Diary Archives - Mad Hedge Fund Trader

October 26, 2009

Global Market Comments
October 26, 2009

Featured Trades: (CANADIAN DOLLAR), (FXC),
(AUSTRALIAN DOLLAR), (FXA), (NEW ZEALND DOLLAR),
(BNZ), (RSX), (OIL), (ZACHARY KARABELL)

1) It?s all about the dollar, which I have despised all year like the red headed stepchild it has become (click here for my initial recommendation). The assured onslaught of federal debt issuance headed our way will be the overriding investment consideration for traders and portfolio managers for the next decade. That will knock the stuffing out of the greenback against every currency except the Zimbabwean dollar, and even that will rally when you get a long overdue regime change. As the new currencies of barrels of crude oil, 100 pound ingots of copper, or rail cars of iron ore won?t fit into your wallets or purses, foreign currencies offer a great dollar alternative. There was once an argument that foreigners piled into these currencies to capture a huge yield pickup, but even that advantage is now gone, with almost everything now yielding nothing. The soggy buck also explains a lot of what is going on in our stock market, with companies earning most of their revenues from increasingly wealthy foreigners, like those in technology, energy, and commodities. As I write this, I am looking at new one year highs for my favorite picks of the former British crown colony currencies of the Canadian dollar (FXC), up 28% YTD, Australian dollars (FXA) up 49% , and New Zealand dollars (BNZ), up 80%? dollars. Their bounteous natural resources, Anglo-Saxon contract law, a semi common language, and vibrant ports make them the safe bet of choice. Sure, they are all overheated and way overdue for a short term pull back. But over the long haul, you can count on the loony to hit parity, to be eagerly followed by the Aussie dollar, and then the kiwi. And once again, I am including a gratuitous photo of my favorite Canadian, Pamela Anderson to pique your interest.

2) Last January I was extremely positive about building long equity exposure in Russia, one of the two BRICKS that is a big energy exporter (click here for the call ). I predicted that the Market Vectors Russia ETF (RSX) would deliver double the upside of the S&P 500 in the imminent bull market. Well I lied. It actually tripled, while the Dow eked out a measly 70%. It even would have worked as a market neutral pairs trade, long Russia, short the US. This was an oil play on steroids, and with crude then trading in the $30s, how hard of a call was that? A recovery in the ruble also gave you a nice hockey stick effect in the dollar traded ETF. The bounce in the Russian currency stopped the country?s reserve outflow dead in its tracks, and enabled the Russian Central Bank to start slashing interest rates from the nosebleed territory of 13%. There is plenty of room for further cuts. But Russia is not out of the woods yet. Some 30% of the $780 billion in corporate debt is due for rollover this year, and the unemployment rate is at 9.5% and climbing. It also doesn?t help that they lock up oligarchs on bogus tax charges, and will expropriate foreign assets at the drop of a hat, as they did from Shell and British Petroleum. But none of my investors told me I could only do business with nice people who gave me a warm and fuzzy feeling. A rising oil price atone for all sins, as any Middle Eastern sheik can attest. You might want to take a shower after you write the trade ticket, buy hey; sometimes you just have to follow the money. Just watch out for the volatility.

3) Zachary Karabell, president of River Twice Research, is one of the few original thinkers out there who also has a sense of humor. So there?s more than one? Zach has brought his considerable talents to bear on the current state of the Chinese-American relationship in a new book, Superfusion: How China and American became One Economy and Why the World?s Prosperity Depends On It.? International trade has fused the two countries into a single economic unit that accounts for a quarter of the world?s population and a third of its GDP, despite wildly different cultures, much like the loose confederation that makes up the European Community. The Middle Kingdom now has reserves of $2.3 trillion, which is overwhelmingly invested in the US. Where else can it go? That enabled them to step up and play an important role in the bail out of the US financial system this year. But it is an imbalanced agglomeration, with Americans over consuming and under saving and the Chinese doing the reverse. This has to stop, lest the symbiotic relationship tears itself apart. The tit for tat, storm in a tea cup, where the US imposed punitive import duties on Chinese tires and the they retaliated with a ban on American chicken feet (yes, they eat them, yuk!), is a recent example. The reality is that old, boring industries that once might have fought tooth and nail for protection are now migrating to China en masse and finding new life. Bet you didn?t know that General Motors sells more cars in China than in the US, some 1.6 million this year? Don?t hold your breath waiting for China to float the Yuan, as it is one of the few tools that give the Mandarins in Beijing direct control of a huge, disparate economy. Chinese military spending is so parsimonious that it won?t remotely comprise a threat to the US. What little they have is directed at potential regional aggressors, like Japan, India, and Russia. The greatest risk to the existing relationship is that Chinese growth continues so rapid, that it pits them against the world in resource bidding wars, which could get ugly. With crude at $82 and copper at $3, has that already started? The book is well worth a read for some excellent ?out of the box? analysis. Does anyone have any good recipes for chicken feet?

QUOTE OF THE DAY

?Looking at dreadful air pollution outside, we see an environmental disaster and the Chinese see progress,? said Zachary Karabell, president of River Twice Research.

October 23, 2009

Diary

Global Market Comments
October 23, 2009

(SPECIAL WHEAT ISSUE)

Featured Trades: (AGU), (POT),
(MON), (DBA), (CAT), (JON STEWART)

1) With December wheat (WZ09) tickling $5.48 yesterday, the e-mails are now pouring in from farmers, co-ops, and silo managers in the Great Plains states offering reasons why it should go higher. The Northern states and much of the Midwest west have now endured a couple of cycles of heavy rains followed by punishing freezes. With much of the crop now being brought in wet, it has to be dried by burning large amounts of natural gas to keep it from rotting, delaying shipping. The intemperate weather is pushing back the double planting of new crops. Railroad managers tell me that extra cars are being booked by the hundreds to ship wheat to the West coast ports to accommodate larger than expected Chinese buying. The harvest in the Ukraine is coming in seven million metric tonnes less than expected, which will force some Eastern European nations to come here to buy. My bet that weather would not continue perfect is paying off big time. How hard was that? I also predicted that the September $4.40 bottom would be put in by cash strapped small farmers desperate to unload at any price in order to finance seed and chemicals for the next crop (click here for the report). Traders who took my advice now have the luxurious choice of cashing in their three week, 25% profit (175% if you did it through the futures) and running, or rolling over to a longer dated contract to catch the bigger trend. For a list of reasons why you want to do this, read the piece below on the coming food crisis. And if you want to know how to get set up on the futures, don?t hesitate to email me at www.madhedgefundtrader.com.?

2) I don?t normally rely on National Geographic magazine for investment advice, but in the June issue the screaming long term bull case for the soft commodities is there in all its glory (see their cool website by clicking here). During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields.?? Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won?t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. The net net of all of this is that food prices are going up, a lot. Entertain core long positions in corn, wheat, and soybeans on the next dip, as well as the second derivative plays like Agrium (AGU), Potash (POT) and Monsanto (MON). You might also look at the PowerShares Multi Sector Agricultural ETF (DBA). These will all surpass last year?s stratospheric highs at some point.

3) Caterpillar (CAT) presents itself as a bib overall, straw hat, work boot wearing, ?aw shucks,? rural Illinois company, much like the open pit miners and roustabouts who use their elephantine products. In reality, CAT is one of the slickest, most sophisticated multinationals selling, 70% of its wares to the harshest, most unforgiving corners of the globe, where sweaty, determined men rip things out of the ground for a living. That is why CAT is one of the few companies that I have followed on a bottom up basis for the last 35 years as a great ?tell? for the future course of all things I hold dear, like gold, silver, copper, iron ore, coal, and agriculture. In announcing his 53% drop in Q3 YOY earnings to $404 million, CEO Jim Owens made crystal clear that he is of the ?V? persuasion. He thinks a horrific -6.1% GDP quarter will be followed by two back to back 3%-4% quarters. Confidence is returning in the crucial growth markets in Asia, and rising commodity prices auger well for the future. Last year?s melt down was so traumatic that the best companies in the world radically cut inventories, which now have to be rebuilt in a hurry. Owens sees starts in housing, another big market for the firm, recovering to the one million level next year because pent up demand is building, and affordability is at a 25 year high. The only doubts stem from the disturbing degree that this spending is accomplished with borrowed money here and around the world. Last February, I told you I would lay down on the nearest railroad tracks and let a train run over me if you didn?t load up on CAT at $25 as a great indirect commodities play (click here ).? The big question now is whether Owens will put his money where his mouth is and hire new workers. Everything Owens says is incredibly bullish for energy and commodities of every flavor.

4) I am frequently asked where I find my best sources of market intelligence. Well here they are: Saturday Night Live, The Colbert Report, The Onion, and The Daily Show With Jon Stewart. How else would I know that Jim Cramer argued vociferously that Bear Stearns wouldn?t go under, a week before it croaked, or that Dora the Explorer had been appointed to the Supreme Court? For a great example of Stewart?s astute analysis, click here for his take on the Goldman Sachs (GS) earnings. I?ve seen my trading performance improve significantly when I keep the Comedy Channel on all day, instead of CNBC, which has degenerated into a wearisome series of softball questions and an endless infomercial for its owner, General Electric (GE). And now I hear it?s for sale. I though the ?cash for clunkers? program had ended. If you can?t have a sense of humor about this business, it?s time to retire.

QUOTE OF THE DAY

?The rate of profit is always highest in the countries that are going fastest to ruin,? said Adam Smith, on the dangers of ?overtrading? in The Wealth of Nations.

October 22, 2009

Diary

Global Market Comments
October 22, 2009

Featured Trades: (XOM), (DBA),
(USO), (RJI), (AFRICA), (AFK), (GAF), (EWH, (FXI)

1) Those of you searching for the 'new normal' better take a close look at the China National Offshore Oil Company's (CNOC) efforts to top Exxon Mobil's (XOM) $4 billion bid for development rights to a giant new field off West Africa. This is only the latest chapter in a global bidding war for essential resources they, and we, need. Long gone is the day when the Standard Oil Company only needed to deliver King Saud a new Cadillac every year to assure rights to his kingdom's oil supplies, even though it often had to be towed by teams of camels, as there was no refining capacity yet on the peninsula. Decades later, I was part of a SWAT team at Morgan Stanley whose schmoozing kept the crude flowing and the cash surpluses recycling. Having grown up in the desert near Indio, California, I was the only one in the company who actually liked caravanning out into the desert to scoop up cooked rice with my fingers off of giant brass platters, and guzzle illicit Johnny Walker Red, said to be smuggled in by a wayward member of the royal family. I never did get used to the sheep brains, though. But I digress. To the current generation of oil traders, I might as well be talking about the Pax Romana than the Pax Americana, which is now equally ancient history. The hard truth is that they are out there bidding against the new 800 pound gorilla in the market, as are others for coal, iron ore, copper, gold, silver, wheat, corn, soybeans, and myriad other essentials. If you have any doubts about China's acquisitive determination, look at the chart below showing that the Middle Kingdom's outbound direct investment is outstripping inbound investment for the first time. Will the Pebble Beach Golf Course next? For you and I, this means we can count on the price of everything to go up in the future, a lot. Keep food, commodity, and energy ETF's permanently on your radar, like the PowerShares agricultural (DBA), the Rogers International Commodities (RJI), and the Oil Trust (USO). Jim Rogers, are you listening?

2) Two of my favorite picks for the year blasted through to new highs last night, the Hong Kong ETF (EWH) and the China ETF (FXI). Even Bono is singing about Chinese stocks going up. The FXI is now up a staggering 136% from the March lows, compared to a measly 65% for the S&P 500. Looks like those decades of eating fish heads and rice are finally paying off for me. Have you ever noticed how the quality investments rise much faster than the dodgy ones over time? At least the global wave of liquidity is surging into the good names, not only just the crap, as it is here in the US. Jim Rogers, are you listening yet?

3) Feel like investing in a state sponsor of terrorism? How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped? Another country lost four wars in the last 40 years. Still interested? How about a country that suffers one of the world's highest AIDs rates, endures regular insurrections where all of the westerners are massacred, and racked up 5 million dead in a continuous civil war? Then Africa is the place for you, the world's largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo. Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms. Goldman Sachs has set up Emerging Capital Partners, which has already invested $1.6 billion there. China sees the writing on the wall, and has launched a latter day colonization effort, taking a 20% equity stake in South Africa's Standard Bank, the largest on the continent. In fact, foreign direct investment last year jumped from $53 billion to $61 billion, while cross border M & A leapt from $10.2 billion to $26.3 billion. The angle here is that all of the headlines above are in the price, that price is very low, and the perceived risk is much greater than actual risk. Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. The reality is that Africa's 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure. For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It reminds me of the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years, because the risks were so high. This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has rocketed by 82% from the March lows to the recent highs, and the SPDR S&P Emerging Middle East & Africa ETF (GAF).

QUOTE OF THE DAY

'Interest rates are at zero. The Fed has made it very painful not to take risk,' said Ed Yardeni, president of Yardeni Research, a former chief economist at EF Hutton and Federal Reserve Governor.

October 21, 2009

Diary

Global Market Comments
October 21, 2009

Featured Trades: (GOOG), (MS),
(1987 CRASH), (CVA), (AMSC)

1) When people ask me what is the one stock they should put in their kid?s college fund and forget about, I always give them the same company: Google (GOOG). The toll taker for the Internet that controls 70% of the global market for search just announced record Q3 profits of $1.6 billion on a revenue rise from $4 billion to $4.4 billion. In this economic environment these numbers are nothing less than astounding, making GOOG one of the few US firms that has actual top line growth.? Google earnings, in fact, have turned into a valuable leading economic indicator by telling us that the strong ad growth came in the retail, travel, and the automotive sectors. This bang up performance is further proof that the irresistible tectonic shift away from old line media like newspapers, radio, and TV, to online, is accelerating, offering advertisers far and away the highest return on investment. Google is fast becoming the operating system for all advertising. While critics focus on the myriad ways the company recklessly burns money on peripheral businesses like Google TV, YouTube, forays into print media, and their private space program, I see gigantic growth opportunities that will prevent the company from becoming another Microsoft (MSFT). Mobile search grew 30% QOQ as the growing legion of sophisticated portable devices are increasingly used for search. Also, click rates cratered in the great recession, the price of ?investment advisor? for example plunging from $4 to pennies. A recovery could bring an equally ferocious rebound in rates that fall straight to GOOG?s bottom line. Most analysts are now targeting the high $600s for the stock price, which I believe will prove conservative. If you are ever worried about America?s future, then just look at these two kids, Larry Page and Sergey Brin, who built a $400 billion company out of their dorm room at Stanford in virtually no time, with no capital. Just ignore the office foosball table, volley ball court, and at-desk massage service.

Goog2.png picture by madhedge

2) With the orgy of recollections about the 1987 stock market crash on the 22nd anniversary yesterday, I suppose I should throw in my two cents worth. I was in Paris visiting Morgan Stanley?s top banking clients, who then were making a major splash in Japanese equity warrants, my particular area of expertise. I was escorting around our Tokyo economist, David Gerstenhaber, now a noted hedge fund manager, who waxed on bullishly about the long term prospects for the Japanese economy. When we walked into our last appointment, David casually asked how the market was doing (Paris is six hours ahead of New York). We were told the Dow was down 300. Stunned, I immediately asked for a private conference room so I could call the equity trading desk in New York to buy some stock. A woman answered the phone, and when I said I wanted to buy, she burst into tears and threw the handset down on the floor. Redialing found? all transatlantic lines jammed. I never bought my stock, nor found out who picked up the phone. I grabbed a taxi to Charles de Gaulle airport, and flew my twin Cessna as fast as the turbocharged engines would go, breaking every known air traffic control rule. But by the time I got back to London, the Dow had closed down 512. Then I learned that George Soros asked us to bid on a $250 million blind portfolio of US stocks after the close. He said he had also solicited bids from Goldman Sachs, Merrill Lynch, JP Morgan, and Solomon Brothers, and would call us back if we won. We bid 10% below the final closing prices for the lot. Ten minutes later he called us back and told us we won. How much did the others bid? He told us that we were the only ones who bid at all. Scrotums tightened throughout the firm. The next morning the Dow continued its plunge, but after an hour managed a U-turn, and ensued on a monster rally that went on the rest of the year. We made $75 million on that one trade. It was the worst investment decision I have seen in the markets in 35 years, executed by its most brilliant player. Go figure. Maybe it was George?s risk control discipline kicking in. At the end of the month, we then took a $75 million hit on our share of the British Petroleum privatization, because Margaret Thatcher refused to postpone the issue, giving Morgan Stanley?s equity division a flat P&L for the month of October, 1987. I think I sweated off five pounds that day Even now, I refuse to gas up at a BP station, no matter how green it is.

3) If the 2009 Clean Energy Bill passes, it is going to pave the way for major structural changes to the US economy, which few of the non-engineering types voting for it in Congress understand. The bill encourages electric power utilities to switch to renewables, upgrade the electric power grid, and put in place a cap and trade system which places an enormous burden on the power industry to go green (click here for background report). The bill is expected to sail through the House, but faces a major fight in the Senate, where the administration is going to have to get all of their ducks in a row for it to pass. The bill provides the legal structure to spend that $100 billion for alternative energy already passed in the stimulus bill. In his cheerleading press conference for the bill, Obama correctly declared that dependence on hydrocarbons was jeopardizing our national security. He also cleverly described this as a massive creator of high tech jobs that can?t be exported.?? I?m not highlighting this because I live in California, wear sandals all year, drive a Prius, or have a refrigerator stuffed with organic greens as if a giant gerbil does my shopping. Since this economic crisis started, the key has been to buy whatever the government is buying, and since they are going into alternatives in a big way, you want to be right ahead of them (click here to see my solar piece). Time to add more alternative energy names to your list to buy on the bigger dips. Look at American Superconductor (AMSC), which is involved in advanced wind turbine designs and electric power grid upgrades. Also take a peek at Covanta (CVA), an established business that profitably burns trash to create electricity.

QUOTE OF THE DAY

?The shape of the recession is going to be an ?L? for Europe, a ?U? for the US, and a ?V? for Asia,? said my former Morgan Stanley colleague and buddy, Tom McManus, the chief investment officer at Wells Fargo Advisors. Tom?s current number one pick is the energy sector, also a favorite of min
e.LUV

October 20, 2009

Diary

Global Market Comments
October 20, 2009

Featured Trades: (DINNER WITH OBAMA),
(MS), (BYRON WIEN), (JULIUS CAESAR),

1) The black GM Suburban barreled into the parking structure at San Francisco?s posh St. Francis Hotel, its emergency lights flashing, and quickly disgorged a team of secret service agents. Behind them the armored Cadillac limo screeched to a halt, and out lept Barrack Obama, the President of the United States. He came to speak to a select group of wealthy, A-list, party faithful who had paid $15,200 each for the privilege of? having their picture taken with our famous president. Although the tension was so thick you could cut it with a knife, Obama firmly shook my hand with the controlled cool he is famous for, and produced the obligatory grin for the camera, as if on autopilot. The scene outside in Union Square was a mad house, with every fringe group but the Lemurians well represented, and the police struggling to prevent a shouting match between antiwar demonstrators and the anti-abortion activists exploding into violence. An Obama win in the California was never in doubt, with 85% of some districts going for the Democratic candidate. Yet,?? the Golden State was a mandatory stop for Obama as it generated the cash flow needed to fund wins in a half dozen battleground states. The support paid off, as dozens of desperately needed infrastructure projects started raining down upon us the second after the budget was passed, and no less than a half dozen UC Berkeley notables filed into the administration, with more waiting in the wings. I always thought that Obama was a man from the future, but he is 150 years from the future, and would bring upon us more rapid change than many even in his own party are able to digest. He is not an African American, but an African and an American, and bears no taint of slavery in his DNA. He is taking huge risks with the future of the country now, and may drive us all to ruin if his lofty plans don?t work out. But what choice does he have? The backdrop for the 2012 was either going to be the Great Depression II or a fragile recovery fueled by massive borrowing. Seems like a no brainer to me. I?ll just go out and short more dollars, laughing all the way to the bank. Call me a cynic, but as they used to say at Morgan Stanley, who is guilty of losing the $100 bill, the guy who dropped it, or the one who picked it up? You can find the photo on my Facebook page.

2) It warmed the heart to see my old Morgan Stanley (MS) colleague, Byron Wien, on TV. After my incendiary and iconoclastic interview with Bill Fleckenstein yesterday (click here to read), I thought I?d get the view from the other side of the street. Byron was our strategy guru at MS, then went on to mega hedge fund Pequot, and then parachuted comfortably into a co-chairman?s role at the all seeing, all knowing Blackstone. At 76, he looks pretty old and crotchety, but then he looked old and crotchety when I first met him 30 years ago. Byron gained his fame by annually publishing a top ten list of market surprises that traders believe are unlikely, but have a high probability of happening, which the clients used to absolutely eat up. His list for 2009 is looking pretty good. Back in January when the world was ending, Byron predicted that by year end, gold would blast through to a new high of $1,200, oil would rebound to $80, the S&P 500 would reach 1,200, Chinese growth would come in at 7%, ten year Treasuries would sell off to a 4% yield, housing would bottom, and Obama would become a hawk on Afghanistan. He could be batting ten for ten by year end. He argues that Christmas sales will come in better than expected, and the top line surge will enable the S&P 500 to climb the last leg to his target. We are close enough to his other targets to call it a win for him. When his next top ten list comes out in January, pay close attention.

3) One of the great pleasures of running an online business like this is that not a day passes without being totally amazed by the Internet. You may recall that last week I wrote a piece translating the arcane Latin found on a US dollar bill (click here for the story). What do I find in my in-box the next morning but a dozen new subscriptions from Romans! Who knew Romans were surfing the net? I mean the modern kind from Rome and other parts of Italy. It turns out that an Italian language investment website is screening the net for Italian language pieces, and to your dumb, garden variety search engine, Latin is close enough. If you want to give your Italian a real work out and see that I?m not making this up, click here . I haven?t been to Italy since I totaled a plane there taking off from Palermo, Sicily, which it turns out has one of the worst wind shear airports in Europe (it was a rental). So to my new Italian subscribers, I say, quoting Julius Caesar, vini, vidi, vici!

QUOTE OF THE DAY

?In the next two to three years, more money will be lost in long term Treasury bonds than was lost in the last two years in the stock market,? said Allan Lance of the Lance Letter.

October 19, 2009

Diary

Global Market Comments
October 19, 2009

Featured Trades: (BILL FLECKENSTEIN),
(DIN), (RIMM), (JWN), (DOW 10,000), (FSLR)
(TRES AMIGAS TRANSMISSION FACILITY)

1) I have worshipped legendary hedge fund manager, Bill Fleckenstein, as the God that he is for decades. So I thought it was time to catch up with the noted bear on the day the Dow popped above 10,000. Bill said he took out his 'Dow 10,000' hat and symbolically placed it on top of the six foot tall stuffed grizzly he keeps in his office. The same idiots who sold the bottom in March are now buying the top, and some fantastic short selling opportunities are setting up. He is in no rush, as the current liquidity driven tide that is lifting all boats could run into January. But 2010 could be the year when serious money is once again made on the short side. His favorite targets will be technology companies like Research in Motion (RIMM), where double ordering is now rampant, as Kool-Aide drinking managers rush to replenish depleted inventories. Retailers like high end department store Nordstrom (JWN) are also in his cross hairs, as are restaurant chains like IHOP (DIN). Big banks are a temptation, but they are a black hole on information, and the government is changing the rules every day, so he'll stay away. 'Anything with a bad balance sheet will get clubbed,' said Bill, with the subtlety of a 20 pound sledge hammer. Long Treasury bonds are a bubble waiting to burst, and the TBT is a home run staring you in the face. He can understand why the low end in residential real estate is holding up, with the government offering a tax free bribe of $8,000 to all comers ($15,000 in California). But the high end is in serious trouble, and it is raining McMansions in tony neighborhoods.?? The nightmare won't end until the banks foreclose on everything and then puke it all out, putting in the real bottom. This could be a long time off. He doesn't see any way commercial real estate can avoid disaster. What Bill does like is gold and silver, which seem to be climbing a higher wall of worry than stocks. He also likes the commodity producing currency, the Canadian dollar. Imagine that? Have I left anything out? Buy wheat. Traders are transfixed by this year's huge American crop, when in reality, 40% of the wheat producing areas of the world are suffering prolonged droughts, and $8/bushel is not out of the question. How does he know all of my positions? Did someone tell? At least if I'm wrong in my own views, I'll have some distinguished, articulate, and very entertaining company. For more on Bill's views, go to his insightful and informative blog called the 'Daily Rap' by clicking here

2) Wow! Dow 10,000! It is definitely the year of the bungee cord. Of course, the GDP is now 40% higher, and the national debt, at $12 trillion, is more than double the first time the index crossed this magic number in 1999. Some are saying this is an indication of how cheap the market is. Some, but not all- including me. We have a 'V' shaped stock market recovery discounting an 'L' shaped economic recovery, a match made in Hell, which will come back to haunt us all. Bond fund subscriptions are outpacing stock fund subscriptions by 13 to one. Humongous amounts of cash prefer to sit on the sidelines in money market funds and short term Treasury bills yielding nothing. Insider buying is nonexistent. Only 85% of the population is participating in the economy now, if you use the broader unemployment statistics, and only 75% of you take out the 'black' economy. It seems like much of the investing public has taken up the attitude of fool me once, shame on you. Fool me twice, shame on me. Sure you could strap on a long here and make a few bucks. Could you conceivably get away with it? Maybe. Is it a good idea? No. Making 10% on the upside at the risk of a 50% loss is not how great fortunes are wrested from the market. There is a time to play and a time to sit, and I vote for the latter. There is no law that says that you always have to trade, despite what your broker might say.

3) Just thought I'd pass on a complimentary review of my letter and website by one of the more sophisticated personal blogs out there, posted by Laurence Hunt. You can read it by clicking here . I slave away 16 hours a day, tracking 100 markets around the world, writing until my shoulders are so stiff they feel like they've turned into concrete, wondering if anyone ever reads this stuff. Reviews like this are indisputable proof that someone is, and keeps me going.

4) There was an article in the Wall Street Journal the other day which I'm sure you skipped over, but which has earthshaking implications for the energy future of the US. Until now, the country's power grid has been divided into three unconnected chunks, making transnational transmission impossible, leading to huge regional mispricing. While California and New York suffered from brown outs and sky high prices, electricity was given away virtually for free in Texas. A group of power companies is now proposing to build the $1 billion Tres Amigas superstation in Clovis, New Mexico that would connect all three grids. The plant would use advanced superconducting technology that will send five gigawatts of power down cables cooled at 300 degrees below zero. The facility would solve a major headache of alternative energy planners, and will no doubt accelerate development. It would allow the enormous wind farms on the drawing board in the Midwest to ship energy to the power hungry coasts. Ditto for the mega solar projects proposed in the Southwest deserts, and the big geothermal plants being built in Nevada. With Obama sending tidal waves of government cash towards the sector, the timing couldn't be better. It is also great news for major alternative suppliers like First Solar (FSLR). Some of these projects might now actually make some sense. For the complete story, please click here .

QUOTE OF THE DAY

'The economic crisis will continue until we get some real leaders and get rid of all the whores in Washington,' said the ever diplomatic Bill Fleckenstein, a legendary hedge fund manager.

October 16, 2009

Diary

Global Market Comments
October 16, 2009

Featured Trades: (RESIDENTIAL REAL ESTATE), (ETF?s), (CALIFORNIA WINE MARKET)

1) I can honestly say that I have worked for the worst boss on the planet, Rupert Murdoch, when I free lanced for his flagship newspaper, The Australian. No matter what I wrote about Japan?s trade down under in sugar, wheat, coal, iron ore, steel, or uranium, it was always ?bloody awful,? even though I was usually accurate, timely and right (and cheap). His visits to Tokyo were a total nightmare, and since I was the only one in the organization then who spoke Japanese, the chore to escort him always fell to me. I can tell you that the grandfatherly Rupert you see today is a cheap, watered down Chinese imitation of the tyrant who terrorized us 30 years ago. When good people were fired, which was often, they were overwhelmed by an immense sense of relief. That rant aside, his newly acquired toy, the Wall Street Journal, still occasionally publishes some useful information. The October 5 issue ran a survey of websites for Exchange Traded Funds, the most popular and rapidly growing investment vehicle to come out so far this century.? ETF?s make possible narrow, rifle shot bets on specific, markets, sectors, currencies, and commodities in both long and short, and leveraged or non leveraged formats. They are the perfect securities for a guy like me who is constantly trolling the world for opportunities. Morningstar (click here)? is the most comprehensive, handing out star ratings, as it does with mutual funds. Tom Lydon?s ever helpful ETF Trends (click here) , offers a paid subscription service, which publishes 8-10 specific ETF recommendations a day, based on his own investment strategy, which is somewhat similar to my own. For a free ETF data base and directory you can go to the ETF Guide (click here) . To check out the WSJ piece in its entirety, please click here .

2) Since I have been pelted daily with predictions that residential real estate has bottomed for the last two years, like hail in a Midwestern summer thun derstorm, I feel a public duty to tell you that is just not the case. Now that the state and federal moratoriums are off, foreclosures are accelerating. There are over a million Option ARM and Alt-A loan resets about to hit the fan. Since many owners will not see positive equity in their homes in their lifetimes, banks are seeing more walk aways and keys mailed in, often with tearful letters attached. The run up in mortgage rates from 4.5% to 5.5% has yet to hit the market. Some 18 million homeowners divert 50% of their incomes to pay for housing, double the 25% that is considered healthy, and many of them are losing jobs at a record rate. While the volume of units sold has rebounded, the action is dominated by speculators, flippers, and bottom feeders bidding for properties at 10-40 cents on the dollar, not exactly a sign of health. I like to visit the plethora of open houses in my neighborhood, but always find the dead broker hanging from the showerhead a bit of a downer for a Sunday afternoon. Call me when Ozzie & Harriet Nelson come back to the market. I listened to industry insiders call the bottom of the Japanese real estate market for 15 years, until they finally died, and the market is still a fraction of its 1990 high. I think we are closer to the bottom than the top in terms of price, but closer to the top than the bottom in terms of time. You can take that to the bank.

3) One of the great things about living in Northern California is the proximity to Napa Valley, one of the world?s preeminent wine making regions. But as children frolicked in huge tubs of merlot at the annual fall grape stomping ritual, nothing but sour grapes could be heard among the vineyard owners huddled in small furtive groups.? The California? market has crashed, with premium Napa Valley cabernet fetching only half the $4,000/ton achieved only two years ago. The weather hasn?t helped, with alternating hot and cold spells shrinking the harvest by 10%-20%.? The glassy winged sharpshooter pest is an ever present risk, and there are still some holdouts of the phylloxera plague that forced most grapevine roots to be torn up two decades ago. Plunging prices and shrinking volumes do not make a great business model. Napa had its own version of the subprime boom, with nouveau riche pouring in to buy starter vineyards brandishing vanity labels-no experience required. Today foreclosures on these trophy properties are rampant, and you can buy them for a dime a dozen. CALPERS, the California State Pension Fund?s $200 million investment in the sector is starting to smell like a three day old bottle of Thunderbird, not fit for use as salad dressing. The new age of frugality has consumers migrating en masse to the low end of the market, leaving high priced labels like Opus One and Grgich Hills (made famous by the cute movie Bottle Shock) stranded in the marketplace. Central Valley winemaker and low end mass marketer, Charles Shaw, known locally and unaffectionately as ?Two Buck Chuck,? is making a fortune buying bulk wine at bankruptcy auctions for 50 cents a gallon, bottling it at his Napa plant, and knocking it out as low end supermarket wine with the Napa appellation for, well, $2. It?s a great time to expand your portfolio to investment grade wine. At least you can drink your mistakes.

QUOTE OF THE DAY

?The only recovery that?s happening is the one on Wall Street. The one on Main Street hasn?t happened yet,? said Gary Kaminsky, the former managing director of Neuberger Berman, who thinks liquidity and fear of underperformance could drive stocks higher for the rest of the year.

October 15, 2009

Diary

Global Market Comments
October 15, 2009Featured Trades: (WHEAT), (WZ09), (HELEN THOMAS), (TROLL DOLLS)

1) I bet I?m the only guy you know whose wedding was filmed by the KGB. My friend, the TASS correspondent,? shot 8mm film of the entire assembled foreign press at the event at The Foreign Correspondents Club of Japan in the seventies, no doubt for their files in Moscow. No wonder they lost the cold war. We?ve stayed in touch through the years, through the collapse of the Soviet Union and the many wars, revolutions, booms, and busts that followed. He now advises a Russian hedge fund. What else? He called me the other day to tell me I was right on track with my recommendation to buy wheat (WZ09), because the Ukrainian grain crop had just come in 12% lower than last year. Poor weather had caused yields to plummet, and this would no doubt be good news not only for wheat, but corn and soybeans as well. The country was once known as the bread basket of Europe, which was one of the reasons why it was invaded by Napoleon in 1812 and the Germans in 1942. They still have a sizeable impact on global prices. I have also gotten an assist from my trading partner is the Midwest, one Jack Frost, whose early arrival has analysts slashing forecasts of grain crops here, leading to a 18% pop in price in the last week to $5.18/bushel. It?s even getting nippy hear in Fog City, where the roses in my front yard have commenced an early die off.?? I?ve noticed over the decades that when do the hard research and get your fundamental call right, all of the accidents and surprises tend to happen in your favor. That seems to be happening here.

2) One of the joys of having small children is that you get to know the guy at the local plumbing supply shop really well. It?s amazing what will fit down a toilet these days. He once told me that when Troll Dolls hit the market, every plumber in the country was guaranteed a job for life. When I went there yesterday I thought I?d pick up some leading economic indicators as well. After a deadly year, business is picking up a bit. Sure, it is still down a third from two years ago, but there is a definite improvement going on. The Eureka moment! His comments confirm the sort of ?L? or ?square root? shaped recovery I have been expecting. We aren?t going to zero anymore, but it is not exactly off to the races either. Throughout the nineties, a salesman at Circuit City (RIP) walked me through every generation of technology, and he was worth his weight in gold. All I had to do was buy a new TV from him every year, and they kept getting bigger and more expensive. I bought the second high definition TV sold in California, after George Lucas, who I used to run into at the local IHOP. Sometimes figuring out the direction of the economy is as simple as going down to the local butcher, baker, or candlestick maker and asking. They are on the front lines of economic activity, and they will see any changes months before those of us glued to computer screens. Asking George Lucas also helps.

3) I managed to catch up with my former white House Press Corp colleague, Helen Thomas, when her national book tour swung through San Francisco. At 89, Helen is the oldest and longest serving member of this esteemed group of journalists, and has the traditional right to ask the first question at each press conference. The native Kentuckian has covered every president since Kennedy, but has been observing the political scene since the Roosevelt era (Franklin, not Teddy). I knew her when I was a wet nosed apprentice writer during the Carter administration and she was a senior writer for the old United Press International. Helen hasn?t changed an iota, and is as feisty as ever. John F. Kennedy was her favorite president, a man of peace who knew war, who inspired people and launched the space program and the Peace Corp. Lyndon Johnson brought to life the most sweeping social programs since FDR?s New Deal, but saw his legacy shattered by the Vietnam War. She pitied Richard Nixon, who at the end felt the wrath of the nation fall upon his shoulders. Gerald Ford was a decent human being, too nice, really, for the job that was thrust upon him. Ronald Reagan was a master at managing the press. George W. Bush lied to the people about WMD?s in Iraq and hung the albatross of torture around America?s neck. He then sanitized the war for public consumption, and cowed the press into fearing being called unpatriotic and anti-American. Bush heard that Helen was murmuring that he was the worst president in US history, and broke with a century of precedent by conspicuously ignoring her seniority during his administration. Obama, who shares a birthday with Helen, lacks the courage to do the right thing and should stick to his guns. But all new presidents come in completely unaware of what they have signed up for and there is a tortuous learning process. Investigative reporting is gone forever because newspapers can?t afford it. Helen has seen public morals become more liberal for ourselves, but more strict for our public officials. I know there isn?t any real investment insight here, and I will probably get some angry e-mails from conservatives. But hey, when a piece of living history crosses your path, you grab on to her with both hands and shake her until the gems of insight she possesses fall loose. If Helen could only bottle and sell the energy she has at her age, she could make a fortune.

QUOTE OF THE DAY

?Seek the truth, and let the chips fall where they may,? Said Helen Thomas about her profession, adding ?I?m a cynic with hope.?

October 14, 2009

Diary

Global Market Comments
October 14, 2009Featured Trades: (NATURAL GAS), (CHK),
(DATA BASE SEARCH), (REGIONAL BANKS),
(DOLLAR BILLS)

1) I received another scratchy, crackling cell phone call from my drilling buddy in the Texas natural gas fields today. You could almost hear the dust on the line. The doubling of prices in the last month is totally bogus, and is nothing more than a short covering rally ahead of the seasonally strong run up to winter. Storage facilities are completely full, and while the production cutbacks have been substantial, they are still not enough. Some companies, like Chesapeake (CHK), are even suicidally boosting production in a desperate attempt to offset falling prices with jacked up volumes, at everyone else?s expense. This is all setting up a fabulous short selling opportunity, possible in early December, once the winter draws are priced in. There is still a huge risk that production will overwhelm storage as more new unconventional shale and tight gas deposits are brought on line, leading to another collapse in prices. A retest of the September lows is a gimme, and the $1 handle is still a possibility. So those of you who were nimble enough to bite a hunk out of the recent pop in CH4, better use any strength to cash in positions. I?d love to get more out of my friend, but I don?t think my aged, arthritic back could take another three hours driving down washboard roads in?? a beat up pickup truck with no springs.

2) Paid subscribers should be aware that you can use The Mad Hedge Fund Trader?s Data Base Search at any time by clicking here at http://madhedgefundradio.com/Data_Base_Search.html . Simply type in any stock symbol, company name, or individual name, and all references going back to February, 2008 will pop up. The original purpose was to enable potential investors to track what I was saying about specific markets, sectors, and securities over time, and see if I knew what I was talking about, or if I was just making it all up. I use it myself daily to track down data I know is lurking in there somewhere, like the number of BTU?s in a ton of coal, global electric power generation, or the price of cherries in California. The search engine is powered by Google (GOOG), so you will see text ads on the same topic cleverly placed alongside anything you find. The only limitation is that entries be at least three characters long. So instead of entering just ?X,? you?ll have to type in the full name ?US Steel.? I have in fact written about 350,000 words in the past 21 months, or about half the length of War and Peace. It took Tolstoy six years to write his epic about Napoleon?s invasion of Russia in 1812, and no one made a dime off of his stock tips. Try it, you?ll like it.

3) I have really been avoiding financials for the last few months after they had their dead cat bounces. However, I had to listen to MidSouth Bank CEO Rusty Cloutier when he spoke on CNBC. His 24 branch bank, with a market cap of only $103 million, is based in Lafayette, LA, one of my old stomping grounds, and home of the world?s greatest touff? and shrimp gumbo. He says that ?Unless we break up the big banks and get back to sound banking principles we are going to relive this over and over again??.Free enterprise has to have the right to fail??.Allan Greenspan and his administration have some problems they have to ??fess up to.? With the current system of megabanks ?They get the gain and we get the pain??.I?m regulated now by 13 agencies of the US government and I don?t know that I need a 14th.??? Regional Banks have really been taking it on the kisser this year, with 99 going under, four times the previous year?s rate. The FDIC has turned into an effective stealth undertaker, checking into local motels under assumed names, marching in at the Friday afternoon close with court orders in hand, and selling assets at fire sale prices to a healthy competitor by Monday morning. None of the government owned banks have been targeted by the federal agency yet. There?s no one who can read you a riot act like a Southern regional banker.

4) If you want to impress your friends with your vast knowledge of financial matters, then here are the Latin translations of the script on the backside of a US dollar bill. ?ANNUIT COEPTIS? means ?God has favored our undertaking.? ?NOVUS ORDO SECLORUM? translates into ?A new order has begun.? The Roman numerals at the base of the pyramid are ?1776.? The better known ?E PLURIBUS UNUM? is ?One nation from many people.? The basic design for the cotton and linen currency with red and blue silk fibers, which has been in circulation since 1957, carries enough symbolism to drive conspiracy theorists to distraction. An all seeing eye? The darkened Western face of the pyramid? And of course, the number ?13? abounds. Thank Benjamin Franklin for these cryptic symbols, and watch Nicholas Cage?s movie National Treasure. The balanced scales in the seal are certainly wishful thinking and a bit quaint. Study the buck closely, because there are going to be a lot more of them around.

QUOTE OF THE DAY

?By thinking at the 30,000-foot-level about asset classes, investors will get much better results from their portfolios,? said Steven M. Sears, vice president for asset allocation at PIMCO, the world?s largest bond fund.

October 13, 2009

Diary

Global Market Comments
October 13, 2009GLOBAL RISK ALERT!

Featured Trades: (GOLD), (SILVER), (CANADIAN DOLLARS), (AUSTRALIAN DOLLARS), (NEW ZEALAND DOLLARS), (BRAZIL), (RUSSIA), (INDIA), (CHINA), (TAIWAN), (SOUTH KOREA), (VIETNAM), (JNK), (TBT)

1) When everything is working, and my portfolio is firing on all 12 cylinders, I pinch myself and ask ?Is this real? What can go wrong?? I?m reminded of the slave whose task it was to remind conquering Roman generals ?All glory is fleeting.? Virtually all of my recommended core longs in gold, silver, Canadian, New Zealand, and Australian dollars, Brazil, Russia, India, South Korea, Taiwan, Vietnam, and?? junk bonds are at or near highs for the year. I called the bottom in Natural Gas within 40 cents, and mercifully baled on my one short in US government bonds, the TBT. What we are seeing is a global surge in liquidity as cash emerges from the bomb shelter, squints at the day light, and then rushes to buy the first thing it can find. Everything is going up, regardless of fundamentals. It is the proverbial tide that is lifting all boats. You can make a lot of money in these conditions, but there is no way of knowing if this will last for one week, or another year. But they can go on much longer than you think. In the last two liquidity driven markets I traded, Japan in the eighties and NASDAQ in the nineties, fundamental analysts railed against the tide for years, claiming that stocks were overvalued, each call getting their office moved ever closer to the elevator and men?s bathroom. When someone finally did throw the switch on these markets, it got dark amazingly fast. Tokyo went out at an all time high on the last day of 1989, and then dropped a staggering 45% in January. NASDAQ plunged just as fast from its 2000 top. The one thing we can all be certain about is that the survivors have vastly improved their risk control after our recent crash. Make hay while the sun shines, but keep your finger hovering over that mouse. The level of risk is definitely high than it was in March. When the next real downturn starts, it could resemble a flash fire in a movie theater.

2)?? I have to admit that I was stunned when the announcement hit the tape that Obama won the Nobel Peace Prize. I was sure he would get it, but not until he left office in 2012 or 2016. Even Obama admitted he didn?t deserve it. I happen to know the Swedish royal family quite well, as they invested in my hedge fund during the nineties. When I visited their money managers in Stockholm, I stayed at the Grand Hotel, where the Nobel winners are put up during the December ceremonies. On the wall of my suite hung original letters from fellow Californian and Nobel Prize winner in literature John Steinbeck. It turns out that more than 20% of?? the 829 Nobel Prizes have been awarded to Californians, thanks to the state?s massive investment in the sciences, 21 to UC Berkeley professors alone, including this year?s prize for economics. During the 100 year anniversary of the prize in 2004, all living Nobel winners in the state were invited to lunch with the Crown Princess Victoria, the Duchess of V??sterg??tland. I sat next to Milton Friedman and debated monetarism with the cantankerous University of Chicago economist for an hour. Swedes feel that since their country is small and relatively insignificant on the world stage, the Nobel Prizes are one of the few ways they can influence international events. By giving Obama an early prize, they are giving him a vote of confidence and attempting to give him some credibility in his dealings. Many countries certainly have every reason to be wary of his outstretched hand, given our recent history. The best news for Obama? The $1.5 million prize is denominated in Swedish kroner, which has been appreciating against the dollar. And no, I don?t have a Nobel Prize myself, at least until they start handing them out to hedge fund managers.

3) There?s nothing like getting up in the morning, sharpening your ax, taking off your shirt, and splitting a quarter cord of wood to get the blood flowing. I managed get the same invigorating effect by catching part of a nice 50% move in lumber futures earlier in the year, based on an expected recovery of exports to China (click here for my earlier call ). A wave of buyers followed me, heralding a recovery in the housing market, which I didn?t believe in for two seconds. Since June, the performance of the knotty, aromatic commodity has been definitely pekid. Listen hard and the trees are trying to tell us something. How are we supposed to have a recovery in the housing market with falling lumber prices? Are they building houses now without wood? Have I missed some great technological development in the home construction industry where termite proof houses are now all the rage? I think it?s much more likely that the Chinese topped up their inventories and the recovery in real estate is wishful thinking. Please take a look at the chart and tell me where I?ve gone wrong. If the trees are right, then real estate stocks, REIT?s, homebuilders, and even the banks are about to get slammed again. Is that smoke I smell?

QUOTE OF THE DAY

?Sic transit gloria mundi?

For over a thousand years Roman conquerors returning from the wars enjoyed the honor of triumph, a tumultuous parade. In the procession came trumpeters, musicians and strange animals from conquered territories, together with carts laden with treasure and captured armaments. The conquerors rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children, robed in white, stood with him in the chariot or rode the trace horses. A slave stood behind the conqueror holding a golden crown and whispering in his ear a warning: that all glory is fleeting.
? Gen. George C. Patton