Featured Trades: (HAS THE EURO TURNED?), (FXE), (EUO)
ProShares Ultra Short Euro ETF
Currency Shares Euro Trust
3) Has The Euro Turned? The call that a turn in the dollar was imminent by Brown Brothers Harriman's Mark Chandler is looking more prescient by the day (click here for the call). September and October was all about pricing in Ben Bernanke's quantitative easing, and that is looking pretty much done. The next play in this kabuki drama will see 'uncertainty' emigrate from the US to Europe, sending the dollar off to the races and the Euro in for rehab. Lindsay Lohan, eat your heart out.
A reemergence of the 'PIIGS' disease, concerns about the deteriorating quality of the lesser sovereign credits in Europe, is now unfolding as the triggering event. US interest rates rising at the long end are adding fuel to the fire, shifting interest rate differentials overwhelmingly in Uncle Buck's favor. It also helps that 95% of traders are bearish on the dollar, the surest indicator you'll ever see that it is about to go the other way. While America's trade deficit remains massive, that shortfall is being overwhelmed by enormous amounts of foreign capital pouring into our stock and bond markets, on which Ben has painted a giant bullseye.
It all adds up to the $1.4250 print we saw on the Euro last week marking the high. Rallies from here in the European currency are to be sold. Players new to the space can achieve this through buying the (EUO) ETF, a leveraged 200% short bet against the Euro. Looking at the charts and the momentum, we could see a plunge below $1.33 by year end.
The Euro is Moving into Rehab With Lindsay Lohan
So They Do Love Me After All?
Featured Trades: (CISCO), (CSCO)
4) The Cisco Shock. When a great company announces a surprise, temporary setback that sends the stock plunging, I am drawn like a starving great white shark to fresh blood in the water. All it took was a matching of earnings expectations for this great technology firm to crater 13% in minutes, triggering stop losses, the gnashing of teeth, and the rending of great swatches of hair. This is not a commentary on Cisco itself, but of the fragile, over extended nature of the markets at this lofty altitude.
Of course, the big surprise came from a sudden drop off in sales to state and local governments, who are big users of video conferencing products. Somehow, it escaped notice in the recent midterm election that spending cuts always lead to falling sales and swinging great job losses. This is what it really looks like up close and ugly. I have been warning readers about this all year, but it seems I have few readers in Washington, and those that do mostly use the hard copies to line the bottoms of their bird cages. The other disappointment came from the cable industry, which is cutting back capital investment while its lunch is being relentlessly eaten by the Internet.
At $20.52 a share, Cisco offers a PE multiple of 10 times, versus a market average of 15, the prospect of a dividend next year, and at 12%-17%, one of the most consistent long term growth outlooks of anyone. Did I mention that they get a majority of their sales from overseas, where growth rates are posting white hot double digit rates? Buy this baby on dips to catch a Q1, 2011 rebound. Despite the sorry state of the US economy, demand from the Internet for Cisco's high end routers from data centers continues to grow at blistering rates.
Got Any Cisco For Sale?
Featured Trades: (KARL DENNINGER ON HEDGE FUND RADIO),
(ONLY BUY COMPANIES YOU HATE),
(SPX), (INDU), (BAC), (C ), (JPM), (WFC),
(AAPL), (GOOG), (QQQQ),
(BP), (GS), (C), (PFE), (MO)
1) Karl Denninger of Market Ticker on Hedge Fund Radio.
Karl Denninger of Market Ticker thinks there is a secondary banking crisis around the corner that will trigger a cascading collapse in the stock market, and another government bailout. TARP 3 anyone? We could reach 3,000 in the Dow and 300 in the S&P 500.
This is one of many controversial and incendiary opinions about the state of the global financial markets Karl voiced to me in a wide ranging interview on Hedge Fund Radio. Karl says the idea that we are going back to an S&P 500 of $105-$110 in the face of the soaring cost input factors is totally laughable.
Bernanke is making the same mistake we saw in 1933. The nightmare scenario for him is a coincident dollar and stock market selloff. The risk of hyperinflation will force him to back off on easy money. If the market goes up by 30% and the dollar devalues by 30%, then you haven't made any money. When cost push pressures show up, corporate earnings are going to disappear. Companies like Kimberly Clark are reporting the largest raw material cost increases in history. Even Apple is seeing cost push problems.
'Foreclosure Gate' will be much worse than expected. There is upwards of $200 billion worth of exposure just on the 'put back side'. The large banks also have second line exposure on their own balance sheets that is at least as big, if not bigger. In dollar terms, interest income has been good, but their spreads have been collapsing.
Banks problems may become impossible to hide in 3-6 months. They are passing around the losses trying to hide the truth. Banks made their earnings in the recent quarter by taking down reserves. Not providing for these risks is absolute fancy.
The 900 pound gorilla in the room is the second line problem, which is mostly concentrated in the top banks, including (BAC), (C ), (JPM), (WFC). Industry wide, only $1 trillion of $3.5 trillion in real estate losses has been realized, and at some point, someone is going to have to swallow. Wells Fargo is the most leveraged, could be the first to go, with $1 trillion in off balance sheet exposure, including all of the garbage they took in from Wachovia.
Are you wondering why financials have done so poorly this year? Investors are still laboring under the false premise that these firms are too big to fail and that the government won't let anything bad happen to them. It is assumed that in the worst case, they will see flat earnings and no EPS growth for the next couple of years. Karl thinks that is incredibly na??ve. The big pension funds that own most of these stocks are going to get hosed.
The majority of money has been made in the bond market. Karl hates to buy near a top.
Commodities are starting to look scary. The 'softs' have delivered parabolic moves which never end well. Oil breaking through $100 could be the triggering event for the corporate margins crash which takes the stock market down. Break $87 and it's off to the races. This will cause tremendous damage to the economy.?? Then bring in the 'RISK OFF' trade, because everything will go down, starting sometime in 2011.
Until then, you can day trade, play in the futures market, and make plenty of money. Just keep everything on a tight leash. Stay away from positions that are hard to get out of. Dollar strength could be the key triggering event. Europe could also be another. And then there are potential black swan events, like state attorney generals halting the foreclosure process.
Karl believes the technology sector is very over extended. Apple (AAPL) is now 20% of PowerShares QQQ Trust (QQQQ). Apple's success is attracting competition. Google Android sales have suddenly rocketed, a tectonic ship for the market. LG and Samsung are more attractive than Google (GOOG) or Apple, because they supply the processors and screens. Intel at $20 doesn't look bad, especially if it breaks the 200 day moving average to the upside. In so many areas in the tech world, he loves the companies but hates the prices.
Karl Denninger is the publisher of the daily blog, Market Ticker. He was the CEO and one of the founders of MCSNet, a Chicago area Internet and networking company which he sold in 1998. Since then, Karl has been a successful independent trader. In 2007, he started posting Market Ticker, a highly entertaining and prescient, if not irreverent daily blog. He also created TicketForum, an online trading forum. In 2008, Karl received the Reed Irvine Accuracy In Media Award for Grassroots Journalism for his coverage of the market meltdown. To learn more about Karl Denninger, you can visit his website at http://market-ticker.org/ . To listen to my lively interview with Karl on Hedge Fund Radio in full, please click here.
Does Anyone See 300 Here?
Does This Look Overextended to You?
Featured Trades: (ONLY BUY COMPANIES YOU HATE),
(SPX), (INDU), (BAC), (C ), (JPM), (WFC),
(AAPL), (GOOG), (QQQQ),
(BP), (GS), (C), (PFE), (MO)
2) Only Buy Companies You Hate. The Wall Street Journal published one of the funniest investment strategy pieces I have ever read. Dilbert cartoonist Scott Adams argues that you should invest in companies you hate because only the most unprincipled and rapacious firms make the greatest profits.
Moral bankruptcy is a great leading indicator of success, and the best ones can get you to balance your wallet on the end of your nose and bark like a seal, as you buy products that you utterly despise. Companies with the work ethic of a serial killer, like British Petroleum (BP) come to mind, but you can also add other firms to the list, like Goldman Sachs (GS), Citicorp (C), Pfizer (PFE), and Altria (MO).
Adams initially started investing in companies he loved, like Enron, WorldCom, and Webvan, and absolutely lost his shirt. Adams' advice to BP is not to waste money on artificial, sincere ad campaigns apologizing, but get us to hate them more. Bring on more dead bird pictures!
Who is Adams about to hate next? Apple (AAPL), because he irrationally craves their products, resents their emotional control over his entire family, can't get ITunes to work, and is appalled by those aloof? black turtlenecks that Steve Jobs wears. For my own recent piece on Apple, please click here. To read the entire, hilarious piece in full, please click here .
Hand Me a Buy Ticket! &*%@*!
'Parabolic moves end up creating parabolic corrections. This is going to end badly. It's not a matter of if, but when.' said hedge fund manager Mark Fisher of MBF Asset Management.
Featured Trades: (OCTOBER NONFARM PAYROLL)
1) Don't Pop the Champagne on Those October Nonfarm Payroll Figures. Poor Obama. The guy just can't catch a break. A day after the midterm election delivered a 'shellacking' to the once, and possibly future, community organizer from South Chicago, Ben Bernanke announces one of the greatest economic stimulative efforts of all time. Two days later, and the October nonfarm payroll comes in at a rollicking +151,000, one of the best reports of the year.
Would it have been enough to tip the election outcome in his favor? It certainly might have in the closest run races, such as for his old Senate seat in Illinois. A state with a population of 12.9 million, it took only 71,501 votes to deliver it to Republican Mark Kirk. We shall never know for sure.
Sifting through the data, it is clear that this was a good report. Private employment jumped by 159,000, and there were sizeable revisions upwards in the July and August numbers. Unfortunately, 150,000 jobs a month is precisely what we need to tread water, in order to accommodate population growth and immigration. That's why the unemployment rate remained unchanged at 9.6%.
The number that jumped off the page, grabbed me by the lapels, and shook me until my Japanese gold inlays fell out of my teeth was the 35,000 in gains in temporary help. I predict this will be a large element of future positive employment reports. It is proof that corporate managers have absolutely no confidence in the future, will only hire full time workers at the point of a gun, preferring to add only part timers without benefits that can be dumped at the first sign of trouble.
Also of note is the 14,000 in losses in local government workers. Local school districts have taken the cue from the corporate world by firing teachers and rehiring them as substitutes at one third of their old pay, with no benefits. This is a continuation of a new, major long-term trend for the economy, which I believe will be a decade long affair. Local governments are sucking money out of the economy as fast as the federal government is shoveling it in.
The bottom line for you and me is that American economic growth will continue poking along at a subdued long term average of only 2% a year, that US assets should continue to under-perform, and you should get your money the hell out of the country into foreign markets where you can earn real returns.
Featured Trades: (POLAND), (PLND), (EPOL)
2) Where to Play QEII in Europe. In one of the worst timed ETF launches of the year, Van Eck brought out the Market Vectors Poland ETF (PLND) in November, 2009, just on the eve of the Euro collapse. iShares followed with their MSCI Poland Investable Market ETF (EPOL) at the end of May. Since then, it has been off to the races.
Poland is one of Europe's own emerging markets, and its close links with the German economy will enable it to ride the coat tails of any future economic recovery. Take the euro to parity against the buck, which could happen in the next substantial dollar rally, and you have the makings of a massive export boom down the road to the Fatherland.
Poland also sits on a gigantic coal bed, and with its weak environmental regulation, will make it ground zero for importing American 'fracting' techniques to unleash massive natural gas supplies.
The coming collapse of the Euro, the world's most despised currency, means that down the road, Poland can ditch the Zloty and join the European Community at a highly favorable exchange rate.
My Euro maven ex-Economist colleague, Vivian Lewis, of the daily Global Investing letter (click here for her site at http://www.global-investing.com/ ) also says that the country is embarking on a privatization program that will sell off relics from its communist past at discount prices. When the United Kingdom did this during the eighties, everyone, including myself, made a fortune.
As long as QEII is alive and well, you can load up on Poland and sleep like a baby.
I've Got Poland in My Portfolio
Featured Trades: (GOLD), (GLD), (ABX)
3) You No Longer Have to Be Crazy to Buy Gold. The good news is that you no longer have to be crazy to buy gold. Until recently, certifiable believers chasing the barbaric relic were driven by a host of urban legends and wild conspiracy theories which frequently appear on the Internet, such as the imminent bankruptcy of the US Treasury, Fort Knox holding only titanium bars that had been painted gold, Weimar style hyperinflation that is just around the corner, or the gold ETF (GLD) owning only paper, and not physical gold.
No more. The long term structural demand for the yellow metal is now so well known, that I can read about it in the tabloids while waiting in line at Safeway. There is an emerging market central bank bidding war going on, with India and China trying to outmaneuver each other to raise their gold holdings to developed world levels. The EC or the IMF may sate that demand by selling off their remaining holdings to bail out Greece. A rising emerging market middle class also brings large, newly enriched consumers from countries that have long cultural preferences for owning gold and silver over paper fiat currencies.
Now that we have decisively broken through to a new all time high, how high can we go? Surely peak gold is upon us. Barrick Gold (ABX), the world's largest gold producer, would not be hacking out new mines under incredibly harsh conditions at 15,000 feet in the Andes if there were easier supplies to develop.
My own long term gold forecast has been the old inflation adjusted high of $2,300 (click here for the call). But higher altitudes beckon. If you want to take gold up to its historic peak in world GDP last seen in 1980, that would see gold at $5,300. Also, keep in mind that the total world gold supply has increased since then from 110,000 tonnes to 170,000 tonnes. For gold to recover the old peak percentage of the world monetary base, M3, it would need to rise to $5,700.
Then there is the grand daddy forecast of them all. After the US allowed the price of gold to float from $34/ounce in 1971, it rose 2,500% to $850. An equal move of the 1999 $250 bottom would take us up to $6,250. I think I'd be a seller there.
The great thing about gold is that, absent a dividend or a coupon, you can never claim it is too cheap or too expensive. While the current production cost at the big mines is around $400/ounce, the only certainty is that there are now more buyers than sellers. Look at the table below of the performance of gold so far, relative to other bull markets of the last three decades, and it is clear that we are only just getting started.
Featured Trades: (EMERGING MARKETS), (EWZ), (RSX), (PIN), (FXI)
Brazil iShares ETF
Market Vectors Russia ETF
PowerShares India ETF
iShares FTSE/Xinhua China 25 ETF
1) It's Off to the Races With Emerging Markets. Ben Bernanke's unprecedented announcement that he is buying $600 billion in medium dated Treasury securities is tantamount to the government ordering you to pour all of your money into emerging markets. The 'RISK ON' switch has been flipped, and the Feds have poured super glue into the mechanism. We could have a moon shot up until the end of the year from here. The only price to pay is rising risk levels.
Jim O'Neil is the fabled analyst who invented the 'BRIC' term a decade ago, and? has since been kicked upstairs to the chairman's seat at Goldman Sachs International (GS) in London. Jim thinks that it is still the early days for the space, and that these countries have another ten years of high growth ahead of them.
As I have been pushing emerging markets since the inception of this letter, this is music to my ears. By 2018 the combined GDP of the BRIC's, Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), will match that of the US. China alone will reach two thirds of the American figure for gross domestic product. All that requires is for China to maintain a virile 8% annual growth rate for eight more years, while the US plods along at an arthritic 2% rate.
'BRIC' almost became the 'RIC' when O'Neil was formulating his strategy a decade ago. Conservative Brazilian businessmen were convinced that the new elected Luiz Lula da Silva would wreck the country with his socialist ways. He ignored them and Brazil became the top performing market of the G-20 since 2000. An independent central bank that adopted a strategy of inflation targeting was transformative.
If you believe that the global financial markets are back into risk accumulation mode, as I do, then you probably should top up your Brazil position, as it has lagged in the smaller emerging markets so far this year. Jim Chanos, you may be right about a China crash, but you're early by a decade!
Featured Trades: (OIL), (XOM), (OXY), (COP)
2) The Price of Oil is Going Up. The free Ben Bernanke put also applies to the commodities markets. I received another scratchy, crackling cell phone call from my drilling buddy in the Texas natural gas fields today. You could almost choke from the dust on the line.
He told me that the BP Gulf disaster was turning the fundamental assumptions of the oil industry upside down, and that sharply higher oil prices were in the cards, probably $100/barrel by year end. Major oil companies with deep pockets at risk were rushing to offload their existing offshore leases and partnerships in producing wells to avoid BP's potential $30 billion hickey.
If nothing else, the majors have learned that liability caps are nothing more than wishful thinking. They can only speculate what a new round of vengeful regulation will cost them. Hedge funds looking for 'the next big play' were willing buyers, but only at substantial bargains. We are witnessing nothing less than the birth of a new distressed junk market.
It is all part of a repricing of risk that values offshore assets at a discount, and onshore ones at a new found premium. Only big swinging dicks need apply, as minimum participations are going for as much as $50 million.
The impairment of Gulf assets is also breathing life into the once moribund natural gas market. Enough gas supplies are being left under the Gulf to offset the enormous new production coming online through the new 'fracting' technology, where everyone is using a volume strategy to offset plunging prices. Gas is not heading off to the races, but supplies will be tight enough to sustain it in a $3.50-$5.00 trading range for the next 18 months.
It all makes me want to go back and buy more ExxonMobil (XOM) ( click here for my piece), Occidental Petroleum (OXY) ( click here for the report), and Conoco Phillips (COP). I'd love to get more out of my friend, but I don't think my aged, arthritic back could take another three hours driving down washboard roads in a beat up pickup truck with no springs to track him down at his newest drilling location. Besides, I already have enough 8 x 10 signed glossy portraits of George W. Bush to last a lifetime, and I didn't want to hurt his feelings by turning down more.
