Global Market Comments
March 2, 2010

Featured Trades: (30 YEAR TREASURY BOND), (TBF), (TBT),
(RSX), (IDX), (THD), (PIN),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR)

1) Louise Yamada, one of the most widely followed technical analysts in the market, says the 29 year bull market in Treasury bonds is coming to a close. Looking at the 200 year history of interest rates in the US, such bull markets are historically 22-37 years in length, and this one is definitely looking long in the tooth. Although doubters insist that you?ll never get a collapse in bonds in a deflationary environment, Louise says that all bond peaks occur in such conditions. Yields show prolonged, saucer like bottoms, much like we are seeing now. She also says that retail interest in such paper also surges when interest rates are at multi decade highs, as we saw clearly with last year?s flow of funds. When foreign buyers lose interest in our debt, the 30 year Treasury bond is the first place their lack of interest will show up. The charts for the 30 year are setting up a perfect head and shoulders top, and when the yield break through 4.8%, watch out. The next stop may be 7%. Her advice is that if you are going to stay in the government bond market, shorted your duration as much as possible. My advice? Sell the 30 year bond futures, which today are selling at 119, up 2? points from last week?s low. If Louise?s scenario plays out, it will take the futures well below 100. If you can only sleep at night with less leverage, buy the (TBF) and the (TBT). We are about to enter the golden age for these short bond ETF?s.

2) If you wonder why I recommend a shower after investing in Russia, Bill Browder will give you the reasons at length on his YouTube video (click here for the link ). Bill is the founder and CEO of Hermitage Capital Management, one of the firms that pioneered equity investment in the former Soviet Union in the nineties. After a decade of pursing a campaign of activist investing that brought major changes in corporate governance in big companies like Gazprom and Sberbank, a mafia connected government struck back with a vengeance. It deported Browder in 2005, arrested his lawyer, and pressured him to provide false testimony again his boss, which he refused. A year later, the man died in prison from ?natural causes.? The Russian government then seized Browder?s operating companies, but fortunately for investors, not before he was able to sell off $4.5 billion in holdings and spirit the funds out of the country. Browder, who is of Russian descent, and whose grandfather was chairman of the America Communist Party, says his case is but the tip of the iceberg. Major multinationals like Shell, BP, and Ikea have also been the victims of corruption and faced arbitrary seizure of assets by the well connected. This lawlessness is the reason why Russian companies perennially trade at single digit multiples. They are cheap on paper, but carry hidden, unquantifiable risks. Browder has since refocused his interests, and is now managing $1.2 billion in other safer emerging markets, like Indonesia (IDX), Thailand (THD), and India (PIN). No doubt that investing in Russia is a double edged sword. It offers enormous oil reserves and natural resources, with GDP flipping from a -7.9% rate in 2009 to an expected 3.2% this year. Russia?s stock market (RSX) brought in a blazing 125% return in 2009. But you run the risk of a knock on the door in the middle of the night.

3) If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis. Investment in fresh water infrastructure is undeniably going to be a recurring long term investment theme. One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world?s population, up to 90% of the fresh water is already polluted, some irretrievably so with toxic heavy metals. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% over the next 20 years. Underground water sources in the US, like the Oglala Aquifer, which took nature millennia to create, are approaching exhaustion. Take a look at the photo below, which I pulled off the NASA website, showing dramatic falls in the water tables in the largest food producing areas of India and Pakistan, as measured by the Gravity Recovery and Climate Experiment (GRACE) satellite. While membrane osmosis technologies exist to convert sea water into fresh, they require ten times more energy than current treatment processes, a real problem if you don?t have any, and will easily double the end cost to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of last year?s stimulus package was similarly spent. It says a lot that when I went to the UC Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds! At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which brought in a positively effervescent 46% return in 2009. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world?s greatest per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

Global Market Comments
February 26, 2010

Featured Trades: (TOYOTA), (TM), (PALLADIUM), (PALL),
(RESIDENTIAL HOUSING), (XHB)

1) Since I am probably the only person in the country who once worked for Toyota, speaks Japanese, and worked in the White House Press Corps, and am therefore fluent in the ways of Washington, I feel obliged to comment on yesterday's Congressional hearings on Toyota. There, Akio Toyoda, president of the Toyota parent and grandson of the founder and English speaking Yoshimi Inaba, president of Toyota Motor North America, Inc. faced the firing squad. It was the usual Congressional theater, with the member from Kentucky, where non union Toyota plants are located, listing off the firm's charitable donations to the community, while the one from Michigan launching a vicious, no-holds-barred attack. The language spoken by the two Japanese couldn't have been more different. Toyoda spoke the words of inherited wealth, of a ruling shogun, of privilege, and of condescension. Inaba talked like the hardscrabble warrior that he was, who spent 40 years clawing his way up the Toyota organization ladder. I think the entire crisis happened because Toyota management believed in their products to such incredible extremes that any criticism was viewed merely as the unhappy grumblings of competitors. Similarly, the quality of Japanese products became so ingrained in the minds of American regulators that they too fell asleep at the switch, giving the company a free pass on the rising tide of consumer complaints. On top of this, you can pile the Japanese cultural preference against sending bad news up the command chain. This is one reason why Japan lost WWII, and is why the suicide rate in the country is so appallingly high. When the bill finally came due, the price tag was 37 dead in acceleration accidents, and a witch hunt on national TV. Toyota's management will make sure, literally on pain of death, that every product rolling off the assembly line from here will be models of engineering perfection. The stock has held up amazingly well so far, probably because it is mostly owned by strong hands, with few traders involved. Not only should you buy the stock when global markets return to risk accumulation mode, you should buy a Toyota car as well. It will be the only time in your life that you can find them at a discount.

2) Since the run up to the Toyota hearings began, the palladium ETF (PALL) has dropped about 10%, giving up all of the gains that occurred after my January 27 story on the white metal (click here for the piece). The sell off happened because traders assumed the dent to Toyota's reputation would mean fewer car sales, less demand for catalytic converters, and less need for palladium or platinum. The crazy thing about this logic is that those dumping Toyotas will buy a vehicle from another car maker instead, maintaining demand for catalytic metals at their current level. Maybe it was the wholesale flight from all hard assets that took the poor man's platinum down. Watch your screens.

3)I just thought I'd repost my interview with Toyota USA president Jim Lentz in the wake of his testimony in front of congress this week. He looks like he aged about ten years since I saw him in November. In journalism they tell you to always be nice to people on the way up, because you meet them again on the way down. Now there are rumors of a criminal prosecution of Jim.

'I spent an evening chewing the fat with James Lentz, the president of Toyota Motor Sales, USA, (TM) who let loose some incredibly insightful views on the long term future of the global economy. I have been following Toyota for 35 years, hobnobbing with senior management, touring their factories in Japan, and driving their marvelously engineered products. It is far and away one of the best run multinationals, with awesome research resources, spending $9 billion a year on R&D, but are also one of the most secretive organizations on the planet. If the CIA only kept its secrets so well! Peak oil is going to hit in 2017-2020, making gasoline prohibitively expensive. Toyota is racing to get as many hybrids out there as possible by then, converting a Mississippi factory from Highlanders to the hugely popular Prius. In Japan there is a backlog of 200,000 orders for these cars, and Toyota makes a profit on every one. The plug in version of this car will be fleet tested in the US next year, and sold to the public from 2012. But hybrids, which reduce emissions by 70%, compared to conventional cars, are just a transitional solution until the technology for hydrocarbon free alternatives, like electric only and fuel cells, mature in the 2020's. The US car market will come in at 10 million units this year, but will rebound to 15-16 million units by 2015. At 9.3 years, the average age of the American car fleet is the oldest on record, and replacement demand will be huge. New car based consumer societies are also emerging in Argentina, Mexico, Thailand, and Indonesia. The American car industry, accounting for 4% of GDP and 10% of total employment, isn't going away, as many fear. However, it will evolve beyond current recognition. Toyota is certainly putting its money where its mouth is, with an $18.2 billion investment in 14 American factories, directly employing 34,000, and indirectly another 380,000. Long term, I love this stock. James has worked for Japan's largest car maker for 26 years, but still can only order one beer in that impossible pictographic language. By the time the evening was out, I made sure he could order a second, and a third, in Japanese.'

4) The US Department of Housing and Urban Affairs certainly peed on the parade of those blowing horns and banging drums because they believed the real estate market was recovering. Seasonally adjusted new home sales for January came in at a paltry 309,000, the lowest figure on record, and a gut wrenching decline of 11.2% from the previous month, versus the expected gain of 3.8%. It just doesn't get any worse than this. Sure, the horrendous weather in the Northeast was a factor. But the harsh reality is that, with enormous federal and state tax incentives soon to expire, the life support that kept this industry alive is about to see the plug kicked out. Once the Fed ends the TALF, mortgage rates are going up, even is overnight rates remain rock bottom, putting another stake through the heart of this market. Unemployment is going to stay pitilessly high, sending consumer confidence into another death spiral. For what it's worth, I never bought the whole green shoots thing, viewing the enormous gains seen in stocks over the last year as nothing more than one giant dead cat bounce. The XHB, the homebuilders ETF, held up remarkably well. But let's face it, the life has already been sque
ezed out of this sector. There is nothing left to short. There are going to be so many great trading opportunities this year that you shouldn't even think about tying your capital up in a house. Rent, don't buy.

Global Market Comments
February 24, 2010

(SPECIAL JOSEPH STIGLITZ ISSUE)
1) The great thing about interviewing Joseph Stiglitz over dinner is that you don?t have to ask any questions.? You just turn him on and he spits out one zinger after another. And he does this in a kibitzing, wizened, grandfatherly manner like one would expect from a character that just walked off the set of Fiddler on the Roof. The unfortunate thing is that you also don?t get to eat. The Columbia University professor and former World Bank Chief Economist animatedly talked the entire time, and I was too busy feverishly taking notes to ingest a single crouton.

Stiglitz argued that for 30 years after the end of the Great Depression there was no financial crisis because a newly empowered SEC was on the beat, and everything worked. A deregulation trend that started under Reagan began stripping away those protections, with the eventual disastrous repeal of Glass-Steagle in 1999. The philosophical justification adopted by many economists, including Fed chairman Alan Greenspan, was that unfettered markets always lead to efficient outcomes.

This belief was based on simplistic models assuming that markets were always perfect, always open, and that everyone had perfect information. Stiglitz?s own work on ?information asymmetry,? which earned him a Nobel Prize in economics in 2001, pulled the rug out from under this theory, because it showed that one party to a transaction always has more information than the other, often the seller.

The banks used this window to introduce super leveraged derivatives that had never been regulated, studied, or even understood. They then clawed open accounting loopholes that were so imaginative that not only were shareholders and regulators deceived about how much risk was involved, senior management was clueless as well. Instead of managing risk, they created risk.

A 2006 GDP that was 80% derived from real estate transactions and a savings rate that fell to zero meant that a severe crash was a sure thing. President Bush?s response was to unleash an extreme form of ?trickle down economics,? with the banks given $700 billion with no conditions attached. Intended to recapitalize the banks so they could resume lending to the mainstream economy, much of the money ended up being paid out in bonuses and dividends. Of the $180 billion used to rescue AIG, $13 billion went to Goldman Sachs, and much of the rest went to German and French banks. No wonder Main Street feels cheated.

The financial system is now more distorted than ever, with major institutions wards of the state, and smaller banks that actually lend to consumers and small businesses going under in record numbers, because the playing field is so uneven. There are too many structural conflicts of interest. The ?once in a 100 year tsunami? argument is merely a justification for changing nothing. Banks would rather maintain the fiction that the loans on their books are good, than make adjustments, meaning there will be more foreclosures in 2010 than in 2009 or 2008. No financial system has ever wasted assets on this scale, and the end result will be a national debt many trillions of dollars larger.

The $787 billion stimulus package was too small, and should have been at least $1.2 trillion, but there was no way Obama was going to get more out of this Senate. The 40% of the stimulus that was tax cuts will get saved and create no immediate beneficial effects on the economy. More money should have gone to the states, which unable to deficit spend, are now a huge drag on the economy. But even this meager package was able to prevent the unemployment rate from rising from 10% to 12%, as it was set to do. The inadequacy of the first package means a second is almost a certainty. Any major spending cuts will produce ?Hoover? outcomes.

The outlook for the economy is bleak, at best.

Well, I don?t get to chat at length with a Nobel Prize winner every day, so I thought I?d give you the full blast, even though I had to leave a lot out. I?ll talk more about markets tomorrow.

Global Market Comments
February 18, 2010

Featured Trades: (USO), (CRUDE), (SILVER),
(FOREIGN TREASURY HOLDINGS),
(TBT), (TBF), (HEDGE FUND RADIO)

1) I?m not buying the $8 rally in crude (USO) this week because the contango which has been supporting prices in the face of lukewarm demand for the past year has been rapidly disappearing. Contango involves buying crude on the spot market, taking delivery, storing it in leased supertankers, and reselling it in the forward market for returns that at times have exceeded a non leveraged 100%. This enabled the US hedge fund community to effectively operate the world?s second largest navy, keeping so many ships bulging with Texas tea you could almost walk across the Caribbean without getting your ankles wet. At the peak, there were thought to be over 100 ships slow steaming in circles to conserve fuel, creating enough demand to support charter rates globally. By my calculation, the annualized contango return has recently shrunk to a mere 7.12%, not much more than you can get with investment grade corporate bonds. That means when the current crop of forward contracts expire, they won?t be rolled over, dumping vast amounts of crude on the open market. Another factor cutting the knees out from under crude has been the recently strong dollar. Many managers last year found a barrel of oil a much more desirable hard currency than our flaccid greenback. That monetary demand now seems to be on hold. Don?t buy any more oil at these prices than you can use in your salad dressing. If the economy does slow in the second half, as many are predicting, it will be nice to buy your own tankers full of crude at lower prices.

2) If you missed the great run up in silver last year that saw prices run up 95%, you are being offered a second bite at the apple. The latest round of risk reduction by global hedge fund has bashed the white metal, knocking $5 off of the $19.50 high seen in the heady days of November. Today we are at $16.15, and it looks like the 200 day moving average at $14.09 will hold. The metal is at the bottom end of its historic valuation relative to gold, which has ranged between 12:1 (Remember the Hunt Brothers?) and 70:1. Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon?s mine, to Nazi gold bars in Swiss bank vaults, and would fill two Olympic sized swimming pools. But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps. Silver did take a multiyear hit when the world shifted from silver based films to digital photography during the nineties. Now rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference for the jewelry, as in Latin America. That means we are setting up for a classic supply demand squeeze. I think we could run to the old high of $50/ounce in the next economic cycle, if another monetary crisis doesn?t get us there first. Since silver can trade with double the volatility of gold, this forecast could prove conservative.? You can buy the futures, where a 5,000 ounce contract worth $80,700 on the COMEX carries a margin requirement of only $6,750. You can also buy one ounce American silver eagle .9993% pure coins, but make sure you have a big safe to accumulate a serious position.

3) Make my sushi order a double. The latest figures from the Treasury Department for December show that Japan is now the largest holder of US government debt. China slipped to the number two position after unloading $34.2 billion in paper in December, paring its holdings to a mere $755.4 billion. This is an ominous development for several reasons. Japan has the world?s worst demographic outlook, with the number or retirees skyrocketing relative to the number of wage earners. Soon the country will have to start drawing down its substantial savings to offset falling contributions from a shrinking workforce. Today?s firm hands will become tomorrow?s loose ones, as Japan inevitably flips from a buyer to a seller of American debt. Chinese liquidation of its holdings also does not bode well for future sales, and could become the lead up to our first failed Treasury auction. I have been warning about such a possibility for months now, and see it as the triggering event for a cataclysmic collapse of the bond market, and the spike up in yields. If this comes to pass, you can kiss that recovery goodbye. Keep trading the (TBF) and the (TBT) from the long side, and explore some outright shorts in the 30 bond futures contract.

4) My guest on Hedge Fund Radio this week is Peter Schiff, president of Euro Pacific Capital, one of the country?s leading international fund managers. Peter obtained his degree in finance from the University of California at Berkeley in 1987. In 1996 he set up Euro-Pacific Capital, a firm that has successfully focused on investing in foreign stocks, bonds, gold, and commodities. Peter was the economic advisor to libertarian Ron Paul?s 2008 presidential campaign. Today Peter is running for the US senate seat in Connecticut that will soon be vacated by the retiring senator Chris Dodd. Peter is a man of strong beliefs and opinions, which he will be more than happy to share with us. We will be talking about investment strategies to survive the coming debacle, and of course, politics. 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

?We are no longer the locomotive in the world economy. We?re the passenger, and occasionally the caboose,? said Clark Winter, CIO at SK Investment Partners, about the Chinese flag hanging outside the New York Stock Exchange last week.