Featured Trades: (THE BANK OF AMERICA MELT UP), (BAC)
3) The Bank of America Settlement is Huge. For those Macro Millionaires who bought the (BAC) March, 2011 $12-$14 call spread that I recommended on December 7, this is your big payday. The North Carolina based 'too big to fail' bank announced a settlement with government agencies Fannie Mae and Freddie Mac over claims that (BAC) failed to adequately disclose the risks on 787,000 home mortgages they bought. Estimates of (BAC's) potential liability from the suit ranged up to $250 billion, and likely criminal prosecution of senior management. The settlement amount came in at only $3 billion.
Needless to say, this is a hugely positive development for the stock, which opened up 6% Monday morning, and is now up $2.54, or 22% from my initial trade alert. The March call spread has skyrocketed from 56 cents to $1.40, a gain of 150% in four weeks. Those who sold the March, 2011 $10 puts against the position made even more. I bet you didn't think your first trade in a new, untested, and unknown program would generate the best trade of your life. But I did.
I just ran the numbers on the Macro Millionaire portfolio, and in your first month you have earned a total return of nearly 17%. Of this, nearly half, or 7.50%, is accounted for by the (BAC) position. At this point, the spread is worth $1.40 out of a potential maximum value of $2 on expiration. So you have already wrested 70% of the potential profit from the trade.
I am convinced the call spread will expire at its $2 maximum value on March 18. But when you make this much money this fast, and one position accounts for such an outsized portion of your total performance, it becomes a risk control issue. So the more cautious among you might consider cutting half the position. I am going to hang on for the 'E ticket' ride for now, but when I bail, you'll be the first to know.
Well done, Macro millionaires!
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Featured Trades: (MY RUN IN WITH THE LAW)
3) My Run in With the Law. I'm sorry I'm late getting my letter out today. I was racing home from San Francisco on Highway 24 when the California Highway Patrol pulled me over for doing 80 mph in a 65 mph zone.
The officer asked me where the fire was, and I told him I was rushing back to my office to get my investment newsletter out. He asked if this was like a stock market letter, and when I said yes, he informed me that in addition to speeding, I would be cited for a pink taillight.
I pointed out that several pension funds relied on my letter for direction and that the sooner they got it, the better their performance would be. The officer then asked if CALPERS, the California Public Employees Retirement System, was one of those. When I confirmed this, he told me that this was his pension fund, that it had lost a third of its value in the last two years, and tacked on a third violation for excessive smoke belching out of my tail pipe.
I upped the ante by informing him that a lot of home owners read my letter for real estate advice. The cop sighed that his own house had dropped in value by half, and hit me again for using my cell phone while driving, a $148 fine.
Then I noticed a Marine Corp. gunnery sergeant's pin on his uniform. I casually mentioned that I had been a jarhead captain and was a combat pilot in Desert Storm. He murmured under his breath that he hated all officers, and then noticed the life sized blow up Barbie Doll sitting in my passenger seat that I used to gain access to the carpool lane.
As he handed me my fifth citation for illegal use of a commuter lane, a minimum $340 fine, I decided to keep my mouth shut. Who knew we financial types were so unpopular on Main Street? Looks like the next time I need to rush back from the city, I'll be riding my bicycle.
Featured Trades: (FRONTIER MARKETS), (EEM)
3) The 'Frontier' Markets are Beckoning. A quick look at the world's top performing stock markets during the first half of 2010 will not exactly ring bells for many investors. Bangladesh came in tops with a 40.7% gain, followed by Sri Lanka (34.6%), and Venezuela (18%). You have to get down to Chile, number four, to find an ETF (ECH), and to Thailand (TF), to find a fund peripherally covered in this letter (click here for the link). Only two of the top nine countries have dedicated funds.
Having a hard time finding any of these in your portfolio? Therein lies the problem.? This is turning into a year when the world's least liquid, most untradeable countries offering minimal amounts of public information and disclosure, are bringing in the best returns, shutting most of us out.
The Lilliputian size of these markets, where total market capitalization is less than that of a single medium sized company in the west, is keeping the big institutions out. The best gains are increasingly coming from outside the mainstream BRIC countries of Brazil, Russia, India, and China, which are becoming increasingly crowded with foreign index funds, ETF's, hedge funds, and even individual investors fleeing subpar performance in the US.
These are being labeled as 'frontier' or 'pre-emerging' markets by early stage investors. Jim O'Neill at Goldman Sachs, who originally coined the term 'BRIC' a decade ago, refers to several of them as the 'N-11' (click here for 'Goodbye BRIC's, Hello N-11').
They all offer the same story; an emerging middle class bursting on to the world economy, generating white hot growth rates like those seen in Japan (EWJ) in the fifties, Singapore (EWS) in the seventies, or China (FXI) today. These countries typically offer great infrastructure plays in banking, telecommunications, and construction.
Expect to hear a lot more about these markets in the future, and for your investment lives to become complicated as a result.
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The Frontier Markets Are Beckoning
Featured Trades: (AAPL), (STEVE JOBS)
2) Apple's next stop: $1,000. When I took a young, cocky, long haired, Levis wearing Steve Jobs around to meet Morgan Stanley's institutional investors to pitch an Apple share offering 28 years ago, I vowed never to buy anything from the man. He was such a great salesman, and possessed such a messianic devotion to his product, the risk of getting legged over had to be great.
This proved a good strategy for the next 18 years, when the company nearly went under three times, and the stock repeatedly plunged from its initial listing price of $22 down to $4. Disastrous products like the Apple Newton came and went, and then poor Steve got fired.
Living in the San Francisco Bay Area, I was also creeped out by the fanatical cult following that Steve enjoys. Criticize an Apple product here, and you risk getting attacked, ostracized, deleted from address books, and chopped off Christmas card lists. There was also no end of abuse from my IPod and Imac addicted kids.
I have to confess now that my prior prejudices caused me to miss the boat on Apple for the last decade, when the stock soared from $4 to $275, eventually topping Microsoft (MSFT) with a nearly $300 billion market capitalization. To see the company bring out a ground breaking, high end $499-$829 product like the IPad and sell 2 million units in a short two months during appalling economic conditions is nothing less than amazing. The recent stock performance has also been miraculous, bouncing back from a flash crash low of $195 to challenge its old high in a matter of weeks.
Forecasts for the global smart phone market are ratcheting up by the day on the back of surging demand from emerging markets. Sales could reach 250 million units annually by 2012, of which 17% currently is sold by Apple. The company has become a monster cash flow generator, spewing out $12 billion over the last 12 months. It sits on a cash mountain of $23 billion, or $45/share. Apple now has the envious problem in that sales of several of its products are going hyperbolic at the same time.
Some analysts have Apple's earnings skyrocketing from the current $12/share to $30 over the next two years, which at the current 22 multiple would take the share price up to $675. If the company's multiple expands to its pre crash average of 35 X, that would take the stock to a positively nose bleeding $1,073, giving it a 400% return over the next two years.
I'm not saying that you should rush out and load up on stock today. But it might be worth taking a stake on the next wave of fear that strikes the market.
To prove that I am not the world's worst Apple analyst, let me tell you about Ron Wayne, who owned 10% of Apple (AAPL) and you sold it for $800 in 1976. What would that stake be worth today? Try $22 billion.
That is the harsh reality that Ron Wayne, 76, faces every morning when he wakes up, one of the three original founders of the consumer electronics giant. Ron first met Steve Jobs when he was a spritely 21 year old marketing guy at Atari, the inventor of the hugely successful 'Pong' video arcade game. Ron dumped his shares when he became convinced that Steve Jobs' reckless spending was going to drive the nascent start up into the ground, and he wanted to protect his assets in a future bankruptcy.
Co-founders Jobs and Steve Wozniak kept their original 45% ownership. Today Job's 0.5% ownership is worth $1.5 billion, while the Woz's share remains undisclosed.
Ron designed the company's original logo and wrote the manual for the Apple 1 computer, which boasted all of 8,000 bytes of RAM (which is 0.008 megabytes to you non-techies). Today, Ron is living off of a meager monthly social security check in remote Pahrump, Nevada, about as far out in the middle of nowhere you can get, where he can occasionally be seen playing the penny slots.
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What a Long and Windy Road It's Been
Featured Trades: (FOR PROFIT EDUCATION)
3) The Big Hedge Fund Killing in For Profit Education. Hedge funds have made huge profits this year by shorting the for-profit educational sector.
The industry was ripe for the taking. For two decades, for-profit schools have lured gullible students with inflated promises of impressive sounding degrees which they pay exorbitant tuition to obtain. In education's version of the subprime crisis, creative financial aid departments obtained cheap government loans to finance the entire program.
There are now over 2 million attending these institutions, accounting for 10% of all higher education in the US, and the profits that have poured in have been absolutely massive. Early investors rode the IPO train all the way to the bank. The problems arose when few students ever achieved these laudable goals.
According to Department of Education statistics, 55% of US college students obtain a degree within six years. At the University of Phoenix (click here for their website at http://www.phoenix.edu/ ), with 400,000 students, the largest for-profit university, only 36% meet this deadline, only 6% at some campuses, and a mere 4% of online students. Dropouts end up defaulting on loans that can amount to as much as $100,000 for a worthless, incomplete bachelor's degrees, and up to $200,000 for advanced degrees.
It now looks like the gravy train is about to end. Secretary of Education Arne Duncan has promised a crack down on the industry, bringing in more regulation and prosecutions of deceptive marketing practices, where degree programs are sold like time shares. The leading accreditation organizations are also having second thoughts about the for-profits, where 95% of the instructors are part time and tenure is unknown. Complaints are rife about shoddy teaching standards and missing doctorates.
The government has funded $750 billion in student loans, and while 10% of public university loans go unpaid, the default rate at for profit schools is thought to be as high as 50%. Starve these schools of subsidized government funding, and their shares are history. And just try and get a job with one of these Mickey Mouse degrees.
Some of the worst offenders have already seen cataclysmic declines in their share prices this year, like Apollo Group (APOL), -37%, Capella Education (CPLA), -45%, and DeVry (DV), -37%. And a Republican win of the House of Representatives in November has enabled these stocks to rally in the hope that this will cause some heat to disappear.
There is no trade in these stocks here, as they have already fallen too far to make them attractive shorts, and I don't want to touch the long side with a bargepole. However it is a great example of how the hedge fund industry performs a public service by ferreting out corrupt practices and crooked management and taking their capital away by crashing their stocks. Making a few hundred million dollars along the way is nice too. Call it creative destruction with a turbocharger.
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SPECIAL ENERGY ISSUE
Featured Trades: (OXY), (BP), (OIL)
1) Take a Look at Occidental Petroleum (OXY). As a follow up to my trade alert for Macro Millionaires to buy the double leveraged oil major ETF (DIG), I thought you'd like to know what my second choice was. There are a lot of belles at the ball, but you can't dance with all of them.
While a student at UCLA in the early seventies, I took a World Politics course which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, crawling out of the desert half starved, lice ridden, and half dead.? I concluded that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10.? I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.
I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg?? egg on his desk. He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians? I told him everything I knew, including the two weeks in an Algiers jail for taking pictures in the wrong places. His parting advice was to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.
When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.
Some 40 years later, while trolling the markets for great buying opportunities set up by the BP oil spill, I stumbled across (OXY) once more (click here for their site at http://www.oxy.com/ ). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005. (OXY's) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. It has raised its dividend for the eighth year in a row, by 15% to 1.60%. Need I say more?
The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. I decided to add it to my model portfolio. Energy is one of a tiny handful of industries I am willing to put my money in these days (technology and commodities are the others), and BP has handed me a rare opportunity to get in as the tightwad that I truly am.
Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.
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A Faberge Egg
Featured Trades: (SPECIAL BATTERY ISSUE),
(XIDE), (BYDFF), (SQM), (SNE), (GM), (XOM)
FOR PAID SUBSCRIBERS ONLY
1) The Great Race for Battery Technology.
The End is Near for the US
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Tesla
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Nissan Leaf
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Toyota Prius
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Meet My New Laptop
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I Don't Look 151 Years Old, Do I?
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BYD F3
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Karma
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Anything for a Green Card
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Its Easy, Just Read the Manual
Featured Trades: (CISCO SYSTEMS), (CSCO)
3) A Nice Update on Cisco Systems. For those of you who caught my trade alert to buy the Cisco Systems (CSCO) $20-$22 bull call spread last week and where hoping to get it at lower prices can forget about it. I spoke to an analyst today whose outlook for the networking giant was even more optimistic than mine.
The company has announced an incredibly aggressive buy back program that will soak up 17% of its outstanding shares on any further dip in prices. Cash on the balance sheet has ballooned from $38 billion last year to a staggering $45 billion today. Its fundamental business is rock solid, which it has successfully moated against any potential competitor. All of the mega trends currently in play in the online world, like cloud computing and the upgrade to video streaming, play directly into Cisco's hands. The income statement and cash flow couldn't be healthier.
He believes that the current 30% dip from the April high was purely sentiment driven and creates the buying opportunity of a lifetime. According to his estimates, CSCO is currently selling at 12 times next year's earnings. Get a multiple expansion on the upside, and you could see the shares rocket from today's $19.55 to as high as $28 in the foreseeable future. If for some reason you are unable to employ the options strategy here, the outright stock is a huge buy here.
Just thought you'd like to know.
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Cisco is Looking Impenetrable
Featured Trades: (MUSTANGS)
4) The Bull Market in Mustangs. 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 these voracious animals. Local populations are exploding, eating local ranchers out of house and home, who depend on public grazing lands to feed commercial livestock.
Recently, the Bureau of Land Management held hearings on where to place 25,000 excess animals. Mustangs are the feral descendents of horses which escaped the conquistadores, and there are now thought to be 30,000 running wild, down from a 19th century peak of 2 million. The BLM 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, Marilyn Monroe, and James Dean's last film, The Misfits.
Madeleine Pickens, the wife of famed oil trader T. 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 when they are gone.
Featured Trades: (SPY), (EWJ)
Japan iShares ETF
2) Why I'm Avoiding Japan Like the Plague. Now look at the world's worst population pyramid, that for Japan (EWJ). These three graphs show that a nearly perfect pyramid drove a miracle stock market during the fifties and sixties which I remember well, when Japan had your textbook high growth emerging market economy. That changed dramatically when the population started to age rapidly during the nineties. The 2007 graph is shouting at you not to go near the Land of the Rising Sun, and the 2050 projection tells you why.
By then, a small young population of consumers with a very low birth rate will be supporting the backbreaking burden of a huge population of old age pensioners. Every wage earner will be supporting one retiree. Think low GDP growth, huge government borrowing, deflation, collapsing bond markets, a depreciating yen, and terrible stock and housing markets. If you are wondering why I believe that a short position in the yen should be a core position in any portfolio for the next decade, this is a big reason. Dodge the bullet. Enjoy their food and hot tubs, but not their stocks.
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