1) I took some time off yesterday to watch a piece of economic history roll through town. The Union Pacific Railway's (UNP) engine no. 844 roared past, hauling a trainload of retired union members and railroad buffs in its trademark yellow observation cars. The 4-8-4 steam engine was built in 1944 to haul the massive freight trains demanded by a wartime economy. The company has since spent a fortune maintaining the crown jewel of the great age of steam in perfect operating condition. Normally based in Cheyenne, Wyoming, it hurtled over the Rockies and the Sierras to visit us on a heritage tour. Progress of the belching 500 ton behemoth was updated every ten minutes through Twitter's tweets, which garnered 481 followers by the time it made it to the San Francisco Bay Area. It barreled through the station like a freight train, blasting its whistle, and singing with heat the faces of the enthralled kids. To see this piece of romantic transportation history, please click on the video above.
Sure, I know the train was videoed every 100 feet all the way from Wyoming to here, including by the four guys standing next to me who posted their work on YouTube. Some even chased the train over the Sierras to get multiple shots and put up montages. This is a community of over the top fanatics. But what the hell, it was fun anyway. By the way, UNP is a great long term buy as an indirect commodities play, and a call on the recovery of the US economy.
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2) For those out there still looking for a 'smart grid' play, take a look at Quanta Services (PWR). The Houston based company offers design, construction, and maintenance of power infrastructure networks. At a 17 multiple of next year's earnings, it is not cheap, and the shares have already posted a double since the March 9 low, so the action is definitely there. But when the full force of Obama's stimulus plan hits, the 30% earnings growth that is the current consensus forecast may look a tad low. The Federal Energy Regulatory Commission (FERC) has already announced $10 billion in programs, and 'smart grids' are one of the few places in the energy space where the government can spend money and generate an immediate result. Up to 10% of America's electric power supply is thought to be lost through resistance from decrepit power lines and inefficient distribution. That works out to a lot of tankers from the Middle East or train loads of coal from Appalachia. Never underestimate the power of a buzz word to boost earnings. Buy on the inevitable dip.
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3)?? The paint peeled off the walls while Yahoo (YHOO) CEO Carol Bartz laid out her assessment of the firm's many challenges at yesterday's conference call in language that would make a Marine drill sergeant blush. I knew Carol when she was at Autodesk in Marin, and believe me, she is no shrinking violet. She said that the engineering focus had scattered to the wind, with engineers in almost every country. There was one product manager for every three engineers. No surprise then, that she announced 700 layoffs after the 2,400 that were axed last year. YHOO's Q1 earnings actually came in line, with a $117.6 million net on $1.58 billion in revenues, thanks in large part to a $401million gain on a Chinese Internet company. No comment on the Microsoft negotiations. Is it any revelation that enormous bloat accumulated under the leadership of Jerry Yang, the world's worst manager, and the guy who infamously turned down the $35/share bid from Microsoft? Time to put the grownups in charge.
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QUOTE OF THE DAY
'Stop your sinning, do more good, and give more money,' said PIMCO managing director, Paul McCulley, quoting his preacher father in an admonition to the government. He added, 'Valuation metrics have to find the new normal, and we haven't found the new normal yet.'
1) Those who followed my recommendation to buy copper on January 5 are the happy participants in the first bubble of the year. The red metal has rocketed from $1.28 to $2.26, while producer Freeport McMoran (FCX) soared 88% from $25 to $47. Heavy and secretive stockpiling of the red metal by China, which accounted for a third of the world's 18 million tons of consumption last year, has been a main driver. Heavy buying by commodities based ETF's provided the turbocharger. It is time to take some money off the table. Asset markets everywhere have suddenly gotten way too healthy, with global equity markets alone tacking on $7 trillion in value in six weeks. No one ever got fired for taking a profit, especially in this angst ridden environment. Of course, longer term, I expect copper to rise past its all time high of $4.10, and for FCX to vault above its old high of $122, as we make the irresistible shift from a paper to a hard asset backed world.?? But it's going to take more than a short covering rally in financial markets to get back up there. Better to buy it back lower.
2) Last year was truly the annus horriblus for the Fortune 500, which saw profits plunge from $645 billion to $99 billion, the worst performance in the tabulation's 55 year history. AIG alone lost $99.3 billion, taking it from number 13 on the list to no. 294, made possible I'm sure only through some spectacular accounting fiction. Many once mighty names were struck from the venerable list, including Lehman Brothers (LEH), Bear Stearns (BS), and Anheuser Busch (BUD), to be replaced my new risers and IPO's like Polo-Ralph Lauren (RL), Master Card (MA), and Visa (V). Only three companies have shared the number one spot since 1955: Exxon Mobile (XOM), Walmart (WMT), and General Motors (GM). Guess which one made the top this year? It is clear that this Depression is causing a great winnowing out of the US economy. The strong are getting stronger and the weak are getting wiped out.
3) Japan will soon hit its bond market with a near record $110 billion of new paper to finance its emergency economic stimulus program. Anticipation of the program has already pushed yields on the JGB to 1.46%, a high for the year, up from 1.21% in January. With short term interest rates at zero and the world's lowest long bond yields, there is little doubt the government will pull this off, according to Sean Maloney, interest rate strategist at Nomura Securities. Nearly twenty years of weak domestic growth and a decently growing money supply have created a structural oversupply of capital in Japan, an endless cash glut, and a shortage of high grade, low risk investments. The bigger question is whether this splurge will make any difference. After building 1,000 'bridges to nowhere' during the nineties to cope with a 'lost decade', no country has more conclusively proven the futility of government stimulus spending on public works than Japan. Is Obama about to make the same mistakes in the US?
4) Lehman Brother's (LEH) $200 billion worth of unsecured creditors should be careful what they wish for. Their payoff might be radioactive. The bankrupt former investment bank is holding 500,000 pounds of yellow cake, a form of refined?? uranium used to make fuel rods for nuclear power plants. Lehman took delivery of the uranium oxide as the result of an expiring futures contract. The price of yellow cake recently plunged from $140 to $40 as part of the general rout in the prices of all energy supplies, and the postponement of the construction on new power nuclear plants in China and India.?? Fears the creditors would force the Lehman position to be dumped on the market also aren't helping prices.
5) China has surpassed the US for the first time as the largest buyer of cars from Japan. Nissan reported a leap in sales in March to the Middle Kingdom of 29% YOY. The cause is a $550 billion Chinese emergency economic stimulus package that among other things cut taxes on new car purchases by 50%. China is facing the same dilemma as the US in its recovery efforts. When you spend this much money, the beneficial effects spill outside your own borders, inundating the world.
QUOTE OF THE DAY
'Trading is now the new asset choice,' said Scott Jacobson of Capstone Sales Advisors.
1) March Housing Starts came in at 510,000, down 10.8% from February, and short of the 540,000 consensus. Permits fell 9% to 513,000. Completions were down 3.5% to 796,000.?? The estimated five million houses for sale, in foreclosure, or sitting in bank portfolios waiting to be dumped are sitting on this industry like an 800 pound gorilla. Pulte Homes (PHM)-Centex (CTX) combination will have to swim upstream against Niagara Falls in order to survive. Will someone please fire the plunge protection team? They're doing a lousy job.
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2) Pack your portfolios with agricultural plays like Potash (POT), Mosaic (MOS), and Agrium (AGU) if Dr. Paul Ehrlich is just partially right about the impending collapse in the world's food supply. You might even throw in long positions in wheat, corn, soybeans, and rice. The never dull, and often controversial Stanford biology professor told me he expects that global warming is leading to significant changes in world weather patterns that will cause droughts in some of the largest food producing areas, causing massive famines. Food prices will skyrocket, and billions could die. At greatest risk are the big rice producing areas in South Asia, which depend on glacial run off from the Himalayas. If the glaciers melt, this will be gone. California faces a similar problem if the Sierra snowpack disappears. Rising sea levels displacing 500 million people in low lying coastal areas is another big problem. One of the 77 year old professor's early books 'The Population Bomb' was required reading for me in college in 1970, and I used to drive up from Los Angeles to hear his lectures (followed by the obligatory side trip to the Haight-Ashbury). Other big risks to the economy are the threat of a third world nuclear war caused by population pressures, and global plagues facilitated by a widespread growth of intercontinental transportation and globalization. And I won't get into the threat of a giant solar flare frying our electrical grid. 'Super consumption' in the US needs to be reined in where the population is growing the fastest.?? If the world adopts an American standard of living, we need four more Earths to supply the needed natural resources. We need to raise the price of all forms of carbon, preferably through taxes, but cap and trade will work too. Population control is the answer to all of these problems, which is best achieved by giving women an education, jobs, and rights, and has already worked well in Europe and Japan. All sobering food for thought.
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3) Will someone please help me out here? Q1 is widely expected to be the quarter from hell, with earnings expected to plummet by 38%, and the market rockets 26%, the biggest hyperbolic move since 1930. Is there a disconnect here? I know I only got a magna cum laude in math in college, not the summa cum laude I deserved (my professor didn't understand his subject and hated me for it). But is it possible that the market has gotten ahead of itself? Just a tad? Is the economy really going to have the massive bungee cord type recovery that the market is discounting here? Could we be setting up for the perfect sell in May and go away scenario, like we saw last year? I don't get this. I await your comments in earnest.
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QUOTE OF THE DAY
'We will all starve to death in our SUV's' warned Professor Paul Ehrlich about the threat to the world's food supply posed by global warming.
1) I chatted with Speaker of the House Nancy Pelosi yesterday as she was passing through the San Francisco Bay Area. I have known Nancy for 15 years, and she was breathing fire and spitting nails as usual. With the public fuming over banksters' bonuses and bail outs, Wall Street can pretty much count on a Congressional investigation of the causes of the crash, much like the Pecora Commission did in 1932. Health care, essentially a global competitiveness issue, isn't going to wait for better times either. A bill for a combined public-private national insurance system will reign in the runaway cost of Medicare and Medicaid, the most rapidly growing entitlements. Expect the fireworks to start soon. Investment in education yields the largest source of tax revenues for the Treasury, so expect more spending there too. Obama plans to cut his $1 trillion budget deficit by a third before the end of his first term, and two thirds by the end of the second. If Congress can't do this, inflation will rear its ugly head. No kidding. Debt service already exceeds $250 billion a year, or 8% of the total budget. Only 'pay as you go' programs will pass to control the deficit. The Feds are also going to go after $300 billion in uncollected taxes. Earmarks, which rose by 400% under the Republicans, will be cut in half, and the remainder published on the Internet. Growing up in an Italian American political dynasty that produced two mayors of Baltimore, the petite Nancy used a seat on the San Francisco Library Committee as a springboard to become the most powerful woman in the world in a mere 22 years. She has moved from the kitchen to the kitchen cabinet on the coattails of Obamaphoria. Now the Republican Party's worst nightmare, she has the power to get a lot of what she wants done.
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2) Mall giant General Growth Properties (GGP) filed for bankruptcy protection early this morning, marking one of the largest-ever real estate failures in U.S. history. Analysts say General Growth will likely survive the long-anticipated Chapter 11 filing intact, but could emerge as a much smaller company after distressed sales of assets. The filing marked the unhappy end of a months-long effort to restructure an impossible $27B debt load, and will leave equity investors with nothing. Expect more giants like this to fall.
3) Walking around San Francisco's financial district the other day, I couldn't help but notice the colorful, but huge 'for lease' and 'space available' signs wrapped around whole buildings. The San Francisco Chronicle produced some current market figures for the wasteland that is now the commercial real estate market. Rents have crashed 24% in a year, with Class 'A' office space plunging from $50.92 to $38.80 a square foot, the biggest drop since the dot com bust in 2001. Tenants are downsizing, consolidating, or disappearing altogether.?? Macy's and Charles Schwab together are vacating 500,000 square feet this year, with more than half of all Bay Area companies expected to shed staff in the next six months. Purchases of office building have ground to a complete halt because of the absence of financing. Not helping are the city's notoriously high operating costs, labor rules that would make Bolsheviks blush, and a tax rate that is about to jump from 8.75% to 9.75% to help bail out the state. It's a lot to pay for a great view. Will the last one leaving please turn out the lights?
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4) I went to www.foreclosureradar.com to see which of my neighbors were about to lose their houses. One bank auction is listed at Cassandra Court. Well, duhhh. You'd think if someone were at risk of losing their home, they wouldn't buy on Cassandra Court. Cassandra was the Trojan princess condemned by Apollo to a lifetime of predicting a dire future which no one would ever believe.
5) Because of the crash in asset prices last year the government is considering renaming 401k's to 201k's. ?
QUOTE OF THE DAY
'When I was on the reviewing stand at the Presidential inauguration, I suddenly was visited by the ghosts of every female activist on whose shoulders I now stand, from Susan B. Anthony onward. They said '?Now we have a seat at the table.' Then they left,' said House Speaker Nancy Pelosi.
Global Market Comments April 15, 2009 Featured Trades: (GM), (CHINA), (MSO)
1) Thanks, but no thanks! Goldman Sachs (GS) voted with a big thumbs down on the stock market today yesterday by issuing $5 billion in new equity at $123/share. Perhaps not coincidently, this gives the government a $1 profit on its holding in the venerated former investment bank. The move comes on top of the announcement of spectacular earnings of $3.39/share on revenues of $9.4 billion, double expectations, and a 150% rally in the stock since November. The deal was brought to market so fast it made your head spin. The money will be used as a down payment towards their $10 billion TARP repayment. Do you get the impression they are unloading this stock like it is a hot potato? Obviously they don't think the shares are going to rocket back up to last year's high of $200 anytime soon. Is it worth that much to get the Feds out of their hair? Those pay restrictions on senior executives have to be grating. And you can't imagine a greater culture clash than between the Masters of the Universe and the Treasury's white shirted, polyester suit wearing, bean counters. Or maybe GS thinks the market is peaking here and it's time to cash in their chips while they can. Windows these days are vanishingly small. Please pass the Vaseline.
2) Thanks to China's one child only policies of the past 50 years, and a cultural preference for children who grow up to become personal safety nets, there are now 32 million more boys under the age of 20 than girls. Large scale interference with the natural male: female ratio has been tracked with some fascination by demographers for years, and is constantly generating unintended consequences. Until early in this century, starving rural mothers abandoned unwanted female newborns in the hills to be taken away by 'spirits'. Today pregnant women resport to the modern day equivalent by getting ultrasounds and undergoing abortions when they learn they are carrying girls. The resulting shortage of women has led to an epidemic of 'bride kidnapping' in surrounding countries. Stealing of male children is common. Political scientists have long speculated that an excess of young men would lead to more bellicose foreign policies by the Middle Kingdom. But so far the choice has been for commerce, to the detriment of America's trade balance. Economists now wonder if the practice will also shave a few basis points off China's long term growth rate. Parents with boys tend to be bigger savers, so they can help sons with the initial big ticket items in life, like an education, homes, and even cars. It's not nice to fool with mother nature.
3) Martha Stewart picked up 350,000 followers in her first month on Twitter. Just telling her friends in less than 140 characters what she was having for Easter brunch generated a massive response. Too bad no one has yet figured out how to make money from this.
4) Sarah Palin, the possible future Presidential candidate, earned $125,000 last year as the Governor of Alaska. Tiny Fey earned $4.6 million convincingly imitating Sarah Palin on NBC's Saturday Night Live. Whoever thought laughs would be more profitable than campaign promises? Maybe Tina Fey is better at being Sarah Palin than Sarah Palin is? Go figure.
Featured Trades: (WFC), (WB), (JPM, (BAC), (C), (GM)
1) So there is life after near death! Wells Fargo (WFC) stunned the street with a surprise $3 billion profit in Q1, vastly better than expectations. The shocker was that charge offs from loan losses amounted to only $3.3 billion, a shadow of forecasts that ranged as high as $8 billion. Analysts suspect that some creative accounting was involved in consolidating the losses from recently acquired Wachovia Bank (WB). Short sellers were seriously squeezed and no doubt are now speaking in voices several octaves higher, pushing the stock up an amazing 40%. The news triggered an all out assault on bank haters, there are still plenty out there, taking JP Morgan up 24% and Bank of America up 42%. A share of Citigroup at $3will now buy you a cup of coffee at Starbucks, but only if you get the cheap stuff. With the Fed raining money down on the sector and the Treasury changing the rule book almost daily to make this work, how else was this going to play out? This puts WFC first in line to repay TARP money and get the Feds out of their hair. It also underlines the argument that I have been making all along that if you put mark to market and asset valuation issues aside (no easy task), the banking business in now the most outrageously profitable in its long history.
2) The latest off to the General Motors (GM) bond holders: zero cash, zero debt, and a 20% ownership in GM stock, which may become worthless if GM files for bankruptcy within 60 days. This is down from 8% cash, 16.5% of new debt, and 90% on GM stock that was on the table just a few weeks ago. Whoa! Harsh.?? Looks like the unions are going to take it on the nose too. I guess it's not a good idea to lend money to people who crank out crappy products to a disappearing market at higher prices than their competitors. If this isn't the Fat Lady clearing her throat and getting ready to sing, I don't know what is. The death watch continues.
3) Financial reporters are spending way too much time reporting about the pirate seizure of the American container ship Maersk Alabama off the Somali coast, despite the happy ending. CNBC has been playing pirate songs all week. One even referenced the Marine Corps. Hymn ('To the shores of Tripoli'). I guess you don't get to say 'arrrgh' too much in the floor of the New York Stock Exchange.
4) OK, enough is enough! Right here, at $3.60, is where you buy Natural Gas ($NATGAS)! After peaking at $13.50/btu last year, it has become the red headed step child of the energy complex, plunging a gut churning 74% to a low of $3.50. To see demand this weak coming out of a cold winter is nothing less than stunning. The credit crisis has forced US companies like Chesapeake Energy (CHK) and Devon Energy (DVN) to scale back exploration, so the US rig count has dropped by half. The price collapse is welcome news for consumers, as NG is an essential raw material for making naphtha, fertilizer, and plastics and accounts for 20% of US electric power generation. It also is a favored fuel of the green crowd, as the only products of its combustion are carbon dioxide and water. The industry was making the leap from a domestic industry to a global one just as the global recession punched it right between the eyes. The completion of six liquefaction plans in Qatar, Russia, Indonesia, and Yemen, costing $48 billion, is expected to boost global production by 25% this year, and more big plants are coming on stream in the near future. Below $3.50/btu the pick producers start shutting in supply, which will cause the glut to disappear rapidly. If I'm right, and those really are crocuses out there and not some florid hallucination, then it's time to load the boat with NG.
5) San Francisco's Golden Gate Park had an Easter egg hunt for the blind. The event, organized by the Blind Babies Foundation, enabled vision impaired children to seek plastic eggs with beepers, which they could exchange for prizes. I love it.
QUOTE OF THE DAY
'We are all going so fast, but where are we going?' said Larry Brilliant of Google's philanthropic arm, Google.org.
Many readers have asked me to review my recommendations of the last three months, so here is The Mad Hedge Fund Trader's Q1 report card. I have reprinted by January 4, 2009 Annual Asset Review and followed with comments in bold type.
Equities: UP
The collapse of the volatility index (VIX) is telling us that the horrific, gut churning, 10% daily moves are over. But equities are no longer a US play. Extracting the insane leverage of the last decade means chopping the US growth rate down from a booming 5% to an anemic 2%. This is not a strong argument to buy American companies, which is why most analysts only see the indexes recovering 10%-20% this year. You might just get tedious range trading after the late 2008 dead cat bounce. The real action will be in the BRIC countries, which will see upside returns double what you will get with the S&P 500. Buy Brazil's Bovespa ($BVSP), Russia's RSX (RSX), India's Bombay Sensex ($BSE), and China's FXI (FXI) or Hang Seng. And it may be time to spell BRIC with a 'K' by throwing in the Korean Kospi ($KOSPI) as a sweetener.
Grade: A After one more spike, the VIX collapsed from 50% to 36%, so a ton of money was made on short volatility and time decay plays. My call that the export sensitive BRICK's were a 'Buy' was a total home run, as they massively outperformed the US. Brazil is up 18%, Russia 29%, India 20%, China 18%, and Korea 20%. The S&P 500 is still down on the year by a miserable 3%. With 80%-90% of the world's economic growth expected to come from emerging markets over the next ten years, this trade has much, much further to run. If you want to be conservative and diversified, buy the iShares MSCI Emerging Market basket ETF (EEM), up 21% on the year.
Bonds: Treasuries Down, Private Debt Up.
As I have been vociferously arguing in these pages for months, US Treasury bonds are witnessing the final stages of an overinflated bubble, and you don't want to be anywhere near this asset class when it bursts. Take out the flight to quality and year end balance sheet window dressing bid from this market, and you have an accident begging to happen. Take in the long term inflationary impact of Obama's plans, and you have a 30 year contract which peaked at 142 last week that is really only worth 70. It's just a matter of time before massive government issuance buries largely foreign buyers. Throw in the 50:1 leverage offered by a long bond futures contract, and the profit potential of a short position is so enormous, there are not enough zeros on my calculator to total it up. Buy the Lehman 20 year plus ultrashort bond ETF (TBT). Unfreezing of the debt markets will move the prices for every other type of debt off of their current throw away levels. Buy corporates of every grade with a heavy weighting in junk, or fixed income securities backed by REIT's, emerging markets, credit cards, student loans, or subprime loans. A convenient way to do this is to buy the ETF's for the Lehman High Yield Bond Fund (JNK), the PS Corporate High Yield Bond Fund (PHB), and the iShares iBoxx Fund (HYG).
Grade: A+ My recommendation to short the Treasury's long bond was spot on, with the US Lehman 20 year 200% short ETF (TBT) soaring by 25%. With the government's printing presses running overtime, this is going to be your new free lunch. The junk bond ETF's PHB (up 6%) and HYG (up 1%) also were profitable, but did less well, as credit concerns linger.
Commodities: UP
After giving up almost all of their 21st century gains, virtually all commodities, including grains, softs, energies, and metals, are due for a recovery. A good part of the sell off resulted from the disappearance of financing, which is now slowly working its way back into the market. Now that newbie investors who never should have been involved, like pension funds, have bailed on this asset class, conditions are set for some serious base building. Commodities will be the principal beneficiaries of an epochal trend away from paper assets, towards hard assets, that will be the dominant investment theme for the next decade or two. Chinese and Indians still want to raise their standard of living faster than these substances can be grown, or ripped, or pumped out of the ground. Now Obama is adding America to the infrastructure build out story. A safe way to play this is through beaten down, dividend yielding, producing equities like Freeport McMoran (FCX) for copper, Chesapeake Energy (CHK) for natural gas, and US Steel (X) for steel and iron ore.?? But don't expect huge gains until we see signs of a global economic recovery by the middle of the year. Then watch out.
Grade A+ Commodities and their underlying stocks have been the place to be in 2009. You really couldn't miss, with grains, softs, energies, and metals all doing well. Freeport McMoran rocketed by 92% on a 45% move in copper.?? Oil is up 28%, and gold ran 17% before its current pullback. The only letdown has been natural gas, which due to supply and storage difficulties unique to this one energy source, has fallen by 30%. However, my stock pick in the area, Chesapeake Energy (CHK), jumped by a robust 23%. Again, this trade has a long way to run. While they stopped making almost everything in this recession, the world hasn't stopped making more people. They are all going to need to eat, travel on more roads, and live in more houses. The emerging market thirst for a higher standard of living is as strong as ever. Look for crude to move to $200/barrel on the next spike. Move your portfolio out of paper assets into hard ones.
Currencies: Dollar and Yen Down, Everything Else Up
Since we are smack dab in the middle of a six year trading range, I don't really have a handle on what the buck is going to do short term. Could we see $1.20 or $1.00 for the greenback in an event driven overshoot short term? You betcha! But longer term, the trend is still down. Obama's highly inflationary reflationary policies will eventually lead to an utter collapse in the dollar. If they are successful, the economy will recover, bringing Americans back to their old low saving, high consumption, high importing ways, adding fuel to the fire. Don't bet against the 45 year trend. No one ever got rich betting against the US consumer. Expect to pay $2.00 for a Euro in the years ahead. Take that European vacation now!
Grade: Pass Since I really didn't take a view, I don't deserve a grade. In fact, the euro is dead unchanged year to date at $1.33, keeping to a pretty boring range of $1.25 to $1.37. But the collapse of the dollar is a mathematical certainty resulting from current US government policies, and may be the trigger for the world's next big financial crisis.
Real Estate: Down
With markets still deleveraging, and the son of subprime, the Alt-A loans on our
doorstep, real estate is dead money at best. Although the cost of carry for home ownership is rapidly approaching equivalent rental costs on an after tax basis, fewer and fewer buyers are qualifying for loans. Add 1.2 million unsold homes from builders, to three million existing homes already on the market, and you have a staggering 4.2 million homes for sale in the US. There are at least another two million homes being held off the market waiting to smack down any recovery in prices. This is 7% of the total American housing stock. Probably 20% of US homeowners are underwater on their mortgages, and they're not buying anything anytime soon. We also have an impending crisis in commercial real estate generating lots of mall bankruptcies and empty retail space to deal with. Remember, 'debt' is a four letter word. I don't see a meaningful recovery in residential real estate for five years, and then it will be a slow claw back at best.
Grade: A+ Although we don't have the benefit of a daily closing price in the Wall Street Journal every day, I think it's safe to assume that all sectors of the real estate market have continued their death spiral this year. Stay away. Rent, don't buy.
Final Grade: A I am sticking to my guns on all of my core trades for 2009. Call me what you want. You can even call me 'Mad'. Is anyone looking for a new money manager or financial advisor?
Global Market Comments April 9, 2009 Featured Trades: (GOLD), (ABX), (GM), (TM)
1) 'There is room for bulls and bears, but pigs get slaughtered,' said Peter Munk, the legendary founder and CEO of Barrick Gold, the world's largest gold producer. This is his admonition to worshipers of the barbaric relic hoping for a quick super spike to $2,000 or $5,000 an ounce. Since 2003 gold has tripled from $300 to $1,000, outperforming every asset class in every currency, and he has no problem with it backing and filling here in a long term uptrend. The fundamentals look great, as the world is running out of the yellow metal. The industry used to be run by demand from the Indian wedding season. The current economic stress has made the country a net exporter of gold for the first time. Global jewelry demand is at a 20 year low. With the help of satellites, the world is pretty well mapped out, so there will be no more surprise Californias or Klondikes found. The only untapped reserves are in the Andes at 13,000 feet, or in countries too dangerous to visit. The cost of extraction has also doubled in ten years to $400/ounce, driven by labor, fuel, trucks, and environmental mitigation. Gold will only go down when the US government turns off its printing presses. With record stimulus packages in place, there is a fat chance of that happening in this lifetime. Ultimately, the price of gold is a barometer of fear, which will not be in short supply in the new era we are facing.
2) General Motors (GM) has 6,500 dealers in the US and Toyota Motors (TM) has 2,000, but Toyota sells more cars than GM. And you want to save this company? Don't mention the fact that their cars fall apart, miss the market by a mile, guzzle gas, and have destroyed over $300 billion in shareholder equity in the last ten years.?? The fact that this company still exists is a tribute to their advertising prowess with an older generation of buyers that is rapidly dying off.?? The Volt doesn't have a snowball's chance in hell of competing against the Toyota Prius, especially the plug in version that is coming out next year at little more than half the Volt's projected price. Just as only Nixon could go to China, only Obama can dispatch GM. The launch yesterday of its Segway-GM hybrid, the Puma Pod, just highlights how pitiful their efforts have been. The sooner GM goes to corporate Heaven (or Hell), the better.
3) Many hotel investors not only lost their hearts in San Francisco, they lost their wallets too. The New York Times highlighted the dire condition of the city's hotel market. The occupancy rate in February plunged to 57.7%, the lowest since 9-11, with many luxury rooms going for less than $100 a night. The collapse in pricing has been exacerbated by the Internet, and first and foremost by the William Shatner inspired www.priceline.com, whose competitive offering system unleashes avalanches of cheap rooms on the market at the first sign of weakness. As a result, the average price of a room has dropped in a year from $156.16 to $127.59. Many hotels acquired at the market top in 2004 and 2005 have cash burn rates so severe that they are in imminent threat of defaulting on loans.
4) Michelle Obama was seen wearing a J. Crew outfit on her current European tour, which then immediately sold out. Now, if we could only get her to drive a Chrysler!
QUOTE OF THE DAY
'I'm not an actor playing a money manager. I'm a money manager, so my clients are listening to what I'm saying,' said Robert Weiner, CIO at RDM Financial Group, in an admonishment to a CNBC reporter.
Global Market Comments April 8, 2009 Featured Trades: (PLD), (TBT), (PHM), (CTX)
1) I bumped into Jim Lehrer last night, the legendary anchor of 'The News Hour With Jim Lehrer' on PBS, as he breezed through the San Francisco Bay Area promoting his 22nd novel, 'Oh, Johnny'. The ex-Marine, whose first big story was covering the Kennedy assassination in Dallas, had some cogent observations on the current demise of the US newspaper industry.?? Print media have traditionally been the originators of the news, the guys who went to the city council meeting and took copious, accurate, notes. For this, the paper got full page ads from the local car dealers and every other retail business. Now the car dealers are going under. The proliferation of new media, from radio to TV, the Internet, and smart phones means that the monetization of this content has moved downstream to be reaped by others. Talk radio, weekend news programs, comedy shows, even congressional debates, and yes, blogs (guilty), are feeding off of this news cornucopia for free. The originating newspaper maybe gets a penny of each dollar of revenue spawned by their stories. Newspapers now have no choice but to cut costs by firing journalists and moving online. Thomas Jefferson said that 'an informed electorate is essential for a democracy'. The big question is, when all the journalists are gone, where will the news come from? I have suspected all along that Truth, Accuracy, and Neutrality will be the big casualties of all of this. They will go the way of the full service gas station, free check in luggage on airlines, and home delivery of newspapers by teenage boys on bicycles.
2) Pulte Homes (PHM) is buying Centex (CTX) for $1.3 billion, net of all the debt they are acquiring in a stock only deal. Centex stock is up 33% on the news. This is a bold move in that it creates the nation's largest home builder.?? I wonder how many finished, but unsold houses they are getting? And undeveloped land? A spate of takeovers like this, where the strong take over weak, overleveraged players, consolidating the industry, is a classic sign of a market bottom.
3)?? If stocks sell off from here you should get a rally in Treasuries that will be ripe for selling into. There is no way that investors are being compensated for their risk with yields at these levels, especially with massive global government reflationary efforts guaranteed to bring a resurgence of inflation. I think the futures contract on the long bond will collapse from 127 now to inder 70 in three years, once hyperinflation hits. With the leverage offered by a futures contract, the returns will be huge. However, this is not a riskless trade. There have already been several rounds of stop loss buying by traders who jumped into this strategy too early, as unimaginable buying kicked in at 120, 125, 131, 136 and finally 141. In Japan the ten year bond eventually hit a low of 0.46%, making our ten year at 2.85% look incredibly expensive. That works out to a futures price of 200 or more. Of course we are not Japan. The Treasury has done more to repair things in 60 days than Japan did in 15 years, and Japan has still not adopted full mark to mark accounting. Some 19 years after their bubble burst, the country is still seeing subpar growth, and ten year yields have made it back up to only a measly 1.25%. There are also constant games going on in the bond futures markets like expiration plays, engineered short squeezes in the underlying, and bogus news leaks. PIMCO, the Newport Beach based Pacific Investment Management Company, the world's largest private bond investor, plays this market like a violin. Still, I think it's worth a shot. Take another look at the Power Shares Lehman 20 year plus ETF (TBT), which gives you a 200% short on the sector. This will be the last bubble we can short into for a long time.
4) Jeffrey Schwartz, for the former CEO of the global logistics and warehouse firm Prologis (PLD) is not looking for a quick recovery of the economy, and sees a lot more pain for his industry. The firm suffered a near death experience last year and was only able to extricate itself with the sale of some Asian assets.?? Prologis is the world's largest developer of commercial warehouse space, and a leading manager of REIT's. The Denver based company employs 1,500, managing 2,898 properties, totaling 548 million square feet in 115 countries. It had been a highly leveraged call on the growth of international trade, which is now imploding with unprecedented speed. PLD's growth focus is still on China, where it has 38 million square feet of space, and land commitments to double that. It is investing $1 billion there over the next two years, counting on a government commitment to support the logistics sector. Investors certainly believe it. The stock has roared 57% in the last ten days. The company has announced that it is using the rally to issue new shares to wisely reduce its insanely high levels of debt. This will dilute existing shareholders by 50%, but hey, half of something is better than nothing, isn't it?
QUOTE OF THE DAY
'You can't swing a cat in the US without hitting a barrel of oil,' said Stephen Schork of the Schork Report, an energy newsletter.
Global Market Comments April 7, 2009 Featured Trades: (VIX), (SPX)
1) Today I spoke to my old Morgan Stanley boss , Barton Biggs, who is so bullish that he believes we are only one third to one half of the way through the current stock market rally. Barton, voted best international strategist for seven years, and one of the founding fathers of investment in emerging markets (with some pushing from me), now runs Traxis Partners, a major global macro hedge fund. This earnings season will be a disaster, with forecast S&P 500 earnings at $40-$55 or lower. But hedge funds are still net sellers of assets, according to well placed prime brokers, and most still expect a retest of the lows at 666 in the S&P, or new lows in the 400's. The capacity for the industry to take on new risk is therefore huge. Also encouraging is three consecutive monthly improvements in the Purchasing Managers Index (PMI). He sees this year as a replay of 1938, when a huge rally ensued after a long bear market, with 1938 valuations to boot.
2) This G-20 meeting certainly has been different from past ones, where the collective promises to stimulate the economy amounted to $1 trillion. Obama gave the Queen an IPod. Chinese president Hu Jintao gave Obama a gift made in China, while Obama gave him an American gift made in China. When George Bush first heard the term G-20 he shouted 'Bingo.'
3) The recession has gotten so bad that women in Beverly Hills are resorting to diet and exercise to lose weight. ?
4) There is a great debate raging in the markets right now over the stubborn persistence of the volatility index (VIX) remaining over 40%. Is it still too risky to go back into the market? Are we going to new lows? Is the next big move an updraft or a downdraft? Part of the confusion springs from a misunderstanding of what the VIX is. It is just a mathematical guess about how big the next move in the market will be.?? A 40% VIX implies that one out of three days will see a 2.25% palpitation, and once a month we will suffer a 4.5% gyration. You can have the market drop 10%, rise 11.1%, remaining unchanged, but still generate a tremendously high VIX. The equation doesn't care what the direction is. VIX unfairly picked up a bearish connotation because of the panicked rush by long side only investors to buy downside protection in falling markets, driving put implied volatilities through the roof. This is why investors associate a high VIX with falling markets. In the end, this debate can only be resolved in one way, and that is to the downside. Smart hedge funds are now shorting out of the money calls on VIX. VIX will crash when markets go to sleep, as they inevitably will. Be careful what you wish for. Traders don't pull down million dollar salaries playing 'Solitaire' on their computers.
QUOTE OF THE DAY
'Making money went out the door two years ago. We're just contributing to cash flow now,' said CEO Joe Anfuso of Florsheim Homes, a Stockton area residential home developer.
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