Featured Trades: (CNBC SPOOF)
4) Trashing CNBC on a Slow Day. With trading volume dropping through the floor the market has gotten so boring that I have run out of things to write about. So I can either pump out a mediocre piece of crap that you will probably lose money on, like the other newsletters do, or I can give you something frivolous and useless, but really funny. I vote for the latter. Below find a link to a YouTube video of a bizarre spoof of CNBC listing the countless shortcomings of its personalities, as seen in an imaginary interview between Larry King and Sarah Palin. My apologies in advance to Bob Pisani, Rick Santelli, Erin Burnett, Mark Haines, Trish Regan, Melissa Francis, Jim Cramer, Larry Kudlow, Sue Herera, John Maynard Keynes, and Michelle Caruso-Cabrera's breasts. Yes, I know, don't shoot the messenger. And don't miss the shameless plug for Zero Hedge at the end. Hurry up and watch it before the libel lawyers take it down. Here it is at http://www.youtube.com/watch?v=T9CEqhmU0Pg
'A slave with three masters is a free man,' said guru, Peter F. Drucker, in his classic tome on management, The Essential Drucker.
Featured Trades: (QUANTITATIVE EASING)
1) The Fed Makes Its Move. Man, I go on vacation of a couple of days and the world turns upside down. I'm talking about the arrival of the QE II. No, I'm not talking about the docking of a new cruise ship, or even the ruling member of the House of Windsor. It's round two of quantitative easing I'm referring to, the Federal Reserve's attempt to head off a double dip recession by flooding the system with liquidity. After watching retail sales shrivel, the housing market roll over for dead, again, and unemployment tenaciously flirting with double digits, Bernanke & Co. are admitting that there might just be a little problem with the economy. As far as the markets are concerned, he might as well have pulled the fire alarm, hit the panic button, and set off distress flares. Of course, avid readers of this letter have been aware of this scenario since January, when I predicted a 'square root' shaped recovery, generating growth that is feeble at best at 2.0%-2.5% (click here for the call). This is why I have avoided equities like a new form of venereal disease all year, except for the rifle shots in technology, energy, commodities, precious metals, and a few special situations. Too bad I didn't reach the second derivative conclusion earlier that this would cause bond prices to fly. After seeing optimism shoot to the upside in Q1, we shall see pessimism over do it on the downside in Q3. PIMCO's BSD, Mohamed El-Erian, is talking about a 25% probability of a double dip, while Yale economist Robert Shiller sees a 50:50 chance. The upcoming November election promises to muddle the picture further in coming months. The crystal clear waters of Lake Tahoe beckon. Maybe I should take a second summer vacation this year.
Can QE 2 Save Our Economy?
Featured Trades: (COP), (BP), (OIL)
2) ConocoPhillips Looks Like a Steal. Since I am a permabull on energy of all types, I am constantly trolling the markets for cheap energy plays, and ConocoPhillips (COP) popped up on my radar. The large cap integrated oil major has announced a $20 billion restructuring that has whetted my appetite. Specifically, they are allocating $10 billion to retire debt and a further $10 billion to buy back their own stock. With a PE multiple of 8.5 X and a dividend yield of 4%, some 1.3% higher than ten year Treasury bonds, you can hardly blame them. COP has long been a favorite of Oracle of Omaha, Warren Buffet, (click here for the tip). Bring them back to their peer group valuation, and that takes the stock up to $75, some 36% higher from here. I'm not the only hedge fund manager looking for these kinds of plays, which is why I was able to grab a quick 38% profit in British Petroleum (BP) in a matter of weeks (click here for the call). Look at the chart and try to buy at the bottom end of its recent range. It's nice to have some insurance for that day you know is coming when you wake up and find oil suddenly up $10 because of some unexpected shenanigans in the Middle East.
Waking up to ConocoPhillips
Featured Trades: (SHIPPING), (TK), (NAT), (OSG), (FRO)
3) Pick Up Shipping Stocks for the Dividend. The markets are currently stampeding for yield of any description, damn the risk. That's why shipping stocks have suddenly come into focus, which offer some of the highest dividend yields on the board. Nordic American Tanker (NAT) has a bounteous 8.30% dividend, while Frontline Ltd. (FRO) is offering positively stratospheric 10.20% yield. It would be a vast understatement to say this is an industry that is not without problems. When commodity prices collapsed and international finance froze up, charter rates cratered. Overbuilding from the days when obtaining financing was as easy as, well, falling overboard, left a glut of hundreds of ships in mothballs in Singapore. Unpredictable fuel prices also have profitability bouncing up and down like a yoyo.? Just take a look at the Baltic Dry Index ($BDI), a measure of spot rate for bulk carriers, whose chart looks like that of a lifeboat in a typhoon. Still interested? I think the way to do this is not to reach for yield, and stay with companies that are more modest payers, but have firm contracts for bottoms for the foreseeable future. That gives you a modest haircut on returns for a lot less risk, a better risk/reward ratio that I am always looking for. Shippers that meet these specs include Overseas Shipholding Group (OSG), with a still healthy 5.10% dividend yield, and Teekay Shipping (TK), with a 4.80% return. And I never thought I'd say this, but to avoid your single company risk you might consider buying calls on the BDI itself, as continuous Chinese buying of iron ore is expected to keep rates strong there for the rest of the year.
Featured Trades: (RARE EARTHS),
(AVL.TO), (GWMGF.PK), (RAREF.PK), (LYSCF)
1) Rare Earths Are Becoming a Lot More Rare. Interest in Rare Earths is starting to heat up in a dramatic fashion and it is something you should keep on your radar. So named because they were hard to get in the 18th and 19th century, these once obscure elements have suddenly become the focus of several converging trends in the global economy, as they are the key ingredient of magnets. There are 17 in all, divided into light (cerium, Ce, lanthanum, La, and neodymium, Nd) and heavy (dysprosium, Dy, terbium, Tb, and europium, Eu).
It turns out that you can't build a hybrid or electric car, a wind turbine, thin film solar, LED's, high performance batteries, or a cell phone without these elements. One Prius uses 25 kilograms of the stuff. You also can't fight a modern war without rare earths, being essential for radar, missile guidance systems, navigation, and night vision goggles.
That's where things get interesting. China now produces 97% of the world's rare earth supplies, much of it coming from small mines operating by criminal gangs where it is safe to say, concerns about environmental considerations are nil. Recently, China announced that it may start restricting rare earth exports, possibly banning several, it is thought, in order to force foreigners to buy more of their downstream electronic products. Such a ban could begin as early as 2012.
The world market for rare earths is tiny now, amounting to only $1.4 billion a year. But Toyota intends on doubling its production of?? Prius's from one million to 2 million units in the near future, while China and South Korea want to boost their combined electric and hybrid production by 1 million units by the end of next year. Demand for wind turbines is going off the charts, thanks to massive government subsidies in Europe and the US.
America was once the world's largest producer of these elements, until it was undercut on prices by China (see chart below), and all US production ceased. The threatened Chinese export ban has prompted a group of investors to reopen Molycorp's Mountain Pass California mine, a jackrabbit ridden, rattlesnake infested pit an hour southwest of Las Vegas. The mine was the world's largest producer of cerium and neodymium, and provided the europium that was used to produce the first color televisions. The group has filed with the SEC for an IPO that seeks to raise $500 million to reopen the mine and a nearby refinery.
Now congress wants to get involved, proposing a rare earths strategic stockpile for the military, and offering subsidized loans to fund it. Remember what that did for oil? Every peak in oil prices in the last 30 years coincided with the government topping up its strategic petroleum reserve.
Rare earth prices have already started to move, with cerium doubling to $4/pound since 2007, and neodymium up 500% to $23/pound during the same period. Rare earths don't have any futures or ETF's to trade, so the only way to get involved is through the miners themselves, which involves an added element of risk. Take a look at the established players, which include the Canadian firm, Avalon Rare Metals (AVL.TO) (click here for their site), Great Western Minerals Group (GWMGF.PK), Rare Earth Metals (RAREF.PK), Lynas Corp (LYSCF), and Molycorp, after it goes public.
'The biggest trend of 2010 is to see who gets kicked out of the banking system,' said Meredith Whitney, who runs a boutique financial research firm
Featured Trades: (LUNCH WITH THE CIA)
1) Lunch With the CIA. Lunch with the Central Intelligence Agency is always interesting, although five gorillas built like brick shithouses with wires sprouting out of their ears, staring at me intently, didn't help my digestion.
Obama's pick of Leon Panetta as the agency's new director was controversial because he didn't come from an intelligence background- upsetting the career spooks at Langley to no end. But the President thought a resume that included 16 years as the Democratic congressman from Monterey, California, and stints as Clinton's Chief of Staff and OMB Director, was good enough. So when Panetta passed through town on his way home to heavenly Carmel Valley for the holidays, I thought I'd pull a few strings in Washington to catch a private briefing.
The long term outlook for supplies of food, natural resources, and energy is becoming so severe that the CIA is now viewing it as a national security threat. Some one third of emerging market urban populations are poor, or about 1.5 billion souls, and when they get hungry, angry, and politically or religiously inspired, Americans have to worry. This will be music to the ears of the hedge funds that have been stampeding into food, commodities, and energy for the past three weeks. It is also welcome news to George Soros, who has quietly bought up enough agricultural land in Argentina to create his own medium sized country.
Panetta then went on to say that the current monstrous levels of borrowing by the Federal government abroad is also a security issue, especially if foreigners decide to turn the spigot off and put us on a crash diet. I was flabbergasted, not because this is true, but that it is finally understood at the top levels of the administration and is of interest to the intelligence agencies. Toss another hunk of red meat to my legions of carnivorous traders in the (TBT), the leveraged ETF that profits from falling Treasury bond prices!
Job one is to defeat Al Qaida, and the agency has had success in taking out several terrorist leaders in the tribal areas of Pakistan with satellite directed predator drones. The CIA could well win the war in Afghanistan covertly, as they did in the last war there in the eighties, with their stinger missiles supplied to the Taliban for use against the Russians. The next goal is to prevent Al Qaida from retreating to other failed states like Yemen and Somalia. The Agency is also basking in the glow of its discovery of a second uranium processing plant in Iran, sparking international outrage, and finally bringing Europeans to our side with sanctions against Iran.
Cyber warfare is a huge new battlefront. Some 100 countries now have this capability, and they have stolen over $50 billion worth of intellectual property from the US in the past year. As much as I tried to pin Panetta down on who the culprits were, he wouldn't name names, but indirectly hinted that the main hacker-in-chief was China. This comes on the heels of General Wesley Clark's admission that the Chinese cleaned out the web connected mainframes at both the Pentagon and the State Department in 2007. The Bush administration kept the greatest security breach in US history secret to duck a hit in the opinion polls.
I thought Panetta was incredibly frank, telling me as much as he could without those gorillas having to kill me afterwards. I have long been envious of the massive budget that the CIA deploys to research the same global markets that I have for most of my life, believed to amount to $70 billion, but even those figures are top secret. If I could only manage their pension fund with their information with a 2%/20% deal! I might even skip the management fee and go for just the bonus. The possibilities boggle the mind!
Panetta's final piece of advice: don't even think about making a cell phone call in Pakistan. I immediately deleted the high risk numbers from my cell phone address book.
I have been pounding the table with these guys for four decades to focus more on the resource issue, but they only seemed interested in missiles, planes, tanks, subs, and satellites. What a long strange trip it's been. Better take another look on any dip at the Market Vectors agricultural ETF (DBA), their agribusiness ETF (MOO), as well as my favorite ag stocks, Monsanto (MON), Mosaic (MOS), Potash (POT), and Agrium (AGU). Accidents are about to happen in their favor.
Featured Trades: (PLATINUM), (PPLT)
ETFS Physical Platinum ETF
2) Time for Platinum to Play Catch Up. Since you've recently been romancing gold, you should check out platinum, her younger, racier, and better looking sister, who wears the low riders. The white metal historically has more volatility than gold, but this year has risen by only 6.2%, compared to a 9.5% gain for the barbaric relic. No doubt the 'double dip' threat to the economy is having an impact.
While gold is just shy of its all time high, Pt has to rise a further 50% from here just to match its 2008 high of $2,200, suggesting that some catch up play is in order. I have always been puzzled by the fact that platinum is 30 times more rare than gold, but at $1,572 an ounce, trades at a mere 30.4% premium to the barbaric metal. And unlike gold, platinum has actual uses.
You have to refine a staggering 10 tons of ore to come up with a single ounce of platinum. The bulk of the world's 210 tons in annual production comes from only four large mines, 80% of it in South Africa, and another 10% in the old Soviet Union. All of these mines peaked in the seventies and eighties, and have been on a downward slide since then.
That overdependence could lead to sudden and dramatic price spikes if any of these are taken out by unexpected floods, strikes, or political unrest. While no gold is consumed, 50% of platinum production is soaked up by industrial demand, mostly by the auto industry for catalytic converters. Recently, no lesser authority than Jim Lentz, the CEO of Toyota Motors Sales, USA, told me he expects the American car market to recover from the current 12 million units to 15-16 million units by 2015. That's a lot of catalytic converters. That assumes that 14.5 million cars a year are scrapped, requiring almost no new net demand. Surprises will be to the upside.
Jewelry demand for platinum, 95% of which comes from Japan, is also strong, as the global pandemic of gold fever spreads to other precious metals. You can trade Platinum futures on the New York Mercantile Exchange, where a margin requirement of only $6,075 for one contract gets you exposure to 50 ounces of platinum worth $78,600, giving you 12:1 leverage. For those who like to get physical, the US mint issued Platinum eagles from 1997-2008 in nominal denominations of $100 (one ounce), $50 (? ounce), $25 (1/4 ounce) and $10 (1/10th ounce) denominations. Stock traders should look at the ETF (PPLT).
'There are people who can't get used to the idea that the country is being run by a black guy living in public housing. Obama is only half black, so I guess that makes him our 'starter Negro,' said political commentator Will Durst.
