Diary Archives

June 12, 2009

Global Market Comments
June 12, 2009 Featured Trades: ($WTIC), (CRUDE), (COPPER), (FCX)

1) Since energy is going to be the dominant factor in making our investment decisions for the next decade, I thought it would be a good time to sit down with Carl Pope, Executive Director of the Sierra Club. Carl is as sharp as a tack, with the fervor of an evangelist, always a dangerous combination. In the spirit of full disclosure, I have to tell you that I was a member of the Sierra Club back in the sixties when they were mostly interested in identifying mountain wildflowers and bird calls. They changed a little after that. Carl says that the ?Earth has a fever,? with temperatures rising, glaciers melting, forests burning, oceans rising and acidifying, and the overwhelming cause is hydrocarbon burning. The US needs to cut CO2 emissions to 2 tons per person, per year, by 2050, or down 90% from today?s levels. To do this we need to ban the burning of coal by 2030, unless it is sequestered, and stop all petroleum consumption by 2040. We can accomplish this by converting all cars to electric and moving freight via an electrified rail system. Petroleum needs to be classified as toxic waste, and a cleanup superfund needs to be set up, funded by 10% of the earnings of the oil companies for the next ten years. If we eliminate oil consumption, our trade deficit will improve by $100 billion/year, that money can be invested in the US to create 10 million jobs, and we will all be a lot healthier. The biggest and quickest way to cut CO2 emissions is to convert all coal fired power plants to natural gas immediately, and Carl likes the Pickens plan (see my May 15, 2009 Newsletter ). Carl is not shy about using his 40 man Washington DC office to twist the arms of recalcitrant Senators and Congressmen to achieve these ambitious goals. I had to pinch myself. The Sierra Club has backed off from its earlier, more radical positions, and that much of what they are saying makes good economic sense. No more going back to a bicycle based economy. While 40 years is not exactly tomorrow, look how fast the last 40 have gone by. Remember pedal pushers, thin ties, fins on Chevy?s, and the Bay of Pigs? When contemplating your risk positions, you always have to consider all views. Who knew that $147/barrel would turn us all into environmentalists?

pope1.jpg picture by madhedge

2) I am constantly in search of the big macro numbers that explain the world to me, so it is with some fascination that I publish the chart below, courtesy of Mark Perry, which wonderfully quantifies the carnage we have endured since the 2007 peak.?? World stock market capitalization fell $35 trillion, or 54%. It has since bounced by $10 trillion over the last three months. Do you feel $10 trillion richer? I don?t think so. And you may be about to give up $5 trillion of that. If you throw in real estate and commodity losses, and net out gains from US Treasuries with losses in private bonds and derivatives, the net, net, net is that we went from a $100 trillion world to a $50 trillion world in two years. If I?m wrong on these figures, you can always deduct the difference out of my next paycheck.

3) Very, very rarely I find a comment that is so brilliant, that I feel obligated to quote it verbatim, in its entirety. Anything less would dilute its meaning. This is what Defense Secretary Robert Gates said in a recent issue of Foreign Affairs. ?Repeatedly over the last century, Americans averted their eyes in the belief that events in remote places around the world need not engage the United States. How could the assassination of an Austrian archduke in the unknown Bosnia and Herzegovina affect Americans, or the annexation of a little patch of ground called Sudetenland, or of a French defeat in a place called Dien Bien Phu, or the return of an obscure cleric to Tehran, or the radicalization of a Saudi construction tycoon?s son?? There is wisdom here for hedge fund managers and the rest of us too.

4) I have to tell you that my old friend, Dr. Copper, the only commodity that has a PhD in economics, has decisively broken resistance at $2.25 and hit a new high for the year at $2.40, up 78% from the year?s low. If you recall, I was feverishly pounding on the table trying to get people to buy the red metal at $1.35 in January. I also was pushing the world?s largest copper producer, Freeport McMoran (FCX) at $30. Is this the definitive breakout that will lead us into the next leg of the global equity bull market? I don?t know, but there is one thing that makes me feel queasy. Our illustrious state?s public employee pension fund, CALPERS, has announced that it is again making asset allocations to the commodities area. When they did this a year ago, it all ended in tears, putting in the spike tops in every commodity across the board, followed by the mother of all crashes. California teachers saw their pension payments cut. You would think that once burned is twice forewarned. Is history about to repeat itself? CALPERS, with $170 billion in assets, down a third from the peak, it?s just too big to play in this space. This is the playground of end commodity producers and professional traders. It?s like sharing a very small cage with a very large, 800 pound gorilla, who, oops, is horny. All they can do is damage. Better for them to go back to being a closet global index fund. But keep an eye on Dr. Copper anyway.

QUOTE OF THE DAY

?I?d rather lose an opportunity than lose capital,? said Doug Kass, President of Seabreeze Partners.

June 11, 2009

Diary

Global Market Comments
June 11, 2009

Featured Trades: (WTIC), (TBT), (CRUDE), (SPG)

1) I chatted with Jeff Rubin last night, former chief economist with CIBC World Markets, who reaffirmed my own hyper-bull case for crude in bucketfuls.? He was in San Francisco, admiring our civic planning and mass transit system, as part of a tour to promote his new book ?Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization.?? We are in the bottom of the ninth inning of the hydrocarbon age. The next super spike will take us to over $100/barrel within 12 months of the beginning of an economic recovery, and much higher after that. The problem is that we are losing 4 million barrels/day through depletion just when demand is increasing. The only offset will be dirty, foul, huge carbon footprint, $100/barrel Canadian tar sands, which will double, to account for 40% of our imports. The biggest increase in consumption is in OPEC itself, where consumption has ballooned to 13 million barrel/day and oil is being wasted on a prodigious scale, compared to only 7 million b/d in China. Gas there costs only 25 cents/gal, utilities in Saudi Arabia pay only three cents/gallon for bunker fuel, and Dubai is blowing 3,000 b/d equivalent running an indoor ski resort. Oil over $100/barrel will bring globalization to a screeching halt. Economies will go local because it will cost too much to transport goods, as we have in the past. No more California avocados in Toronto. More importantly, no more Chinese steel in the US, or any other heavy exports, which will lead to a resurgence in domestic manufacturing and the jobs that come with it. Last year $90 of the $600 cost of Chinese steel went to shipping costs. $10/gal gasoline will take 50 million of our 240 million cars off the road. Even if we replace them with electric cars, we don?t have the power grid to juice them. Chinese exports will collapse, but so will their Treasury purchases, meaning no more bailouts for us. Oops. Subprime neighborhoods will get plowed back into farmland so we can eat. I think Jeff is dead on about oil prices. But as necessity is the mother of invention, some of his? predictions about their impact on international trade are a bit extreme for me.

2) Just another update on my core short in long dated US Treasury bonds, the TBT, which hit a new high for the year of $60, up 72% from my initial call . The nine to eleven year note auction went off OK, despite its enormous size. What drove the yield on the ten year to a seven month high of 3.99%, the 30 year to 4.67%, and herded buyers into the TBT was the May US budget deficit of $190 billion, an all time record, despite massive inflows of income tax revenues.? There was also word that Russia didn?t want to buy any more US government debt because they hated the dollar. After having spent four decades on the front lines of the cold war, I have to pinch myself when I hear stuff like this. The news sent equities on a 200 point intraday swoon. If higher rates and $70 crude don?t go away, they are going to kill the stock market. Everyone is holding their breath for the 30 Treasury bond auction tomorrow. The time to pay the piper is coming, and his rates are going up.

3) The Dana Point, California St. Regis Monarch Beach Hotel has defaulted on a $70 million loan, while lenders have repossessed the ?W? Hotel in San Diego. Thus, the spotlight is again refocused on the next phase of the financial crisis, where an army of shoes are falling. A torrent of tenant bankruptcies is creating ?see through? buildings in cities throughout the country, which are becoming as abundant as Priuses at an Obama rally. Some players see a further three year bleed that could take property prices down another 40% from here. Large, publically traded REITS have used the three month stock market rally to raise $11.5 billion in new equity that will enable to reduce debt and leverage, as well as buy up of weak competitors and distressed property. Look at Simon Properties Group (SPG), up 128% from the March lows. The saving grace here is that the recent bubble was nowhere as inflated as the S&L crisis in the early nineties. But cap rates may have to climb to the double digit levels we saw then before this period of punishment ends. Cash rich hedge funds are circling.

4) The Western US has found a new wrinkle in the housing collapse, where homeowners are desperately struggling to cut living costs to meet the next doubling of their adjustable rate mortgage payments on their underwater houses. Raising horses can cost more than children, so Nevadans are turning them loose to join herds of wild mustangs, to dodge the $30,000/year it costs to board and care for them. Local populations are exploding, eating local ranchers out of house and home, who depend on public grazing lands to feed commercial livestock. Mustangs are the feral descendents of horses which escaped the conquistadores, and there are now thought to be 30,000 out there, down from a 19th century peak of 2 million. The Bureau of Land Management has another 30,000 in pens, and is making 10,000/year available for adoption at $125/each. The problem is that many adopt ?pets? who then flip them to Canadian slaughterhouses, which cater to the odd French taste for horseflesh. To see how this works, watch Clark Gable?s last film, The Misfits. Madeleine Pickens, the wife of famed oil trader Boone Pickens, has offered to take the BLM?s entire herd and put them out to pasture at an undisclosed million acre location. If there is anyone who could have an undisclosed million acres, it is Boone. I have frequently run into majestic and beautiful mustang herds over the years while camping in the remote desert (no, I don?t go to Burning Man). Reminding me that there is still some ?wild? in the ?West?, I will miss them if they are gone.

QUOTE OF THE DAY

?There will be no energy bailout. The Fed can?t print BTU?s,? said Jeff Rubin, former chief economist at CIBC World Markets.

June 10, 2009

Diary

Global Market Comments
June 10, 2009 Featured Trades: (FLS), (PTEN), (EPD), (KMP), (MS), ($TNX)

1) The market has gotten so dead here that I have started watching Suzie Ormand to get trading ideas. So I?m not supposed to run large balances on my credit card? Who knew? A hedge fund friend told me that the market is now like watching a ball tossed in the air that is at the apogee of its move, just before the free fall begins. No news, with shrinking volume and volatility. General Motors (GM) isn?t a stock anymore, so all of the news flow there might as well be a History Channel documentary. You can only sell so many out of the money short dated calls on other stocks before bumping up against risk control parameters. Even if you do make money in these conditions, it is at the expense of a Maalox addiction to fight the multiple holes in your stomach. It?s not worth it. This is why I prefer to spend my summers mountain climbing or practicing my ballroom dancing. Please see my ?Sell in May and Go Away? opus.

mountainclimber4.jpg picture by madhedge

2) Last January I said that I felt like a kid in a candy store when I looked at the oil service stocks here and here. Let?s see how those worked out. Flowserve (FLS) is a global supplier of pumps, valves, seals, automation, and services to the power, oil, gas, and chemical industries, and seemed like the deal of the century at a PE multiple of 7X. It has since soared by 88% from $45 to $85. Buying Patterson-UTI Energy (PTEN) at a 5X multiple seemed like a better idea because it operates 403 rigs for oil and gas drilling in the Midwest. It has exploded 125% from $7 to $16. Subsequent recommendations to buy Kinder Morgan Energy Partners (KMP) and Enterprise Products Partners (EPD) did just as well. As much as I love these companies, you have to take some money off of the table after such humongous moves. The entire sector tracked the up move in crude very nicely, dollar for dollar. If I am the least bit right to take profits in long positions in crude, as I mentioned in yesterday?s comment, you have got to cash in some chips in the oil service sector as well. I have always been a big fan of taking the easy money, and the easy money has been made. Long term, these are great holds, but short term, they?ve run ahead of themselves. Make the volatility work for you. Remember, you are dating these companies, not marrying them.

3) The world?s largest hedge fund is taking profits on one of its biggest positions. I?m talking about the US Treasury allowing ten banks to repay $83 billion in TARP money. I guess the banks really want to get the government green eye shades out of their board rooms, who have been surreptitiously swiping the soap out of the executive washroom. This means paying back 5% money when it costs 6% to fund in the markets, and 10% of you want to raise equity. I guess it?s worth it if this enables you to revive your celebrity golf tournaments in California for ?clients,? throw Caribbean parties for your top producers, and get the Gulfstream out of storage after it couldn?t be sold. Could bonus compensation also be an issue? Gee, do you think? I have to begrudgingly give the government credit for making a ton of money on this trade. Not only did they borrow from us at zero and lend at 5% in huge size. They also got, at the point of a shotgun, fistfuls of? equity warrants that have tripled. And they did stop the bank runs that took Morgan Stanley (MS) down to a near death experience of $6, boosting it back up to a positively virile $32. Alas, if only I could play by their rules. I have a question, Mr. Geithner. Does the government have to pay taxes on those profits? Will it report them?

4) First of all, let me warn you that reading this paragraph is a complete waste of time. Still interested? There is chatter about that the Fed is considering raising interest rates at its next meeting. After all, where can they go from zero, but up? The bond market is certainly telling us that rates should go higher, with yields on ten year Treasuries jumping from 2.45% to 3.95% since March. This is the usual kind of gibberish you get from financial journalists, who deep into a summer with no real news, resort to making stuff up out of thin air. US industrial capacity utilization is terrible and still falling, while unemployment is still rising at a record pace. Sure, commodity prices have doubled this year. But this is happening because investors are looking for an alternative to the sick dollar, not because there is huge underlying demand by end users. This is one of the reasons why I have recently become cautious about all of my long positions. So I can say with complete confidence that the chances of an interest rate hike are less than zero for the foreseeable future. This discussion did have the one benefit that it did enable me to fill this space in my newsletter.

QUOTE OF THE DAY
?If you think health care is expensive now, wait until you see what it costs when it is free,? said P.J. O?Rourke, an American satirist and former National Lampoon editor.

June 9, 2009

Diary

Global Market Comments
June 9, 2009

Featured Trades: (TBT), (CRUDE), ($WTIC)

1) Get me out of oil! I love a core long position in this commodity, and expect it to hit $200 before I join the AARP. But we have really gone too far, too fast, and are seriously in overshoot territory. Industry traders have been taking advantage of the greatest contango of all time, buying the front month contract, taking delivery, keeping it in storage, and reselling it forward to reap returns of up to 50%. And that is without leverage! Clever analysts are resorting to Google Earth to spy on storage facilities via satellite. Non industry players have been buying it as a dollar replacement. Crude burns better than dollar bills. As a result, crude in storage has ballooned to record levels. All fine and good when the price is going up. But crude can't stay this high once the sugar high that is sustaining the economy burns off. Better to bail now at $70 and buy it back at $50 once reality sets in. And for Heaven sakes, don't try to get to clever by shorting the stuff!

2) I have watched many countries go bankrupt over the years, as my collection of defaulted bonds hanging on my wall attests. Governments borrow so much that the cost of the debt service exceeds the national budget, so the country has no choice but to quit paying.?? I am starting to see disturbing parallels here. Bush took the national debt from $5 trillion to $12 trillion, and Obama will inflate it to $17 trillion by the end of 2010, boosting it to a frightening 82% of GDP. The cost of the borrowing is rising too. Today a 1% jump in bond yields raises the federal interest burden by $50 billion. The Congressional Budget Office says that figure will explode to $170 billion in ten years. Can you see the same hockey stick, hyperbolic, exponential growth in obligations that I do? Interest rates will soar to double digits, the dollar will crash, and private borrowers will get crowded out of the market, taking the economy into the tank. People blanche when I tell them that my target for the PowerShares US Lehman leveraged short government bond ETF (TBT) is $200, but the logic is inescapable.

3) I met with Dr. Christina Romer, chairman of the Council of Economic Advisors, who practically tore my ear off proselytizing her new found religion, health care reform. Appointed by Obama to advise him on all things economic, Dr. Romer had this hot potato dropped in her lap six weeks ago in one of her daily briefings to the President. With the enthusiasm and ebullience of a new found convert, Dr. Romer laid out goals that were nothing less than revolutionary. She plans not to just 'socialize' medicine, but to fundamentally rebuild the entire health care infrastructure of the US. Tax incentives will be created to encourage value over volume. People can keep existing plans they like. Technology will be applied to cut costs, not only to come up with more complicated and expensive cures. Existing subsidy programs for the poor will be folded into the new plan, offering coverage to 46 million uninsured.?? Providers will get cash incentives for prevention. Individuals will gain the advantages of risk pooling. Pre-existing conditions will be covered.?? All of this will be made revenue neutral through the taxation of employer paid insurance and savings through new efficiencies. If the administration can pull all of this off, the benefits will be huge. An annual 1.5% reduction in health care costs will add 8% to GPD and increase family incomes by $10,000/year by 2040. This will boost corporate profitability and competitiveness, labor mobility, the quality of life, and reduce the budget deficit and unemployment. Failure will see health care spending rocket from the current 18% to 33% of GDP in 30 years, and the number of uninsured explode to 76 million. Romer spewed out statistics as only an economics PhD from MIT can. Oh, and now or the stuff you care about. The economy will shrink in Q2, see no growth in Q3, and turn positive by Q4. The issue doesn't affect me, as I have always avoided health care, insurance, pharmaceutical, and biotech stocks like the plague; they being subject to capricious government approvals, and therefore inherently unpredictable. These are the opening shots of a political dogfight that will ensue over the next three months and dominate the media.

4) America's economy was powered by personal computers in the eighties, the Internet in the nineties, and credit cards and subprime loans in this decade. So what is America's next gig? I think conversion of the global energy grid to alternative sources is the best candidate. If you took this out of the realm of geeky engineering graduate students and high school science projects and made this a national priority and a defense issue, it could become a major GDP driver for decades. Using the broadest possible definitions, the number of green jobs could grow from one million today to 37 million in 20 years, or 17% of the total work force. Since many of these jobs are in local construction and installation they can't be exported. Last year, 8,000 megawatts of wind power was built, the equivalent of seven large coal fired plants, accounting for 42% of all new power generation. If the US develops cost competitive clean energy while China is still stuck using the expensive dirty stuff, it will have a competitive advantage that could reverse the terms of trade with the Middle Kingdom. The US would also have superior technology that it could sell to the rest of the world. I can tell you that green energy is one of the few themes that gets a hearing with venture capitalists these days, and this will be a major stock market driver down the road. I know this is all long term stuff, but remember buying Apple (AAPL) at $4 in the early eighties?

QUOTE OF THE DAY

'In a social democracy with a fiat currency, all roads lead to inflation,' said legendary hedge fund manager Bill Fleckenstein.

June 8, 2009

Diary

Global Market Comments
June 8, 2009

Featured Trades: (VIETNAM), (BIDU), (SOHU), (NTES), (SINA), (GOLD)

1) If you think that the place where China does its offshoring would be a great investment, you'd be right. Vietnam has been one of the top performing stock markets this year, its index rising by an amazing 85%.?? It was a real basket case last year, when zero growth and a 25% inflation rate took it down 78% from 1,160 to 250. This is definitely your E-ticket ride. Vietnam is a classic emerging market play with a turbocharger. It offers lower labor costs than China, a growing middle class, and has been the target of large scale foreign direct investment. General Electric (GE) recently built a wind turbine factory there. You always want to follow the big, smart money. Its new membership in the World Trade Organization is definitely going to be a help. Remember what happened when China joined the WTO? Until now, the only way to get involved with this country was to go through the tedious process of opening a local currency brokerage account, or buy a region sub emerging market ETF. But now there is a vehicle to get in and out of this ultra emerging market easily, through the London listed Vietnam Opportunities Fund (VOF.LN), run by Vena Capital Management. I still set off metal detectors and my scars itch at night when the weather is turning, thanks to my last encounter with the Vietnamese, so it is with some trepidation that I revisit this enigmatic country. Throw this one into the hopper of ten year long plays you only buy on big dips, and go there on vacation in the meantime.

2) After nearly four decades in the industry, I can tell you that stocks can be snarly, bad tempered beasts that would as soon as bite you as give you rabies. So it is a rare pleasure when I get to trade securities like the Chinese Internet companies, which have been purring away like a domesticated kitten. If you need further proof of where the future growth in the global economy is coming from, take a look at Bidu (BIDU), the Google of China, which I strongly recommended on March 6. It has jumped 280% from the lows to $280, and has been one of my better calls of the year. In the meantime, our Google (GOOG) rose by only 48% to $435, just 8% more than the S&P 500. These hedge fund darlings are best of breed companies, but the Chinese one outperformed the American counterpart by a factor of 6:1. This is the consequence of the US economy making a permanent shift from a 5% growth rate to 1.5%-2%, and is a pattern you can expect to see repeated around the world for the next decade. The cruel truth here is that American companies, with the drag of a mature economy, will never command the same multiples of Chinese ones. When looking for long equity exposure, always look for Chinese ones first. Expect huge growth of the four horsemen of the Chinese Internet sector-Netease (NTES), Sina (SINA), and Sohu (SOHU), and BIDU- who are going to eat our lunch.

3) Brace yourself for the impending gold shortage. Gold shortage? Yup. Last year, South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232 tons. It now ranks only third in global production of the yellow metal, after China and the US. Severe electricity rationing, a shortage of skilled workers, and more stringent mine safety regulations have been blamed. Choked off credit has frozen the development of new capital intensive deep mines, as it has for everybody else. Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce. In the meantime, the financial crisis has driven flight to safety demand for gold bars and coins to all time highs. Last year, the US Treasury ran out of one ounce $50 American Gold Eagle coins, now worth about $980. Competitive devaluations by almost every central bank, except Japan, mean that currencies are not performing as the hedge that many had hoped. It all has the makings of a serious gold shortage for the future. Could last year's downturn be a blip in the eight year bull market? When we break $1,000, which could happen any day now, watch out above!

4) The sushi market has crashed. Premium blue fin tuna for sale at Tokyo's Tsukuji fish market, where I once lived next door, have seen prices drop 30% in the past year. The monster 500 pound frozen fish, which in better times fetched as much as $60,000 each in open outcry auctions, have gone out of favor. A Q1 GDP of -4.0% and a 5% unemployment rate have brought cutbacks in Japanese business entertainment spending as well as supermarket purchases of luxury items. This is despite a rising shortage of the best grade catches that has driven fishermen as far away as Antarctica. I'll let you know when prices start to tick up, as it could be a great leading indicator for the Japanese stock market.

QUOTE OF THE DAY

'The fall of a great nation is always a suicide,' said the great British historian Arnold Toynbee.

June 3, 2009

Diary

Global Market Comments
June 3, 2009

Featured Trades: (C), (BAC), (MS), (GS), (JPM), (LUMBER)

1) For me it's d??j?? vu all over again. When I traded the Nikkei during the nineties, every market rally was capped by a predictable flood of new equity issuance by cash starved, undercapitalized Japanese banks. It sucked the life out of the market for a decade, confining it to a monotonous 14,000-20,000 range, until it finally dropped by half again after the dotcom bust. Sound familiar? This was while the Dow was going from 2,000 to 10,000. Now the tables are turned. Last month saw American banks soak the market with new equity on an unprecedented scale; Citibank (C) $58 billion, Bank of America (BAC) $25.9 billion, Morgan Stanley (MS) $6.8 billion, Goldman Sachs (GS) $5.8 billion, and JP Morgan (JPM) $5 billion. If the market edges higher, we will no doubt face more supply. I have no doubt that this will define the top end of a range in the Dow that we will have to live with for quite a long time. Volatilities will crash. Better to go trade China, Brazil, India, or any other country that has large cash surpluses and relatively healthy banks.

2) If you are wondering about those funny looking little cars in parking lots around the city, you better go to Scott Griffith, CEO of Zip Cars. The online membership-only car rental company makes available 6,000 Mini Coopers, Priuses (Priai?), Scions, BMW three series, and other small cars to its 300,000 members for rent at $9-$10 an hour, gas and insurance included. Once a reservation is made, the company emails the car to open up for the member to drive away. You can rent a car on your PDA while standing next to it (http://www.zipcar.com). The entire process is untouched by human hands. The privately held company says that 14 million potential customers in the US are a ten minute walk away from their cars, and that the global market for this service is 37 million.?? Zip Cars, which merged with Flexcar in 2007, sees increasing demand from economizing families looking to them for second cars. Vehicle choices are made by customers, and there has never been a request for a GM or a Chrysler.

3) Those fortunate few who took my advice to go long lumber futures can now go out and build a bonfire to celebrate. Since then, the homebuilder's favorite commodity has rocketed by 35% to $200. The biggest producers, Weyerhaeuser (WY), Rayonier (RYN), or Louisiana Pacific (LPX) have also done well. The last gap up was prompted by more mustard seeds that the housing market may have hit bottom. The enormous subsidies offered to first time buyers is also helping eat into inventories.?? After seeing similar Chinese inspired moves in copper, crude, and coal, this is further proof of the beginning of a much broader, long term bull market in commodities.

4) If you are interested in alternative history, as I am, you will be fascinated by a Barrons interview with Douglas Holtz-Eakin, John McCain's economic guru, and current president of an economic consulting firm.?? The new Republican president would have offered a smaller stimulus package, relied more on tax cuts, and let the big banks and car markers go under. Health care and education reform would have gone forward in a much diluted form. The gas tax may have been axed. What Holtz-Eakin doesn't say is that these policies would have produced a deeper, longer global recession, taken the Dow down to 4,000, the dollar up to parity with the euro, and 30 year Treasury yields down to 2%. I think it is also safe to assume that McCain's first choice for a Supreme Court appointment would not have been Sonya Sotomayor.

QUOTE OF THE DAY

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

June 2, 2009

Diary

Global Market Comments
June 2, 2009

Featured Trades: (SILVER), (NATURAL GAS), (GM)

1) The big thing for me yesterday was the long awaited (well, maybe not so long) upside breakout in silver to a new six months high of $16.00, up 95% from the October lows. Please see my warning of the impending move at. The metal is at the low end of its historic valuation relative to gold, which has ranged between 12:1 (Remember the Hunt Brothers?) and 70:1 and is currently 62:1. Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon's mine, to Nazi gold bars in Swiss bank vaults, and would fill two Olympic sized swimming pools. But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps. Silver did take a multiyear hit during the nineties when the world shifted from silver based films to digital photography. Now, rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference, as in Latin America. That means we are setting up for a classic supply demand squeeze. I think we could run to the old high of $50/ounce in the next economic cycle. Since silver can trade with double the volatility of gold, this forecast could prove conservative.

2) Every evening, after the cleaning staff has swept up the discarded trade tickets from the floor, the networks have swapped relentlessly opinionated commentators for game shows, and all but the most ambitious traders have decamped for the bars across the street, I sit down and go over my portfolio, asking myself a few key questions. Have I gone completely insane? What have I missed? Are these the positions of someone who has gone completely barking Mad (oops)? Just as I was going through this exercise last night, a long time friend from the energy industry, who used to put me up in his Dallas mansion when I was wildcatting for natural gas in the Barnet Shale a decade ago, called me up and told me I was out of my tree putting people into NG at $3.60.?? Huge discoveries, such as the Hainesville shale in Alabama, have made available enough NG to last the US another 50 years. The new generation of fracting technology, while great for taping into marginal, low grade fields, is much more difficult to turn off when prices are low without causing permanent damage. And then there is the looming threat of large scale LNG imports from abroad. The big gas companies will be forced to dump whatever they have on the market at any price, possibly taking prices this summer down to $2, or even $1. This, after all is the mother of all overshoot contracts. Of course, one could argue that these risks are what already took it down to $3.20, and that industry demand will happily soak up the excess supply. Did I mention that the hurricane season started yesterday? Only Mr. Market knows for sure, and he ain't talking. In the past month, my calls have enabled traders to catch a 50% move in NG, followed by a 20% move (http://madhedgefundradio.com/April_14__2009.html ). No one will think less of you if you want to cash out here at $4.30 and stay on the sidelines until a more definitive bottom is put in. As they love to tell you in flight school, there are old pilots, and there are bold pilots, but there are no old, bold pilots.

3) The fat lady finally sang. General Motors (GM) is gone at last. Don't look at the share price, which now trades in pennies, down from $90. Look at the labor force, which has shrunk from 360,000 to 39,000 on its way to 18,000. I sat at Ralph Nader's knee (because there were no chairs) 40 years ago, who wore his unfashionable trademark white shirt and pencil thin tie. He was fresh from the runaway success of his book Unsafe at Any Speed, which castigated GM for its Corvair, which had the unfortunate tendency to explode when hit from behind. Even then he was predicting the demise of GM. Companies that recklessly kill off their customers and produce inferior products at high prices can't last, he said. Fuel efficiency and the environment came later. Many people considered him a communist then, for bashing GM was considered unpatriotic by most and treasonable by some. No doubt J. Edgar Hoover's FBI was following his every move. I think that Obama should now make Nader a director of GM, along with that other GM hater, Michael Moore.

4) I have made a lifetime hobby of analyzing scams out there, partly to warn my investors, but also driven by my fascination with the creativity and determination of crooks intent on extracting cash from the unwary (for the last one, see how to raise money for your hedge fund at http://madhedgefundradio.com/March_27__2009.html). In the San Francisco Bay Area, the new con is to rent out a house you don't own. The unscrupulous are targeting any of the thousands of abandoned or empty homes in the high rent region, changing the locks, and then renting them out below market on Craigslist. The victims sign a lease, pay first and last month's rent, plus a two month security deposit, and move in. They don't realize they've been had until the lender, the sheriff, or the true owner shows up to evict them. No wonder that credit check went so easily! To protect yourself, go to www.foreclosureradar.com, which will tell you if that property you are lusting after is delinquent, in foreclosure, or scheduled for auction, before you lay out any cash.

QUOTE OF THE DAY

'I think I timed this move perfectly. I'm at a last place network, I'm moving to a state that's bankrupt, and tonight the show is sponsored by General Motors,' Said Conan Obrien on his opening monologue of the Tonight Show.

June 1, 2009

Diary

Global Market Comments
June 1, 2009

Featured Trades: (CRB), (GOLD), (CRUDE), (SILVER), (MEE), (FCX), (MSFT), (ORCL), (INTC), (CSCO)

1) If you have been aggressively long commodities of every size, shape, color, and flavor, as I have been all year, then you just had one of the best trading months of your career. The CRB index rocketed by 17% in May, the best move since the early days of the first oil shock in 1974. That year I spent weekends driving my Volkswagen van from Los Angeles down to Mexico, where I filled it with jerry cans of gasoline because it was still selling for 25 cents a gallon there (an early attempt at arbitrage). I finally sold the vehicle and used the cash to buy a one way ticket to Japan (Remember that John E?). My favorites went up the most. Crude leapt 29%, Silver clocked in a 23% return, and gold was up 9%. The producing stocks also did spectacularly well. Coal producer Massey Energy (MEE) soared by 44%, dragged up by oil, while my beloved Freeport McMoran (FCX), with the world's largest gold and silver reserves, rose by 30%. While these things are all superheated on a short term basis, the ten year agreements are still good. You can find massive Chinese buying behind almost every one of these. Hmmmm, I wonder if those bell bottoms still fit.

2) Expect to hear a lot about ignition in the next year. No, I don't mean the rebuilt ignition for the beat up '68 Cadillac El Dorado up on blocks in your front yard. I'm refering to the inauguration of the National Ignition Facility next door to me at Lawrence Livermore National Labs. The home of the hydrogen bomb was set up amid the vineyards and cow pastures of this bucolic California suburb so if someone accidently flipped the wrong switch, it wouldn't blow up San Francisco, or more importantly, Berkeley. The $5 billion project aims 192 lasers at a piece of frozen hydrogen, using fusion to convert it to helium and unlimited amounts of clean energy. The heat released by this process reaches 100 million degrees, hotter than the core of the sun, and will be used to fuel convention steam electric power plants. There is no need for a four foot thick reinforced concrete containment structure that accounts for half the construction cost of conventional nuclear plants. The entire facility is housed in a large warehouse. The raw material is seawater, and a byproduct is liquid hydrogen, which can be used to fuel cars, trucks, and aircraft. If this all sounds like it is out of Star Trek, you'd be right. I worked with these guys in the early seventies, back when math was used to make things, and before it was used to game financial markets, and I can tell you, there is not a smarter and more dedicated bunch of people on the planet.?? If it works, we will get unlimited amounts of clean energy for low cost in about 20 years. Oil will only be used to make plastics and fertilizer, taking the price down to $10 for domestic production only. The crude left in the Middle East will become worthless.?? Coal will only be found in museums, or in jewelry. If it doesn't work, it will melt the adjacent Mt. Diablo and take me with it. If you don't get your newsletter tomorrow, you'll know what happened.

3) The US is turning into Europe. Think high taxes, chronic high unemployment, more government involvement in everything, less innovation, and much lower growth, in exchange for a social safety net and better coffee. That is the message the markets told us by retreating to the 6,000 handle in March, levels not seen since 1996, and down 54% from the 2007 peak. Equity prices are shrinking to multiples, in line with a permanently lower long term growth rates of maybe 1%-2%, a shadow of the 5% rate seen for much of this decade. Perhaps this is what mature economies are supposed to look like. If someone is holding a gun to your head and you must buy American stocks, only select names that get the bulk of their earnings from overseas. Microsoft (MSFT), Intel (INTC), Oracle, (ORCL), Cisco (CSCO) all get 60%-70% of their profits from overseas, where up to 90% of the real economic growth will come from for the next decade. Commodity and agricultural companies and ETF's also fit this picture. As for me, I think I'll move to Tahiti and live off of coconuts and freshly speared fish, wearing only a loin cloth. Anything is better than becoming French.

4) It's another sign of the times when the weekend fruit picker population is doubled by people hard hit by the economy,?? looking to save money on food costs. After driving through miles of undulating brown hills studded with oak trees, passing mile upon mile of horse ranches, rusted out cars, and abandoned mobile homes, you come to Brentwood, the fruit capital of Northern California. There, thousands of families harvested ripe bing cherries and peaches at the wholesale price of $1 a pound, fruit that normally costs $6 a pound at the supermarket. Anything you eat in the orchard is free. All a great deal if you don't mind having purple fingertips at the end of the day. Just watch out for the cars pulled over on the side of the road on the way home, their occupants puking out all their excess cherries. In a nod to the 21st century, growers in this Grapes of Wrath industry compile lists of email addresses, and notify their itinerant fruit pickers which crops are ready for harvest via the Internet. Also on the calendar this season are grapes, apples, apricots, plums, loquats, nectarines, mandarin oranges, and wheel chair accessible walnuts (?). At the end of each harvest, professional crews sweep through and pick up what's left, if the prices will bear it. If you wonder why we put up with the earthquakes, high taxes, gridlocked politics, and a non functioning state government, this is the reason. By the way, does anyone know what to do with 25 pounds of cherries? Send me your recipes.

QUOTE OF THE DAY

'You have to be very careful giving up analogue dollars for digital pennies,' Said Jeff Zuker, CEO of NBC.

May 29, 2009

Diary

Global Market Comments
May 29, 2009

Featured Trades: (GM), ($BDI), (DRYS)
Special Shipping Issue

1)The imminent demise of General Motors (GM) will be a nail in the coffin for the commercial real estate market, which I believe will be the financial crisis of 2009. Some 2,000 dealers are being axed, dumping hundreds of millions of square feet on to a market that least wants it. These were the guys who sponsored the local baseball team and Girl Scout cookie sales, and their absence will rip the hearts out of hundreds of American communities. Much of this is prime space, near dense populations, with great frontage, adjacent retail space, completed site work, mitigated environmental work, and already zoned for commercial use. Some might get turned into mini malls, but I'm afraid more will end up as indoor climbing walls and paintball battlefields. Commercial real estate sales are off 73% this year, while vacancies have catapulted to 16.7%. Banks have seized 464 properties so far in 2009, including $7 billion worth in March alone, and thousands more are on the brink.

2) If you are not a captain on a bridge somewhere, ready with orders to repel boarding pirates with fire hoses, you might be forgiven for being unaware that the Baltic Dry Shipping Index ($BDI) has gone up an unbelievable 20 days in a row. This market for bulk cargo charter rates made investors seasick last year when the near complete shutdown of international trade and a cessation of credit took the index down a mind boggling 94%, from 12,000 to 650. At that level, the market was pricing in a probability that no ship would ever sail anywhere again, and that the global fleet would permanently rust at anchor. A slow thawing of credit has drawn in some hot money that has taken the BDI back up to 3,400, a handy 560% gain in six months. It has also been matching the revival of commodity markets tick for tick. The chart below looks like crude with a turbocharger. In additional to being a favorite topic to impress friends with at dinner parties, the BDI has also become a favorite of the 'green shoots' crowd as proof that the world is not going to end after all. After so many things have had great runs, there are a lot of charts that look like this now (Crude, FXI, etc.). This one is just the most extreme.

3) The Athens based, Dry Ships Inc (DRYS), which operates a fleet of 40 coal and iron ore carriers, has done almost as well. After my call to buy it in December at $4, after a crash from $110, it popped to $18, and currently is churning around $7. The company launched three equity fund raisings since then, bringing in over $1 billion to pay off debt. It slashed operating expenses, cancelled orders for new ships, and wrote off defaulted charter contracts.?? The always colorful CEO George Economou, says he now has $1.67 billion in cash and is prowling for takeover targets. Keep this great trading vehicle on your radar screen as a supper leveraged call on the recovery of the global economy.

4) I met with my congresswoman last night, Ellen Tauscher of the 10th district, on her way to Senate hearings for her appointment as Undersecretary of State for rms Control and International Security. Helen started out life on Wall Street at the old Bache & Co. as one of the first female members of the NYSE, became an entrepreneur, and spent the last 13 years in congress overseeing all things nuclear ('If I told you the details I'd have to kill you').?? It looks like Obama is going to adopt Teddy Roosevelt's approach to foreign affairs of 'walk softly, but carry a big stick.' 'There's a better way to do it than just offering up our military,' she said. 'We want to go back to the high ground on the nuclear issue,' she continued, which meant restarting the destruction of some of our stock of 5,000 weapons already agreed to by treaty with the Russians. Her new responsibilities will include nuclear, biological, and chemical weapons control, the monitoring of nuclear power plants, treaty compliance, and the reigning in of Iran and North Korea's nuclear ambitions. On the financial bailout bill, for which she voted, she opined, 'If your neighbor's house is on fire, it's in your self interest to do something about it.' She thinks that California has a nonworking government model that needs a constitutional convention to fix. The Republican Party has marginalized itself by sacrificing its moderates for the sake of ideological purity. That is what prompted Senator Arlen Specter to change parties. Good luck working for Hillary at Foggy Bottom.

QUOTE OF THE DAY

'Cheap is not a sufficient condition in which to invest in these times. It has to be combined with credit worthiness,' said Marty Whitman of the Third Avenue Funds

May 28, 2009

Diary

Global Market Comments
May 28, 2009

Featured Trades: ($WTIC), ($NATGAS)

1) That great sucking sound you hear is the air going out of the housing recovery- punctured by the collapse of the bond market and the spike in interest rates. Interest rates on 30 year fixed rate mortgages gapped up from 5.03% to 5.29% in just one day, up from the 4.50% low two months ago. This underlines what a difficult position the government is now in. While all the stimulus spending is great, the need for epic financing is triggering a collapse of the dollar and the bond market. The resulting soaring interest rates are bound to snuff out any recovery. Obama is truly caught between the Scylla and the Charybdis. (non antiquities scholars see Homer's Ulysses).

2) Those who missed the last 50% move in natural gas got a second chance to visit the trough this week, with the pull back to $3.50 from $4.59. Buying above an industry wide 'cap in' price of $3.50 seems a no brainer to me, but is controversial nonetheless. This is a fraction of the $13.50 peak seen last year. You can bet that every electric power utility in the country is scampering to acquire advance supplies, many mandated by new environmental regulations to use the clean burning fuel, taking advantage of a rare opportunity to buy at the cost of production. Natural gas is still a steal at these levels for the long term. They don't call this the widow maker for nothing, and if the volatility seems daunting, play in smaller size through the CME Emini contract, which only has $10,000 worth of underlying (2,500 MM?? BTU).

3)?? With crude topping $63 yesterday, a near double from the low, the next super spike in prices may come sooner than you think. Despite a long history of lying and cheating, OPEC has managed to cut production by 3.3 million barrels a day from last year's peak, thanks largely to the heroic efforts of Saudi Arabia. The International Energy Agency says that thanks to collapsing prices and the disappearance of financing, investment in new production facilities fell 15-20% last year. That has taken the number of rigs in use globally down 32% to 2,055. OPEC countries have cancelled or delayed 35 large projects, taking a potential 5.5 million barrels a day of potential production off the market. One of America's largest suppliers, Mexico, will flip from an exporter to a net importer in the next five years. While Obama's new pronouncements about green energy are laudable, so far, it is just that, talk, without funding and any ability to generate a significant impact on the market for a decade. One speech doesn't slow down the five ultra large crude carriers headed our way every day. There hasn't been a whisper about conservation. Read the writing on the wall. If and when we do get a real economic recovery, watch out! $200, here we come!

4) To highlight again the pitiful state of public education in the US, I learned that six out of the last ten winners of the Scripps National Spelling Bee were of Indian descent, and several of these were home schooled. Last year's winner was Sameer Mishra, who correctly spelled 'numnah', a sheepskin used to prevent chafing between horse and saddle. The word is not even in my Microsoft spell checker. To win these contests kids not only have to learn almost every word in the English language, they also have to be knowledgeable of the Greek and Latin root languages. A smattering of Arabic, Dutch, French, Swedish,?? and Hindi helps too (the origin of 'numnah').When told the word, the nine year old Sameer said 'That's a relief.' See http://www.youtube.com/watch?v=IL6R2uEMTdM . This year the event will be disrupted by the demise of several of the sponsoring newspapers, such as the Rocky Mountain News.

QUOTE OF THE DAY

?When commodities are available for less than the cost of production, something good usually happens,? said Wally Weitz of Wallace R. Weitz & Co. of the current natural gas market.