February 19, 2013

Global Market Comments
February 19, 2013
Fiat Lux

Featured Trade:
(TLT), (TBT), (NLY), (CVRR), (CWB),

iShares Barclays 20+ Year Treas Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
Annaly Capital Management, Inc. (NLY)
CVR Refining, LP (CVRR)
SPDR Barclays Capital Convertible Bond ETF (CWB)
United States Oil (USO)

What?s a Poor Bond Manager To Do?

With the consensus wisdom now pervasive that the 60 year bull market in bonds is over, what is a poor bond fund manager to do? Has he now become the defacto manager of the New York Mets, condemned to reliably losing every season? Pity the hapless financial advisor who has to drag clients, kicking and screaming, out of what has worked so well for the last several decades.

Those who earn their daily crust of bread from the fixed income markets could well be facing a perfect storm in 2013. The headline risk from Europe could vanish, US GDP growth accelerates, and the housing and auto markets continue robust recoveries. A speed up in China?s business activity would be the final nail in the coffin.

What?s more, the action of the Fed could turn the modest weakness we have seen so far into an absolute rout. If they ease too soon, the best bond managers may be able to trade around the gradual rise in interest rates that results.

If the Fed eases too late, real inflation will return, and the risk of a real bond crash presents its ugly face. What is most concerning is that no less a figure than Ben Bernanke himself has said the challenge of getting it right is on the scale of finding a needle in a haystack.

The price for getting it wrong is large. Jack up the yield on ten year Treasuries (TLT) from today?s 2.0% to 4.5%, which some traders believe could happen by the end of this year, and your bond principal plunges by 23%. Here?s a prediction for you: I expect a sudden upsurge in the demand for coronary specialist to skyrocket, as many bond investors suffer heart attacks when they open their yearend statements.

We all could suffer heart failure if conditions in the bond markets get too dire. Drop the value of everyone?s largest holding too quickly, and it could trigger another financial crisis, one that makes 2008 look like a cakewalk. Be careful what you wish for.

There are a few great managers out there who will be able to make money in the bear market. For a start, you de-risk, dumping long dated Treasuries and municipal bonds and anything else with a fig leaf of a low coupon. Shorten duration wherever you can.

A big premium will be paid for bond managers who can be creative and imaginative in squiring their investments. These are the sharp guys who are moving into floating rate loans and high yielding direct bank loans. Their Spanish and Portuguese language lessons are paying off, with cash getting funneled into foreign debt markets that don?t track with the US yield curve. These guys will also get a nice foreign currency kicker in a weak dollar universe.

It might also require managers to expand the definition of the term ?bond? to stay in the black. You saw the equity guys engage in this sort of ?mission creep? when bonds were hot. This might include investing in convertible bonds (CWB) and other various hybrid securities. Investing in the debt of sector winners, like financials and energy, will be a winner. My own favorite in this field are ultra high yield REIT?s (NLY) and Master Limited Partnerships (CVRR).

It?s clear that the salad days are over for bond managers. They are really going to have to pedal hard from here on just to break even. Most will lose money no matter what they do.

Individual investors can give themselves some edge by moving money away from large managers that will suffer the most from shrinking liquidity, and towards smaller, more nimble ones who can dance between the raindrops. Target those with less than $10 billion in assets who can take advantage of smaller, high yielding deals.

Want to try something really gutsy and against the grain? Switch out of California state tax free debt, which has just enjoyed a massive rally thanks to governor Jerry Brown?s budget balancing efforts, into Illinois debt, now the lowest rated in the nation. Neither state is likely to default, and you pick up 80 basis points in yield on the switch. Click here to read ?The Muni Bond Myth? for the reasons why.

TLT 2-15-13

CWB 2-15-13

NLY 2-15-13


But My Financial Advisor Told Me Bonds Were Safe

The Population Boom

In their century long coverage of exotic places, cultures, and practices, National Geographic Magazine inadvertently sheds light on broad global trends that deeply affect the rest of us. Plus, the pictures are great. A recent issue celebrated the approach of the world’s population to 7 billion, and the implications therein.

Long time readers of this letter know that demographic issues will be one of the most important drivers of all asset prices for the rest of our lives. The magazine expects that population will reach 9 billion by 2045, the earliest date that I have seen so far. Can the planet take the strain? Early religious leaders often cast Armageddon and Revelations in terms of an exploding population exhausting all resources, leaving the living to envy the dead. They may not be far wrong.

A number of developments have postponed the final day of reckoning, including the development of antibiotics, the green revolution, DDT, and birth control pills. Since 1952, life expectancy in India has expanded from 38 years to 64. In China, it has ratcheted up from 41 years to 73. These miracles of modern science explain how our population has soared from 3 billion in a mere 40 years.

The education of the masses may be our only salvation. Leave a married woman at home, and she has eight kids, as our great grandparents did, half of which died. Educate her, and she goes out and gets a job to raise her family’s standard of living, limiting her child bearing to one or two. This is known as the ?demographic transition.?

While it occurred over four generations in the developed world, it is happening today in a single generation in much of Asia and Latin America. As a result, fertility around the world is crashing. The US is hovering at just below the replacement rate of 2.1 children per family, thanks to immigration. But China has plummeted to 1.5, Europe is at 1.4, and South Korea has plunged as low as 1.15.

Population pressures are expected to lead to increasing civil strife and resource wars. Some attribute the genocide in Rwanda in 1999, which killed 800,000, as the bloody result of overpopulation.


US Population Growth Chart


Who Expensive Oil Hurts the Most

Every time the price of oil spikes, we learn vast amounts of information about the global reach of this indispensable commodity. It’s like taking a non-core elective in geology at college. So I was fascinated when I found the chart of relative sector winners and losers below.

No surprise that energy does best from sky high crude prices. It is followed by telecommunications and health care. You would also expect consumer discretionary stocks to take it on the nose, as high energy prices almost always lead to a cyclical downturn in the economy. Who is the worst performer of all? Europe, which makes the recent weakness even more understandable.

Clusterstock Chart of theDay


Europe Will be the Biggest Loser from High Oil Prices




February 15, 2013

Global Market Comments
February 15, 2013
Fiat Lux

Featured Trade:
(TLT), (TBT),

iShares Barclays 20+ Year Treas Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)

The Bond Crash Has Only Just Started

When I was a little kid in the early 1950?s, my grandfather used to endlessly rail against Franklin Delano Roosevelt. The WWI veteran, who was mustard gassed in the trenches of France and was a lifetime, died in the wool Republican, said the former president was a dictator and a traitor to his class, who trampled the constitution with complete disregard. Hoover, Landon, and Dewey would have done much better jobs.

What was worse, FDR had run up such enormous debts during the Great Depression that not only my life would be ruined, so would my children?s lives. As a six year old, this disturbed me quite a lot, as it appeared that just out of diapers, my life was already pointless. Grandpa continued his ranting until a three pack a day Lucky Strike non-filter addiction finally killed him in 1977.

What my grandfather?s comments did do was spark in me a permanent interest in the government bond market, not only ours, but everyone else?s around the world. So what ever happened to the Roosevelt debt?

In short, it went to money heaven. And here I like to use the old movie analogy. Remember, when someone walks into a diner in those old black and white flicks? Check out the prices on the menu on the wall. It says ?Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.?

That is where the Roosevelt debt went. By the time the 20 and 30 year Treasury bonds issued in the 1930?s came due, WWII, Korea, and Vietnam ?happened and the great inflation that followed. The purchasing power of the dollar cratered, falling roughly 90%, Coffee was now $1.00, a hamburger $2.00, and a Steak $10.00. The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.

Who paid for this free lunch? Bond owners, who received, minimal, and often negative real, inflation adjusted returns on fixed income investments for three decades.

This is not a new thing. About 300 years ago, governments figured out there was easy money to be had by issuing paper money, borrowing massively, stimulating the local economy, and then repaying the debt in devalued currency. This is one of the main reasons why we have governments, and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.

The really fascinating thing about financial markets so far this year is that I see history repeating itself. Owners of bonds have had a terrible start, and things are about to get much worse.

The 30-year Treasury bond suffered a 3% loss in January. That means it has already lost its coupon for the year. Bondholders can expect to receive a long series of rude awakenings when they get their monthly statements. No wonder Bill Gross, the head of bond giant, PIMCO, says he expects to get ashes in his stocking for Christmas this year.

The scary thing is that we could be only six months into a new 30-year bear market for bonds that lasts all the way until 2042. This is certainly what the demographics are saying, which predicts an inflationary blow off in decades to come that could take Treasury yields to a nosebleed 18% high. That scenario has the leveraged short Treasury bond ETF (TBT), which has just leapt from $59 to $69, soaring all the way to $200.

Check out the chart below, and it is clear that the downtrend in long term Treasury bond yields going all the way back to April, 2011 is broken, and that we are now headed substantially up. The old resistance level at 1.95% now becomes support. That targets a new range for bonds of 1.90%-2.40%, possibly for the rest of 2013.

There is a lesson to be learned today from the demise of the Roosevelt debt. It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra low interest rates, and spending it all.

If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny should go to new social programs. Long-term capital investments should be the sole target. Here is my shopping list:

$1 trillion ? new Interstate freeway system
$1 trillion ? additional infrastructure repairs and maintenance
$1 trillion ? conversion of our transportation system to natural gas
$1 trillion ? construction of a rural broadband network
$1 trillion ? investment in R&D for everything

The projects above would create 5 million new jobs and end the present employment crisis. Who would pay for all of this? Today?s investors in government bonds, half of whom are foreigners, especially the Chinese and Japanese.

Whatever happened to my life? Was it ruined, as my grandfather predicted? Actually, I did pretty well, as did the rest of my generation, the baby boomers. My kids did OK too. Grandpa was always a better historian than a forecaster. But he did make a fortune in real estate, betting on the inflation that always follows borrowing binges.

TNX 2-13-13

TLT 2-13-13

TBT 2-13-13

Grandpa Thomas

Grandpa (Right) in 1916 Was a Better Historian Than Forecaster

Watch International Savings Rates for Market Cues

Often while searching for a piece of data through Google, I stumble across something else, which is far more interesting. That is how I found the table below of international savings rates.

Why should you care? Because countries with high savings rates tend to have strong economies and great stock markets, since there is plenty of excess cash available to pour into investments. Those with low savings rates suffer from weak economies and poor stock markets, because of a shortage of available capital. When the American savings rate dropped below zero in the latter part of the last decade, it set off emergency alarms for me that a collapse of the financial markets was on the horizon.

During the last four decades, I have watched Japan’s savings rates plunge from 16% to 2.8%, and you know the result for markets there. When it approaches zero, that will be the time to short the JGB’s, the yen, and the Nikkei stock index. The only country that doesn’t fit this analysis is Australia, with a mere 2.5% savings rate, but boasts a positively virile stock market and currency. The resource boom there is skewing things towards under saving and over consumption.

By the way, the outlook for the US, with its still miserable 3.9% savings rate, does not look great when considering this benchmark. Don’t expect a runaway bull market anywhere savings rates are low and falling. What are savings rates telling us are the best countries in which to invest? China, 38%, India, 34.7%, and Turkey, 19.5%.

Australia? 2.5%
Japan? 2.8%
USA? 3.9%
Brazil? 6.8%
Britain? 7.0%
Germany? 11.7%
Ireland? 12.3%
Switzerland? 14.3%
Turkey? 19.5%
India? 34.7%
China ?38%

Fist of Dollars

February 14, 2013

Global Market Comments
February 14, 2013
Fiat Lux


Featured Trade:
(EWZ), (ECH), (GXG), (CU), (CORN), (SOYB), (WEAT)

Seaspan Corporation (SSW)
Chunghwa Telecom Co., Ltd. (CHT)
Malayan Banking Bhd (MLYBY)
iShares MSCI Singapore Small Cap Fund (EWSS)
iShares MSCI Brazil Capped Index (EWZ)
iShares MSCI Chile Capped Investable Mkt (ECH)
Global X FTSE Colombia 20 ETF (GXG)
First Trust ISE Global Copper Index (CU)
Teucrium Corn (CORN)
Teucrium Soybean (SOYB)
Teucrium Wheat (WEAT)

Reaching for Dividends in Asia

You would think buying the highest yielding stocks in the world?s fastest growing countries would be a no brainer. Yet, you hardly ever find decent recommendations in this area. So after spending a few dozen hours scouring the investment universe, I came up with the short list below.

Some of these have already had good moves in this yield starved world. But it is still a good exercise to undergo on an otherwise slow noose day. And you never know, we might actually get a dip in global equity markets someday that will give you a chance to get in.

Seaspan Corporation (SSW)
is the world?s leading independent owner and manager of containerships. The Hong Kong based company has been fairly resilient in wake of the financial crisis in the United States and Europe. Annual fixed-rate shipping contracts have allowed the company to stay afloat at a time when consumer spending in the West has decreased significantly. Their recent investment in new building contracts for 10,000 tonne fuel-efficient SAVER design shipping vessels and the purchase of 4,600 tonne TEU class second-hand vessels are expected to save the company millions in fuel and shipping costs.

Seaspan offers common shares trade on the New York Stock Exchange under the ticket (SSW) as well as 9.5% series C cumulative redeemable perpetual preferred shares under (SSW C). The company has a market capitalization of $1.25 billion and generates revenue of $642.21 million. Its forward P/E ratio is 18.40 and PEG ratio is 2.26. It has a solid Price/Sales of 1.94 and a Price/Book ratio of 1.13. Seaspan has a dividend yield of 5.10%. With an historic 5-year dividend average of 8.5%, future economic uncertainly may mean a rebound to higher yields. The stock is relatively stable with a previous close at $19.91.

SSW 1-13-13

Chunghwa Telecom (CHT)?is the largest telecommunications company in Taiwan. It is the largest service provider in the country and it is one of the biggest revenue earners in the Asian telecom industry. They also operate in several south-east Asian countries as well as China and Japan. The once government owned company has steadily become privatized. As of 2005, the government?s ownership was reduced to 50%.

The company has a market capitalization of $24.65 billion, generates revenues in an amount of $7.52 billion, and a net income of $1.37 billion. Its P/E ratio is 18.06 and forward price to earnings ratio is 19.38. Its Price/Sales is 3.25 and its Price/Book ratio is 2.0. Chunghwa Telecom has a year over year earnings growth of 23.31% which is expected to increase in the coming years. The stock?s dividend Yield is currently at 4.5% with a historic payout ratio of 78%. They company has paid dividends since 2010 and expects steady dividend payment in the future.

CHT 2-13-13

Malayan Banking BHD (MLYBY) is the largest financial services provide in Malaysia. They operate over 2,200 branches in 19 different countries and have a customer base of over 22 million. Malayan Banking BHD has done an excellent job investing in new growth opportunities while remaining a relatively conservative institution. Within the past several years, they have expanded domestically as well as internationally increasing the number of ?Maybanker? employees to 45,000.

The company has a market capitalization of $23.09 billion, generates revenues of $5.10 billion and a net income of $1.81 billion. Its Price/Sales is 4.47 and its Price/Book ratio is 1.88. The company has a profit margin of 35.54% and a quarterly earnings growth of 13%. The stock?s trailing annual dividend yield is 7.6%.

MSCI Singapore Small Cap Fund (EWSS) is my final recommendation regarding Asian high yield dividend stocks. This small cap ETF index is largely comprised of financials (mainly real estate), industrials, consumer discretionary, and information technology companies. Suntec Reit, Sats Ltd., Venture Corp Ltd., and the Singapore Post Ltd. are its top holdings. Investing in this ETF will offer you great exposure to Asian growth stocks.

The index has next assets of $5.93 million, a P/E ratio of 17.84, and a price to book of 2.44. The ETF?s total returns are at 42.18% since its inception last year with a 12-month yield of 16% according to iShares. In mid-December the ETF faced a substantial drop due to its large dividend payout of $5.63 a share. The ETF pays out a dividend yield of a whopping 20.37%. This ETF is indeed high risk, but the financial stability of Singapore makes it a worthy investment.

EWSS 2-13-13


An Evening With General Douglas Fraser

I never cease to be amazed by the intelligence provided me by the US Defense Department, which after the CIA, has the world?s most impressive and insightful economic research team. There are few places a global strategist like me can go to get intelligent, thoughtful forty-year views, and this is one. Wall Street, eat your heart out.

Of course, they are planning how to commit ever declining resources in future military conflicts. I am just looking for great trading ideas for my readers, which my assorted three-star and four-star friends have in abundance. I usually have to provide some extra analysis and tweak the data a bit to obtain the precise ticker symbols and entry points, but then that?s what you pay me to do.

An evening with General Douglas Fraser did not disappoint. He is an Air Force four-star who is the commander of US Southern Command (SOUTHCOM), one of nine unified Combatant Commands in the Department of Defense. Its area of responsibility encompasses Central America, South America, and the Caribbean. SOUTHCOM is a joint command comprised of more than 1,200 military and civilian personnel representing the Army, Navy, Air Force, Marine Corps, Coast Guard, and other federal agencies.

The United States is now the second largest Hispanic country in the world, and it will soon become the largest. These industrious people now account for 15% of US GDP, and that figure will grow to 35% by 2050. The Hispanic birthrate in many parts of the US is triple that of any other ethnic group. Because of this, any politicians that pursue anti-immigrant policies are doomed to failure. This may, in part, explain the November election result.

Latin America?s GDP is growing at 4% a year, more than double the current US rate. American trade with the region grew by 72% last year, with imports surging an eye popping 112%. It is the source of one third of our foreign energy supplies. It has tremendous wealth in copper, iron ore, and food production that have yet to be exploited. In the last decade, 40 million have risen out of poverty. Yet 13% of the inhabitants earn less than $1 a day.

This poverty has made Latin America fertile ground for the international drug trade, which poses one of the greatest threats to America?s security today.? Profits from the cocaine trade reached $88 billion in 2011, which is more than the GDP of any single Central American country. Some $33 billion worth of this narcotic made it into the US last year. Brazil is the world?s second biggest consumer of cocaine, after the US, with the UK the largest per capita consumer. The farther you move this product from the source, the more expensive it gets. Cocaine costs $2,000 a kilo in Brazil, $40,000 in the US, $80,000 in Europe, and $150,000 in the Middle East.

Technology has made communications, organization and logistics tools once only found in the military available to anyone. This creates a level playing field for international crime organizations of all sorts. The drug business is so profitable that the cartels are now building submarines in the jungles of Columbia at a cost of $4 million each, and sending them under water to the US to make a $100 million profit per voyage.

This illicit wealth is financing the growth of other illegal activities, like money laundering, arms dealing, human trafficking, and even the transportation of exotic animals. This is corrupting the smaller and weaker governments. Key transit point, Honduras, bas become so violent, with the highest murder rates in the world that the US recently had to withdraw 150 Peace Corps volunteers.

As a result, Fraser has had to modify the mission of SOUTHCOM from a primarily military one to non-traditional crime fighting. His planes are intercepting smugglers at the favored Venezuela-Honduras-US air corridor, as well as craft making it up the Central American west coast.? He is providing military assistance, training, and joint operations where he can, but must balance this with the human rights record in each country.

In addition to his other responsibilities, General Fraser is also keeping close track of China?s rapidly expanding trade relations in the area. They have begun selling inexpensive, low end weapons and military equipment to some of these countries.

The investment opportunities I picked up from General Fraser were legion. It certainly made the ETF?s for Brazil (EWZ), Chile (ECH), and Columbia (GXG) no brainers for a long term portfolio. The Brazilian Real and the Chilean peso are screamers. Copper (CU) and the grains, (CORN), (SOYB), and (WEAT), are probably also good bets.

General Fraser graduated from the Air Force Academy in 1974 and is fluent in Spanish. He has commanded Air Force combat units in Japan, Korea, and Germany. He was later a senior officer in the Space Operations Command. General Fraser joined SOUTHCOM in 2009 after serving as deputy commander of the Pacific Command.

After his briefing, the readers of the Diary of a Mad Hedge Fund Trader who came at my invitation that evening were given the opportunity to ask questions of one of America?s most senior military officers on a one on one basis. In a lighthearted moment, I mentioned to the General that his career total of 2,800 flight hours exceeding my own by only 600 hours. But his rides were vastly more exciting than mine, with most of his time spent in F-16?s and F-15-s, some of the most lethal weapons ever developed.? My log contains an assortment of aircraft that include a lot of more sedentary Cessna?s, a few C-130 Hercules, a P51 Mustang, a De Havilland Tiger Moth, and a few precious hours in a Russian Mig-25 and Mig-29.

Douglas Fraser- Gen.

Fighter PilotMeet my Flight Instructor