto industry it doesn?t get any worse than this. I know the management, the philosophy, and the strengths of this company intimately, and they will come roaring back. Let the ruckus over the recall burn out, and add Toyota to your ?buy on dips? list.

3) Someone once asked PIMCO?s bond king, Bill Gross, if he were stranded on a desert island and could get only one statistic on which to base investment decisions, what would it be? He didn?t hesitate. Initial claims for unemployment insurance, released by the Labor Department every Thursday at 8:30 am EST, gives the best real time snapshot of economic activity. With traders on tenterhooks regarding the near term outlook for jobs, and a fractious midterm election looming, these data are about to become more important than ever. During the first half of 2009, more than 600,000 new claims a week were common. Since then, they have dropped to a still serious 450,000/week, indicating, at best, a tepid recovery. When claims drop below 400,000, the unemployment rate will stop rising, below 350,000 a recovery is in progress, and below 300,000 the boom times are back. The US is unique in seeing a large amount of job switching, even in good times. Keep those eyeballs glued to your screens on Thursday mornings.

QUOTE OF THE DAY

?The investor in America sits t the bottom of the food chain,? said John C. Bogle, founder of the Vanguard Group of index funds.

February 2, 2010

Diary

Global Market Comments
February 2, 2010

Featured Trades: (THE DISCIPLINED INVESTOR), (EWS), (EWZ), (EWY), (EPI), (GOLD), (SILVER), (COAL), (TM), (BOONE PICKENS), (Q4 GDP)

1) The liquidity driven rally is going to have to get some legs on its own, or there will be big problems very shortly, says? Andrew Horowitz, president and founder of Fort Lauderdale, Florida based Horowitz & Company. Andrew, who has built a major presence on the Internet publishing at www.thedisciplinedinvestor.com , argues that investors are getting worn out by an onslaught of contradictory news coming out of Washington, and can pull the rug out from the market very quickly. ?When the risk switch is flipped ?on,? traders pile into positions, and when it is flipped ?off?, they pile out just as quickly,? says Andrew. Virtually every technical indicator he follows was flashing overbought in mid January, forcing Andrew to dump half his long positions. Andrew uses a holistic approach to the market which he calls ?QantaFundaTechna,? which blends quantitative, fundamental, and technical approaches to generate buy and sell recommendations on stocks, mutual funds, ETF?s, and options. He is only using mutual funds in the offshore small cap arena where mangers can use language and knowledge of local business and accounting practices to add value. His strategy enabled him to get through the disastrous 2008 and 2009 with low single digit returns, even though many technical and fundamental models were blowing up, allowing him to live to fight another day. Andrew is a registered investment advisor, blogger, and podcaster extraordinaire. His podcasts, 145 of which have been posted so far, and are rated among the ?Top Ten iTunes?. He lists among is most interesting interviewees former labor secretary Robert Reich and hedge fund manager Dennis Gartman. In 2007, Andrew has published a book about his approach called The Disciplined Investor-Essential Strategies for Success. Andrew also writes for AOL Finance and MSN Money. Longer term Andrew, who now has $80 million in high net worth customer accounts under management, prefers, South Korea (EWS), Singapore (EWS), Brazil (EWZ), and India (EPI). Technology still has a long way to run, and among the commodities, coal looks interesting. He likes the precious metal, and things he?ll get more bang for the buck with silver versus gold. In the end, Andrew believes that we are all going to have to work a lot harder and smarter to get descent returns. To hear my complete interview with Andrew on Hedge Fund Radio, please go to my website by clicking here

2) Reformed oil man, repenting sinner, and borne again environmentalist T. Boone Pickens says that ?when we turn the US green, it will have the best economy ever.? I met the spry, homespun billionaire at San Francisco?s Mark Hopkins on a leg of his self financed national campaign to get America to kick its dangerous dependence on foreign oil imports. For the past 30 years, the US has had no energy policy because ?no one wanted to kick a sleeping dog? while oil was cheap. Production at Mexico?s main Cantarell field is collapsing, and will force that country to become a net importer in five years. Venezuela is shifting its exports of its sulfur laden crude to China for political reasons, once refineries in the Middle Kingdom are completed to handle it. Unfortunately, unstable energy prices and the disappearance of credit have put alternative energy development on a back burner. If the US doesn?t make the right investments now, our energy dependence will simply shift from one self interested foreign supplier (Saudi Arabia) to another (China), as was highlighted in the recent New York Times article on Sunday (click here for the link? ). Wind and solar alone won?t work on still nights, and can?t power an 18 wheeler. Don?t count on the help of the big oil companies, because they get 81% of their earnings from selling imported oil, and don?t want to kill the goose that laid the golden egg. The answer is a diverse blend of multiple alternative energy supplies from American only sources.? Although Boone now has Obama?s ear, it?s a long learning process. Boone has donated $700 million to charity, and says the 20,000 trees has planted should offset the carbon footprint of his Gulfstream V. I worked with Boone to organize financing for a Mesa Petroleum Pac Man oil company takeover in the early eighties, when it was cheaper to drill for oil on the floor of the New York Stock Exchange than in the field. Now 80, he has not slowed down a nanosecond.

3) As I expected, the Q4 GDP blew out to the topside, coming in at 5.7%, the strongest performance since Q3, 2003. This is clearly what the stock market was seeing as the rally extended through the fall and into the winter, delivering an increasingly gob smacking return. Inventory rebuilding from bare shelf levels was the main impetus. Take that out, and the GDP grew only at a 2.2% rate. Another ominous development was that consumer spending fell from 2.8% to 2%. How an economy can grow without healthy spending by individuals is beyond me. I guess you don?t splurge at the mall over the weekend if you?re worried about getting pink slipped on Monday morning. It?s possible that this robust growth will continue for another quarter, completing the first part of my scenario for the ?square root? shaped recovery. You can also expect some major downward revisions in the headlines 5.7% number, as we have already seen in the past two quarters. For growth to continue from here you need a capital spending binge that will lead to hiring. But having just survived the near death experience of their lives, I don?t know a single businessman who?s will to go out on a limb here. So the ?V? may be in, and we?ll flat line after that.

QUOTE OF THE DAY

?The Roman Empire fell because its last six emperors were all faggots,? said President Richard M. Nixon. He also said that ?I would never shake the hand of someone from San Francisco.? No wonder even his friends hated him.

February 1, 2010

Diary

Global Market Comments
February 1, 2010

Featured Trades: (PIIGS), (EURO), (GREECE), (GOLD), (DOW/GOLD RATIO), (PRESIDENTIAL STOCK RETURNS)

1) Beware of Greeks bearing bonds. That is the message the markets screamed at us this week, when yields on the sovereign debt issued by the home of Plato and Socrates rose a gut-wrenching 400 basis points against German bunds. The move is welcome news to the big hedge funds that piled into the Piigs trade over the New Year in expectation of the worsening of the credit worthiness of Europe's weakest members. To the uninitiated, this is where you go long the debt of German government agencies, a country that has passed a constitutional amendment to balance the budget by 2016. (Hellooooooo! Is anyone in Washington listening?). You then short in equal value amounts the debt of Portugal, Ireland, Italy, Greece, and Spain. This trade already delivered a home run in a matter of weeks, and could have more to go. I managed to catch this indirectly in my January 4 Annual Asset Allocation Review by warning that the dollar haters had become too numerous and were about to get a severe spanking, getting whacked mercilessly by a greenback punching through to the $1.30's initially, and eventually to the $1.20's. This was predictable because the dire straights of the EC's weakest members are certain to prolong the European Central Bank's zero interest rate regime far longer than ours. The debt levels in some of these countries make America look like a paragon of fiscal integrity. Some analysts are predicting that the Euro itself might not even survive the crisis. How long can a sober, conservative German grandfather be expected to indulge the disgraceful habits of its party animal, thrill seeking, drug addicted grandchildren? I fear not long.

2)Whenever I am confronted with non believers in gold, I love to pull out the chart below, showing the Dow Jones priced in the barbaric relic and smack them across the face with it. A 20 year bull market in the yellow metal took the stock index from 1.4 ounces in 1980 to a 40 ounce peak at the top of the dotcom bubble in 2000. It has been falling ever since, dropping to a mere 8 ounces by the end of last year. Today it is hovering at 9.2 ounces, but is definitely looking very heavy. When was the prior stock peak? In 1971, when massive deficit spending, spawned by the Vietnam War, forced the Nixon Shock, which freed gold to float from $34/ounce, sending the Dow fleeing from a 30 ounce valuation.?? Do you see any parallels with today? Iraq and Afghanistan maybe? If we return to the 1980 ratio, the Dow Jones has to either fall 85% to 1,540, or gold has to rocket 6.6 times to $7,300/ounce. With the printing presses in Washington running so loudly that my teeth are starting to chatter, I vote for the latter. The most likely outcome is some combination of the two, where we see stagnant or falling stock prices and rising gold. Do I hear $5,000/ounce anyone? My own $2,300 forecast, the old inflation adjusted all time high, is looking more conservative by the day. Me, conservative? Perish the thought!

3) Hail to the Stock-Promoter-in-Chief! Given the spectacular performance of the stock market since Obama's inauguration, you might be forgiven for thinking that this was the best record in history. But you would be wrong by a big margin. A bounce back from the 1929 crash delivered an unbelievable 96.5% jump for Franklin Delano Roosevelt in the year leading up to March 4, 1933. He is followed by a postwar boom induced 30.9% appreciation that Harry S. Truman ushered in to January, 1946, the first time the Dow index recovered the 200 level in 17 years. Obama only comes in third with a relatively modest 29.5% pop since his inauguration a year ago. Who brought in the worst return? Jimmy Carter suffered a 19.6% fall during the chronic stagflation of the late seventies. The Vietnam War did likewise to Richard Nixon, with a 17% decline in 1969. Warning to Obama: after FDR's fabulous first year gains, the market struggled for eight more years, until an expected WWII win sent it on a long term upward trajectory. If this president thing doesn't work out for Obama, I guess he can always pursue a career as a Wall Street lawyer.

QUOTE OF THE DAY

'By 2014, the GDP of emerging economies will surpass that of developed economies'?.The most attractive place in the world to invest right now is China' said David Rubenstein, CEO of the Carlyle Group.

January 29, 2010

Diary

Global Market Comments
January 29, 2010

Featured Trades: (McCARTHY HEARINGS),
(GOLD), (ABX), (PCY), (LQD)

1)?Have you no shame, sir?? That is what I expected Treasury secretary Tim Geithner to cry out during his congressional grilling today. The circus was preceded by a Republican congressmen holding up emails for the cameras proving Geithner?s perfidy in the AIG bailout, but was unable to tell us exactly what was in them. Is Whitaker Chambers going to testify next? Are we going to be led to a pumpkin patch?? No, I?m not old enough to remember the red scare and the 1954 McCarthy hearings, although I know that many of you readers are. It was all comic theater listening to the conservative minority attempt to blame Geithner for the financial crisis they created, the bail out that Bush?s Treasury secretary initiated, and the bill that was passed on to Obama. Where were these people demanding full disclosure in October, 2008?? The farther we move away from those cataclysmic days, the more people come up to me saying we should have let all the banks go under and dealt with the aftermath. They don?t understand that a decade long Great Depression II was staring us in the face. I can remember enough of the stories my parents and grandparents told me about those difficult days to know that it is something I?d rather not suffer through myself. You can?t blame these people for being upset, as it was they who were abandoned by their leaders and left drifting in the wind. Somehow the party of fiscal rectitude morphed from Dr. Jekyll to Mr. Hyde as soon as it got into office in 2001, and raced to double the national debt to $11 trillion as fast as possible. It all makes me want to throw the remote at my TV and cry. I don?t understand why Republicans think blaming Democrats for Republican sins is going to get them anywhere. Antics like this are certain to guarantee another seven years of the one party state. Adjust your portfolio accordingly. Enough ranting and raving for today.

2) If you are wondering about the long term prospects for gold, just ask the guy who has the biggest bet in the market. That would be Peter Munk, founder and CEO of Barrick Gold (ABX). His company produced the 8 million ounces of the barbaric relic last year, has the world?s largest reserves, and mined 6 billion ounces of copper as a sideline. In September, Munk set the cat among the pigeons when his company announced that it would take off its gold hedges at a cost of $5 billion. The move provided the launching pad for a 25% spike up in gold to a new all time high. Munk?s confident explanation was that the long term future of the yellow metal was so secure that the hedges were no longer needed to smooth out his company?s earnings. No other asset class was up every year for the past decade. Investors are so scared from the events of the financial crisis, with banks dropping like flies and fund managers blowing up right and left, that it will influence their investment decisions for decades. That means building a core holding of gold to protect against the next crisis, whether it ever comes or not. Munk recommended against short term trading the shares of gold miners, but to keep a permanent asset allocation to the sector. Uncertainty is rising, is now a permanent feature of the investment landscape, and a short term rally in the stock market isn?t going to change that. The rise of middle class gold buyers in emerging markets is also something that isn?t going away in our lifetime. ?They make cheap suits in China, but not cheap gold,? he said. Munk?s comments reconfirm my own view that we may see some sideways action in precious metals for six months before the next blast up to a new high, getting us closer to my own target of $2,300. Better take another look at gold futures, coins, bullion, the ETF (GOLD), and ABX shares themselves.

3) Last year, I suggested emerging market sovereign debt ETF?s as safe, high yielding investments in which to hide out in case the equity markets swoon again. The stock mrket looked pretty grizzly last week, so let?s see how they performed. The Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY), which has 40% of its assets in Latin American bonds and 31% in Asia, was more or less unchanged. The two year old fund now boasts $451 million in market cap and pays a handy 6.29% dividend. This beats the daylights out of the one basis point you currently earn for cash, the 3.65% yield on 10 year Treasuries, and still exceeds the 5.37% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single ?A? US corporates. The big difference here is that the countries that make up the PCY have a much rosier future of credit upgrades to look forward to. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. Not so for the US, which has bond issuance going through the roof, and downgrade noises growing ever louder. A price appreciation of 125% over the past year tells you this is not exactly an undiscovered concept. Still, it is something to keep on your ?buy on dips? list.

4) News Flash: As I write, the S&P 500 has broken the 50 day moving average, an event that usually presages larger falls to come. Of course, you already knew this was going to happen when Charles Nenner warned you in his December 12 interview with me on Hedge Fund Radio, when he gave an exact date of January 7 for the market peak. He predicted that the market would fall 10%-20% from there. I reminded you again in my December 16 summary of the radio interview (click here ). I gave you a heads up one more time with my January 4 Annual Asset Allocation Review with my piece entitled I?d Rather Get a Poke in the Eye With a Sharp Stick Than Buy Equities. As it turned out, the S&P 500 peaked on January 11, which is close enough for government work. The Euro has also broken through to the $1.39 handle, and the dollar surrogates of crude, gold, and copper are also weak, as they should be in the face of a carry trade unwind. Commentators are blaming Obama?s State of the Union speech. The reality is that stocks were just too damn expensive, can?t be justified by the economy?s weak fundamentals, and only got this high because of the free money given speculators by the Fed
. Since everything else Charles forecast is coming true, you better listen to his interview on Hedge Fund Radio one more time by clicking here

QUOTE OF THE DAY

?To stand back and let it burn is irresponsible,? said Treasury secretary
Tim Geithner during congressional hearings.

January 28, 2010

Diary

Global Market Comments
January 28, 2010

Featured Trades: (SOUTH KOREA), (EWY), WON),
(TIGERS), (LEMURS), (HEDGE FUND RADIO)

1) I have been banging on about South Korea (EWY) for some time now as the ?K? that should be in ?BRICK?, the country that has successfully carved out a niche between the rock and the hard place, China and Japan, yada, yada, yada. Click here for my last piece on the Hermit Kingdom. So when the recent Vice Minister of Finance for the ROK passed through town, I leapt at the opportunity to have dinner. The wrenching, soul searching rebuilding and reregulation of the financial system the US is suffering now, South Korea went through during the Asian financial crisis in 1998. That meant Korean banks entered the recent meltdown with less leverage, better balance sheets, and a healthier consumer loan book than its American counterparts. These institutions have non performing loan ratios to kill for. The happy dividend was a classic ?V? shaped recovery last year, it?s GDP hand springing from a -5% rate to a +4.5% in a matter of months. That enabled the KOSPI, the main Korean stock index, to outperform China?s, bringing in a 57% return in 2009, no mean feat. An export led recovery boosted the current account surplus, suddenly transforming the Won into a hard currency. This stellar performance gained Korea membership into the exclusive G-20 club of industrial nations. Korea is now pursuing a clever export strategy by climbing up the value chain from below and getting American and European consumers to replace more expensive Japanese and German cars with KIA?s and Hyundai?s, which deliver the same quality for half the price. There are challenges longer term. Korea has to win?? the race to develop a service economy while its larger neighbors are still over reliant on manufacturing. Think medical tourism a la Bangkok and New Delhi. It also has the world?s lowest birth rate, which at 1.19, is far below the replacement rate of 2.2. Seoul is the easiest major city in the world to flag a taxi, drivers outnumbering New York by 7:1 on a per capita basis, as this is a traditional parking palace for the unemployed.? As I know you are all astute followers of demography, you?ll immediately grasp that fewer babies today mean a dearth of consumers in 20 years. The only downside of the dinner for me was that after gulping down huge quantities of garlic soaked kimchee, my social life was put on an indefinite hold.?

2) In case you missed it, the second hand animal market has crashed. Forced to slash budgets by cash starved municipalities, the nation?s public zoos have been paring back their collections of living exhibits. The Washington Zoo is trying to offload a 7,000 pound hippopotamus; while the San Francisco Zoo is short some tigers after one ate a visitor and had to be shot. The Portland Zoo was able to liquidate a portfolio of lemurs only because of the popularity of the recent DreamWorks? ?Madagascar 2? animated film.?? When zoos are forced to economize, they downsize the big eaters first to save on feed costs; hence, the absence of elephants in San Francisco (Could this be a political gesture?). In fact, zoo staff were recently busted for illegally harvesting acacia on private property, a favorite of giraffes, which grows wild here after its introduction a century ago. The hardest to move? Baltimore has been trying to sell its snake collection for two years now. Talk about an illiquid market. Maybe they should try AIG. Snake derivatives anyone?

3) My guest on Hedge Fund Radio this week is Andrew Horowitz, president and founder of Fort Lauderdale, Florida based Horowitz & Company. Andrew is a registered investment advisor, blogger, and podcaster extraordinaire. He has built one of the most sophisticated investment websites on the Internet, and his podcasts, 145 of which have been posted so far, and are rated among the ?Top Ten iTunes?. Andrew uses a blended investment approach called ?QuantaFundaTechna? which combines stocks, mutual funds, ETF?s, and options to deliver investment returns. In 2007, Andy has published a book about his approach called The Disciplined Investor-Essential Strategies for Success. Andrew also writes for AOL Finance and MSN Money. You can learn more about Andrew Horowitz by visiting his website at www.thedisciplinedinvestor.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 , click on ?Listen Live!?, and click on ?Houston 1180 AM KGOL.?? For archives of past Hedge Fund Radio shows, please go to my website by clicking here.

QUOTE OF THE DAY

?Cash bonuses on Wall Street are going to become a dinosaur,? said Jon Corzine, governor of New Jersey, and former chairman of Goldman Sachs.

January 27, 2010

Diary

Global Market Comments
January 27, 2010

Featured Trades: (EXIT SRATEGY), (PALLADIUM), (PALL), (CANADIAN MAPLE LEAF),? (MILLENNIUM GENERATION)

1) I can tell you with absolute certainty that the ?Exit Strategy? the Fed?s Bernanke is contemplating is nothing less than a total, unadulterated myth. This is the fairy tale you read to your young children at night where the government cuts back its spending and the Fed shrinks its lending. The private economy then picks up the slack, and the rest of us live happily ever after. Unfortunately, this time there will be no Prince Charming riding in on a white horse. In 2009, the US ran an unprecedented $1.5 trillion budget deficit, financing the shortfall by issuing Treasury bonds. The Fed happily obliged by soaking up this tsunami of paper, either directly, or indirectly through mortgage purchases. This boosted its own balance sheet from $800 million to a mind boggling $2 trillion in the process, or about 14% of GDP. Were there any other takers of new government debt? China bought $100 billion, and another $200 billion went to a hodgepodge of assorted foreign central banks and sovereign funds, barely 20% of the total. Back out the Fed as the buyer of last resort, and where are we? The private demand isn?t there, especially if the Fed plans on raising interest rates at the same time. I can already hear the excuses the foreign buyers will be fobbing off on Tim Geithner; I?m sorry, but I?ve got to rush off to a Peking duck dinner; it?s Ramadan; I have a date with my mistress; the dog ate my homework; etc; etc; etc;. There are only two possible outcomes to the greatest financing gap in history. Interest rates have to soar to unimaginable levels to attract recalcitrant investors, or the plunge in spending sends us into a postponed Great Depression II. Let me know which one it is, will you? I?ll be hiding out in my camouflaged underground bunker in the desert. And if you do come calling, be a peach and bring me some MRE?s, a five gallon bottle of water, and a case of 9 mm ammo, will you?

2) When the current outbreak of angst biting at the heels of the markets runs its course, and traders morph back into risk accumulation mode, you can count on palladium outperforming the other precious metals. During 2009, gold rose 27%, silver 49%, platinum 56%, and palladium a whopping 117%, and I expect this outperformance to continue. Last month, Toyota?s USA?s president, Jim Lentz, told me over a couple of beers that the US car market will recover from the present 11 million annual units to 15 million by 2015. (You can forget the drug induced haze of 20 million annual units free money brought us, returning in our lifetime). Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by 3 million units a year. Which catalyst will the auto makers choose? Palladium at $440 an ounce or platinum at $1,550 an ounce? Hmmmm, let me think. They do have new management now, so maybe they?ll figure it out. Some 80% of the world?s palladium production comes from Russia and South Africa, dubious sources on the best of days. On top of this, you can add demand from the new platinum ETF (PALL), which with a launch of $250 million, will soak up a hefty 8% of the world?s palladium production on day one. Those set up to trade the futures can play the December contract, where a margin of $2,363 gets you a 100 ounce exposure worth $44,000. If you don?t know how to do this, email me at madhedgefundtrader@yahoo.com and I?ll tell you how. If you are looking for something to stash in your gun safe, bury in the backyard, or give to the grandkids on their college graduation, get physical with 100 ounce bars at $50 over spot, or Royal Canadian Mint one ounce palladium Maple Leaf coins at $80 over spot.

3) I have been banging the table for years now about the importance of demographic trends for the economy, the financial markets, and the housing market. Well, politics is no different, as the table below of Obama?s approval rating shows. Millennials, who are now aged 18-29 (I have three of them) are suspicious of government, have a strong anti business bias, are opposed to new regulation, are highly conscious of environmental issues, and give the president his highest marks. They also happen to care the least about health care, and put a high value on ethics. This is important because the Millennium Generation will surpass in size 80 million baby boomers this year. No wonder the last election focused so much energy on Internet campaigning and fund raising. Is the outcome of future elections to be determined by clicks and bandwidth? The data effectively means that the population of liberals is growing, while that for conservatives is shrinking. Politician planners and makers of campaign tchotchke take note.

Age???????????????????????????????????????????????????????????????????????????? Approve?????????????????????????????? Disapprove

Millennials?? 18-29???????????????????????????????????????????? 60%???????????????????????????????????????????? 40%
Gen X?? 30- 46???????????????????????????????????????????????????????? ???? 56%???????????????????????????????????????? ?? 44%
Baby Boomers 47-63???????????????????????????????????? 56%???????????????????????????????????????????? 45%

QUOTE OF THE DAY

?You don?t give an arsonist a medal for putting out the fire,? said a commentator today about the battle over the renomination of Ben Bernanke.

January 26, 2010

Diary

Global Market Comments
January 26, 2010 Featured Trades: (HEDGE FUND RADIO), (TRADER MARK), (ATHR), (ASIA), (DRWI), (BRF), (RSX), (IDX), (EWA), (VNM), (JAL), (NISSAN MOTORS), (NSANY), (NISSAN LEAF)

1) My guest on Hedge Fund Radio this week was Mark Hanna, publisher of the wildly popular, www.fundmymutualfund.com investment website, who believes that the US economy is in a ?drugged pleasure dome that kicks the can down the road,? and will bring ?another ugly episode in the market.? If the S&P 500 breaks the 200 day moving average, which is looking increasingly likely by the day, he?ll turn on a dime and bail on his longs. ?Trader Mark,? as he is known on the Internet, employs a hybrid fundamental/technical, long/short approach to the market which he has developed through trial and error over the last 15 years. His record enabled him to build a readership of 150,000 a month at his website, and brought him an impressive 13,482 followers at blog aggregator www.seekingalpha.com . Mark has delivered a 77% return through model portfolio tracker, Investopedia, that has brought him $7 million in commitments for a mutual fund he plans to launch this summer. Mark likes the small cap mobile technology area, and has traded in Atheros Communications (ATHR), Asia Info Holdings (ASIA), and Dragon Wave (DRWI). China and India have great fundamentals, even though they are getting overhyped. More attractive is Brazil, which offers a small cap ETF (BRF). In the BRIC complex, he?d take Russia (RSX) out, which presents unquantifiable country risks, and substitute in Indonesia (IDX), another resource exporter with a growing middle class that is close to China. Also on his horizon are Australia (EWA) and Vietnam (VNM). To listen to my interview with Trader Mark in its entirety, please go to Hedge Fund Radio at my website by clicking here

2) I have to admit that I was stunned and then saddened when, as a four decade long customer of Japan Airlines, I heard that the national flag carrier had filed for bankruptcy. The airline will keep flying, but only after wiping out shareholders, cutting a third of its 52,000 employees, telling its banks to write off $4 billion in debt, and taking another $6.6 billion in bailout money from the Japanese government. It seemed like only yesterday that the company?s spanking new 747?s ferried camera toting tourists around the world en masse, offering the epitome of service, my own sister-in-law escorting them along the way as a stewardess. But the sins that felled the big American carriers 20 years ago (remember Pan Am, National, and Braniff?), those of back breaking legacy costs, powerful unions, an aging fleet, and horrific price competition, finally caught up with JAL. It didn?t help that it is thought to have hedged several years of fuel costs at the 2008 market top when crude was trading around $125/barrel. A never ending deluge of retiring government officials (a practice known in Japan as amakudari, or descent from heaven), assured a perennially weak management. In the end, it was the ousting of the Liberal Democratic Party in last year?s election and the crucial support that went with it that did it in. It is symptomatic of much of what is wrong with Japan today that it took this long to happen. I hope that JAL can cut a deal to provide either American or Delta Airlines new routes in exchange for $1 billion in cash to stay in the air, or I shall miss the hot sake in first class dearly.

3) It looks like Nissan Motors (NSANY) is going to win the race to bring out the first mass market all-electric sedan in the US with the introduction of its ?Leaf? model later this year. The company is now conducting a national road show enabling potential buyers, some of whom have developed a cultish interest in this product,?? to test drive the futuristic vehicle. The five passenger, front wheel drive, five door Leaf will get 100 miles per charge, which will accommodate the needs of 95% of American drivers? daily needs. At $2.75 per charge, the Leaf will get price equivalent mileage of 110 miles per gallon. Maintenance will be incredibly cheap, as the car will have no oil, antifreeze, transmission, cylinders, or tailpipe. If this technology takes hold, tens of thousands of local mechanics will become the unemployed buggy whip makers and carriage designers of our age, as there will be nothing for them to do but repack wheel bearings in grease. This is a mode of transportation with virtually no moving parts. The car will offer impressive acceleration and handle like any six cylinder engine vehicle. A full 220 volt charge will take eight hours, or 26 minutes if you are happy with an 80% quick charge. Nissan will be offering some cool features, like drive by wire, rear view cameras, regenerative braking to extend battery life, and IPhone apps to monitor battery status. The 24 kWh induction motors will run off of lithium ion batteries with a life guaranteed at five years, and possibly extending to ten years. Every buyer will get a free home inspection to assess charging options. Nissan is rushing to build a national infrastructure of public charging points at service stations and shopping malls that the car?s GPS can find on its own. The first cars will be manufactured in Japan, but Nissan anticipates bringing a Tennessee factory online down the road. The company is being cagey on pricing, hinting that it might come in at a competitive $25,000-$35,000, with a $7,500 federal tax credit. Beam me up, Scotty.

QUOTE OF THE DAY

?If you want to succeed, double your failure rate,? said Thomas Watson, the CEO who built IBM into a global force from the twenties to the fifties. He also said, ?I think there is a world market for maybe five computers.?

January 25, 2010

Diary

Global Market Comments
January 25, 2010

Featured Trades: (SPX), (TBT), (GLD), (FXA), (UNG), (WHEAT), (CORN), (SOYBEANS), (CYB), (OAKLAND BAY BRIDGE)

1) At the Friday close, technical analyst to the hedge fund stars, Charles Nenner, put out his long awaited sell signal on the S&P 500, with the market?s definitive break of the crucial 1,125 support level. From here you sell into the rallies. The SPX is going to plunge 10-20%, Treasury bond interest rates are going to soar (TBT), and gold (GLD) has peaked out. There are tradable shorts setting up in all three of these markets that will run for the first half of 2010. These calls are the product of Nenner?s proprietary Cycle Analysis System, which he has spent three decades developing, and generates calls of tops and bottoms for every major market in the world. I have diligently analyzed Nenner?s approach for a couple of years now. It appears to consist of multiple overlays? of traditional technical analysis, some mathematically derived time and momentum indicators, and a dash of Elliot Wave for good measure. The result is reliable enough to make a living, as long as you learn how to read him and don?t bet the ranch (or the windmill?) on any single trade. Nenner 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 this year, sectors for which I am also hugely bullish long term. He sees natural gas (UNG) retesting the old lows at $2.40. Farther out, Nenner sees a new major bear market beginning in 2013 that will take both stocks and bonds to new lows. Nenner has a long career that includes stints at medical school, Merrill Lynch, Rabobank, and ten years as a technical analyst at the noted vampire squid, Goldman Sachs. To learn more about the approach of his firm, the Charles Nenner Research Center in Amsterdam, please visit his site at www.charlesnenner.com. To hear my in depth, extended interview with Nenner where he outlines all of his views for 2010, please go to my website by clicking here .

2)Friday lunch had me sharing a cold, congealed chicken salad with Bill Clinton?s Secretary of Labor, Robert Reich at San Francisco?s Fairmont Hotel, who says that easy money is creating new bubbles around the world, especially in China and commodities, that will only end in tears. The Middle Kingdom is the first country where inflation may break out to the upside. There is also a new form of protectionism that has emerged under the guise of competitive devaluations, where counties printing paper money are racing to the bottom, which will eventually force a revaluation of the Chinese Yuan (CYB). A US GDP that is 71% dependent on consumer spending is unsustainable, since they can no longer afford it, can?t get credit, no longer have a personal ATM in the form of home equity loans, are worried about losing their jobs, suffer under a huge debt burden, and are now unexpectedly having to save more for their retirement since their houses have dropped in value by half. Scott Brown?s surprise win for the Massachusetts senate seat will only cause uncertainty in Washington to explode, not exactly a stock market friendly development. The Obama administration committed a major error by devoting one third of its massive $870 billion stimulus program to tax cuts, which in this environment, will get saved, not spent. The TARP money, while succeeding in rescuing the financial system, only ended up in Treasury bills and never made it to Main Street. The best way to revive the economy is to give money to the states directly, which, unable to run deficits, can only cut spending and raise taxes. This will create a $350 billion drag on the economy during 2010-2011, in effect an ?anti stimulus? that cancels out a third of the federal government?s reflationary efforts. I took two of Bob?s economics classes at UC Berkeley, and know too well his wry humor, acid wit, and preference for backing up arguments with mountains of empirical data. Bob warned his guests not to take his investment advise, as he bought his home in Berkeley at the 2006 market top, and has since had to to eat a 10% cut in his Berkeley professor?s salary forced on him by state budget cutbacks. A Rhodes Scholar who dated Hillary Clinton at Yale and ran for governor of Massachusetts, Bob is never without an original thought, nor a stranger to controversy.

3) The first 300 foot, 6,800 ton segment of the new approach to the Oakland Bay Bridge was delivered this week. This massive wing shaped piece of steel is the first of 28 to be delivered that will be used to rebuild the 73 year old symbol of the Foggy City. Out of towners may recognize this as the bridge that terrified motorists by partially collapsing during the 1989 Loma Prieta earthquake, paving the way for a ground up seismic retrofit. Where was it built? You guessed it, China, where inferior steel, shoddy welds, and poorly translated plans caused a 15 month delay in the fabrication, pushing completion of the new structure off to 2014. Despite delays caused by an El Nino winter, the new component made it over from Shanghai on a specially designed ship in only 22 days. Local unions bitterly opposed the offshoring of the project to the Middle Kingdom, even though a wholly American made bridge would have more than doubled the anticipated $6.3 billion cost. Looks like I?ll still have to hold my breath while driving over to San Francisco, even after it?s finished. It says a lot that the Chinese can rebuild one of America?s greatest engineering icons, ship it across the Pacific Ocean piecemeal like a giant Lego set, and erect it here at half the cost of the local help. It?s another ominous ?tell? on the future of the global economy.

Out With the Old, In With the New

QUOTE OF THE DAY

?Isn?t it funny when you walk into an investment firm, and you see all of the financial advisors watching CNBC??that gives me the same feeling of confidence I would have if I walked into the Mayo Clinic or Sloan Kettering and all of the doctors were watching the TV soap opera General Hospital,? said a bond manager friend.