Star traders at major investment banks with great track records used to be able to pick and choose among the large funds bidding for their services. Now there is a torrent of talent pouring into the marketplace fleeing the onerous restrictions of the Dodd-Frank, pay caps, greater disclosure, and more scrutiny from the SEC. Low trading volumes have caused the banks to scale back from a first half hiring binge.

Hedge funds, whose own recruiting is driven more by capital flows, have also crimped new hiring, their own modest first half returns keeping new investors at bay. With short interest rates near zero, and the yield curve flattening beyond all recognition, the double digit returns of yesteryear are but distant memories. Instead, many hot shots are heading out on their own, setting up new boutique firms with substantially smaller amounts of capital.

Could we be setting up for a bonus draught like the one we saw in 2008?

Featured Trades: (BUY RUSSIA, BUT YOU MAY WANT TO TAKE A SHOWER), (RSX)

 

2)Buy Russia, But You May Want to Take a Shower.? If you wonder why I recommend a shower after investing in Russia, Bill Browder will give you the reasons at length on his YouTube video (click here for the link). Bill is the founder and CEO of Hermitage Capital Management, one of the firms that pioneered equity investment in the former Soviet Union in the nineties.

After a decade of pursing a campaign of activist investing that brought major changes in corporate governance in big companies like Gazprom (OGZPF.PK) (click here for the link at http://www.gazprom.com/ ) and Sberbank (SBRPF.PK), a mafia connected government struck back with a vengeance. It deported Browder in 2005, arrested his lawyer, and pressured him to provide false testimony against his boss, which he refused. A year later, the man died in prison from 'natural causes.'

The Russian government then seized Browder's operating companies, but fortunately for investors, not before he was able to sell off $4.5 billion in holdings and spirit the funds out of the country.

Browder, who is of Russian descent, and whose grandfather was chairman of the American Communist Party, says his case is but the tip of the iceberg. Major multinationals like Shell, BP, and Ikea have also been the victims of corruption and faced arbitrary seizure of assets by the well connected. This lawlessness is the reason why Russian companies perennially trade at single digit multiples. They are cheap on paper, but carry hidden, unquantifiable risks.

Despite all of the above, mega hedge fund Traxis Partners founder, Barton Biggs, says there is still a case to make for investment in Russia. It is the classic emerging middle class story. Russians have no credit card debt, no home mortgages, and terrible housing, but the resource wealth to buy what they need. Barton sees Russia eventually becoming a basic, functioning European country, but will first have to engineer a growth spurt to get there. That is the play. The principal vehicle for most foreigners to get into the land of Lenin and Red Square is to buy the ETF, (RSX).

No doubt that investing in Russia is a double edged sword. It offers enormous oil reserves and natural resources, with GDP flipping from a -7.9% rate in 2009 to an expected 3.2% in 2010. But you run the risk of a knock on the door in the middle of the night.

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Featured Trades: (BONDS-WHERE DO WE GO FROM HERE?), (TLT), (TBT)

1) Bonds-Where Do We Go From Here? There is nothing like coming back from vacation and seeing all your shorts go to zero. Well, they almost did. My bet that bond prices would fall going into the end of QE2 paid off big time, with the (TLT) September $103 calls that I sold at 74 cents now trading at a lowly, almost cowering 20 cents.

It is always nice to get an assist, and I certainly got one on this trade with a warning from Standard and Poors about how dire America's debt prospects really are. These were not new estimates, but they certainly set the cat among the bond holding pigeons, especially when cast against a backdrop of Greek unrest. Like, this could be us in five years?

Since we are all only as good as our last trades, the question arises of what to do next. Unfortunately, the pickings out there are pretty thin. I think we are trapped in a narrowing range that in terms of the ten year Treasury yield now looks to be 2.85%-4.00%, with the last tick appearing on my screen at 3.15%. The (TLT) dropped a dramatic 5 points in a week, while the double short ETF (TBT) soared by an awesome 10%. So whatever you do, don't short bonds right here.

Wait a couple weeks, and you should get another chance to put this short on. The current round of 'RISK OFF' should exhaust itself by mid to late July, once Q2 earnings are out. Then we will be looking into the abyss of the August 2 debt crisis.

I expect a deal to be struck, but only after both parties have milked this issue for maximum political advantage, with negotiations going? on to the last second of the last minute of the last hour before midnight. The fear this will generate, especially among foreign investors, should be enough to drive yields back to the high 2.90% area.

I am not buying the Armageddon predictions that you hear daily on the tube. Inflation is not hitting anytime soon, driving ten year yields to 5%-6%. I'm sorry, but 2% GDP growth just doesn't get you there. Nor are we headed towards a hyper deflationary bond bubble that takes yields to 2%. We are growing, but not just very much, and certainly without any new hires. We may have to wait until well into next year for that scenario to unfold.

I know this sounds pretty boring, but that is what the economic data are telling us. At least until it changes.

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Will Someone Please Wake Me Up When Volatility Returns?

According to HSBC's private bank, of 300 hedge funds they track, only nine are up double digits, and most of those are narrowly mandated technology funds. Almost every fund lost money in June. And oh, how the mighty have fallen, with the biggest funds producing the soggiest performance.

Bruce Kovner's Caxton Associates' main fund is off by 3.88% this year, Paul Tudor Jones is down by 2.25%, Louis Bacon's Moore Capital took a 2.84% hickey, and Fortress Capital has dipped 2.44%. Emerging markets have done worse, with Brevan Howard's dedicated fund taking a 4.64% knock. Paulsen & Co. pursued a bullish strategy in the banks which I never understood and lost an eye popping 20%.

For a start, you can blame the almost complete absence of any clear trends this year. The S&P 500 is up was up 7% in the first half, with the entire move occurring only during the last three days. Until then, we spent all out time inside a narrow 120 point, 9% trading range. Ditto for Treasury bonds, which are up only 3 points on the year with a yield so small you need a magnifying glass to find it. The ETF (TLT) stuck inside a miserable 10 point, or 11% range.

How about the Euro? Is the never ending sovereign debt crisis presenting great shorting opportunities? Not a chance. The European currency is up 7% this year. The only way to pay the bills with a move like that is to leverage up like crazy, something that risk managers are loathe to do.

How about commodities? Did Dr. Copper, the only metal with a PhD in economics, open its wallet for hedgies this year? Nope. The copper ETF (CU) is actually down 1%. Maybe it should go back to night school for another course in macroeconomics?

Perhaps precious metals gave us an in? Negative. Despite all of the fear, angst, and general tearing out of hair seen this year, gold managed a modest 4% gain, while silver, after a lot of sound and fury, delivered a middling 8% increase. Platinum and palladium are dead unchanged on the year, thanks to the deflationary impact of the Japanese earthquake on the global auto industry.

Possibly this really is the year when cash is king. Sounds to me like the best thing to do is to go to the beach.

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Not a Lot to Chew on Here

Featured Trades: (PLATINUM), (PPLT), (GOLD)

 

3) Time for Platinum to Play Catch Up. For those of you who have been romancing gold, you should check out platinum (PPLT), her younger, racier, and better looking sister who wears the low riders. The white metal usually outperforms gold in bull markets for precious metals, but this year has fallen 3.4%, compared to a 4.7% gain for the barbaric relic. No doubt the 'double dip' threat to the economy is having an impact.

While gold is just shy of its all-time high, Platinum has to rise a further 30% from here just to match its 2008 high of $2,200 an ounce, suggesting that some catch up play is in order. I have always been puzzled by the fact that platinum is 30 times more rare than gold, but at $1,720 an ounce, trades at a mere 15% premium to the yellow metal. And unlike gold, platinum has a wide array of actual industrial uses.

You have to refine a staggering 10 tons of ore to come up with a single ounce of platinum. The bulk of the world's 210 tons in annual production comes from only four large mines, 80% of it in South Africa, and another 10% in the old Soviet Union. All of these mines peaked in the seventies and eighties, and have been on a downward slide since then.

That overdependence could lead to sudden and dramatic price spikes if any of these are taken out by unexpected floods, strikes, nationalizations, or political unrest. While no gold is consumed, 50% of platinum production is soaked up by industrial demand, mostly by the auto industry for catalytic converters.

The Japanese earthquake and tsunami knocked out a good portion of the world's car production, hence the unexpected weakness this year. But Japanese recent industrial production data show that we are now witnessing the second leg of the 'V', the up one, and that should lead to a sudden lurch upward in platinum demand. That could take US car production alone from 13 million units a year to 16 million by 2015. That's a lot of catalytic converters. That assumes that 14.5 million American cars a year are scrapped, requiring almost no new net demand. Surprises will be to the upside.

Jewelry demand for platinum, 95% of which comes from Japan, is also strong, as the global pandemic of gold fever spreads to other precious metals. You can trade Platinum futures on the New York Mercantile Exchange, where one contract gets you exposure to 50 ounces of platinum worth $86,000.

For those who like to get physical, the US mint issued Platinum eagles from 1997-2008 in nominal denominations of $100 (one ounce), $50 (? ounce), $25 (1/4 ounce) and $10 (1/10th ounce) denominations. Stock traders should look at picking up the ETF (PPLT) on the next substantial dip.

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Check Out Gold's Racier Sister