Featured Trades: (AFRICA), (EZW), (AFK), (GAF)
2) Some Feedback on South Africa. The great thing about the Internet is that sometimes it gives you back more than you put into it. In response to my piece on South Africa (EZW) a few days ago and my other work on Africa generally (AFK), (GAF) (click here for 'Feel Like Investing in a State Sponsor of Terrorism' ), a flood of data poured in bolstering my arguments in favor of the dark continent.
Africa has a population that approaches India and China's, possibly making it the next cheap labor market. Some 60% of the planet's remaining uncultivated land is there, which is why China, Libya, and Saudi Arabia have been pouring billions into agriculture there. Africa has 40% of the world's gold reserves and 10% of its oil reserves, with massive deposits of coal and other key resources.
If you have any doubts about Africa, take a look at the direct investment that has been pouring into the banking sector in South Africa in recent years, the most stable and best capitalized industry on the continent. HSBC has gobbled up Ned Bank, Barclays has gobbled up ABSA Bank, and China has taken a 20% stake in Standard Bank, probably the best run institution is the sector. Having been a four decade observer of the global financial system, I can tell you from experience that the changing of the guard in the banking system often presages major long term bull markets. You want to follow the smart money here.
Despite all this, only 3% of global direct investment finds there way there. Prices? are so low and earnings leverage so great that any dire political risks you can come up with, and there are definitely some out there, have got to already be priced in. It's just a matter of time before the markets address this imbalance.
Is Africa a Sleeping Giant?
Featured Trades: (COPPER), (ECH), (DBB), (FCX), (JJC)
iPath Dow Jones-UBS Copper Sub Index Total Return ETN
PowerShares DB Multi Sector Commodity Trust Metals
iShares MSCI Chile Index ETF
3) Is Copper the New Red Gold? Federal detention centers in the San Francisco Bay area are slowly filling up with a new type of criminals. Illegal immigrants and petty drug dealers are being joined by a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge copper electrical wire. At current prices a decent night's haul can net crooks up to $20,000 at recycling centers.
Long known as 'Dr. Copper', because it is? the only commodity with a PhD in economics, the red metal has long been an excellent forecaster of economic activity around the world. Hedge fund managers have been impressed by copper's ability to hold up, and even advance in the face of 'double dip' threats from the US economy. While demand for American home construction remains in the basement, this weakness is more than offset by surging demand from China, whose own construction industry remains on a tear.
It also helps that they're not making copper anymore. Some of the world's largest mines are reaching the end of their useful lives, with increasing amounts of capital being poured into ripping a declining grade of ore from the earth. Global production has fallen 12% during the first half of this year. This is a problem because the opening of a new mine can take as long as 15 years, once the time required for government approvals, infrastructure, water supplies, transportation, and yes, bribes, is added in. What's in the pipeline is all there is for the next five years.
Copper is also benefiting from its accelerating 'monetization.' International investors, disgusted with the choices available in global stock and bond markets, are increasingly diversifying into the red metal, as well as other 'hard' assets like gold, silver, coal, oil, nickel, iron ore, and others. This is one reason why the big metals exchanges are finding their inventories at a low ebb. It's anyone's guess, but perhaps half of the current $4.40/pound in the copper price is accounted for by investor, as opposed to end user demand.
The obvious plays here are in the dedicated copper ETN (JJC), and the base metal ETF (DBB). Another candidate is Chile's ETF (ECH), which has tacked on a blistering 13% since I recommended it a month ago (click here for 'Chile is Hot'). And you can look at Freeport McMoran (FCX), the world's largest publicly listed copper producer. And yes, you can even buy .999 fine copper bullion bards at Amazon by clicking here.
I have some hedge fund friends who have discretely stashed thousands of copper bars in warehouses around the country, expecting the red metal to hit $6/pound within the next three years. If the doesn't work out, I guess they can always ea their inventory by pursuing a new career as an electrician. Hey, a good union and a steady $70/hour paycheck, what's so bad about that?
Copper Mines Are Running on Empty
Featured Trades: (ZHOU XIAOCHUAN), (FXI), ($SSEC),
(TUR), (EPOL), (EWY)
iShares FTSE/Xhinhua China 25 ETF
iShares MSCI Turkey Investable Market Index ETF
iShares MSCI Poland Investable Market Index ETF
South Korea iShares ETF
1) China's Central Bank Governor Defects to the US. The fiber optic cable that makes up the Chinese Internet is absolutely burning up today with rumors that the governor of the People's Bank of China, Zhou Xiaochuan, the Middle Kingdom's equivalent to Federal Reserve governor Ben Bernanke, has defected to the US. The Chinese authorities' efforts to censor the story has only succeeded in pouring fuel on the flames. Even if the rumors turn out to be untrue, this could mark the end of three decades of political stability in China.
The report was relayed to the US by Asia Pacific analyst Matt Gertken at STRATFOR, a Texas based boutique private intelligence and geopolitical forecasting firm. It is believed that Chuan was forced to leave the country because of an anti corruption scandal, or worse, a dramatic shakeup of China's macroeconomic and monetary policies. Chuan has not been seen in public since August 26.
China is facing a generational change in leadership in 2012, and the maneuvering has already begun over whether the country's breakneck economic reform policies will continue to move ahead, stagnate, or reverse. Many in the 2.25 million People's Liberation Army, where an underpaid rural underclass is well represented, have not been happy with the overemphasis on development of the coastal population centers. Even prime minister Web Jiabao has felt the heat. The brouhaha may explain why the main Shanghai index has sold off 5% in the past week, and the ETF (FXI) has clocked even bigger losses.
The story was just one of a daily outpouring of intelligence nuggets which I have been able to glean from STRATFOR's premium subscription service. The combined output of an impressive 70 man research team steeped in credentials and fluent in local languages has a global reach stretching from Vietnam to the Sudan and Latin America. They include coverage of several emerging markets now moving into prime time, which I have written on extensively, like Turkey (TUR), Poland (EPOL), and South Korea (EWY).
STRATFOR is one of a handful of private intelligence firms that hedge funds increasingly rely on, especially when considering a position in frontier markets where hard data is scarce. Readers of the Diary of the Mad Hedge Fund Trader can claim a $50 discount off STRATFOR's $349 annual fee by clicking here.
China's Central Bank Governor Zhou Xiaochuen:
Soon to Open a Liquor Store in Los Angeles?
Featured Trades: (CORN), (WHEAT), (SOYBEANS)
Teucrium Commodity Trust Corn ETF
2) Time to Add some Corn to Your Diet.? I have been waiting for a substantial dip in the grains to add to a position in corn, and it is clear from the chart below that we are just not getting it. While the US crop seems to be in good condition, with 70% rated 'good/excellent', the global picture continues to move from bad to worse.
In just a few days, torrential rains wiped out Pakistan's entire crop for the year, which historically has been a regional net supplier, and they have destroyed much of the storage as well. Russia and the Ukraine have completely withdrawn from the export market, husbanding what meager harvests they can now expect to feed their own people, forcing several international suppliers to declare a? force majeur on their contracts. It's looking like Canada can expect an early winter, as frosts have already appeared in some of the northernmost fields. Cold, dry weather is also forcing major supplier, Argentina, to pare back forecasts.
I caught a double in wheat a few months ago (click here for 'Going Back into the Ags') during its parabolic move from $4/bushel to $8 and quickly cashed out at the top (click here for 'My Best Trade of the Year'). It is still rich at $6.75. Corn has been a laggard, up only 25% from its May low, and clearly looks like it has broken out to the upside. It also offers individuals a new, easily tradable, liquid ETF (CORN).
Mother Nature is not the only factor boosting grain prices. There is a ton of cash sitting on the sidelines because so many investors are afraid of an Autumn stock market crash, and are loathe to buy the top of the greatest bond bubble in history. Given the strong fundamentals (click here for 'The Bull Market in Food is Only Just Starting' ) and the historically low prices, the grains look pretty good right now on a risk/reward basis in the global scheme of things.
And if the trade doesn't work out, you can always take delivery and eat your long. It's great for the digestion. Believe me, I know!
Featured Trades: (SPX)
S&P 500 Large Cap Index ETF
3) My Equity Scenario for the Rest of 2010. Not a day goes by when I don't fall down on my knees and thank the heavens that I avoided equities for much of this year (click here for 'I'd Rather Get a Poke in the Eye With a Sharp Stick Than Buy Equities' in January). Trading in American stocks this week is a sloppy, low volume, conviction free affair as everyone waits for an August non-farm payroll figure they know will be terrible. Good thing I focused on the grains, the Canadian and Australian dollars, emerging market equities and debt, junk bonds, precious metals, rare earths, and a few special situations like BIDU, POT, AGU, and MOS.
That report could be the stick that breaks the 1038 support which has held for 3 ? months and takes us down to my long standing 950 target for the S&P 500 (click here for 'Why There is No Place to Hide in This Sell Off'). Gold's positively virile action today, where it touched $1,250, just shy of an all time high, tells you that September is not going to be a pretty picture.
Historically, stock markets are weak for the six months going into midterm elections. The April 25 top on the SPX neatly fits that time table. In every election since 1950, markets then rallied for six months after the midterms, setting up for a nice year end rally.
The catalyst for the move will be the removal of the elections themselves as an unknown. With the two political parties at contemptible, diametrical, even hateful? extremes, elections these days have a much larger impact on financial markets than they have in the past.
End September will also bring the next round of earnings reports, which should be pretty good. After all, firing people to boost productivity and profitability is the winning business model of 2010. A 950 SPX gives you a PE multiple of 10, the lowest it has been for years. For you technicians out there, 950 also happens to be a key Fibonacci level.
I have often said that markets will do whatever they have to do to screw the most people. Getting as many as possible maximum short in September, then running the markets for the rest of the year, fits the bill nicely.
Thanks Goodness I Avoided Equities This Year
4) Another Admiring E-Mail. I get about 500 emails a day, but occasionally, I get one so choice that I have to pass it on to you. To the thousands of students, job seekers, and soon to be cashiered veterans who read this letter every day online, take heart!
'Dear Mad Hedge Fund Trader,'
'I'd like to purchase a subscription.? I have learnt a lot from your website, and used some of the insights I got in getting a job (first job actually), 4 weeks ago. The job is at XXXX in Sydney, Australia. I'd like to pay you back by getting a 2 year subscription, but $849 is about a quarter of my monthly salary at this point (I'm way down the corporate ladder). If you could send me the details to put in for a subscription, that would be awesome. I will check this mailbox in the morning before I leave for work. Thank you very much, XXXX'
You can't make this stuff up.
Featured Trades: (SOUTH AFRICA), (EZA)
South Africa iShares ETF
2) On Safari in South Africa. When I first visited South Africa (EZA) as a journalist in 1979, I was stuffed into the trunk of a car and smuggled into Soweto, a fenced off? 'township' , so I could write about the appalling living conditions there. Six ANC bodyguards accompanied my every move, as to venture out alone amidst 100,000 oppressed blacks would have been suicidal. Bringing along my Japanese wife to the land of apartheid didn't exactly go down well with the white locals either, as there was only one hotel in the country that would accommodate us.
The bottom line: everyone hated us. We were lucky to get out alive. Is those days, when long lines of Afrikaners snaked out of coin dealers selling their krugerrands for $900/ounce, everyone was convinced the country would soon blow up in a gigantic, bloody racial war.
It never happened. The Afrikaners made peace with the ANC, an incredible reconciliation process ensued, and by 2010 the country had healed enough to host the World Cup. It's all proof that if you live long enough, you see everything.
Now, South Africa is popping up on the radars of several big hedge funds as one of a handful of frontier emerging markets ready to make the move to prime time. Of course we already know about world class companies like De Beers, Standard Bank, and Sasol, which give it enough muscle in services and industry to stand out from the rest of the Dark Continent.
But did you know about alternative energy and venture capital? Local entrepreneurs report that South Africa is among the best countries to start a new company these days, with top rate universities, a plentiful, well educated professional class, a trained work force, generous government subsidies for key industries, and a healthy local market. Despite its well earned reputation as the premier source for the world's gold and diamonds, 50% of the country's exports were manufactured goods.
This dynamic mix enabled South Africa's GDP to hold up well during the financial crisis. Analysts are expecting a 3.3% growth rate this year and acceleration to 5% or more next year.
But this all misses the really big play in EWZ, whose ticket to prosperity will get punched by selling into fast growing markets? and a rapidly rising standards of living in the rest of Africa. The entire region has enjoyed accelerating GDP growth rates since 2002. This has been partly fueled by soaring commodity prices where Africa has a lock on the market, such as for cobalt and iridium, crucial elements for advanced electronics and cell phones.
There have been a number of new oil discoveries in Nigeria and Sudan. The Chinese are pouring tens of billions of dollars there into gigantic farms in Africa to feed its own hungry masses. Mass distribution of free anti retrovirals and malaria drugs by the likes of billionaire Bill Gates and the US government has also stopped the AIDS epidemic in its tracks.
Mind you, this is not a country without challenges. The unemployment rate is stuck at a daunting 24.5%, crime is rampant, income disparities are vast, and inter racial strife still percolates under the surface. However, when the world's investors flip back to risk accumulation mode, this is a new country you should consider.
Are You a Bull or a Bear?
Featured Trades: (SILVER), (SLV)
iShares Silver Trust ETF
2) Silver is Hot, Hot, Hot. Those who followed my advice to watch silver should by now have the precious coins raining down upon them (click here for 'Why the Really Big Play is in Silver' ).
Since then, the precious white metal has jumped 8% to $19.30, just pennies short of a multiyear high, compared to a more pedestrian 4% move by gold (GLD). It is thus fulfilling my prediction that it would outperform the barbaric relic by 2:1 on the upside.
The action has spilled over into the miners, with Coeur D Alene Mines (CDE) rocketing by 19% in two weeks, while Silver Wheaton (SLW) is up 14% and Hecla Mining (HL) has tacked on an impressive 16%.
Precious metals traders have been stumped by the move, expecting that industrial demand for silver would slump in the face of a double dip recession. What they aren't seeing is the surging monetary demand for silver, which continues to grow beyond all expectations. Not only do you see Americans and Europeans fleeing into silver, rather than lock themselves into 30 year returns in the Treasury bond market at 2.5%, the Chinese are leveraging up a rising standard of living into increased silver coin purchases.
Silver also has a much bigger catch up game to play. While gold is a mere 2% off its all time high, silver must appreciate by 153% to reach a new peak.
Your choices here are the silver ETF, the miners listed above, or futures contracts listed on Comex. You can also get physical by adding to your holdings of .999 fine silver buffalos at a small margin over spot by clicking here. If these guys sell out, shop around, because there are plenty of other merchants with competitive prices. You can always use them to bribe the border guards when you are fleeing the country.
Featured Trades: (GOLD), (GLD), (GDX)
SPDR Gold Shares ETF
Market Vectors Gold Miners ETF
1) The San Francisco Money Show. I attended the Woodstock of investment conferences last week, the San Francisco Money Show, which offered an entertaining three ring circus of traders, foreign exchange models, options platforms, newsletters, cruises, video broadcasts, and more.
The cavernous Marriott Marquis hotel and convention center South of Market on 4th Street was absolutely bubbling with new ideas. You couldn't walk five feet without tripping over a great investment theme, and information overload was the problem of the day. There was a plethora of celebrity speakers, including Elaine Garzarelli, John Mauldin, and Think or Swim founder, Tom Sosnoff.
There really is no corner of the financial markets that was not well represented by market makers, analysts, technology providers, and investors-- thousands of them. With the soaring level of US government debt scaring the daylights out of everyone, the precious metals dealers were there in force.
Of course, the hard asset crowd was everywhere, and you could not swing a dead cat without hitting a miner looking for new funding. Never mind that the barbaric relic went up for all the wrong reasons. The dollars they're making are still just as good at the bar. The only thing missing from the show was the long predicted hyper inflation. Want to prospect in the Ivory Coast? No problem.
I was pleasantly surprised by the diversity of major corporate sponsors there to promote their own shares, like Darden Restaurants, Proctor and Gamble, Roche, Sanofi Aventis, Vale, and Nidec, several of which are great investments. A variety of oil service companies were also well represented. A 'green' section offered a look at wind, solar, and geothermal energy providers.
I took the opportunity to talk with companies about everything from the latest drilling costs, long term food prices, and the true cost of geothermal, to the clever play in gold coins (go for those struck at the San Francisco Mint). I was constantly amused every few minutes by attendees who, seeing my nametag, asked to have a photo taken with the one and only Mad Hedge Fund Trader, and to sign their program.
After I make my fortune, there was even a booth extolling the virtues of retiring on the beach in Costa Rica or Belize. It was a great opportunity to chat with the end investors who ultimately drive all these markets. All in all, it was a weekend well invested. For a calendar of future events, go to www.MoneyShow.com.
Featured Trades: (STEVE FORBES)
2) A Chat With Steve Forbes. I sat down with Forbes magazine publisher and perennial Republican presidential candidate, Steve Forbes, whose father, Malcolm, I knew from my journalism days in the seventies. He was there formally to promote his new book, Power Ambition Glory, but I couldn't help but sense his loftier goals.
He says that the crash was a failure of government. It was caused by the Fed, which pursued a weak dollar policy, kept interest rates too low for too long, and printed too much money. Our central bank should pursue a strong dollar policy which will bring a revival of the credit markets. We have the most hard left president and congress in history, and they are on the cusp of getting what they want. Lifting the rules on upticks and naked shorting threw gasoline on the fire.
The rating agencies are a cartel we should get rid of. Let the free markets work. The stock market recovery last year came with the modification of mark-to-market rules, which never should have been in force. George Bush betrayed the Republican party by abandoning its principles.
Steve has always championed the libertarian wing of his party, and has been the leading proponent of the flat income tax. Did I just hear the first campaign speech of the 2012 presidential election?
