January 6, 2010 Featured Trades: (HEDGE FUND REGULATION),
(CCJ), (NLR), (EWY), (BLONDES), (FXI), (EEM)
1) You?d think with the spectacular performance I was fortunate to bring in last year, I would have new investors pouring in over the transom, bombarding me with requests for offering documents, and asking for presentations to investment committees. The sad truth is that I?m pouring over my list of limited partners, trying to decide who to keep and who to dump. The diplomatic, patient ones who took me out to lunch at Gary Danko?s, invited me for a day on San Francisco Bay in their mega yachts, and went on extended vacations when the markets turned ugly, are in. The others who made law suit noises when I had one down month, sicced an army of due diligence consultants on me, and even hinted at withdrawals, are history. Keeping my life simple by limiting investors to a coterie of buddies who love me, come hell or high water, is a consideration. But my main concern is that the House is certain to pass legislation this year forcing hedge fund managers with more than $150 million in assets under management to register with the SEC. No, I?m not worried about a surprise visit from the federal agency, certain that my own accounts and reporting are accurate down to the last farthing. After all, SEC registration didn?t clip Bernie Madoff?s wings, or stop him from stealing $65 billion from clients, despite multiple canaries loudly singing that something was rotten in Denmark. For me, it?s just a cost issue, as the continuous filing and inspection requirements and legal fees can run into millions of dollars. Why bother? I?d much rather pass this savings on to my clients. And why become a witch, just as the Salem witch trials are starting? The harsh reality is that hedge fund managers are being scapegoated and demonized for the financial crisis, ignoring the fact that no hedge fund was bailed out, took any TARP money, or threatened any systemic risk. The funds that went under took a few wealthy limited partners down with the ship, as they so richly deserved when they didn?t understand the strategies, skipped the due diligence, and were simply trying to buy last year?s track record. If the government has to regulate, it would make much more sense to do so with the top one third of funds that control 95% of the industry assets and can afford it. But sense never seemed to be a prerequisite for legislation coming out of Washington.
2) Deal of the Week. I was blown away when I heard that Korea Electric Power won the contract to build four giant 1.4 megawatt electric power plants in the United Arab Emirates for $20.4 billion. The announcement was a thumb in the eye for the French, whose EPR 1600MW reactor was thought to be the hands down winner. No doubt some old fashioned incentives were in play, but the harsh reality is that the KEPCO bid was thought to undercut competitors by as much as 50%. My only regret about this deal is that I will no longer be able to fly my Cessna down a long uninterrupted stretch of the Emirates coast, a restricted area almost certainly about to pop up on?? my navigation chart. The deal speaks volumes about the direction the global economy is taking. In one fell swoop, South Korea leveraged its low labor cost to take a great leap up the international value chain, using what is basically a simply technology. What is a nuclear power plant, but a fancy way to boil water? It reveals some clever long term strategic thinking is going on in the Emirates, which is expected to run out of oil well before the other Gulf kingdoms. You can forget all the platitudes the Arabs were mouthing over environmental concerns. Why burn this valuable resource locally for nothing, when you can sell it to idiotic, short sighted Americans for $82/barrel? Worst of all, this is a high value added?? industry that America once owned,?? and just plain gave away, because of irrational environmental fears. Bottom line: South Korea takes a quantum leap ahead in the race for global competitiveness, while the US falls further to the back in the dust. Better take another look at my favorite nuclear plays, Cameco (CCJ), and the Market Vectors Nuclear Energy ETF (NLR). And while you?re at it, revisit the South Korea ETF (EWY). And those who don?t see this as a life or death contest for economic survival that we can no longer take for granted better get their heads out of the sand.
3) For an iconoclastic, myth shattering, eye opening view of the true competitive threat posed by Asia, read the piece in? Foreign Policy magazine by Minxin Pei, a scholar at the Carnegie Endowment for International Peace. Power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP only at $5,800, compared to $48,000 in the US. We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars. China can?t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede. All of Asia?s progress to date has been built on selling to the US market. Take us out, and they?re nowhere. With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon. There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more because there is no social safety net. Ever heard of a Chinese unemployment office? Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries. The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia only has one world class school, the University of Tokyo. As much as we despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world. After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for nearly four decades, and you feel this. To read the story in its entirety, click here . I think I?ll reread it next time I think about doubling up my FXI and EEM positions.
?If it bleeds, it leads. If it doesn?t bleed, get a knife,? said Michael Bloomberg, mayor of New York, and the founder of Bloomberg News.
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January 5, 2010 Featured Trades: (TOP TEN SURPRISES OF 2010),
(ZERO HEDGE), (HEDGE FUND RADIO),
(MANAGED FUTRES ACCOUNTS), (CTA?S)
1) My Top Ten Surprises of 2010
My friend and former Morgan Stanley colleague, Byron Wien, now at Blackstone Group (BX), initiated this concept? a few decades ago, which I always find a useful intellectual exercise. The goal is to list events which investors believe are nearly impossible, but which have a higher probability of occurring than they think. To a hedge fund manager, this generates a risk/reward imbalance, which always interests me, and can present great trading opportunities. Often you can see this in option pricing, with ?puts? on securities managers see as ?sure things? being tossed away for pennies. I liken them to Einstein?s ?thought experiments.? Here is my own list for 2010.
1) A dramatic decline in the unemployment rate enables the Democrats to increase the number of seats in the House and the Senate in the November midterm elections. Obama?s popularity soars.
2) A ?Goldilocks? economy of huge corporate profits with no inflation gives the stock market boom another year of life, taking the Dow to a new all time high of 15,000.
3) Strong economic growth cutting the government?s borrowing needs and continuing deflationary concerns keep interest rates on 30 year Treasuries and home mortgages near century lows.
4) Reviving American economic prospects and early Fed move to raise interest rates cause the dollar to soar to parity against the Euro. Differential growth and deficit spending rates then cause the European currency to fly apart. Deutschmarks, French francs, and lira make a comeback as member countries revert to their original constituent currencies. Talks of dollar reserve alternatives die out.
5) The surge in Afghanistan succeeds through a combination of drone attacks and intimate, on the ground, presence in the villages, and the war winds down to a dribble of sporadic suicide bombers. Osama bin Laden is captured in the mountains of Pakistan and put on trial in New York.
6) An American victory in the Middle East triggers the collapse of the fundamentalist regime in Iran. A new reformist government promptly shuts down its nuclear program and establishes diplomatic relations with the US. Obama signs a trade agreement that paves the way for US companies to make a killing rebuilding Iran?s aging energy infrastructure.
7) Continued low subsidized interest rates and renewed first time buyer tax credits at both the state and federal level trigger a buyers? panic in the real estate market. Banks start competing aggressively for market share.
8) The global commodity boom ends as China?s stimulus spending program runs out of money. Gold, silver, and platinum crash. Burgeoning stockpiles of everything, from copper to iron ore, sugar, and natural gas finally overwhelm real demand, and prices crater. Speculative demand vaporizes.
9) Huge new offshore discoveries, great strides in alternative energy, and enormous efficiency gains made possible by a smarter grid trigger a collapse in oil prices to $20/barrel. All exploration and development grinds to a halt, and several oil independents go under.
10) Tiger Woods admits to a sex addiction in a ?tell all? episode of Oprah, and goes on to win every major golf tournament. He refuses to take back the sponsors who baled on him last year, replacing AT & T and Gatorade with Viagra and Flomax.
2) I am pleased to announce my affiliation up with Zero Hedge, the top financial blog on the Internet, which boasts 300,000 visitors daily.?? The underground site posts out of consensus and iconoclastic analysis, and has begun putting up my work on their home page. You can visit their innovative and thought provoking site by clicking here at www.zerohedge.com . It is cleverly modeled on the Brad Pitt cult classic Fight Club, with contributing staff writing under noms de guerre taken from the film. Zero Hedge has broken several important news stories since they launched in March, like Goldman Sachs? prosecution of a hapless quantitative trader who tried to defect to Deutche Bank with proprietary software. To get the flavor for what they?re putting out, read their top story of the year on how to prepare for the hyperinflationary great depression, which drew in an astonishing 65,000 readers, by clicking here . The site has also launched its DARPA project, which is attempting to create an alternative research data base that will replace the inferior and conflicted products now offered by traditional brokerage houses and rating agencies. To find my own work there, just do a search for my handle ?madhedgefundtrader?. Of course you, the paying subscriber to the Diary of the Mad Hedge Fund Trader, will continue to get my research first, weeks, and even months before it appears publicly, in order to maintain your trading edge.
3) Managed futures accounts run by commodity trading advisors (CTA?s) are increasingly becoming an important investment alternative for both individuals and institutions, says Adam Rochlin, the head of MF Global?s alternative investment strategies business in New York. They give access to sophisticated strategies like global macro and high frequency trading to individuals and smaller institutions that can?t afford the astronomical cost of running their own high tech 24 hour global trading desks. They can also give you a convenient vehicle for pure commodity exposure, like in energy and the grains, without having to endure the management risk of indirect stock plays. The managed futures industry certainly delivered the goods in 2008, the year from Hell, when they brought in double digit returns, while every global stock index was crashing. The big new issue is transparency, which CTA?s deal with handily by executing trades in accounts still under the investor?s direct control, instead of asking for funds to be wired to a distant unknown custodian. As the futures markets never shut down throughout the financial crisis, liquidity was never a concern. You can learn more about managed futures accounts by contacting Adam directly at 212-319-1375, or by e-mailing him at alternativeinvestments@mfglobal.com . To hear the complete interview with Adam on Hedge Fund Radio this week, please visit my website by clicking here .
?Bull markets don?t die, they are killed by central bankers,? said JJ Burns of JJ Burns & Co., and investment advisor.
2010 Asset Allocation Review
January 4, 2010
The Thumbnail Portfolio
Equities-up, then down
Bonds-Corporates up, then down. Treasuries down, down, down
Currencies-dollar up, then down
Commodities-up, up, and way
Precious Metals-sideways, then up
Real estate-down to sideways
1) The Economy I am not of the 'V' or 'W' persuasion, but see a 'square root' shaped economic recovery, a 'V' followed by a long, modest rise. After a gut churning plunge in 2008 and early 2009, we are now seeing a bungee cord bounce back. GDP growth could see rollicking great 3%-4% annualized growth rates through Q1 2010. After that, you're going to need a triple shot espresso to stay awake, because growth will settle down to a more somnolencent 2% annualized rate. You can't have robust growth without credit or consumers, both of which are still missing in action in our last conflagration. It's anyone's guess how much toxic waste lies buried in bank balance sheets, so it's going to be a long time before the return to bidding for market share with free credit cards, low teaser rates, and liar loans, or their next generation iterations. The 'shadow banking system' proved to be just that, a shadow. There are still great swathes of the credit markets that have yet to make any recovery at all, like securitized home loans, auto loans, and credit card debt. Anything real estate related, commercial or residential, once a big part of GDP, will be dead weight. Another albatross around the economy's neck are thousands of states and municipalities that are sucking money out of the economy faster than the federal government can pump it in. Since we are not creating the new industries essential for real job growth, I believe the unemployment rate will stay stubbornly high?? at around 10%, much like Germany has seen for decades. The jobs that decamped for China or vaporized on the Internet are never coming back. With tens of millions wiped out, and most of the rest recovering from a halving of their net worth, don't hold your breath for a consumer spending boom. Sure, there were a few more in the stores this Christmas, but most of those were probably shoplifters. Frugality is here to stay. The economy is also going to have to kick its addiction to government stimulus spending, which has accounted for the bulk of the actual growth we have seen this year. If all of that were not bad enough, headwinds in the form of rising interest rates are certain to hit sometime in 2010, either to rescue a collapsing dollar, or because of a sheer volume of government borrowing, or both. What growth we will see in the global economy will be 80% an emerging markets story. As much as I'd like to shout from the roof tops that happy days are here again, I see nothing but storm clouds on my Doppler radar.
2) Equities (SPX), (EEM),(EWZ), (RSX), (PIN), (FXI), (EWY), (EWT), (IDX)
I'd rather get a poke in the eye with a sharp stick than buy equities right here. At a PE multiple of 20 times earnings, US equities (SPX) are at the top of a seven year valuation range. Emerging markets are even worse, with China sporting?? positively bubblicious multiples. There is no doubt that corporate managements panicked at the beginning of 2009 and chopped overheads at an unprecedented rate, leading to the eye popping 700,000 monthly nonfarm payroll losses we witnessed. With the economy snapping back faster than any of them expected, they accidently created the widest profit margins in history. Don't expect lightening to strike twice in the same place. Those margins can only shrink from here, either through the long delayed rehiring of workers that bumps up costs, or because of a double dip recession that slashes revenues. Equities are a lose-lose trade here, threatening more downside than upside. Barton Biggs taught me to always leave the last ten percent of a move for the next guy. Unfortunately, with interest rates at zero, some models value equities at infinity, and many traders seem hell bent on taking stocks there. So as expensive as equities are here, they may be about to surf a New Year tidal wave of liquidity to even greater heights, punishing those who short too soon severely.?? During their eighties stock market bubble, the Japanese loved to quote a favorite local expression: 'When the fools are dancing, the greater fools are watching.' The same may apply now to American equity investors. But this next boost could well be setting up one of the great shorting opportunities of the decade, which could start tomorrow, next week, next month, or by summer at the latest. If some bully is holding you by your ankles outside a high floor window, threatening to let go if you don't buy equities, only pick the emerging market variety (EEM). Think the BRIC's, Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), with South Korea (EWY), Taiwan (EWT), and Indonesia (IDX) thrown in for a more sophisticated flavor. But keep an itchy trigger finger on your mouse, because when the turn comes, there will be no place to hide. And beat the rush by booking that house in the Hamptons, the lakefront property at Tahoe, or the mega yacht in the Mediterranean, early.
3) Bonds (TBT), (JNK), (PHB), (HYG)
Shorting the world's most overvalued asset has got to be the big trade for 2010. I'm talking about 30 year US Treasury bonds. The relentless whirring of the printing presses is so loud that they keep me awake at night, even though, according to Mapquest, I live 2,804.08 miles away. What will be unique with this meltdown is that it will be the first collapse of a bond market in history in a deflationary environment. It is not inflationary fears that will execute the coup de grace for the long bond, it will be the sheer volume of issuance. The Feds have to sell nearly $2 trillion of debt to cover a massive budget deficit and to refund maturing paper, easily the largest amount in history. Pile on top of that billions more in offerings from states and municipalities bleeding white. By end 2010 total government debt will rocket to a staggering 350% of GDP. At some point, the world runs out of buyers, and the long bond yields will begin their inexorable climb from the current 4.6% to 5.5%, 6%, or higher.?? Even Moody's is talking about a ratings downgrade for the US debt, not that we should give that disgraced institution any credibility whatsoever. It's just a question of how many sticks it takes to break a camel's back. I am a worshipper of the TBT, a 200% leveraged bet that long bonds are going down. It has clawed its way back up from $43 to $51, and $60 looks like a chip shot for the first half. Longer term this ETF could hit $200. If interest rates double from the current levels, a virtual certainty, so does America's debt service, from the current 11% to 22% of the budget. That's when the sushi really hits the fan.
Corporate debt, which see interest rates moved more by credit quality considerations than the yield curve, will continue to trade like high yielding equities, as they did for most of 2009. After last year's cornucopia of bankruptcies, investors are also showing a preference for paying up for
securities more senior in the capital structure. That means you're going to have to employ an equity type strategy for this corner of the fixed income market. The global liquidity surge that free money is spawning will boost corporate bonds as much as equities, knocking yields down further. And with the world still in risk accumulation mode, that augers well for the riskiest corner of asset class ? junk bonds, whose default rates are not coming in anywhere near where they were predicted just a few months ago. Buy the junk ETF's like JNK, PHB, and the HYG here for a trade. Just don't forget to unload at the first sign of an equity market collapse.
4) Currencies (FXC), (FXA), (BNZ), (CYB)
Any trader will tell you to never bet against the trend, and the overwhelming direction for the US dollar for the last 230 years has been down. The only question is how far, how fast. Going short the currency of the world's largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer. But once it became every hedge fund trader's free lunch, and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic corrections, which began a month ago, and could continue for several more months. The euro has its own particular problems, with the cost of a generous social safety net sending EC budget deficits careening. Just look at Greece, with a budget deficit of 12.7% of GDP against the 3% it promised on admission to the once exclusive club. Unwinding of 'hot' longs could easily take us into the $1.30's against the euro, and new momentum driven longs could take us to the $1.20's. Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses, and possess small consuming populations. I'm talking about the Canadian dollar (FXC), the Australian dollar (FXA), and the News Zealand dollar (BNZ), all of which will eventually hit parity with the dollar. Think of these as emerging markets where they speak English, best played through the local currencies. If you're looking for a risk controlled pairs trade, I vote for going long the Canadian dollar and short the Euro at ???1.40. For a sleeper, buy the Chinese Yuan ETF (CYB) for your back book.
5) Commodities (FCX), (VALE), (RIG), (JOY), (CCJ), (FSLR), (UNG), (USO), (MOO), (DBA), (MOS), (MON), (AGU), (POT), (PHO), (FIW)
This is my favorite asset class for the next decade, as investors increasingly catch on to the secular move out of paper assets into hard ones. Don't buy anything that can be manufactured with a printing press. Focus instead on assets that are in short supply, are enjoying an exponential growth in demand, and take five years to bring new supply online. The Malthusian argument on population growth also applies to commodities; hyperbolic demand inevitably overwhelms linear supply growth. Of course, we're already eight years into what is probably a 20 year secular bull market for commodities and these things are no longer as cheap as they once were. So you are going to have to allow these things to breathe. Ultimately this is a demographic play that cashes in on rising standards of living in the biggest and highest growth emerging markets. You can start with the traditional base commodities of copper and iron ore. The derivative equity plays here are Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE). Add the energies of oil, coal, uranium, and the equities Transocean (RIG), Joy Global (JOY), and Cameco (CCJ). Crude (USO) has in fact become the new global de facto currency (along with gold), and probably $30 of the current $78 price reflects monetary demand, on top of $48 worth of actual demand from consumers. That will help it spike over $100 sometime in 2010. Don't forget alternative energy, which will see stocks dragged up by the impending spike in energy prices. My favorite here is First Solar (FSLR). Skip natural gas (UNG), because the discovery of a new 100 year supply from fracting and horizontal drilling in shale formations is going to overhang this subsector for a long time. The food commodities are probably among the cheapest resources around, with corn, wheat, and soybeans coming off the back of bumper crops in 2009, and can be played through the futures or the ETF's (MOO) and (DBA), and the stocks Mosaic (MOS), Monsanto (MON), Potash (POT), and Agrium (AGU). Through an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cake walk. You can participate in this most liquid of asset with the ETF's (PHO) and (FIW).
6) Precious Metals (GLD), (SLV), (PTM)
With gold's?? whopping great $150, 12% pull back from the all time high in the past month, I have been deluged by readers asking if this was the peak, if it was the final blow off top, and if gold is finished as an asset class. My answers are no, never, and not on your life. Obama has not suddenly become a paragon of fiscal restraint. Bernanke has not morphed into a tightwad overnight. When I pull a dollar bill out of my wallet, it's as limp as ever. If you forgot to buy gold at $35, $300, or $800, another entry point is setting up for those who, so far, have missed the gravy train. We could be seeing a replay of 2008-2009, where the yellow metal traded in a sideways range for many months before blasting through to a new all time high and quickly tacking on 25%. Start scaling in around $1,040. That's where the Reserve Bank of India started the recent love fest for the barbaric relic with its 200 ton purchase in November. If the institutional world devotes just 5% of their asset to a weighting in the yellow metal, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation adjusted all time high, or higher. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP). I would also be using the current bout of weakness to pick up the high beta, more volatile precious metal silver (SLV) and platinum (PTM), which have their own long term fundamentals working in their favor.
7) Real Estate (ESS)
The agony is going to continue in this world of hurt, and any allocation to either residential or commercial real estate is going to be dead money for the next decade. If you strip away the industry fig leaves, and ignore the paid apologists, the excesses in this sector are truly of Biblical proportions. 'Official,' shadow, and bank inventories, and another 1.5 million imminent option arm induced foreclosures, probably mean there is five years worth of supply out there. Fannie Mae is taking down 75% of the new mortgage in the secondary market, and the FHA is taking almost all of the rest, and there is no way the socialization of the mortgage market can continue indefinitely. The jumbo market has ceased to exist, and it is raining McMansions in tony neighborhoods everywhere. The demographic pressure of 80 million retiring and downsizing baby boomers easily add another five years. The commercial
sector is even worse, with valuations off 50%, some 5% of the industry's $1.8 trillion loan book in default, and cap rates soaring from 5% to 8-9%. The refinancing needs of this industry are gargantuan, and except for some triple 'A' paper taken down by the TALF, there is no bid other than from the vultures inhabiting the distressed world. And no one seems to be taking into consideration the fact that huge chunks of the office market are being permanently emptied out by the Internet, which is sending people home to work, transferring their jobs overseas, or vaporizing them altogether. If the liquidity induced surge in stock prices continues, I might even be enticed into shorting some of the big listed REITS, like Essex Properties (EES), which has nearly doubled from its lows, and is choking on its high prices California exposure. Only buy a home if your wife is nagging you about living in that cardboard box under the freeway overpass. But expect to put up your first born child as collateral, and bring in your entire extended family in as cosigners, if you want to get a bank loan.
Global Market Comments
December 24, 2009
Featured Trades:
(HEDGE FUND RADIO)
1) My guest on Hedge Fund Radio this week is David Gurwitz, the engaging and highly entertaining managing director of Charles Nenner Research, and a long time hedge fund industry veteran. Charles graduated from the famous Bronx High School of Science, and promptly tried out as a professional baseball player for the Montreal Expos. He struck out there, but did later play professional basketball in Europe. His financial career began in 1981 when he became an international tax expert for the big 8 accounting firm, Coopers & Lybrand. He spent another 20 years as a financial consultant and merchant banker. He went into the research business with the famed Dutch technical analyst, Charles Nenner in 2002. David is also an accomplished concert pianist and is about to launch his second commercial CD, making him a true renaissance man. Hedge Fund Radio is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For the online link to the live show, please go to www.bizradio.com, or click here , click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.?? For archives of past Hedge Fund Radio shows, please go to my website by clicking here.
December 23, 2009
Featured Trades: (INTERVIEW WITH SANTA CLAUS)
1) OK guys. I get the message. Yesterday?s letter elicited no less than 100 out-of-office replies. So I?m going to take the hint and disappear for a few days. It?s two days until Christmas, and I haven?t even put my outside lights up yet. I?ll be doing my research with my little kids while watching the Princess and the Frog, and with my older kids while viewing Avatar.? The mandarin oranges are ripe and due for picking, the raccoons have broken a hole through the back fence, and there?s a load of firewood to chop and stack. I guess I?ll take my Lionel train set out, the same steel cast one I played with myself 50 years ago, and see if I can interest my girls. I hope you all enjoy your Christmas festivities, where ever you are in the world. At last count, this letter was being read in 100 countries. My next letter will be sent on December 28, and I?ll be putting out an annual asset allocation review on January 4. Until then, please enjoy the hard hitting, one on one, tell all interview with Santa Claus I conducted just yesterday.
2) I managed to catch up with my old friend, Santa Claus, the other day, before he took off on his global gift giving rounds. I have had a rocky relationship with old Saint Nick over the years, usually getting coal or potatoes in my stocking, as one who lives a feckless life might expect. But one year I found a Mercedes S600 V-12 under the tree! I ended up giving it away because I didn?t like the cup holders, but hey, it was a nice thought! Things are not good at the North Pole. The cost of the software upgrade needed to switch from children?s handwritten letters to email has been a killer. And what the hell is Twitter? The First National Bank of the North Pole won?t let him roll over his debt because snow appraisals aren?t coming in like they used to. Labor costs are rocketing. Elves used to work for a few pieces of candy cane a day, but no more. Now they want black snowmobiles with chrome wheels, big screen TV?s, and Blue Ray HD players. There are rumors of a strike over health care costs, which are bleeding him snow white. The Amalgamated Confederation of Elves must be the only union that gets Viagra with their benefits, besides the United Auto Workers. And now they want free mistletoe, to boot! He?s going to have to skip the unfortunate children of Afghanistan and Iraq again because Obama?s budget cuts won?t allow the US Air Force to provide needed fighter cover. The price of reindeer food is going through the roof, thanks to Chinese hoarding, and Donner and Blitzen are down with the swine flu. Rising costs, lower revenues, and an unruly workforce are not a good business model. Since the government forced that TARP money down his throat, the green eye shades from the Treasury have been camping out in accounting. To top it all, compliance is telling him he?s being investigated for backdated stock options in Santa Claus Inc. All this while the debate rages on over whether he even exists. Tell that to the SEC! Coming on top of all the shareholder carping about his ten figure compensation package, and unlimited use of the corporate sleigh, he needs this like a hole in his head! To be honest, he would have retired by now if he had not invested so much of his savings with Bernie Madoff. Sure, it?s a brave new world out there, but no one ever said being Santa Claus was easy.
?Gold does not have a heart, nor does it have a soul,? said Mama Odie, a 200 year old sorceress in the Disney film The Princess and the Frog
December 22, 2009 Featured Trades: (JOHN BRADY?S 2010 STRATEGY), (SPX), (TBT), (GOLD, (EWZ), (EZA), (XOM), (XTO), (CAP & TRADE), (A CHRISTMAS STORY)
1) MF Global?s strategist for interest rate products, John Brady, sees the S&P 500 rocketing 18% to 1,300 during the first half of 2010, driven by enormous productivity gains that are creating historic profit margins. A flood of money should hit the market just after the New Year. Let there be no doubt that the world is in risk accumulation mode. However, while monetary policy will stay on hold for possibly all of next year, long rates will start to rise because of the sheer volume of Treasury issuance. Think the (TBT). Investors will then start taking profits into June, prompted by the uncertainties of the midterm congressional elections and a possible ?W? recession. John thinks that emerging markets will keep devaluating their currencies to keep exports competitive and stock markets flying, but watch out for the volatility. China is a special situation. By tying the Yuan to the dollar, they are letting Washington set their monetary policy, and guess what? Bubbles are contagious. Like the rest of the planet, John loves Brazil (EWZ), and also South Africa (EZA), where gold, a rising middle class, and an international trade hub are the motivating stories. We are in a secular bull market for the barbaric relic, with a rise to $2,200 feasible, but don?t be surprised if we tick at $800 first. Commodities look great long term as a synthetic short dollar trade. But the buck could rally until mid year before a new big down leg renews. He is also a peak oil believer, and thinks the recent Exxon/XTO Energy deal speaks volumes about the shortage of supplies. It?s cheaper to drill on the floor of the New York Stock Exchange than 30,000 feet down in the Gulf of Mexico. To hear the full 40 minute interview, please go to Hedge Fund Radio by clicking here
2) You are about to be pounded senseless by competing sets of data arguing that global warming is accelerating, not changing, or like Santa Claus, doesn?t exist at all. You will be offered truckloads of contradictory, apple and orange comparisons which sound relevant to non-scientists, but with which it is impossible to reach any meaningful conclusions. With health care out of the way, cap & trade, alternative energy, and the restructuring of our energy infrastructure will move to the head of the queue as the next battleground in Washington. A stubbornly high unemployment rate and a potential double dip recession means that Obama could lose control of the house in November. So he has no choice but to ram through his most radical legislation in 2010. The president certainly made no secret of his desire to wean the country off of imported oil during the election, which means that we have to come up with 20 million barrels a day of crude in energy equivalent or savings somewhere. The problem I have with all of this is the environment is first and foremost an engineering issue. The last time I checked, both parties, even their most radical wings, agreed that the boiling point of water was 100 degrees C, the atomic number of carbon was 6, and the formula for carbon dioxide was CO2. That won?t stop politicians from hijacking,?? emotionalizing, and clouding the issue. At stake is nothing less than the 10% of America?s GDP that the energy industry accounts for, and the moving of substantial economic activity out of Texas, Oklahoma, and Louisiana to the East and West coasts. Don?t expect this to happen without a knockdown, drag out fight. Since I believe that alternative energy will be one of the dominant investment themes of the coming new decade, and have the luxury of a science background, I will be wading through this morass attempting to provide readers with whatever insights I can. Watch this space.
3) A CHRISTMAS STORY
When I was growing up in Los Angles during the fifties, the most exciting day of the year was when my dad took me to buy a Christmas tree. With its semi desert climate, Southern California offered pine trees that were scraggly at best. So the Southern Pacific Railroad made a big deal out of bringing trees down from much better endowed Oregon to supply holiday revelers. You had to go down to the freight yard at Union Station on Alameda Street to pick them up. I remember a jolly Santa standing in a box car with trees piled high to the ceiling, pungent with seasonal evergreen smells, handing them out to crowds of eager, smiling buyers for a buck apiece. Watching great lumbering steam engines as big as houses whistling and belching smoke was enthralling. We took our prize home to be decorated by seven kids hyped on adrenalin, chugging eggnog. A half century later, the Southern Pacific is gone, the steam engines are in museums, anyone going near a rail yard would be mugged or arrested for vagrancy, and Dad long ago passed away. Dried out trees at Target for $30 didn?t strike the right chord. So I bundled the kids into the SUV and drove to the primeval, foggy coastal redwood forests of Northern California. Five miles down a muddy logging road, it was just us and a million trees. The kids, hyped on adrenalin, made the decision about which perfect eight footer to take home. I personally chopped it down, tied it to the roof, and drove us the three hours home. With any luck, these memories will last until the next century, and long outlast me.
?If I only has enough food, defeating the Russians would be child?s play,? said Napoleon in 1812.
December 21, 2009
Featured Trades: (BUREAU OF LABOR STATISTICS),
(CHINESE NUCLEAR PROGRAM),
(CHINESE SECURITIES REGULATION)
1) Those of you counting on getting your old job back on the assembly line in Detroit better look at the eight year jobs forecast published today by the Bureau of Labor Statistics. The table shows that 4.19 million jobs will be gained in the US in professional and business services, followed by 4 million health care and social assistance jobs, while 1.2 million will be lost in manufacturing. This is great news for website designers, Internet entrepreneurs, and registered nurses in California, but grim tidings for traditional metal bashers in the rust belt manufacturing states like Michigan, Indiana, and Ohio. The real challenge for we aged advise givers is that probably half of these new service jobs don't even exist yet, and if they can be described, it is only in a science fiction novel. After all, who heard of a webmaster 40 years ago? Where are these jobs going? You guessed it, China, and other lower waged, upstream manufacturing countries like Vietnam, where the Middle Kingdom is increasingly doing its own offshoring. These forecasts assume that Americans can continue to claw their way up the value chain in the global economy, and not get stuck along the way, as Japan has been since the nineties. China can have all the $20 a day jobs it wants. But if China is able to move up the value chain faster than it has, as it clearly aspires to do, then America is in for even harder times. I'll be hoping for the best, but preparing for the worst. Keep taking those Mandarin lessons, with some Vietnamese thrown in for good measure.
2) The New York Times did an excellent update on China's incredibly ambitious nuclear program last week (click here for the full story). The Middle Kingdom currently has 11 operational plants generating 11 gigawatts accounting for 2.3% of the country's power. It plans to add ten a year for the next decade, taking them up to 70 Gigawatts by 2020, and a staggering 400 gigawatts by 2050. That's nearly the total power generated in China today. This will also make China the world's largest consumer of yellow cake (U3H8) for fuel. Canadian, American, and Australian uranium miners please take note. The goal is to sate the country's insatiable demand for more electricity, as well as making a major dent in new greenhouse gases contributing to global warming. The China Guangdong Nuclear Power Group in the Southern part of the country is using imported French designs with proven track records. But the China National Nuclear Corporation in the North is using riskier Russian designs, and its president was recently arrested on corruption charges (see below). One wonders if these plants will perform as badly as the country's poorly constructed school buildings when an earthquake hits. As nuclear plants are sited next to major cities, an accident could make Chernobyl look like a cake walk.
3) Why don't we try Chinese style securities regulation? Former stock trader, Yang Yanming, was executed by lethal injection last week for embezzling $9.52 million from Galaxy Securities during 1997 to 2003. The move was part of a broader effort by the Mandarins in Beijing to crack down on rampant corruption in the securities industry. Yanming never revealed where the money went, according to the Beijing Evenings News, one of my daily reads. SEC take note. If we adopted similar enforcement measures here in the US, we'd save the $65,000 a year it costs to lock up miscreants like Bernie Madoff in high security facilities. With both state and federal prosecutors now on a holy war against the securities and real estate industries, the combined savings could be huge. Some $80 billion will be spent incarcerating America's 3 million prisoners this year. Still, the more people they execute in the Middle Kingdom, about 10,000 this year, the more they remain the same. Great for the human organ business, but not so good for white collar crime prevention.
'If you don't believe in global warming, fine, that's between you and your beach house,' said Tom Friedman, a columnist for the New York Times.
Global Market Comments
December 18, 2009
Featured Trades: (DBA), (MOO), (PHO), (FIW),
(INTERNET BANKS), (BUREAU OF LABOR STATISTICS)
1) I spent an evening with Lester Brown, president of the Earth Policy Institute and a winner of the coveted MacArthur Prize, for some long term thinking about the environment and its investment implications.? Global warming is causing the melting of ice sheets in Greenland and Antarctica, glaciers in the Himalayas, and the Sierra snowpack. Water tables are falling and fossil aquifers are depleting. In the coming decades this will cause severe shortages of fresh water that could lead to crop failures in India, China, where one billion people depend on mountain runoff to irrigate crops, and even California, which delivers 80% of America?s fresh vegetables. . The fresh water inputs in one person?s food and materials consumption works out to some 2,000 liters a day. That is no typo. As a result, all food prices will rise. To head off the greatest threat to the global food supply in human history, we need to cut carbon emissions by 80% before 2020, not 2050, as is being discussed in Copenhagen. This can only be accomplished by redefining food and the environment as national security issues and launching a wartime mobilization. These difficult goals are achievable. Enough sunlight hits the earth in a day to power the global economy for a year. Texas alone has 20 gigawatts of wind power operating, under construction, or planned, enough to take 5% of our 250 coal fired power plants offline. Electricity demand could be cut by 90% purely through greater efficiencies, like switching from incandescent bulbs to LED?s. Europe could get its entire 300 gigawatt power supply from solar plants in North Africa at current market prices. Cars powered by wind generated electricity would bring fuel costs down to an equivalent 75 cents a gallon, as electric motors are three times more efficient than internal combustion engines. While Brown?s predictions are a little extreme for many, they mesh perfectly with my long term bullish cases for food and water plays. Take another look at the food sector ETF?s, (DBA) and (MOO), and the water space ETF?s (PHO) and (FIW).
2) Is your bank giving you the cold shoulder on your last loan application, not retuning your phone calls, or asking for interminable documentation? Just bypass them. Try an online peer to peer bank, the Internet?s answer to the financial crisis. With massively expensive branch networks, 19th century loan processing, inches of closing documents, and a boatload of regulation, banks are ripe for cannibalization by low cost predators. I had a chance to speak to several of these entrepreneurs in San Francisco. The simplest model matches a one page online loan application and FICO score with a single lender at interest rates of around 9%, plus a small fee. More advanced organizations pool borrowers and lenders, and offer secondary markets for loans, if you want to cash out before maturity. Prosper has been around the longest, and unfortunately was early enough to get sucked into the subprime debacle. They have since relaunched their product with tightened lending standards. Lending Club came next, followed by Pertuity Direct and National Retail Fund. People Capital is pursuing a niche market matching up student borrowers with lenders. We are not far off from the sector being viewed as a new alternative asset class, with the total loan book now exceeding several hundred million dollars. With online fixed overheads near zero, the potential to compete on margins is enormous. While this is purely a venture capital play at the moment, watch this space.
3) My guest on Hedge Fund Radio this week is John Brady, senior vice president for interest rate products at MF Global.?? You will know John well from his frequent appearances in the global business media. He will give us his surprisingly bullish views for 2010 for US and foreign stocks, bonds, commodities, and currencies. John comes to us via a career at Harris Futures, JP Morgan, and nine years as a strategist at MF Global. And no, John did not bump into Professor Barrack Obama when he was getting his MBA at the University of Chicago. Hedge Fund Radio is broadcast every Saturday morning at 12:00 pm Eastern time, 11:00 am Central time, 9:00 am Pacific Coast Time, and 5:00 pm Greenwich Mean Time. For the online link to the live show, please go to www.bizradio.com or click here , then click on ?Listen Live!?, and click on ?Houston 1110 AM KTEK.??? For archives of past Hedge Fund Radio shows, please go to my website by clicking here .
?Food is the weak link in the global economy,? said Lester Brown, president of the Earth Policy Institute.
December 17, 2009 Featured Trades: (FXI), (EWH),
(COPPER), (GOLD), (F), (BA), (GE)
1) I confess that I am a total agnostic when it comes to specific investment philosophies, and a complete whore when it comes to trying out any new analysis that walks by. Maybe it?s because of my science and math background, but for me, raw data trumps opinion and hype any day of the week. So when someone I respect with a great track record argues that my core longs are setting up for a great short, I have to sit up and pay attention. No lesser being than famed short seller Jim Chanos of Kynikos Associates (?Kynikos? is Greek for cynic), says that China?s (FXI) much vaunted 8% GDP growth is being massively inflated. The game will continue as long as there is easy access to credit, but when reality sinks in, the resulting crash will equal the subprime crisis in its severity for the global economy.? China is Dubai times 1,000. While shorting ?A? shares on the mainland is illegal, Jim can short ?H? shares in Hong Kong (EWH)? as well as the growing roll call of US listed ADR?s, ETF?s and futures contracts. Jim is also looking at shorting the derivative commodity plays like copper (see my recent copper warning by clicking here ), cement, and yes, gold. I agree with Jim in that China is the best place to be long in rising markets, and the worst place in falling ones. This is why I have recently put out several global risk alerts, as the level of risk in all asset classes, not just China, is clearly much higher than it was just nine months ago. Jim also dislikes the auto industry, which is still facing backbreaking legacy costs, specifically Ford (F), and Fiat. EADS, the European airbus manufacturer, has myriad problems, and will eventually need a state bailout. Jim is neutral on banks, which are merely kicking the can down the road on bad loans and securities valuation.
2) I know that airline service is pretty poor these days, but isn?t a two year wait for a flight a little extreme? I?m talking about the inaugural flight today of Boeing?s (BA) 787 Dreamliner, which was plagued with manufacturing glitches, like safely attaching the wings to the fuselage. Boeing has bet $13 billion on the next generation aircraft, which is a great leap forward, using advanced carbon fiber technology to produce lighter planes that improve fuel efficiency by 40%. The plane is clearly a make or break for the airline industry, especially if fuel prices rise substantially, as I expect. Some 840 have been ordered, making it far and away the most pre ordered commercial plane in history. That takes the order backlog to 2016, and Boeing is opening a second factory in Charleston, North Carolina to accommodate an ambitious ten plane per month production schedule. The first 787, which can carry up to 320 passengers, will be delivered to Japan?s All Nippon Airways (ANA) in Q1, 2011. To read my initial call to buy Boeing, as well as my family?s long history with the fabled company, click here .? I believe this is a classic case of buying the rumor and selling the news, so it may be time to take some profits here, as the 112% run from the March lows have far outrun the broader market. It looks like the company?s chances of getting a major Air Force tanker contract have been torpedoed yet again, and it will lose money on the first 200 Dreamliners delivered.
3) I met Jack Welch last night, the legendary retired CEO of General Electric (GE). ?Neutron? Jack gets the credit for boosting the market cap of GE from $13 billion to $400 billion in 20 years, turning it into a Wall Street darling in the process. The ?hedge fund that makes light bulbs? is the last big industrial finance company standing, and when the market turns it will make a fortune, because there is no competition left. Jack is currently on the board of a private equity firm, several Internet media start ups, and is advising me on the start up of this newsletter. He gives Obama an ?A? for leadership and communication, but believes his economic policies are seriously flawed. They are based on a 4% annual growth assumption for the next decade. We never managed to achieve that rate during the go go days of the eighties and nineties, let alone attempt it during a new age fraught with deleveraging and frugality. If we get only 2.5% instead, the deficit will explode from $13 trillion to $30 trillion, at which point ?we will be cooked.? Who knew Jack was a closet gold bug, dollar bear, and inflation hawk? Jack was passing through San Francisco at the end of a national tour promoting his wife Suzy?s new book ?10-10-10?, which is about how to create a ?values driven life.? In his heyday, Jack was considered the best manager in the country. Never one to mince words, he is an absolute terror now that shareholder feelings are no longer a consideration.
The genealogy website, Ancestry.com, says that president Obama and Warren Buffett share great grandfathers, making them seventh cousins. See the resemblance?
December 16, 2009 Featured Trades: (SPX), (TBT),
(GLD), (FXA), (UNG), (INDONESIA)
1) The S&P 500 (SPX) is going to plunge 10-20% from early January, Treasury bond interest rates are going to soar (TBT), and gold (GLD) will peak out, all starting in January. There are tradable shorts setting up in all three of these markets that will run for the first half of 2010. Or so says Charles Nenner, of the Charles Nenner Research Center in Amsterdam (visit his site at www.charlesnenner.com by clicking here ). Charles was my guest on Hedge Fund Radio, and has a long career that includes stints at medical school, Merrill Lynch, Rabobank, and ten years as a technical analyst at Goldman Sachs. He has spent three decades developing his proprietary Cycle Analysis System, which generates calls of tops and bottoms for every major market in the world. Charles sees a trading rally in the dollar setting up which could deliver a strong greenback until May, when we should then re-establish shorts, especially in his favorite, the Australian dollar (FXA). The scientist turned technical analyst argues that major bull markets in wheat, corn, and soybeans will begin next year, sectors for which I am also hugely bullish. He sees natural gas (UNG) retesting the old lows at $2.40. Longer term, Charles sees a new major bear market beginning in 2013 that will take both stocks and bonds to new lows. To hear my interview with Charles in its entirety, please go to my website by clicking here .
2) You probably won?t be surprised to hear that I believe that alternative energy will be one of the dominant investment themes of the next decade. While a good journalist never reveals his sources, I?m happy to disclose this one. One of my favorite sources of information to mine on this topic is Greentech Media (click here for their website at http://www.greentechmedia.com/ ) which has published their top predictions for 2010. Here they are:
1) Private capital investment into alternative energy soars to a new record, filling in the gap that opened up in 2008.
2) This will be the year of the ?non-carbon? commodity. Every aspect of the world economy will be reviewed for its total carbon footprint.
3) Energy efficiency gains will become more important than solar. Dump those incandescent light bulbs!
4) The solar industry will scale up from small model facilities to large industrial plants.
5) IPO?s and takeovers will enter the smart grid space, sucking in more capital.
6) The industry will give up on biofuel because of its lack of scalability. I didn?t want to live near an algae factory anyway.
3) If you are looking for another emerging market to add to your list of things to buy on dips, then take a look at Indonesia. The world?s largest Muslim country offers a combination that I love, a population with great demographics that is also a major energy and commodities exporter. The archipelago is the biggest country in Southeast Asia and a huge exporter of oil and LPG to Japan on long term contracts (An old friend of mine torched their Borneo fields at the beginning of WWII, and spent four years in a Japanese prison camp for his troubles). Other big exports include marvelous textiles, rubber, and increasingly rare tropical hardwoods. The global financial crisis only knocked their growth rate from 6.1% to 4.5%, and now it is back above 6%. No doubt, $63 billion of direct foreign investment into the country helped. A series of tax reforms promise to keep the train moving, cutting the top corporate rate from 30% in 2008 to 28% this year, and 25% next year. Wisdom Tree had the ?wisdom? to launch the country?s first ETF (IDX) in January (what timing!), which became one of the best performers this year, rocketing over 310% from the lows to $62.50.? Islamic inspired terrorism is still a lingering concern. I keep Indonesia in the category of highly volatile, high risk, high return frontier markets that you only want to buy on a big dip. Keep it on your radar.
?Cleantech, greentech, and energy technology has to be the next great global industry. China gets it,? said Pulitzer Prize winner tom Freidman, author of Hot, Flat, and Crowded.
