Diary Entry for Friday, February 22, 2013

Dear Diary,

4:30 PM Thursday- Thought I?d check my Bloomberg to see how the Asian markets were opening. Wow! Shanghai is really taking it in the shorts, down 5%. Looks like when Ben Bernanke catches a cold, the Chinese markets catch pneumonia. They must be more dependent on our quantitative easing then we are.

5:00 PM- Call from one of the top New York hedge funds. They just received a research report predicting that Google was going to $1,000. Should they chase it up here? I said not in your wildest dreams. A $1,000 target seems to be a death knell for a stock, as it was for Apple (AAPL) last September. People are just buying Google here because it is the anti-Apple. Call me old-fashioned, but I?ll buy a PE multiple of 7 versus 19 any day of the week.

Quite honestly, I don?t want to buy any stocks at these lofty altitudes. Doing so on the first run at a new 13-year high never works, and he could crash and burn.

If someone was holding a gun to my head and forcing me to buy stocks now, I would be looking at technology laggards, like Hewlett Packard (HPQ), Yahoo (YHOO), and Cisco (CSCO). You might pick up some Apple under $450 as well. Mathematically, it is impossible for it to go under $400, with the Einhorn suit and all.

If you look at how San Francisco and Santa Clara real estate prices are going through the roof with ferocious bidding wars, it is just a matter of time before technology takes over market leadership once again. I said he owed me a nice dinner at Masa at Time Warner Center on Columbus Circle, and we?ll meet up at my July 2 New York strategy luncheon.

Then he told me the real reason for his call. He knew I grew up near Hollywood, had dated several movie stars, and even appeared in one as an extra (Francis Ford Coppola?s Apocalypse Now). Perhaps, I had some insights? His firm had put up the money to make Spielberg?s film, Lincoln. Is Daniel Day Louis a shoe-in for best actor? He had some serious money on him with his bookie.

I said absolutely. Day-Lewis?s portrayal of the Civil War president was so accurate that it was creepy. They could reprint his image on the five-dollar bill and no one would notice the change. History is ?in? this year. In fact, he should double his bet while he still had the chance.

6:30 PM-Take kids to see the new animated film, Escape From Planet Earth. Notice how the kid movies are better than the adult movies these days? There are ample double entendres and innuendos to keep the grownups laughing all the way. Brendan Fraser is such a pussycat. Children?s flics are really his genre. And it?s nice to see that James Gandolfini has finally found a new career doing voice overs for animated movies after the Sopranos.

9:00 PM-Call from a friend at the People?s Bank of China in Beijing. He wants to know if they missed the top of the Treasury bond market (TLT) last summer, and if they should start unloading their $1.2 trillion worth of holdings. They have been on a buyer?s strike for the past year, and have already pared back their position by $100 billion from the peak.

I said don?t worry. If we get a serious slowdown later in 2013, I expect the ?RISK OFF? trade to make a big comeback and take the ten-year yield down to 1.60% on a spike at some point. That would be a good time to flush out his bigger positions. Washington is certainly helping, with an imminent sequester threat caused by a permanently gridlocked congress, to be followed by another debt ceiling crisis.

The world is still suffering from a savings glut and a bond shortage, thanks to ?The 1%? hoarding assets in non-risk instruments, so I am not expecting a serious bond crash anytime soon. Plus, you will get a double kicker with a strong dollar. But please don?t try and sell ahead of a three-day weekend, like you did last time. And thanks for the fabulous Peking duck dinner in Shenzhen last year, although, I think I still have indigestion.

Then he asked, did I, by any chance, see the film, Life of Pi, which was nominated for Best Picture? It was a huge hit in Beijing, with lines extending for hours. I answered no, that a film about a tiger in a lifeboat for two hours didn?t really do it for me. Only the Chinese could do that. Go figure.

9:30 PM- Hit the rack and try to catch some shuteye before the next call.

 

Diary Entry for Saturday, February 23, 2013

2:00 AM-One of my former staff members at Morgan Stanley calls me from a Private Bank in Geneva to tell me that the Euro is getting the stuffing knocked out of it. Is it time to buy? I told him that I would rather find broken glass in my oatmeal this morning. We are miles (kilometers) away from a resolution of Europe?s woes. At the very least, they need a new treaty to create a ministry of finance to be run by the Germans. Expect that to take at least five years, if ever. Then, you can think about buying.

In the meantime, I wouldn?t touch the European currency with a ten-foot pole. European Central Bank president, Mario Draghi, is delusional if he thinks he can levitate the Euro with just talk. Europe can temporary stave off a currency collapse by shrinking their central bank?s balance sheet by $300 billion during the first half of 2013. But with the Fed expanding theirs by $1 trillion and the Bank of Japan by an incredible $1.5 trillion, Europe is assured to lose the race to the bottom in the Currency Wars. The European economy will suffer mightily as a result, eventually crashing the Euro.

Sunday?s Italian election results could well trigger the next leg down for the Euro. It?s looking like a win for Pier Luigi Bersani, continuing the European drift towards socialist governments since the beginning of the financial crisis. Sex with under aged prostitutes will not be a winning campaign strategy for former Prime Minister, Silvio Berlusconi, even in Italy. Better to sell short the yen instead, which has just started on its way from ?76 to ?150 to the dollar.

Then he moved on to the real purpose of his call. What did I think about Les Mis?rables? Do they have a chance of winning something? He had a bet on with his wife, who favored the dark horse, Amour. Only if they have a ?Worst Male Vocal? category. I had to admit I walked out after the first 15 minutes, when Russell Crowe started to sing. He is a better Gladiator than a crooner. I slammed the phone back on the hook and went back to sleep.

6:00 AM-My website administrator called me in a panic. The store is down. A hacker attack prompted PayPal to suspend my account. Since I am one of their largest customers, I call my account rep and get it reopened. The Chinese should know better than to hack my site. One call to Beijing and I could have them shot. Go hack the New York Times, instead. I hear they are looking for a new automotive correspondent.

6:15 AM-An old friend from the Swiss National Bank called asking my read on the US sequester threat. I answered that the financial markets were far more interested in this Sunday?s Academy Awards. Would Ben Affleck capture best picture for Argo, despite being despised by the Hollywood establishment for his appalling performance in Pearl Harbor?

Washington has cried ?wolf? too often for traders to get sucked in one more time. They don?t want to miss the rally when the can gets kicked down the road one more time, as it always does. What? You worried about the long-term deficit growth of the US government? Call me in 2025, when it matters.

I said I owed him a fondue dinner with a bottle of Schnapps for giving me the heads up on the Swiss franc devaluation last year where my followers earned a 400% profit on their puts (FXF). But to collect, he had to take the cog railway up to Zermatt and attend my strategy seminar on August 9.

Since he was asking me about Argo, I had to tell him a story that president Jimmy Carter only revealed to me a few days ago. Most of the Iranian leadership during the late seventies were educated in Germany. So many CIA agents were sent into the country surreptitiously with fake German passports. Once one was asked by Iranian immigration why his passport read ?Aaron H. Schmidt?, when German passports always spelled out the full name. Thinking quickly on his feet, the agent shot back quickly, ?because my parents named me after Hitler, and I received a special dispensation to only use the letter ?H.? The official understood completely and let him go. True story.

7:00 AM Another call from my website administrator. The website is down. My story on ?Why Gold is Dead? (click here) brought a traffic spike that is causing the servers to melt. The gold bugs are going crazy over it. I am burning up the Internet.

8:00 AM- I get a call from a leading money manager in London?s Mayfair district. Europe is closing. With gold down $100 in a week, is it time to buy? Not yet, I said. The panic selling has only just started, and margin clerks everywhere were sharpening their knives. Wait for a capitulation to deliver a false breakdown below $1,500 before jumping in. That?s where I expect emerging market central bank participation to kick in. And go have a pint of bitter for me at the Pig & Whistle next door, will you. Tell the owner, Nigel, to put it on my running tab.

He then raved about the terrorism movie, Zero Dark Thirty. Las Vegas is giving Jessica Chastain 2:1 odds to take best actress. What do you think? I said I thought the movie gave the most accurate portrayal of the actual day-to-day work done by the CIA that I had ever seen. But the whole premise that torture led to bin Laden?s raid was total BS, and was pissing off a lot of people at the agency, from Leon Panetta on down. If anything, the bad intelligence they got from torture slowed them down. Go for Jessica, I said. It?s the patriotic thing to do.

10:00 AM-Better get to work on today?s letter. I?m already behind the eight ball. I?ve gotta lead with the Tesla (TSLA) story. Their earnings are out. Boy, a lot of people sure look at me when I drive that car. Too bad they are mostly guys. But I can?t understand why my passengers keep getting carsick. I better take another look at Ford (F) too. I heard George Soros has taken a 3% stake in the company. Time to double up?

1:15 PM-My friend, JR, a senior executive at an oil major, calls from Houston. What the hell was going on with the price of oil (USO)? Three months ago, it was at $84, then he blinked, and it was $99. I told him that Israeli intelligence thinks there won?t be a war with Iran until the summer at the earliest, if ever. Until then, Texas tea was going to stay in a rough balance, with rising Chinese demand offset by growing American production, thanks to the new fracking technology. That is why oil volatility has collapsed. The range in oil for the past eight months has been tighter than a gnat?s ass, only $15. If you really must have an energy play on, buy some solar, like First Solar (FSLR). Four more years of Obama means four more years of government support for alternative energy.

He said thanks, and next time I was in town he would buy me a 24-ounce chicken fried steak at Billy Bob?s that spilled over both sides of the plate. I can?t wait. I?ll let my doctor have the heart attack.

Then he told me why he really called. He knew that I was a former combat pilot, like him, and wanted to know what I thought about the crash scene in Flight? Wasn?t it cool? Those Hollywood people, with their Brioni Tux?s and designer dresses are really your kind of people. Do you think Denzel Washington has a shot at Best Actor? I confided in him that I had nightmares after watching it because it reminded me of my own many plane crashes. Denzel completely nailed how you handle a high stress situation like that, with total calm and focus, while keeping the people around you from freaking out. But I still liked Daniel Day-Lewis better in Lincoln.

2:00 PM-Still haven?t started on the letter yet. I have been answering 200 email requests for information about the Trade Alert Service. This always happens whenever I have a hot trade on. The watchers want to become players. With my two year return approaching an all-time high of 80%, new subscribers are pouring in.

4:45 PM- Well, I got the letter done, but I?m too late. The web editor has gone to the DMV to register her new Prius, and the backup has gone to the yoga studio. Ouch! 10% sales tax for new cars in Washington State! They must be as broke as California.

5:00 PM I put on a 60-pound pack and my heavy climbing boots and head out the back door on a ten mile hike to climb Grizzly Peak as I do every evening. Gotta stay boot camp ready. You never know when Uncle Sam is going to call again. Who cares if I?m 61?

9:00 PM Back to my screens. The Euro has broken $1.32 again. Where was I last week? Asleep? Still, I am going to avoid the Euro. It has recently been so trendless that it has killed more traders than a bad tin of caviar. There are better things to do.

10:00 PM-Time to call it a night and break out a bottle of Duckhorn merlot. Jeese, it seems people only wanted to talk about the Academy Awards today. Is the market that bad? Such is the price of living in California.

Does anybody want my job?

There is a new real estate bubble forming in the US, but it is not inflating where you think. Apartment rents have been rapidly rising, and are about to go ballistic. In fact the appreciation has been so strong that the cost of ownership is now less than renting in many parts of the country, provided you can get one of those hard to get, ultra low interest rate bank loans.

By 2050 the population of California will soar from 38 million to 50 million, and that of the US from 300 million to 400 million, according to data released by the US Census Bureau and the CIA fact Book (check out the population pyramid below).

That means enormous demand for the low end of the housing market, apartments in multi-family dwellings. Many of our new citizens will be cash short immigrants from Asia and Latin America. They will be joined by generational demand for limited rental housing by 65 million Gen Xer's and 85 million Millennials enduring a lower standard of living than their parents and grandparents. These people aren't going to be living in cardboard boxes under freeway overpasses, and the new square footage created will be inadequate to meet demand, thanks to the recent six-year vacation for new construction.

The trend towards apartments also fits neatly with the downsizing needs of 80 million retiring Baby Boomers. As they age, boomers are moving from an average home size of 2,500 sq. ft. down to 1,000 sq. ft. condos and eventually 100 sq. ft. rooms in assisted living facilities. The cumulative shrinkage in demand for housing amounts to about 4 billion sq. ft. a year, the equivalent of a city the size of San Francisco.

In the aftermath of the economic collapse, rents are now rising and vacancy rates are shrinking. Fannie Mae and Freddie Mac financing is still abundantly available at the lowest interest rates on record. Institutions and high net worth individuals combing the landscape for high yield, low volatility cash flows and limited risk are pouring money in.

The Next Real Estate Bubble?