Featured Trades: (RESIDENTIAL REAL ESTATE)
1) The Residential Housing Market is Still Burning Down. Today, the Commerce Department reported that June new home sales, at 330,000, were up a blistering 24%. So is the crash in residential real estate over? It's off to the races, right? Wrong! Much of the gains were cancelled out by whopping great downward revisions which caused April to shrink from 504,000 to 422,000, and May to shrivel from 300,000 to an unbelievable 267,000, a 60 year low. Every time I update my prediction that home prices are either going south or nowhere for a decade, my inbox gets flooded with angry emails from real estate agents around the country and other industry apologists screaming that I am missing record home affordability and historic low 30 year mortgage interest rates. Over the weekend I received an assist from Barrons (click here for the link), which highlighted an unexplored angle in the real estate crisis. The coming demographic curve predicts that there will be a shortage of those aged 35-49, prime first time home buyers. At the same time, there will be an oversupply of those over 50, like me, who are looking to downsize their housing requirements. The net effect is for national home ownership that peaked in 2004 at 69% to fall as low to as 64% by 2015, its 1993-94 bottom. The flip side is that renters will soar from 32.8% to 36% during the same time period. Needless to say, this is terrible news for house prices. It also explains why low end multifamily housing, where newly formed young families and immigrants reside, is one of the few sectors of the housing markets showing a pulse. If you want more depth on this politically sensitive issue, please read my notorious piece on 'The Hard Truth About Residential Real Estate' by clicking here.
Featured Trades: (THE HARSH REALITIES OF TRADING)
3) It's Harder Than it Looks. A recent piece at the underground website, Zero Hedge, by one 'pivotfarm' resonated with me in explaining how hard it actually is making money in the market (click here for the link). It looks deceptively easy from the outside. You buy a share, watch it go up under its own power, and sell for a profit. How hard is that? This is why the securities industry has such a long history of attracting those interested in shirking hard work, aspiring to get rich quick. If you do encounter those with new found fortunes, they usually stole it. You want to run a mile from managers touting perfect track records, as they are usually fake. The reality is a little bit harsher. The author lists the great lengths that the pros go to insure success, including endless education, iron clad self discipline, and independence of thought. He refers to New Yorker writer Malcolm Gladwell's insight that if you look behind the scenes, success can usually be explained by unbelievable hard work (click here for my 'Evening With Malcolm Gladwell' ). I draw these simple analogies for potential traders. Just because you like listening to music on your car radio doesn't mean that you can compose Beethoven's Fifth Symphony, reading the Sunday papers doesn't bestow on you the gift to write Tolstoy's War and Peace, and watching weekend movies doesn't turn you into Steven Spielberg.
Potential Trading Wizards?
Featured Trades: (EMERGING MARKET DEBT), (PCY)
Invesco PowerShares Emerging Market Sovereign Debt ETF
4) Is Emerging Market Debt the New Prime Credit? Last year, I suggested emerging market sovereign debt ETF's as safe, high yielding investments in which to hide out in case the equity markets swoon again. The stock market has looked pretty grizzly for the last three months, so let's see how they performed. The Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY), which has 40% of its assets in Latin American bonds and 31% in Asia, is up 156% from its low, and up 10% since the beginning of the year. The two year old fund now boasts $481 million in market cap and pays a handy 6.44% dividend. This beats the daylights out of the one basis point you currently earn for cash, the 3.02% yield on 10 year Treasuries, and still exceeds the 5.44% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single 'A' US corporates. The big difference here is that the countries that make up the PCY can look forward to a much rosier future of credit upgrades.? PCY received a boost from a flight of capital, out of the euro zone, into other sovereign credits. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. Not so for the US, which has bond issuance going through the roof, and downgrade noises growing ever louder. Still, all good things must come to an end. If you are holding a position in this ETF, I would think seriously about cashing out. With 10 year Treasury bonds tickling a 2.83% yield last week, I am getting leery about the entire fixed income universe. And no one even got fired for taking a profit.
Is it Time to Cash in Your Emerging Market Debt?
Featured Trades: (EUROPEAN BANK STRESS TESTS),
(EURO), (FXE)
Currency Shares Euro Trust ETF
1) Give All the European Banks 'A's'. A favorite ploy of poorly managed school districts in California is for the teachers to simply give all their students 'A's'. That way the state and federal money keeps rolling in, and demanding parents can be assured that their over protected children are performing. That seems to be what is happening with the stress test given to European banks, the results announced on Friday, which most passed with flying colors. French banks were found to be the healthiest. Only 7 out of 91 banks in 20 countries were sent to the markets to raise more capital. One German bank flunked the test, one from Greece, and five from Spain. Having been a banker in Europe myself for a decade, I can tell you first hand that they have never been big on transparency. The test assumes that banks will be able to maintain a minimal 6% tier one capital ratio, even after another economic or sovereign debt crisis wipes out $700 billion in new losses. Healthy banks generally have 10% capital ratios. Many analysts suspect that the European Union reverse engineered the test, setting the standard by calculating the lowest capital ratio that would pass the most banks. Eyebrows were further raised when the German banks refused to disclose their sovereign debt holdings, which are believed to already carry huge losses. Still, there has been a sigh of relief in the global capital markets, as credit spreads tightened all week. Add one known, scratch one unknown. The news is considered good enough to allow the rallies in US stocks and the Euro a few more days of life. We'll find out for sure when the next round of disclosure comes our way in two weeks.
Europeans Have Never Been Big on Transparency
Featured Trades: (TURKEY), (TUR), (TKC), (TURKISH LIRA)
iShares MSCI Turkey Investable Market Index Fund ETF
1) Turkey Is On The Menu. The boarding of a Turkish ship by Israeli commandos and the international brouhaha that it sparked has thrown a searing spotlight on that emerging nation. Several hedge fund friends and now a few readers of this newsletter in Istanbul have urged me to explore this intriguing nation further. So I thought I would use this otherwise slow news day to do exactly that.
I first trod the magnificent hand woven carpets of the Aga Sophia in the late sixties while on my way to visit the rubble of Troy and what remained of the trenches at Gallipoli, a bloody WWI battlefield. Remember the cult film, Midnight Express? If it weren't for the nonstop traffic jam of vintage fifties Chevy's on the one main road along the Bosporus, I might as well have stepped into the Arabian Nights. They were still using the sewer system built by the Romans.
Four decades later, and I find Turkey among a handful of emerging nations on the cusp of joining the economic big league. Q1 GDP grew at a blazing 11.4% annualized rate, second only to China, exports are on a tear, and the cost of credit default swaps for its debt is plunging. Prime Minister Erdogan, whose AKP party took control in 2002, implemented a series of painful economic reform measures and banking controls which have proven hugely successful. Since the beginning of this year, Turkey's ETF (TUR) has outperformed BRIC poster boy China's ETF (FXI) by a whopping 11.8%.
Foreign multinationals like general Electric, Ford, and Vodafone, have poured into the country, attracted by a decent low waged work force and a rapidly rising middle class. The Turkish Lira has long been a hedge fund favorite, attracted by high interest rates. With 72 million, the country ranks 18th in terms of population and 17th in terms of GDP, some $615 billion. It has a near perfect population pyramid; with young consumers greatly outnumbering expensive retirees (click here for more depth in my 'Special Demographic Issue').
Still, Turkey is not without its problems. It does battle with Kurdish separatists in the east, and has suffered its share of horrific terrorist attacks. Inflation at 8% is a worry. The play here long has been to buy ahead of membership in the European Community, which it has been denied for four decades. Suddenly, that outsider status has morphed from a problem to an advantage.
Growing economic power brings political influence with it. The last year has seen Turkey broker settlements in the Balkans and facilitate the Iranian uranium swap with Russia. Some analysts claim this new flexing of diplomatic muscle has a pronounced Islamic, anti American bent. Remember, Turkey refused transit rights to US forces during the invasion of Iraq.
The way to play here is with an ETF heavily weighted in banks and telecommunications companies, classic emerging market growth industries (TUR). You also always want to own the local cell phone company in countries like this, which in Turkey is Turkcell (TKC). Turkey is not a riskless trade, but is well worth keeping on your radar.
US Dollar/Turkish Lira Inverse Chart
A Turkish Population Pyramid to Die For
Featured Trades: (FXI), (COCOA), (CHOCOLATE), (NIB)
iPath Dow Jones-UBS Cocoa Subindex Total Return ETN
2) Hedge Fund Corners the Cocoa Market. That Hershey bar you've been sneaking out to buy on breaks is about to cost you a lot more. London based Anthony Ward's Amajaro hedge fund built up a billion dollar long position in the cocoa futures market, which traders expected him to unwind going into expiration. To the absolute shock of investors and industry insiders alike, he took physical delivery instead of 240,000 metric tonnes of the delectable soft commodity, about 7% of the world supply.
The move triggered some extreme volatility in the markets. The difficulties of transporting and storing this quantity of a perishable commodity boggle the mind. Ward, a long time successful cocoa trader, is clearly taking advantage of a poor crop this year in the Ivory Coast, a major producer, betting on a price rise. The move was so unexpected that traders and big consumers, like Cadbury and Nestle, have been caught short. Although these giants hedge their requirements years in advance in the futures markets, no one expected this amount of product to be taken off the market so quickly.
Speculation is rife about secret hedges, under the table contracts, or other back room deals. Ward was able to accumulate such a large stake because the UK's LIFFE lacks the position limits in force in the US markets. The affair takes one back to the days of Jesse Livermore in the 1920's, whose shenanigans earned him the sobriquet of 'Mr. Cotton', as well as the Hunt Brothers' maneuverings in 1980 which took silver to a staggering $50 an ounce (today it is $17.85). The fabled economist John Maynard Keynes once rented all the available warehouse space in London to avoid taking delivery of a bad position in copper.
Traders are now split as to whether Ward can join this illustrious company by pulling it off, sending prices through the roof, or failing miserably, and see his position dumped in the market at distressed prices. His investors are certainly praying that the newfound penchant for chocolate by the rising Chinese middle class continues to grow. If you want to get involved, and you might consider taking a long nap before you do, you can trade the cocoa ETN (NIB). Come to think of it, I better start stockpiling a hoard of chocolate boxes for next Valentine's Day while prices are still low.
Featured Trades: (THE NEXT 100 YEARS)
3) What Will the World Look Like in 100 Years? George Friedman, geopolitical forecaster and founder of the Austin, Texas based private intelligence firm, Strategic Forecasting (Stratfor) (click here for the link at https://www.stratfor.com/ ), delivers a fascinating list of future political, military, and economic scenarios in his new book, The Next 100 years: A Forecast for the 21st Century.
Friedman claims the current Islamic assault on the West is failing, and will cease to be a factor on the international scene within the decade. Russia will take another run at becoming a superpower, which will fail by 2020, and leave the country even more diminished than it is today. When standards of living in China level off or reverse in the 2020's, chronic resource shortages could cause the Middle Kingdom to implode and break up. China is far more fragile than we realize.
Japan may deal with stagnant economic and population growth the same way it did during the 1930's by invading China as early as 2030. Japan may also take a bite out of indefensible Siberia when it remilitarizes. Poland (click here for 'Where to Play the Dead Cat Bounce in Europe'), a unified Korea (click here for 'The Economic Miracle that is South Korea') , and Turkey (see above) will develop into regional military and economic powers in their own right.
Friedman then describes a theoretical war by a coalition of Turkey and Japan against the US in 2050, resulting in an American victory, which leads to a new US golden age in the second half of the century. Scramjet engines make possible the development of unmanned hypersonic aircraft which can launch a precision attack any place on the planet in 30 minutes. Warfare will move into space and be fought from 'battle stars,' which will also become major energy sources for earth. Friedman kind of lost me when he predicted that the next Pearl Harbor could come from Japan, but not from the sea going aircraft carriers of old, but from caves on the moon.
The big challenge towards the end of the 21st century will be the emergence of a Hispanic nation in the Southwest, which is culturally isolating itself by not integrating with the rest of the country. This could lead to the secession of several states, or a new war with Mexico, which by then, will develop into a major power in its own right. I think to avoid a second Civil War and offload some huge state deficits, Washington just might say '?Adios!'
You can argue that someone making many of these predictions is looney. But if you had anticipated in 1970 that China would become America's largest trading partner, the Soviet Union would collapse, Eastern Europe would join NATO, the US would enter a second Vietnam War in Afghanistan, and oil would hit $150 a barrel, you would have been considered equally nutty. I know because I was one of those people. It does seem that long term forecasters have terrible track records.
All in all, the book is a great armchair exercise in global realpolitics, and an entertaining contemplation of the impossible. More than once, I heard myself thinking 'He's got to be kidding.' To get preferential pricing from Amazon on this thought provoking tome, please click here.
'Companies are not saving cash for a rainy day, but a rainy decade,' said Tanya Beder, chairman of SBCC Consulting.
Featured Trades: (POT), (MON)
4) More on the Grains. I managed to catch an interview with Charlie Rentschler at New York boutique investment bank, Morgan Joseph, one of the top agricultural analysts in the industry, known as the 'Farmer from Harvard.' He says that investment in the sector is a frustrating and unpredictable mix of bugs, weeds, and weather, tossed in with capricious government policy and volatile commodity prices. The industry is enjoying enormous productivity increases, thanks to new genetic seed varieties, narrowing rows for planting which accept more corn seeds in the ground,? automatic GPS steered tractors, and farms requiring less tillage, enabling more acres to be planted. Ethanol now accounts for a staggering 10% of the arable land in the US and one third of the corn crop, and is having a huge upward push on prices. It has ratcheted corn up from the $2 to $4/bushel range, and soybeans from $4 to $10/bushel. His first pick is Saskatchewan fertilizer producer Potash (POT), which is benefiting greatly from rising prices and soaring demand from China, followed by Monsanto (MON), which I, myself, have been pushing for a year. After a period of weakness triggered by the government's January crop report predicting huge increases in corn plantings this year, which is cutting the knees from under prices, I expect to see a long term bull market in food prices. Wait for the markets to price in another perfect year, buy, and then wait for the weather to turn bad, as it invariably does.
'There is no such thing as an isolated economy anymore,' said Alan Greenspan, former chairman of the Federal Reserve.
