September 2, 2009
Featured Trades: (MONGOLIA), (SPX), (IVN), (RTP),
(FSLR),(STP) (YGE), (LEN), (DHI), (TOL)
1) US stocks are now the most expensive they have been in seven years, and never really got cheap during the March low, just fairly valued. At least I have some good company in my views, which are also shared by David Rosenberg of Gluskin Sheff, the former economist at the late Merrill Lynch. The 'faith based' rally is now discounting a GDP growth rate of 4.0%, which has a snowball's chance in Hell of actually occurring. This is up dramatically from the 2.5% growth rate the S&P 500 was discounting when the index was at 667. The best stock market rally since 1933 added an unprecedented eight PE multiple points to stocks, and there is now more risk in the market than the 2007 peak. Underweight portfolio managers and momentum driven day traders are to blame. It's what happened after the 1933 rally that scares me. Needless to say, stocks offer no value here. You can sign up for David's well thought out research for free by going to his website at http://www.gluskinsheff.com/.
2) There's nowhere I won't go to make a buck, so I had to sit up and pay attention when friends in Tokyo told me that the next big Asian equity play will be in Mongolia. Genghis Khan's ancestral land has enormous mineral resources which make it a natural commodity play (did he know?), and it has one of the world's most GDP friendly population pyramids. But incompetent government administrators with antiquated Soviet era sentiments managed to kill every nascent development opportunity in the crib with onerous windfall taxes and harsh joint venture restrictions. The resources stayed in the ground. National elections finally turned over the regressive administration in 2008, and the anti growth tax regime was dumped last week. Mongolia is now close to inking a deal with Ivanhoe Mines (IVN) and Rio Tinto (RTP) to develop the massive Oyu Tolgoi gold and copper mine, which could lead to a doubling of the GDP in five years. We're talking a gigantic 450,000 tons of copper and 330,000 ounces of gold a year. Also on tap is the development of huge coking coal and uranium deposits. The spillover benefits for the rest of the economy would be substantial.?? Mongolia's Lilliputian stock market offers few opportunities for foreign investors. So unless you want to get a job there or invest directly in a local company, you'll have to wait for the ETF to come out, and then the dip to get in. This is exactly what unfolded in Vietnam. Now that visas are no longer impossible to get, as they were in my day, my Japanese and Chinese speaking son tells me that Ulan Bator has become the trendy place for American college grads fleeing unemployment at home. Who knows? Give me a low enough PE multiple and I might even develop a taste for sheep brains and fermented mare's milk.
3) The solar industry is suffering some 19th century Darwinian style competition, with Chinese manufacturers Suntech (STP) and Yingli Green Energy Holding (YGE) clearly dumping panels below cost to gain market share. You may laugh, but I watched the Japanese pursue the same strategy in the seventies and eighties to devastating success. They now control half the US automobile market, and the most profitable half at that. As a solar consumer I shouldn't care, as the 50% price drop has, with Obama's generous tax subsidies, made new installations cheaper than obtaining electricity from my local power company (PGE) at 12 cents a kilowatt. It's just a matter of booking the profit in China instead of Phoenix. But the predatory pricing has also kicked my beloved First Solar (FSLR) in the shins, which has dropped from 44% from $205 to $115 since May. Use the move to pick up FSLR on the cheap. The company is using advanced cadmium telluride based thin film semiconductor technology, which has enabled it to match the Chinese price cuts dollar for dollar, and the engineering will allow them to continue to do so. The Chinese, wedded to an older polysilicon product, can't keep playing this game, unless they want to hemorrhage cash, or face US anti-dumping enforcement. To see more on the current fundamentals of solar, please click here.
4) Don't kid yourself into thinking that the real estate collapse is over. Yes, you can be forgiven for thinking so with July new home sales up 10%, the Case-Shiller home price index up two consecutive months, and homebuilder stocks like Toll Brothers (TOL),?? D.R. Horton (DHI), and Lennar (LEN) through the roof. Nationally, home prices have fallen back to their historic average of 3.2 times earnings. The problem with all of this is that crashes don't end at the averages, they overshoot. Some cities like Los Angeles, New York, and Washington DC are still historically expensive. Take away the life support of ultra low interest rates, the $8,000 first time buyer tax credit, the $6,000 California tax credit, $1 trillion in Fed purchases of securitized debt, and toss in another five million expected new foreclosures, and that might give you your final bottom. But that isn't happening this year. Rent, don't buy. For more on this, look at Martin Hutchinson's excellent work by clicking here
QUOTE OF THE DAY
'The total breakdown of the system is ahead of us. It may come in four, five, or ten years, and it will devastate the world economy. By bailing out the issuers of derivatives, the Fed actions have only postponed the day of reckoning,' said Marc Faber, publisher of the Gloom, Doom & Boom Report.
September 1, 2009
SPECIAL SAN FRANCISCO MONEY SHOW ISSUE
1) I attended the Woodstock of investment conferences last week, the San Francisco Money Show, as a correspondent for financial blog aggregator and research provider www.seekingalpha.com. The cavernous Marriot convention center was absolutely bubbling with new ideas, where you couldn't walk five feet without tripping over a great idea, and where information overload was the problem of the day. The show is one facet of a marketing empire assembled by Charles and Kim Githler over the last three decades, which includes traders, forex, and options expos, newsletters, cruises, video broadcasts, and an exponentially growing website. There really is no corner of the financial markets that were not well represented my market makers, analysts, technology providers, and investors? lots of them. With the soaring level of US government debt scaring the daylights out of everyone, the precious metals dealers were there in force, led by the pros at Millennium Metal (see www.millenniummetals.net ).?? I was pleasantly surprised by the diversity of major corporate sponsors there to promote their own shares, like Darden Restaurants, Proctor and Gamble, Roche, Deutche Telecom, and Nidec, several of which are great investments. New to the venue was a 'green' section well represented by wind, solar, and geothermal energy provides. 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. After I make my fortune, there was even a booth extolling the virtues of retiring on the beach in Costa Rica. It was also 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.
2) I sat down with Forbes magazine publisher and former 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. 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 market turn in March came with the modification of mark to market rules which never should have been in force. George Bush betrayed the party by abandoning its principals. 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 speech of the 2012 presidential election?
QUOTE OF THE DAY
'Blaming greed for the Wall Street crash is like blaming gravity for an airplane crash,' said Steve Forbes, publisher of Forbes magazine.
August 31, 2009 SPECIAL ??CHEAP THINGS TO BUY? ISSUE
Featured Trades: (CHK), (XTO), (SWN), (HK), (WHEAT), (WZ09)
1) Note to self. Don?t do your midnight pee next to the bear box. They?re called that for a reason. And I?m sorry that my shouting at the hungry, six foot tall black bear standing in front of me, no doubt more attracted by my Cheetos, hot dogs, and marshmallows than my Manhood, woke up the campers at the 57 surrounding sites. Of course it was too dark to find my bear spray. My ursine challenger eventually saw my logic that the neighbor?s ice chest was more appealing than I, and lumbered off into the darkness. I have successfully avoided bears of a different sort this summer, those of the stock market kind (see my July 15 warning not to sell to soon by clicking here). Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor. The bulk of the trading volume is now accounted for by worthless zombie stocks like Citibank (C), (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and not consumption. Puzzled CEO?s of every stripe are seeing no recovery in their businesses whatsoever. But bears who have sold into the summer rally have gotten a severe spanking. We are left with momentum players and chartists to grind out ever diminishing returns.? I have used the big up days to sell short dated out of the money calls in small size which, mercifully, expired worthless, sometimes just by pennies. That?s because I keep my favorite quote from John Maynard Keynes pasted to my monitor; ?Markets can remain irrational longer than you can remain liquid.? Better to wait for a more convincing break on the charts before piling on those shorts again.
2) ?When do I buy natural gas? is the most frequent question I am getting from clients these days. I can?t blame them, after watching CH4 dive from $13.50/MCF last year to a September contract low of $2.72. Massive new discoveries and an unusually cool summer is causing a looming storage shortage that has hammered longs. Those who dove in early have been punished, with stop outs followed by stop outs. The bizarre thing is that gas went up in flames while crude more than doubled, from $32 to $77, leaving pros stunned and speechless.?? The crude/gas ratio has soared to an unimaginable 27 times, up from a mere four times in the last decade. On a BTU basis, gas is now only 25% the cost of oil, it burns cleaner, with only half the carbon dioxide output, and is cheaper than high grade coal. Natural gas at these prices is another way of buying oil at $18 a barrel, with less pollution. Industry insiders don?t see it falling below $2/MCF, the breakeven cost of the longest term producers, where the shut off valves will start creaking en masse. Existing gas fields deplete at 25% a year, and the 60% cut in new drilling this year will deliver a rebound in prices by next winter. Longer term, the Pickens plan and the conversion of a large part of our national power generation to natural gas will drive prices higher. In the end, I think the final low will be defined by another Amaranth type disaster, where a super leveraged long hedge fund gets wiped out and is then liquidated under the worst conditions imaginable. In 2007, the Amaranth debacle took gas from $17 to $4 in the blink of an eye. Where Amaranth 2.0 will take us is anyone?s guess. But when it happens, possibly as early as September, other big hedge funds will stampede in like feral cats lapping up spilled milk. If I lived over a giant salt cavern, I would be pumping it full of natural gas now. But since these formations don?t exist in Northern California, I shall have to content myself with the futures markets, where longer dated contracts are selling at big premiums. Email me at madhedgefundtrader@yahoo.com if you need help getting set up on the futures. For those not looking for an ?E? ticket ride, it may now be time to Hoover up the leveraged natural gas equity plays like Chesapeake (CHK), XTO Energy (XTO), Southwestern (SWN), and Petrohawk Energy (HK), which appear to have already bottomed.
3) I drove over the Benicia Bridge yesterday, and saw ships lined up at the silos, sitting high in the water, waiting for transport our record wheat surplus to hungry China. After looking at barge schedules for the Columbia River, weather forecasts for Australia, and planting schedules for Texas and Kansas, I am getting more excited about buying December Wheat under $5 (click here for more background). The Southern planting schedule starts on September 1, and the financially weakest farmers will have to sell whatever they have in storage to pay for the new season?s seed and chemicals. This will give us the inventory clear out we need to allow prices to work higher by year end. The greatest growing conditions in living memory have driven prices for this basic foodstuff from last year?s spot high of $13 to the current low of $4.90. Philosophically, the cynic in me loves shorting ?Perfect,? like the ?Perfect? growth in Japanese bank earnings?? in 1989 (remember Japan as Number One?) and the ?Perfect? business models I saw in dotcoms in 2000 (remember the ?infinite revenues, zero cost? pitch?). You might get a buck out of wheat by year end, and more if conditions become less than perfect. Aren?t we supposed to see an El Nino winter (click here for details)? And you never know when the long term food shortage is going to kick in, where the sky will be the limit for prices (click here for details). View the recent spike in sugar prices as an appetizer, not a dessert. Remember, the Fed can print money, but not calories.
JOKE OF THE DAY
Purse snatchers stole the credit card belonging to Ben Bernanke?s wife. Their credit card company became suspicious when they saw multiple purchases of bankrupt car companies hit his card.
Global Market Comments
August 21, 2009
Featured Trades: (NATURAL GAS), (UNG),
(LITHIUM), (OPTT), (HANG SENG), ($HSI)
1) Many traders are staring at their screens with rapt attention to see if natural gas can hold the new seven year low of $3. If it does, you can expect an explosive rally back to $3.50. If it doesn?t, the mother of all stop loss selling will ensue, as day traders and chartists, ignorant of the fundamentals of CH4, bail on positions that technically looked sooooo attractive. Seeing this terrible price action with a hurricane barreling in on the East coast is nothing less than amazing. NG owners have to be thinking that if you throw good news on a market, and it can?t go up, then get the Hell out of there. You could see $2/MCF in a heartbeat, and the washout could set up one of the great long plays of the decade. Buying on the back of others? distress is always a great play. Please see my call on June 2 to sell NG at $4.30 by clicking here . Remember the $13.50 we saw last year, or better, the $17 that printed after hurricane Katrina? They don?t call this contract the widow maker for nothing. For an excellent update on this clean burning fuel, go to the opinion page of the August 17 issue of the Wall Street Journal and read the piece entitled ?New Priorities for Our Energy Future,? written by none other than two sons of the South, T. Boone Pickens and Ted Turner. (To read the full article, click here). They argue that the gigantic pool of NG recently discovered under the US exceeds the energy reserves of Saudi Arabia and should be used to transform our economy. But that isn?t going to help nervous traders decide if they should puke their long NG positions first thing tomorrow morning.
2) If we do move from a carbon to a lithium based economy, what are the implications? Will we all become mellow? Politicians, industrialists, and environmentalists who see battery powered vehicles as the wave of the future are overlooking the fact that 50% of the world reserves of lithium are found in impoverished, landlocked Bolivia. This is a country that, until now, was best known for killing off famous foreigners (Che Guevara, Butch Cassidy, and the Sundance Kid), and being the source of a new form of venereal disease. Lithium ion batteries are four times more efficient than the current generation of nickel cadmium ones, and are essential for electric cars to finally become economically viable. But now that the country finally has something the world wants, nationalism is rearing its ugly head. Local politicians see their country as the Saudi Arabia of the highly corrosive, toxic, reactive metal, and are already discussing ways to restrict access. Will La Paz become the headquarters of OLEC, the Organization of Lithium Exporting Countries? The only other supplies are to be found in Chile, Argentina, Australia, China, and Nevada. Should the US invade to insure supplies? Iraq worked didn?t it? The safer way for opportunistic investors to play this is to look at Sociedad Quimica Y Minera (SQM), Chile?s largest producer of lithium, which has already seen its shares nearly triple this year.
3) Wave power has been the orphan of the alternative energy world, the allure of infinite supplies of energy offset by the highest cost of extraction. Every time it looks like someone has cracked this nut, a storm comes along and washes away all of their high tech buoys. However, we may finally be seeing this technology come to fruition. New Jersey based Ocean Power Technologies (OPTT) has been working on the problem since 1994, went public in 2007, and seeks to convert the mechanical motion of ocean waves into electricity with their PowerBuoys. Their engineers have created a 150 KW buoy that generates power at a relatively rich ten cents per KW. The energy available in waves is truly immense. A small harbor of these could generate enough electricity to power a medium sized city. The Navy has been their biggest customer until now, accounting for 58% of sales, driven by a directive to obtain half of their renewable energy generation from renewable sources. Commercial projects are operating or under consideration for the Jersey shore, Spain, Scotland, Western Australia, Hawaii, and Oregon, where local utilities are operating under similar mandates. The cash rich, well funded company says if they can mass produce their next generation 500 KW PowerBuoy, which will be operable in 2010, the cost of electricity will drop from 10 cents to 5 cents per kilowatt, making it cost competitive with fossil fuels, wind, and solar. Throw government subsidies into the mix and this could be an interesting play. The stock cratered with those of other green companies, dropping from $20 to $4. With crude now having moved from $32 to $75 on its way back up to $150 this could become an interesting cheap call on energy prices. Check out their website at http://www.oceanpowertechnologies.com/
4) All eyes are riveted on Shanghai, where the index has gone from up 110% on the year to only 53% in less than three weeks. Talk about taking the rice wine away from the party! I know from my own hard earned trading experience that the Middle Kingdom is the home of the one way move, a tendency exacerbated by the 53% retail participation in the daily trading volume. Analysts are looking for the 150 day moving average to hold at 2,700, which could set up a range of 2,700 to 3,500 for the rest of the year. Use the sell off to get a position in an economy that will see growth accelerate from the current 9% rate to possibly 12% by next year. With Shanghai closed to foreign direct investors, the best way to do this with decent leverage is through the Hong Kong based Hang Seng futures. The mini contract has only recently been cleared by US regulators, and is now available to US based traders. One contract? gives you an exposure of? US$26,000, with a margin requirement of?? US$2,000, giving you leverage of 13 times. Catch a 10% move and you earn a handy 130% return. The only drawback is you have to stay up from 9:45 pm to 4:30 am New York time to watch the intraday moves, which can be utterly breathtaking. If you don?t mind the No Doze and want to know how to get set up on this, email me at madhedgefundtrader@yahoo.com.
5) Note to subscribers: I will be off for a week, first to attend the San Francisco Money show, then to drink the pristine, ultra pure waters of Lake Tahoe. Great news for the kids, bad news for the fish. It?s time to accumulate some grit on my teeth instead of stock positions, and watch burning marshmallows drip from my coat hanger into the fire instead of diminishing investment opportunities. Paid subscribers will have these days added to the end of their run. Thanks for all of the wonderful suggestions for poison oak remedies after my last trip. Does anyone know any good tricks to keep the mosquitoes at bay?
QUOTE OF THE DAY
?Recession-Plagued Nation Demands New Bubble to Invest In,? says a headline in The Onion, a satirical publication.
Global Market Comments
August 19, 2009
SPECIAL DEMOGRAPHIC ISSUE
Featured Trades: (VIETNAM), (VNM),
(POPULATION PYRAMIDS)
1)Desperate homeowners counting on a 'V' shaped recovery in residential real estate prices better first take a close look at global demographic data, which tells us there will be no recovery at all. I have been using the US Census Bureau's population pyramids as long leading indicators of housing, economic, and financial market trends for the last four decades. They are easy to read, free, and now available online at http://www.census.gov/. It turns out that population pyramids are something you can trade, buying the good ones and shorting the bad ones. These graphical tools told me in 1980 that I had to sell any real estate I owned by 2005, or face disaster. No doubt hedge fund master John Paulson was looking at the same data when he took out a massive short in subprime securities, earning himself a handy $4 billion bonus in 2007. To see what I am talking about, look at the population pyramid for Vietnam. This shows a high birth rate producing ever rising numbers of consumers to buy more products, generating a rising tide of corporate earnings, leading to outsized economic growth without the social service burden of an aged population. This is where you want to own the stocks and currencies.
2) Now look at the world's worst population pyramid, that for Japan. These graphs show that a nearly perfect pyramid drove a miracle stock market during the fifties and sixties which I remember well, when Japan had your model high growth emerging market economy. That changed dramatically when the population started to age rapidly during the nineties. The 2007 graph is shouting at you not to go near the Land of the Rising Sun, and the 2050 projection tells you why. By then, a small young population of consumers with a very low birth rate will be supporting the backbreaking burden of a huge population of old age pensioners. Every two wage earners will be supporting one retiree. Think low GDP growth, huge government borrowing, deflation, and a terrible stock and housing markets. Dodge the bullet.
3) Where does the US stand in all of this? Brace yourself. It shows that we are turning into Japan. As a silver tsunami of 80 million baby boomers retires, they will be followed by only 65 million from generation 'X'. The intractable problems that unhappy Japan is facing will soon arrive at our shores. Boomers, therefore, better not count on the next generation to buy them out of their homes at nice premiums, especially if they are still living in the basement. They are looking at best at an 'L' shaped recovery, which means no recovery at all. What are the investment implications of all of this? Get your money out of America and Japan, and pour it into Vietnam, China, India, Brazil and other emerging markets with similar population pyramids. You want the wind behind your investment sails, not in your face with hurricane category five violence. Use this dip to load the boat with the emerging market ETF (EEM).
4) Now that we have figured out that Vietnam is a great place to invest, we welcome the news that the Van Eck group is about to launch its own Vietnam Index Fund (VNM). The venture will invest in companies that get 50% or more of their earnings from that country, with an anticipated 37% exposure in finance, and 19% in energy. This will get you easily tradable exposure in the country where China does its offshoring. Vietnam has been one of the top performing stock markets this year, at its peak rising by an amazing 110%.?? It was a real basket case last year, when zero growth and a 25% inflation rate took it down 78% from 1,160 to 250. This is definitely your E-ticket ride. Vietnam is a classic emerging market play with a turbocharger. It offers lower labor costs than China, a growing middle class, and has been the target of large scale foreign direct investment. General Electric (GE) recently built a wind turbine factory there. You always want to follow the big, smart money. Its new membership in the World Trade Organization is definitely going to be a help. Until now, the only way to get involved with this country was to go through the tedious process of opening a local currency brokerage account, or buy a region sub emerging market ETF. I still set off metal detectors and my scars itch at night when the weather is turning, thanks to my last encounter with the Vietnamese, so it is with some trepidation that I revisit this enigmatic country. Throw this one into the hopper of ten year long plays you only buy on big dips, and go there on vacation in the meantime. Their green shoots are real. But watch out for the old land mines.
QUOTE OF THE DAY
'A weaker dollar over time is part of the solution. It facilitates the rebalancing that everyone needs. It allows Asia to consume more and it allows us to produce more. It needs to go down slowly,' Said Mohamed El-Erian, co-CEO of bond house PIMCO.
Global Market Comments
August 18, 2009
Featured Trades: (SPX), (T), (SILVER)
1) Wow! One triple digit move down in the Dow, and all of a sudden, everyone is bearish.? Once invisible falling home prices, soaring deficits, bogus corporate earnings, catatonic consumers, a crashing Shanghai market, and a suicidal Baltic Dry Shipping Index? are now staring nervous stock owners in the face, eyeball to eyeball, and the picture is not pretty. Expect a run at Walmart on the Imodium and Kaopectate supplies. Even Robert Prector, of Elliot Wave fame, was on the tube proclaiming an end to a bear market rally. Did all the BSD bears just come back from family vacations to find the short selling opportunity of the year? Technical analysts think so.
2) Now that the stock market is rolling over like a cheap date, use the weakness, not to buy stocks, but silver. The US Treasury is relentlessly soaking the bond markets with ever rising amounts of borrowing, and loading up on inflation hedges during periods of weakness has to be a great idea. The American silver eagle $1 coin offers investors one ounce of .999 fine silver with a walking liberty design for $15, or 7% over the spot price. The premium on these coins has varied from $1-$4.50 over the past year, depending on the Treasury?s production rate, which is running at near double 2008 levels. Interestingly, an ever present flight to safety bid made sure that the premium never got below a dollar during last year?s liquidity driven crash in prices. If you had to pick a precious metal to buy on decline it would be this one, since it is already 34% off its year ago high, compared to only 9% for gold. If you need the size, liquidity, and low fees silver futures contracts offer, email me at madhedgefundtrader@yahoo.com, and I?ll tell you how to get set up. If you want to take physical delivery to hold it in your hot little hand, will it to your grandkids, hide it from a predatory ex-spouse, or bury it in your backyard, go to Millennium Metals at? www.millenniummetals.net for excellent quality, prices? and personal service. See my earlier call to buy this investment grade white metal by clicking here
3) Great analysis by my alma mater, The Economist (visit their website), over the weekend about the implications of the rapid demise of land line telephones. Some 700,000 of these are being cut each month, with cost conscious mobile only customers jumping from 7.3% of users in 2005 to 20.2% by the end of 2008. Businesses depending on large switchboards are stuck with land lines, so they can expect their bills to go ballistic. You can kiss the telemarketing industry goodbye in a mobile only world, where owners have to pay for incoming calls. No loss there. But first responders like firemen, police, and hospitals are also land line based. Pollsters who only call land lines can also expect greater error rates, and greatly underestimated Obama?s lead for most of the 2008 election. The 50 million cell phone only users they missed tend to be single, in their early thirties, earning under $50,000 a year, and yes, liberal. The trend has been so dramatic, that Hawaiian Telecom, where these trends are moving in extremes, filed for bankruptcy in December. Not good for cable companies, which have been fighting tooth and nail to wrest 20% of the land line market away from traditional, once protected providers like AT&T (T).
QUOTE OF THE DAY
?The worse the economy is, the more stock markets might go up, because the central bankers are printing more money, trying to create another bubble,? said Marc Faber, publisher of the Gloom, Doom & Boom Report.
Global Market Comments
August 17, 2009
Featured Trades: (SUGAR), (CRUDE),
(NATURAL GAS), (CHK)
1) I?m sorry I?m late with my letter today, but the lady in front of me in line at MacDonald?s (MCD) with the four screaming kids maxed out all four of her credit cards buying some hamburgers and happy toys. Her new SUV with the chrome wheels baked outside in the summer heat. Sign of the times. When I got back to the office, Egg McMuffin in hand, I was surprised when someone told me that the recession in Europe was over, that Germany has reported Q2 GDP of a positive 0.3%. What immediately came to mind was that their ?Cash for Clunkers? program started much earlier and was much larger than ours, that they has fewer banks drinking the subprime Kool-Aid, and they saw a housing boom that was only a shadow of the mania that swept the US. Europe is also closer to Asia, does a lot more business there, and is being dragged up by the gangbusters Q2 growth in China. But when I looked at the figures closer, I found more fudges than one of Warren Buffet?s See?s Candies factories. The seasonal adjustment was big, there was more tweaking with the number of working days in the year, and if you strip these out, the number was still negative. The fact is, that heavily export dependent German GDP is down 5.9% YOY, with the euro zone shrinking at a 4.6% rate. It will take years to make this back. So don?t pour the schnapps just yet. I think I?ll go back to being a vegetarian.
2) I love it. The fat lady is singing on natural gas. Not only did we plunge to a multi month low of $3.23/MCF, the crude/gas ratio blew out to yet another new high of an amazing 21 times, wiping out yet another generation of quant players. How many standard deviations is this? Their computers must be melting from the models that are exploding. Didn?t anyone tell them these are just tools, and not gospel? The big providers have just not been able to shut down production fast enough. It looks like Chesapeake Energy?s Aubrey McClendon (CHK) is going to have to sell more of his wine collection and artwork (click here for their website). I have been overwhelmingly negative on NG since early June, (click here for report) , suffering an Internet full of abuse in the process. But you want to buy the final washout, because market conditions are bound to improve this winter. Let?s see if you can get a $2 handle, which traders have not visited this century.
3) The seventies are about to make a comeback. No, don?t drag your leisure suits, bell bottoms, and Bee Gee?s records out of your storage facility. I mean the nuclear industry, which has been in hibernation since the accident at Three Mile Island in 1979. There is absolutely no way we can deal with our energy crunch without a huge expansion of our nuclear capacity, which sits at a lowly 20% of our power generation. France has already achieved this, getting 85% of its electric power from nuclear, followed by Sweden at 60%, and Belgium at 54%. Unless you?re a nuclear engineer, you are probably unaware that the technology has moved ahead four generations. The first one produced the aging behemoths we now see on coasts and rivers, which used high grade fuel that would melt down if someone forgot to flip a switch. Generations two, three, and four never got off the drawing board. Generation five is not your father?s nuclear power plant, relying on a new form of fuel embedded in graphite tennis balls that is just strong enough to generate electricity, but too weak to risk a disaster. This eliminates the need for four foot thick reinforced concrete containment structures, which accounted for 50% of the old design?s cost. Low grade waste can be stored on site, not shipped to Nevada or France. The permitting process is being shortened from 15 years to four by confining new construction to existing facilities instead of green fields, urged on by a less fearful public and even some CO2 conscious environmentalists. At least 30 new reactors are expected to start construction in the US over the next five years, and over 90 in China. There has got to be an equity play here. The Market Vectors Nuclear Energy ETF (NLR), which has jumped an impressive 78% to $25 since March, is the easiest way in. You can also buy its largest components, like Cameco (CCJ), the world?s largest uranium producer, or ??lectrict?? de France (EDF SA) which has the monopoly in France and is developing a major export business.
4) I have been watching with some amusement the price action in world sugar, which has exploded from 16 cents/pound to 22 cents since June, because the world?s largest consumer, India, flipped from being an exporter to an importer. Besides demolishing the budgets this year for the big sugar users here, the chocolate, soft drink, and cereal companies, (and McDonald?s), the sugar spike is a wakeup call for everyone else in the commodity space.?? When sugar last peaked at 63 cents during the seventies, the Club of Rome was in vogue, and discussion of resource shortages and imminent global starvation was rife. That is over $1.50/pound on an inflation adjusted basis today. When global supply/demand get?s out of kilter for something everyone has to have, the sky is the limit on prices. Instead of the normal 10%, 20%, and 30% moves traders expect, they will be served up with gyrations of 10X, 20X, and 30X. I expect all commodities to have major moves up in the decade ahead. Sugar was just the first in line. For more details on how to play these moves, please click here
Global Market Comments
August 14, 2009
Featured Trades: (GG), (GOLD), (BRAZIL), ($BVSP), (EWZ)
1) Charles Jeannes, CEO of Goldcorp (GG) (visit their website ) sees an all time high for the yellow metal of $1,050 by the end of the year. His Canadian company is the world's leading low cost, unhedged producer of the barbaric relic, with major assets in Guatemala, Honduras, Mexico, and Argentina. Gold production has been dropping steadily for the past five years, and this will accelerate, as there are few attractive ore deposits in the world to develop. South African production has fallen off a cliff. With the US government expected to continue flooding the financial system with debt for many more years, the universe of buyers looking for an inflation hedge is growing relentlessly. We are just entering a seasonally strong part of the year for gold demand, with the beginning of the Indian wedding season and the run up in jewelry buying for Christmas presents (GUILTY). India is the world's largest gold importer. Rising standards of living in emerging markets are also providing a long term structural increase in demand. With an average production cost of $299/ounce, the outlook for GG looks particularly golden.
2) Has the 21 day moving average become the new 50 day moving average? With hedge funds and day traders so dominating markets, accounting for 70% of trading volumes, the world's time frame for investment decisions is shortening dramatically. It has essentially been shrunk to fit their monthly P & L's like a cheap cotton shirt. This is why we are seeing spectacular volatility at the beginning and end of each month on a settlement basis, overshadowing the once violent mid month options expirations. It also sheds some light on why there have been no significant pullbacks in the ferocious July stock market rally. It's all been a dream come true for volatility sellers and outright put sellers. The current S&P 500 21 day moving average support kicks in at 882. We'll see how real this theory is when that test happens, which I believe will be fairly soon.
3) Analysts having been paring back their negative forecasts for the Brazilian economy faster than a salsa dancer stoked with triple espressos, taking expected 2009 GDP growth from -2.5% to as high as 5% in?? mere four months. When last year's commodity collapse knocked the stuffing out of the country's exports, many feared a return to the serial crisis that plagued the home of the string bikini and the banana thong during the eighties and nineties. Remember all those sovereign debt defaults? Remember the generals? What a bunch a incompetents! Just because you can run a platoon doesn't mean you can run a country. There is a lot more than just a commodity bounce going on here. Their banking system is now conservative and highly reserved, thanks to the draconian conditions we imposed on them 25 years ago. Too bad we didn't follow our own advice! Once the bane of Brazilian planners, inflation is now down to a comfortable 4.5%. Now the government is cutting taxes to get the country back to its merry high growth, emerging market ways. Since I recommended Brazil at the beginning of the year, the Bovespa has soared some 77% ($BVSPA). Keep the ETF (EWZ) nailed to you short list, and accumulate on any substantial dips. For a more in-depth report on this amazing country, please click here . I'll see you at the Copa.
QUOTE OF THE DAY
'The entire financial system is in receivership to the political establishment, and that's worldwide,' said George Friedman, chairman of the private intelligence company, the Stratfor Group.
August 13, 2009
1) Traders are keeping a laser eye focus on two bellwether markets, which are starting to roll over like a cheap date.? The red hot Shanghai stock market has dropped 10% in the past few weeks, putting in an ominous double top on the charts. The Baltic Dry Index, an indicator of? Chinese bulk raw material importing expectations, put in its worst week in a year, off a bone chilling 40% from its recent peak. What are these markets telling us? Best case, the market is going to sleep. Worst case, we are seeing the red skies of a global sell off. Better trim back you?re long exposure of every size, shape, color, taste, and smell. This year?s mini bubble is over.
2) XTO Energy (XTO) CEO Bob Simpson sees natural gas bottoming around here and then spiking up to $7 next year (see their website ) . It was a perfect storm of a collapsing economy, huge new discoveries, and the coolest summer on record that took us from $13.50 to $3.10. Since then companies have slashed gas exploration and drilling budgets, taken the rig count down from 1,600 to 700, and that number is still falling at a precipitous rate. Total onshore production is down by 3% and will plunge by 10% by the winter. XTO is one of the largest independent oil and gas producers in the country, and Simpson is one of the savviest players in the space. He hedged all of his firm?s 2009 oil production?? at $96/barrel, and 40% of his gas production at a stunning $9/BTU. NG has sold off 15% in the past week, as I expected, and this could be the beginning of the final wash out if no hurricanes show up. Keep that natural gas ticker (UNG) ticker glued to your desktop. There certainly isn?t much else to buy out there right now.
3) I don?t normally rely on National Geographic magazine for investment advice, but in the June issue the screaming long term bull case for the soft commodities is there in all its glory (see their website ). During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields.?? Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won?t even mention the strain the politically inspired ethanol and biofuel programs have placed on the system. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. The net net of all of this is that food prices are going up, a lot. Entertain core long positions in corn, wheat, and soybeans on the next dip, as well as the second derivative plays like Agrium (AGU), Potash (POT) and Monsanto (MON). You might also look at DB Commodities Tracking Index Fund (DBC). These will all surpass last year?s stratospheric highs at some point.
4) The market has been buzzing about an enormous options position that has been put on by one of the major hedge funds, betting that that the S&P 500 goes out with a swan dive at the end of 2009. The trade involves going long 120,000 S&P 500 December 950 puts, and going short 240,000 December 820 puts, a strategy known by pros?? as a ?bear put ratio.? For newbies to the option world, this means the player would automatically go short $2.85 billion worth of stock if the index goes under 950, then goes long $5.70 billion of stock if the index drops below 820. I don?t think this is a trade someone did while sitting at home in bed with their Imac on their lap watching Lost on TV. The position generates a maximum profit of $390 million on December 18 with the S&P 500 at 820, just in time to jump on your G5 for a ski vacation in Aspen. It can be strapped on today for a cost of only $7.5 million, or $62.50 if you want to deal in only a one lot. But the trade suffers accelerated losses below 820. If you want to see the deep background on this trade, please click here . Looks like it?s time for me to download new bear photos from Google.
QUOTE OF THE DAY
?The risk of a ?W? is high because there are so many structural problems that will take a long time to work out. Commercial real estate is bad, the employment situation is not good and will be high for years, and we have huge policy issues, like high taxes, bigger deficits, big structural change,? said David Kotok of Cumberland Advisors.
Global Market Comments
August 12, 2009
Featured Trades: (GMGMQ), (TM)
1) GM says that its new Volt hybrid will get an unbelievable 230 miles per gallon for a 300 mile range when it is introduced at the end of 2010. Does this mean it only has a two gallon gas tank? The $40,000 car will use no gas at all for the first 40 miles a day, which covers two thirds of all American drivers. At three cents a mile, this will give the average driver of 15,000 miles a year a $450 annual fuel bill. By the time the car hits the market, seen by many as the troubled car maker's lifeline to the future, the Prius will have been on the market for ten years and built up a major distribution and service network, not to mention immense customer loyalty. Toyota's (TM) current $22,000 benchmark competitor gets 50 miles/gallon, giving you a $900 a year gas bill at current prices, and has a huge quality advantage. The problem for GM is that by the time the Volt comes out, Toyota will have brought its plug in version to the market, which will deliver the same performance at half the price. Nice idea, GM, but you're 30 years too late.
2)?? Sorry for the short letter today. It is move in day for my son at the University of California at Berkeley. Time to strap the extra long twin mattress and box springs on to the roof of my BMW, and load the trunk with the freshly laundered sheets,?? Imac, lava lamp, tie dyed T-shits, incense burner, sandals, and sub woofer. I think I also saw one or two textbooks in one of those boxes. I didn't want to listen to what the Fed says anyway. Talk to you tomorrow. I promise not to inhale.
QUOTE OF THE DAY
'Forecasts of the future tell you more about the forecaster than the future,' said Berkshire Hathaway CEO Warren Buffet.
