'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.
Featured Trades: (AUSTRALIA), (FXA), (FXE), (EWA)
Currency Shares Australian Dollar Trust ETF
PowerShares Indio Portfolio ETF
Currency Shares Euro Dollar Trust ETF
3) I'm Singing 'Waltzing Mathilda' Again. Many readers made a killing last February when I recommended they buy Australian dollars and short the euro against it (click here for the call). A lot of the hottest hedge fund money then poured into The Land Down Under, while the Euro has crashed. The outright Aussie/US Dollar (FXA) jumped from $AUS.85 to $AUS1.01, while the cross soared from AUS$.63 to AUS$1.41.
Last week, the Reserve Bank of Australia surprised observers and raised overnight interest rates to 4.5%. Ben Bernanke's QEII is triggering simultaneous quantitative tightening in the best managed, but inflation prone commodity producing or emerging countries of the world, like the Land Down Under, India, and of course China. All this does is widen the yield spread between their currencies and the dollar, making them even more attractive to speculators. You might as well be waving a red flag at a bull
I still think Australia is blessed, with that perfect combination of huge resource and energy exports, a strong economy, rising interest rates, a small population to support, and great looking women. Australian stocks (EWA), which have gained a mind blowing 45% since July, should be at the top of your list too.
Another Reason to Invest in Australia
Featured Trades: (SILVER), (SLV), (CDE), (SLW), (HL)
SPDR Gold Trust Shares
iShares Silver Trust
4) Silver Blasts Through to a New 30-Year High.? Those transfixed by gold (GLD) topping the $1,368 level again have been missing the real action in silver (SLV). The white metal has soared 45% to $18.46 since the July low, compared to a more modest 18% move for the barbaric relic, an outperformance of three to one.
I have been a raging bull on silver for two years now, grabbing you by the lapels and shaking you until your dentures fell out if you didn't buy it. It is nothing less than owning gold with a turbocharger. Silver gives you a nice double play. Its qualities as a precious metal are giving it a major boost from a weak dollar, always a risk that is out there. It is also an industrial commodity, which unlike gold, is consumed, and therefore gives you a call on the recovering economy.
If you don't think this move is real, check out my picks in the sector. Coeur D Alene Mines (CDE) has rocketed by 58% July, while Silver Wheaton (SLW) is up a staggering 75% and Hecla Mining (HL) has soared by 61%. To accumulate .999 fine Silver Eagles or silver bullion, click here.
All of a sudden, my $50 an ounce target is not looking so insane when I first made it two years ago. That is a mere double from here. How long will it take to get there? William Herbert Hunt, who engineered the 1980 squeeze with his brother Nelson with a 100 million ounce long position that last took it that high, could tell you, but only from the grave.
SPECIAL ELECTION ISSUE
Featured Trades: (MY ANALYSIS OF THE ELECTION)
1) My Analysis of the Election. Won the World Series, but lost the Speaker of the House. I guess San Francisco can't have everything. My expectation that demographic trends would limit Democratic losses turned out to be wrong. The kids stayed home and texted each other, partied, or watched MTV, and didn't go to the polls. I thought that if the Republicans won the House of Representatives, it would be by handful. They ended up taking 62 seats. Good thing my market calls are better than this, or I'd be washing windshields for a living at Park Avenue and 42nd Street. I nailed the Senate, which I correctly predicted the Tea Party would blow for the Republicans. I even called the spoiler states, Delaware and Nevada.
The West coast turned out to be a clean sweep for the Democrats, as I expected. Meg Whitman spent $35 per vote, versus 60 cents for Jerry Brown, and still lost by 13 percentage points. She probably would have done better if she just sent everyone a check. The sleeper that no one is paying attention to here is that simple majority rule for the legislature passed, dumping the 2/3 requirement. California taxes are about to go up a lot.
Still, without the presidency and the Senate, all conservatives have really won is the right to determine the House agenda, make speeches, and conduct investigations, which I am sure there will be a lot of. One newly elected conservative has even promised to hold McCarthy style un-American activities hearings. You can forget cooperation with the administration. These are not your father's Republicans. They have been rewarded for obstruction, the Senate setting an all time record for filibusters, so you can expect it to continue, or intensify. Bring on gridlock.
New Venue for the World Wrestling Federation
SPECIAL ELECTION ISSUE
Featured Trades: (WHAT THIS MEANS FOR ECONOMIC POLICY)
2) What The Election Means for Economic Policy. Let's put the economic polices the voters chose under the microscope and see what we got. It is not a pretty picture. The bottom line is that my scenario of a lethargic 2-2.5% GDP growth rate continues for the foreseeable future. Here are the reasons why:
1) The party with the worst job creation record in a century is now in charge of job creation. There were 23 million jobs created from 1992-2000. There were only 1 million created during 2000-2008 when the population grew by 22 million.
2) The party that presided over the biggest increase in the deficit in history, from $5 trillion to $10 trillion during 2000-2008, is now charged with reducing the deficit.
3) Republican deregulation policies favor large multinationals that have been the most profitable, because they have been the most aggressive exporters of jobs. Small businesses that generate the most jobs don't show up anywhere in this picture.
4) Without any further assistance from Washington, the states and municipalities are going to have to take an extra sharp hatchet to budgets for teachers, police and firemen, the most junior claims on local resources. The drag on the healthy parts of the economy increases.
5) Much of the campaign focused on cutting the deficit by reducing spending. Below, please find the six largest expenditures in the $3.5 trillion 2010 Federal budget:
$687 billion - Social Security
$655 billion - Defense
$564 billion - Unemployment and Welfare Payments
$448 billion - Medicare
$287 billion - Medicaid
$162 billion - Debt service
Notice, first of all, that you did not see these numbers anywhere during the campaign. They should have been posted at every ballot box along with a Sharpie marking pen. Looking at the list, I see three untouchable Republican sacred cows, social security, defense, and Medicare, taking up the bulk of the spending. Debt service is untouchable. That leaves unemployment and welfare payments and Medicaid as big fat targets.
But even if you completely end this spending, close the agencies involved, and sell off the buildings, as many conservatives have proposed, you have only cut spending by $851 billion, or 61% of the current budget deficit. Some $549 billion of deficit remains. And this assumes the tax rates remain the same. Cut taxes, and the Medicare, unemployment, welfare-free budget deficit rockets to $1.2 trillion, while at the same time slowing GDP growth substantially further. Did I mention that falling spending causes job losses? Talk about jumping out of the frying pan and into the fire.
The mostly closely guarded secret of this election is what spending the Republicans cut in their first budget. I am waiting with baited breath to see how they do this.
Looking for New Office Space