Page 2027 - Mad Hedge Fund Trader

Vietnam Has Been Hot

Vietnam has delivered one of the top performing stock markets so far in 2012. Take a look at the Market Vectors Vietnam ETF (VNM). The venture invests 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 was also one of the top performing stock markets in 2009. It was a real basket case in 2008, when zero growth and a 25% inflation rate took the main stock market index 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. As my old friend, Carl Van Horn, the head of investment at JP Morgan taught me, watch direct investment, because the stock markets always follow.

It also helps a lot that the country has one of the world?s more favorable demographic pyramids. That means it has a high percentage of young, free spending workers and relatively few older social service demanding retirees. That is partially because we killed so many off during 1960-1972.
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 a long vacation. If we get a summer swoon in global risk assets as I expect, this would be a good name to pick up.

The green shoots are real. But watch out for the old land mines.

Pass Me a ?BUY? Ticket Please

Case Shiller Says the Bottom is Not In for Real Estate

Diary

As much as my real estate broker insists that the bottom is in for residential real estate, the raw and unvarnished data still does not support that belief. This morning, the February S&P 500 Case Shiller real estate index put in new lows for nine major markets, as well as for both composite indexes. Overall, prices are down 3.5% YOY. That takes us back to Q3, 2002 levels. It is now officially a lost decade for housing.

The foreclosure disaster in Atlanta continues unabated, with prices there down 2.5% MOM. It was followed by Chicago, -2.5%, and Cleveland, 1.7%. Believe it or not, prices in Detroit are still falling, down 1.3% MOM, and are below 1992 levels. Obtaining bank financing is still a major hurdle for many buyers. Unless you have a FICO score of over 700, the world doesn?t want to know you.

We received additional data today indicating that all is not well in River City. March new home sales absolutely collapsed by -7.1% in March, compared to a gain of +7.3% in February. It is obvious that good winter weather pulled forward demand at the expense of the current quarter. This has ominous implications for the broader economy. Did other industries see this as well?

I have been mercilessly beating up on the residential sector for seven years now. Telling people that their homes, their principal asset, still had farther to fall got me disinvited from the last dinner party years ago. The best case you can make is that we are bumping along a bottom, supported by the lowest interest rates and highest affordably in 50 years. But we are going to be here a long time. As long as the demographic headwinds remain at gale force strength, rent, don?t buy.

By the way, I had a fascinating dinner with Robert Shiller, the Yale economics professor who created this index from whole cloth. When I get some time, I?ll write it up.

Still Facing Gale Force Winds in the Real estate Market

April 25, 2012 - Quote of the Day

Quote of the Day

?With slowing growth in the US and no growth in Europe, you are going to have to shave a few percentage points off of growth in China. If you look at the chessboard as a retail investor, we have a year or more in a sideways to down stock market,? said Dr. Peter Navarro, a professor at the University of California at Irvine School of business.

Trade Alert - (FXY) April 24, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

The Next Two Weekly Jobless Figures Are Crucial

Newsletter

All eyes will be focused on the weekly jobless claims to be released by the Department of Labor at 8:30 AM EST on Thursday.

You may recall that investors did not exactly run the last two weekly reports up the flagpole and salute them, which showed sharp increases in unemployment claims. At this point the bulls are being comfortably complacent, blaming the bad numbers on? ?random noise? and short term statistical anomalies. This was the final data series to turn negative, and the last of a recent plethora of downshifting economic reports.

Get two more high or higher jobless numbers, and the four week moving average will turn up. That will be enough to set the cat among the equity holding pigeons, and turn a modest 5% correction into a much scarier one that is 15% or greater. All of a sudden it is d?j? vu all over again, with 2012 turning into a carbon copy of 2011, 2010, and 2009, and a big summer sell off in the cards.

I have been warning about the likelihood of such a development all year. After every company in the US hired one person, they again slammed on the brakes and quit returning e-mails. Corporate management these days are playing defense, and don?t see any increase in consumer spending as sustainable. Why add overhead in front of the next slowdown? There are also not a lot of companies that want to expand the workforce going into the summer, which normally sees a seasonal slowdown.

This sudden downgrade of one of the most important data streams is occurring just as a whole flock of black swans are getting clearance for landing. The French elections are signaling that we have at least two more weeks of ?RISK OFF? on the table until the run off on May 6, and possibly much more. Last night, the HSBC Chinese purchasing managers index came in at 49.1 for April, below the crucial boom/bust level of 50 for a sixth month. That means a Chinese hard landing is still on the table, although I think that it is unlikely.

The timing of all this couldn?t be worse, or better, if you happen to be short, as I am. The charts for virtually every risk asset, from Apple (AAPL), to the (SPX), (IWM), (USO), (CU), (FXY), (FXE), (GLD), and (SLV), are either showing textbook head and shoulder tops, or are already in clear down trends. I include an ample sampling below.

Anyone who believes that the ?RISK ON/RISK OFF? model is dead works in a profession where they can be consistently wrong and still stay in business, like in journalism. Give it two more weeks, and expect the media to start wringing hands about ?double dip? or ?triple dip? recession. Last year risk assets peaked on April 29. This year, April 29 came early, on April 2.

The Black Swans Have Been Cleared for Landing

Your Wealth and the French Election Results

Diary

It would be easy to ignore what is happening on the other side of the world, especially when they involve the French. But to do so today in this interconnected and interdependent world would be extremely hazardous to your wealth. When a butterfly flaps its wings in Brazil, the tsunami hits Japan.

That is exactly the extreme sort of weather event we are witnessing today with the French presidential election results. This is how they came out:

Socialist Fran?ois Hollande? 28%
Conservative Nicolas Sarkozy? 26%
Right wing Marine Le Pen 18%
Communist Jean-Luc M?lenchon 11%
Other parties and uncommitted? 17%

To say this is a disaster for Sarkozy is an understatement of the highest order. It is the first time in more than 50 years that a sitting president lost in the first round. The odds of the socialists winning again in two weeks have moved from 50:50 to more like 80:20. For Sarkozy to pull things out of the fire from here would require nothing less than a miracle.

The socialist economic policies will require an increase in government spending, growing budget deficits, an extended retirement age, and a far heavier reliance on sovereign borrowing by France. It makes a complete hash of the careful progress made by German chancellor, Angela Merkel, made towards steering Europe to live within its means. More debt issuance means higher interest rates, falling stock markets, and a continuation of the European crisis. Message: bombs away for risk assets.

The only way that Sarkozy could keep his job is to do some sort of a deal with the right wing National Front to create a coalition government. And what would be their price for such an arrangement? The immediate withdrawal of France from the Euro to recover national pride and sovereignty. Message: more bombs away for risk assets.

Needless to say, this is all hugely positive for the dollar (UUP), the yen (FXY), and US Treasury bonds (TLT), and very negative for US stocks (IWM), the Euro (FXE), oil (USO), copper (CU), gold (GLD), and silver (SLV). That house you think you recently bought at the bottom just fell in value by 5%. If you have been reading this letter in recent weeks, you already have all of the right positions and are sitting pretty. If you don?t, you better start reading.

As a long time analyst of the American political scene, I have to laugh at the results broken out by prefecture on the map below. The conservatives dominate the cities, while the socialists control the countryside, which is the complete opposite found in US election outcomes. Similarly, college grads vote conservative while the uneducated vote liberal, which again is the polar opposite of American results. No wonder I have such a hard time digesting frog legs.

The Next Prime Minister of France?

China?s View of China

Diary

I ran into Minxin Pei, a scholar at the Carnegie Endowment for International Peace. Who imparted to me some iconoclastic out of consensus views on China?s position in the world today.

He thinks that power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP only at $5,800, compared to $48,000 in the US. We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars.

China can?t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede. All of Asia?s progress to date has been built on selling to the US market. Take us out, and they?re nowhere. With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon.

There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more because there is no social safety net. Try filing a Chinese individual tax return, where a maximum rate of 40% kicks in at an income of $35,000 a year, with no deductions, and there is no social security or Medicare in return. Ever heard of a Chinese unemployment office or jobs program?

Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries. The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia has just one world class school, the University of Tokyo.

As much as we Americans despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world. After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for nearly four decades, and you feel this vibrating from everything around you. I?ll consider what Minxin Pei said next time I contemplate going back into the (FXI) and (EEM).

April 24, 2012 - Quote of the Day

Quote of the Day

?They got us into this mess, they?ve gotten great credit for getting out of this mess, and now they are creating even a bigger mess,? said the former chairman of Morgan Stanley International and a colleague of mine, Steve Roach.

Closing My Apple Position

Diary

My Apple April $450-$480 call spread expired deep in the money at the close on Friday. Legally, these expire at midnight on Saturday night, so your broker won?t take these off your statement until the following Monday. The position should be zeroed out and you should receive a cash credit. You will also find that the margin requirement has disappeared.

Your net profit on this position should be $1,855, or? $1.86% for the notional $100,000 portfolio. Well done. Here is how the profit is calculated in detail:

Execution

March $450 call cost?????... $97.60
March $480 call premium earned?-$70.25

Net Cost???????.........?. $27.35

Profit Calculation at Expiration

Expiration value???????..$30.00
Purchase cost ?..??????. . $27.35

Net Profit????????.??.$2.65

Total profit = ($2.65 X 100 X 7) = $1,855 = $1.86% for the notional $100,000 portfolio.

I will go back into another position like this in the future, but only after a substantial dip in the share price. I still think that Apple will continue on its march to $1,000 a share. Coming down the road we have Apple TV and the iPhone 5. Of far greater importance will be the adoption of Apple standards by corporate America, which has long avoided Steve Jobs? creations. This is going on everywhere, and is being hastened by the demise of Blackberry (RIMM). But it is a trip that will take years, not weeks or months.

Thanks, Steve

This is What a Lost Decade Gets You

Diary

With all of the handwringing about the zero return on US equities for the last decade, I thought I'd better take a look at the long term charts. It's very clear that we have been trading in a gigantic sideways narrowing wedge for the last 18 years, defined by 14,000 on the upside and 6,000 on the downside.

The clever investors out there, like hedge funds, have been selling every big rally and buying every dip, laughing all the way to the bank and leaving your average Joe pension fund beneficiary, 401k owner, and mutual fund investor holding the malodorous bag.

What's more, I believe that this state of affairs is going to continue for another few years. You get what you deserve. This view is consistent with an economy that isn't inventing anything new, spends more than it borrows, and lets foreigners take the technological lead through sheer indolence and complacency. We aren't going to Twitter our way to prosperity.

It also fits with 80 million baby boomers withdrawing wealth from the system, downsizing their homes, and plopping everything into the Treasury market. This means that we are much closer to the end of this run in equities than the beginning.

If you have any doubts, take a look at the chart below showing that stocks are more expensive now than at any time in the last nine decades. Should one of the world?s? more structurally impaired economies be commanding one of the highest PE multiples? I think not. This is why I have been using my electric cattle prod and my kangaroo skin bullwhip to herd investors to the sidelines.

The Sidelines Are a Good Place to Be