Newsletter Archives - Mad Hedge Fund Trader

Drinks With the President

President Barack Obama certainly arrives at a party like a rock star. Three silver GM Suburban?s flanking an armored black Cadillac limo screech to a halt with lights flashing. All of the roads in the immediate vicinity are closed to traffic.

A dozen sunglass bedecked Secret Service agents leap out, immediately scanning the perimeter. The president bounds out and briskly walks to the plush home of a wealthy supporter.

I managed to briefly touch base with the president during his recent fund raising swing through the San Francisco Bay area. For a mere $32,000 donation to the Democratic National Committee, I received a sweaty handshake and a thank you from the former South Chicago community organizer.

It was all part of a broad swing through the Western states to rally the faithful, and to top off the DNC's coffers, which has raised a record $50 million in California this year. Perhaps Obama just wants to be among friends. While his national job approval rating languishes at 47%, it is 55% here, and an eye popping 72% among Democrats.

Since the 2008 election, some 6 million millennials, generation Y's, or echo boomers have gained the right to vote. Have you spoken to your kids lately? The only issues they care about, the environment, global warming, gay rights, and ending the war, are overwhelmingly Democratic ones. Another 4 million immigrants have also joined the voter rolls.

Sure, only 30% of these groups vote at all. But when election results swing on majorities that can be counted in the hundreds, think Florida in 2000, Ohio in 2004, and Minnesota in 2008, they could make a decisive difference.

The polls we see reported daily are only taken of participants with land lines. So they may be undercounting both cell phone addicted, texting millennials, and immigrants. How many of your kids have land lines? My bet would be none.

Now, let me throw one big unknown out there. Thanks to the Supreme Court's Citizens United vs. the Federal Election Commission decision, the most recent election was the first to see unlimited anonymous corporate donations since the sixties. As a result, the number of election ads disclosing donors has fallen from 97% in 2006 to 32%.

California's proposition 23 was a perfect example of what this means. Billed as the 'Save California jobs bill,' the measure was placed on the ballot and promoted by $6 million in financing from Texas base energy giant Tesoro Petroleum (TSO). And what is the company's plan to create California jobs? Suspend the state's stringent environmental regulations so it could build a new oil refinery in nearby Martinez.

In every postwar election, the party in power has lost an average 27 House seats in the midterm elections. Obama knew this the day he walked into office. That is why the most radical parts of his agenda, like health care, were front end loaded. Expect to hear much about the President's surprise, Clintonesque move to the middle, which was in fact, planned two years ago.

Yes, I know, I should stick to my day job of calling every turn in the market. But sometimes, that profession and making political prognostications become one in the same. Knowing who the next president is going to be is an immensely valuable piece of market information, as the economic philosophies of the two parties are so radically different.

Do you think the White House situation room has a ladies room?

July 9, 2013

Diary, Newsletter, Summary

Global Market Comments
July 9, 2013
Fiat Lux

Featured Trade:
(JULY 16 BERLIN STRATEGY LUNCHEON),
(WHO IS BEN BERNANKE?),
(KEEP INDONESIA ON YOUR RADAR), (IDX),
(WHY WE NEED SIX NEW SAUDI ARABIA?S)
(USO), (RIG), (XOM), (OXY)

Market Vectors Indonesia Index ETF (IDX)
United States Oil (USO)
Transocean Ltd. (RIG)
Exxon Mobil Corporation (XOM)
Occidental Petroleum Corporation (OXY)

July 16 Berlin Strategy Luncheon

Diary, Lunch, Newsletter

Come join John Thomas for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Berlin, Germany, at 12:00 noon on Tuesday, July 16, 2013. A three-course lunch will be followed by a PowerPoint presentation and an extended question and answer period.

I?ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $219.

The lunch will be held at a downtown Berlin hotel within sight of the Brandenburg Gate, the details of which will be emailed with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.

Who is Ben Bernanke?

Diary, Newsletter

Since nothing less than the fate of the free world depends on the judgment of Ben Bernanke these days, I thought I?d touch base with David Wessel, the Wall Street Journal economics editor, who has just published In Fed We Trust: Ben Bernanke?s War on the Great Panic.

I doubted David could tell me anything more about the former Princeton professor I didn?t already know. I couldn?t have been more wrong, as David gave me some fascinating insights into the inner soul of our much-vaunted Chairman of the Federal Reserve.

Bernanke was the smartest kid in rural Dillon, South Carolina, who, through a series of improbable accidents, and intervention by a local black civil rights leader, ended up at Harvard. He built his career on studying the Great Depression, then the closest thing to paleontology economics had to offer, a field focused so distantly on the past that it was irrelevant. Bernanke took over the Fed when Greenspan was considered a rock star, inhaling his libertarian, free-market, Ayn Rand inspired philosophy in great giant gulps.

Within a year the economy had suddenly transported itself back to the Jurassic Age, and the landscape was suddenly overrun with T-Rex?s and Brontosauri. He tried to stop the panic 150 different ways, 125 of which were terrible ideas, the remaining 25 saving us from the Great Depression II. This is why unemployment is now only 7.6%, instead of 25%.

The Fed governor is naturally a very shy and withdrawing person, and would have been quite happy limiting his political career to the Princeton, NJ school board. To rebuild confidence, he took his campaign to the masses, attending town hall meetings and pressing the flesh like a campaigning first term congressman.

The price tag for Ben?s success has been large, with the Fed balance sheet exploding from $800 million to $3.6 trillion, solely on his signature. The true cost of the financial crisis won?t be known for a decade or more. The biggest risk is that we grow complacent, having pulled back from the brink, and let desperately needed reforms of the financial system and the rebuilding of Fannie Mae and Freddie Mac slide.

How Bernanke unwinds this bubble will define his legacy. Too soon, and we go back into a real depression. Too late, and hyperinflation hits. That?s when we find out who Ben Bernanke really is.

Keep Indonesia on your Radar

Diary, Newsletter

If you are looking for another emerging market to add to your list of things to buy on dips, then take a look at Indonesia (IDX). The world?s largest Muslim country offers a combination that I love, a population with great demographics that is also a major energy and commodities exporter.

The archipelago is the biggest country in Southeast Asia and a huge exporter of oil and LPG to Japan on long-term contracts. (An old friend of mine torched their Borneo fields at the beginning of WWII, and spent four years in a Japanese prison camp for his troubles.) Other big exports include marvelous textiles, rubber, and increasingly rare tropical hardwoods. Another plus is one of the world?s most pro growth population pyramids (see below).

The global financial crisis only knocked their growth rate from 6.1% to 4.5%, and now it is back above 6%. No doubt, $63 billion of direct foreign investment into the country helped. A series of tax reforms promise to keep the train moving, cutting the top corporate rate from 30% in 2008 to 28% in 2009, and 25% in 2010. Wisdom Tree had the ?wisdom? to launch the country?s first ETF (IDX) in January, 2009 (what timing!), which became one of the best performers of the year, rocketing over 300% from the lows to $60.

Islamic inspired terrorism is still a lingering concern. I keep Indonesia in the category of highly volatile, high risk, high return frontier markets that you only want to buy on a big dip. Keep it on your radar.

Meet Your New Investors in Indonesia

Why We Need Six New Saudi Arabia?s

Diary, Newsletter

I recently spent an evening with Ambassador Richard Jones, the Deputy Executive Director of the International Energy Agency in Paris, who had some eye opening things to say about the energy space. The IEA was first set up as a counterweight to OPEC during the oil crisis in 1974, and has since evolved into a top-drawer energy research organization.

World GDP will grow an average 3.1%/year through 2030, driving oil demand from the current 84 million barrels/day to 103 million b/d. That means we will have to find the equivalent of six Saudi Arabia?s to fill the gap or prices are going up, possibly a lot. His conservative target has crude at $190 in twenty years. Some 39% of that increase in demand will come from China and 15% from India.

A collapse in investment caused by the financial crisis means that supply can?t recover in time to avoid another price spike. More than 1.5 billion people today don?t have electricity at all, but would love to have it. The best the climate negotiations can hope for is for CO2 to rise until 2020, and then plateau after that, because once this greenhouse gas enters the atmosphere it is very hard to get out.

This will require a massive decarbonization effort reliant on nuclear, hydro, alternatives, and carbon capture and storage. Up to half of the needed carbon reduction can be achieved through simple efficiency measures, like ditching the incandescent light bulb, driving more hybrids, and closing dirty, old coal fired power plants. Natural gas will be a vital bridge, as it is cheap, in abundant supply, and emits only half the carbon of traditional fossil fuels. The total 20-year bill for the rebuilding of our new energy infrastructure will exceed $10 trillion.

Richard, who comes from a long diplomatic career in Kuwait, Kazakhstan, and Israel, certainly didn?t pull any punches. I have been a huge fan of the IEA?s data for 35 years. Better use any weakness in oil prices to accumulate long term positions in crude through the futures, the ETF (USO), the offshore drilling companies like Transocean (RIG), and oil and gas plays like ExxonMobil (XOM)? and Occidental Petroleum (OXY). When oil comes back, it will do so with a vengeance.

I?ll Take Another Six Please

July 8, 2013

Diary, Newsletter, Summary

Global Market Comments
July 8, 2013
Fiat Lux

Featured Trade:
(JULY 19 FRANKFURT STRATEGY LUNCHEON),
(THE TWO CENTURY DOLLAR SHORT),
(UUP), (FXY), (FXE), (FXB), (FXC), (FXA), (BNZ), (CYB)
(CNN?S JOHN LEWIS; THE DEATH OF A COLLEAGUE)

PowerShares DB US Dollar Index Bullish (UUP)
CurrencyShares Japanese Yen Trust (FXY)
CurrencyShares Euro Trust (FXE)
CurrencyShares British Pound Sterling Tr (FXB)
CurrencyShares Canadian Dollar Trust (FXC)
CurrencyShares Australian Dollar Trust (FXA)
WisdomTree Dreyfus New Zealand Dollar (BNZ)
WisdomTree Chinese Yuan (CYB)

July 19 Frankfurt Strategy Luncheon

Diary, Lunch, Newsletter

Come join me for lunch for the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Frankfurt, Germany on Friday, July 19, 2013. A three-course lunch will be followed by a PowerPoint presentation and an extended question and answer period.

I?ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $239.

I?ll be arriving an hour early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at a prestigious private club not far for the Botanical Gardens, the details of which will be emailed to you with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.

The Two Century Dollar Short

Diary, Newsletter

Any trader will tell you the trend is your friend, and the overwhelming direction for the US dollar for the last 220 years has been down.

Our first Treasury Secretary, Alexander Hamilton, found himself constantly embroiled in sex scandals. Take a ten dollar bill out of your wallet and you?re looking at a world class horn dog, a swordsman of the first order. When he wasn?t fighting scandalous accusations in the press and the courts, he spent much of his six years in office orchestrating a rescue of our new currency, the US dollar.

Winning the Revolutionary War bankrupted the young United States, draining it of resources and leaving it with huge debts. Hamilton settled many of these by giving creditors notes exchangeable for then worthless Indian land west of the Appalachians. As soon as the ink was dry on these promissory notes, they traded in the secondary market for as low as 25% of face value, beginning a centuries long government tradition of stiffing its lenders, a practice that continues to this day. My unfortunate ancestors took him up on his offer, the end result being that I am now writing this letter to you from California?and am part Indian.

It all ended in tears for Hamilton, who, misjudging former Vice President Aaron Burr?s intentions in a New Jersey duel, ended up with a bullet in his back that severed his spinal cord. Cheney, eat your heart out.

Since Bloomberg machines weren?t around in 1790, we have to rely on alternative valuation measures for the dollar then, like purchasing power parity, and the value of goods priced in gold. A chart of this data shows an undeniable permanent downtrend, which greatly accelerates after 1933 when FDR banned private ownership of gold and devalued the dollar.

Today, going short the currency of the world?s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer. But once it became every hedge fund trader?s free lunch, and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic corrections, which began six month ago, and could continue for months or years.

The euro has its own particular problems, with the cost of a generous social safety net sending EC budget deficits careening. Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses, and possess small consuming populations. I?m talking about the Canadian dollar (FXC), the Australian dollar (FXA), and the New Zealand dollar (BNZ), all of which will eventually hit parity with the greenback. Think of these as emerging markets where they speak English, best played through the local currencies.

For a sleeper, buy the Chinese Yuan ETF (CYB) for your back book. A major revaluation by the Middle Kingdom is just a matter of time.

I?m sure that if Alexander Hamilton were alive today, he would counsel our modern Treasury Secretary, Jack Lew, to talk the dollar up, but to do everything he could to undermine the buck behind the scenes, thus over time depreciating our national debt down to nothing through a stealth devaluation. Given Jack Lew?s performance so far, I?d say he studied his history well. Hamilton must be smiling from the grave.

See the Resemblance?

CNN?s John Lewis; the Death of a Colleague

Diary, Newsletter

I was deeply saddened by the death of my old friend, CNN Asia correspondent, John Lewis, a legend in television journalism.

I first met John in Tokyo at the Foreign Correspondents? Club of Japan back in 1974, when he was a decorated Vietnam vet from Ohio trying to claw his way into TV, bootstrap style. Personable and easy going, he was one of the few in the club who got along with most of the cantankerous, suicidal, or just plain drunk writers there, and was often the first to step in to stop a fight. In those days you didn?t get fired in this rough and tumble business for punching out competitors.

At my 1977 wedding at the club, John graciously took the pictures because I was too poor to hire a professional. In 1979, rumors spread that this wild man millionaire named the ?Mouth of the South,? Ted Turner, was going to start up a 24 hour news cable channel called CNN, and was looking to hire a full time Asia correspondent. We both jumped at the job, and Lewis won out. Everyone was impressed, but kept their fingers crossed.

I was left part time stringing for NBC news, reporting to the late Bruce McDonald, who had worked his way up from writing for Johnny Carson?s Tonight show to the network producer for Asia, which is a big deal. And you wonder where I got my wicked sense of humor.

I often ran into John in the field, he covering the typhoons, floods, and wars, and me the business angle, which often blended into the same story. So we covered the corrupt Marcos regime in the Philippines, the assassination of Indira Gandhi in India, and the opening up of China. We never missed an opportunity to swap contacts and war stories at dingy, dubious bars from Seoul to New Delhi, and all points in between.

We parted ways in the eighties when my career made a sharp jag to the right with my joining Morgan Stanley in New York. John shot to international fame when he ignored Chinese orders to cease covering the Tianamen Square massacre in 1989, and kept beaming reports abroad until the heavies cut the power off. Gutsy move, John.

I heard that John died of a heart attack at 63. Foreign correspondence did not exactly offer a healthy lifestyle, with all the smoking, drinking, and general carousing that went on. There were also the occupational hazards of the occasional stray bullet, bouts of amoebic dysentery, and stints in jail at the behest of some third world dictator. It was a larger than life existence, but not exactly conducive to a family life, so I moved on. John stuck with it, but what a price! I was appalled when I saw his recent picture. The years had not been kind.

John was one of a dying breed of journalist whose sole interest was to get the story right and get it fast. There was no pandering to a particular political viewpoint, stealth marketing on products, or surreptitious product placement that has regrettably become endemic in the trade today. His was really an old fashioned kind of reporting, almost quaint in its principles.

He will be missed.