'The jobs that we gained over the last two decades were the jobs that led to over consumption, jobs like finance, insurance, real estate, and consumer cyclicals,' said my old buddy, David Gerstenhaber, President of Argonaut Capital Management.
SPECIAL FLORIDA ISSUE
Featured Trades: (ORLANDO STRATEGY LUNCHEON REVIEW)
1) Orlando Strategy Luncheon Review. Now is the greatest time ever to buy a Caterpillar D9 heavy bulldozer. That was my conclusion after visiting Ritchie's Auctioneers, half way between Orlando and Tampa, Florida, which offers hundreds of these giant machines, along with enough steam rollers, backhoes, road graders, and dump trucks to build a small country from scratch. They were being sold off at distressed prices, pennies on the dollar, for little more than scrap metal value. Such is the bitter fruit of the worst downturn in new home construction since the Great Depression.
Driving through the forests and swamps of Florida, one finds a land dotted with giant dinosaurs, pirate ships, wizards, and assorted oversized fruit. It's like being on an LSD trip without going through the trouble of buying and ingesting the banned psychedelic substance. The wreckage of the crash cover the state like a highly contagious plague, with boarded up homes, condos, small businesses, and tourist traps around almost every corner.
After driving through hours of strip malls and dilapidated retirement communities with weed filled golf courses and kudzu choked waterways, one wonders why anyone retires here. I have never seen so many out of state license plates. But the Southern hospitality makes it all worth it, where 'Y'all' comes across as genuine and sincere, not clich??d or stereotyped. The locals are noticeably friendlier the second you get off the plane. When they say have a nice day, they really mean it. In New York it means they intend to mug you.
Diary readers and Macro Millionaires alike flocked to Orlando's exclusive University Club en masse to the best attended strategy luncheon yet. Mark from Australia won the prize for the greatest distance traveled to the event, easily beating out the runner up from Uruguay. Spend your Zimbabwean dollars wisely, Mark.
The extended discussion revolved around the issues that we are all grappling with today in the international financial markets. Followers of this letter are now faced with a dilemma everyone wishes they had. Everything they own with great fundamentals, like commodities, energy, food, precious metals, technology, rails, and short Treasury bond plays, are up 50% or more in the past five months. But what to do with new money? (Nothing). Will there be a QE3? (No.) Are muni bonds a buy here? (Yes.) Will there be more tax cuts (No). How high will oil go? (A lot). How high will interest rates go (Even more). Is it time to buy a house yet? (Rent, don't buy). Will Obama get reelected in 2012? (Yes). Will the Tampa Bay Buccaneers win the Super Bowl next year? (Not a chance).
One gentleman told me he had tracked 200 of my recommendations over the last year and had only found two losers, premature shorts on the yen and Treasury bonds which I stopped out of quickly. All I know is that the harder I work, the luckier I get.
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SPECIAL FLORIDA ISSUE
Featured Trades: (WORLD MONEY SHOW)
2) The San Francisco Money Show. I attended the Woodstock of investment conferences last week, the World Money Show at the Gaylord Palms Resort near Orlando, Florida. Run with military efficiency that only General George S. Patton could have appreciated, it offered a multi ring circus of traders, foreign exchange models, options platforms, newsletters, cruises, video broadcasts, and more.
The cavernous hotel, the size of a small glassed in sports arena was absolutely bubbling with new ideas. You couldn't walk five feet without tripping over a great investment theme, and information overload was the order of the day. There was a plethora of celebrity speakers and old friends, including BMO Capital Markets,' Andrew Busch, uber bear economist, David Rosenberg, Think or Swim founder, Tom Sosnoff, the Financial Times' Gillian Tett, China Stock Digests' Jim Trippon, and fund manager Adrian Day. Forbes publisher, Steve Forbes, was there making his perennial run for the presidency.
There really is no corner of the financial markets that was not well represented by market makers, analysts, technology providers, and investors-- thousands of them. With the soaring level of US government debt scaring the daylights out of everyone, the precious metals dealers were there in force.
Of course, the hard asset crowd was everywhere, and you could not swing a dead cat without hitting a miner looking for new funding. Never mind that the barbaric relic went up for all the wrong reasons. The dollars they're making are still just as good at the bar. The only thing missing from the show was the long predicted hyperinflation. Want to prospect in the Ivory Coast? No problem.
I was pleasantly surprised by the diversity of major corporate sponsors there to promote their own shares, like Sasol, Proctor and Gamble, Petrobras, Roche, General Electric, Vale, and Lucas Energy, several of which are great investments. A variety of oil service companies were also well represented. A 'green' section offered a look at wind, solar, and geothermal energy providers. Even the US Treasury Department had its own diminutive booth, no doubt reflecting the year's coming budget cuts.
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 (go for those struck at the San Francisco Mint). I was constantly amused every few minutes by attendees who, seeing my nametag, asked to have a photo taken with the one and only Mad Hedge Fund Trader, and to sign their program.
The hotel was a bit of a disappointment, which was clearly ill equipped to handle the 8,000 Money Show registrants that descended upon it. I walked out the front door and thought that I had stumbled upon a car show. Instead, it was the gridlocked valet parking, which was diverting guests to another hotel two miles away to catch a shuttle. There were lines longer than those found in nearby Disney World, and when the noontime sessions let out, the restaurants were hit with a plague of locusts, cleaning them out of all food and clean silverware.
After I make my fortune, there was even a booth extolling the virtues of retiring on the beach in Belize. It was 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. You will find me at the Las Vegas Money Show during May 9-12 at Caesar's Palace Hotel, where I will be a keynote speaker with my own booth.
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Featured Trades: (THE COMING TAKEOVER WARS)
3) The Coming Takeover Wars. The spate of takeover bids we have witnessed recently, the attempted BHP Billiton (BHP)-Potash (POT) deal, the Sanofi Aventis (SNY)-Genzyme (GENZ) deal, and Intel's (INTC) acquisition of Infineon Technologies (IFX), is telling the rest of us reams about the broader market.
Virtually all of the recent bids have been made for cash. That means that the acquiring companies believe that both their own and their target's share prices are historically cheap. That may be debatable, depending on whether you think the long term US GDP growth rate is 2%, or is going back to the torrid 3.9% we saw in the last decade.
The real education here is the outing of the industries that are attracting the premium bids. Those include agriculture, energy, commodities, biotechnology, and technology, especially in cloud computing and mobile applications. BP (BP), an oil major, is said to be attracting covetous eyes while its stock is in the basement. Also notice the foreign origins of many of the targets, which underlie my theme that 90% of global earnings for the next ten years are coming from outside the US.
Regular readers of this letter will recognize these industries as part of a handful of major growth leaders for the next decade. By watching the M & A action, you are letting the giants with deep pockets needed to fund massive research efforts do your sector selection for you. Direct investment always leads activity in listed share markets, often by years. Ride on their coat tails for free.
It all reminds me of the 'Pac man' takeovers of the early eighties, when Boone Pickens said that it was cheaper to prospect on the floor of the New York Stock Exchange than in the oil patch. The 2011 iteration of that statement has to be that it is cheaper to hire people through takeovers than to hire them outright. The hard truth is the net effect of these mergers is almost always a reduction of the labor force. This is why the jobs picture has not, and will not improve. To boost your investment performance, keep close tabs on newly announced takeovers, or easier still, keep reading this letter.
Get Your Free Education Here
Featured Trades: (JANUARY NONFARM PAYROLL)
1) Reading the Nonfarm Payroll Tea Leaves. Lifetime followers of the monthly nonfarm payroll report were more than a little amused by the Friday numbers, which could not have been more contradictory, conflicting, and confusing. The headline figure showed a gain of a paltry 36,000, yet the unemployment rate plunged 0.6% to 9.0%, one of the sharpest drops on record. In fact, the unemployment rate has fallen nearly 1% in two months, one of the sharpest drops on record.
Sifting through the tea leaves, these numbers reveal far more than meets the eye. Here are the high points:
*The unemployment rate dropped sharply because people are giving up on looking for work. Once the jobless exhaust their full 99 weeks of unemployment insurance, they disappear completely out of the system.
*Two successive 'snowmageddons' possibly shrank employment by as much as 150,000. Construction and transportation were especially hard hit. Check out those amazing photos of cars buried by snow drifts in a Chicago traffic jam. They look like they are from a disaster movie. Those are all people not getting to work.
*The private sector gained jobs, while the public sector lost them. This is only the beginning of what I believe is 30 more years of government downsizing at the federal, state, and local levels.
*The 25 million jobs the US gave away to China and other emerging markets are never coming back, no matter how much the government spends. Unemployment is now structural and permanent. An entire generation of jobs was given away.
There is another big factor at work here that no one is discussing. I am not counted in the nonfarm payroll, as I work entirely in the cloud. Nor is anyone who works for me, be they in Washington, New Mexico, New York, or Timbuktu. We are all invisible to the Department of Labor. For all they know, we are all at home sitting on the sofa, watching TV while stuffing ourselves with bonbons, and picking the lint out of our navels.
What I'm getting at here is that the monthly nonfarm payroll is vastly underestimating the number of employed, and has been doing so for a very long time. It reminds me of another anomaly, when personal computers first came one the scene 30 years ago. The government originally treated them as consumer electronics sales, not as capital spending as it should have, similarly misleading us all.
The implication is that the economy is much stronger than we realize. The stock market correctly figured this out, eking out a 30 point gain on what were heralded as disappointing numbers. This is also how some 70% of companies have beaten conservative analyst forecasts in the current earnings season. All that is left to ask is how much of this undercover jobs boom is already priced into the market.
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Should Have Taken That Job in the Cloud!
Featured Trades: (NISSAN LEAF), (NSANY)
3) Getting Something for Nothing. I just contracted to buy all the gasoline I want at 14 cents a gallon. No, I have not struck oil in my backyard, or come into an inheritance from a long lost Kuwaiti relative. That is the de facto price that PG&E is billing me for a full charge on the all-electric Nissan Leaf that will be delivered to me in December.
That works out to $1.20 to recharge a vehicle that will transport me 100 miles, at the price of five cents a kilowatt hour. This is less than half the 11.8 cent/hour I pay to run the rest of my appliances, and a tiny fraction of the 40 cent/hour peak rate I pay to run the air conditioner in the summer.
PG&E has exactly one engineer to talk to its 10 million customers about this ground breaking new technology, and after much effort, I managed to get him on the phone. I asked who was paying the subsidy? Were those profligate bastards in Washington involved? He answered that there was no subsidy, that power sold at night was cheap because there was no other market.
So I inquired as to who was paying for all of the equipment upgrades, like the new transformers and power lines that were needed? Do I sense the heavy hand of Sacramento? He replied that there was no capital cost because the same infrastructure that delivered power to me during the day would be used to power my car at night. Only a couple of bucks would be spent on the installation of a new 'time of use meter'.
Of course, they have subsidized the hell out of the Leaf itself. The car that is costing me $22,000 here in California sells for $32,000 in Japan. I know we're supposed to be cutting the deficit by eliminating handouts like this. But you'll only take my subsidies by prying my cold dead hands away from them. Take someone else's subsidies, not mine! It is the American thing to do these days.
He did mention that one unanticipated problem had arisen. My ears perked up. Many wealthy Tesla Roadster owners in Los Altos Hills were impressing so many girlfriends with rides that they were requiring multiple daytime recharges, even though they promised to recharge only at night. Not only did this send their electricity bills through the roof, it was causing problems with the grid as well. I guess its all part of the teething process, a cost of making the great leap forward to the next generation. Who knew that Match.com would be involved?
I never thought I'd get something for nothing, but it looks like this time I will. That is, as long as the damn car works, and my kids don't run the battery down playing rap music all night. For a glimpse at the future and further insights into this amazing technology, please visit Nissan's Leaf website at https://www.drivenissanleaf.com/ .
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Featured Trades: (RESIDENTIAL REAL ESTATE)
1) Years of Pain to Come in Residential Real Estate. Regular readers of this letter are familiar with my antipathy towards real estate of every flavor, with the exceptions of multi-unit dwellings (apartment buildings) and farmland .
So my interest was piqued when Ron Peltier spoke the other day, the CEO of? Home Services America, a national brokerage firm in the Berkshire Hathaway (BRK/A) fold. What better way to get a hands on, from the trenches read on this troubled market than Oracle of Omaha, Warren Buffet's personal agent?
He said that we may see the number of existing homes on the market climb from the current 4 million units to 5 million, versus a ten year annual trailing average sales of 2.5 million units. Record foreclosures are forcing reasonable sellers moving for demographic reasons (larger families, job changes, divorces, etc.) to compete against distressed sellers, driving prices down. Those suffering the indignity of losing their homes are seeing realizations at 25% to 50% below fair value.
At least 25% of American homeowners, or some 35 million dwellings, have negative equity.? While prices on average have fallen back to 2002 levels, Peltier doesn't expect further declines because of the huge support provided by mortgage interest rates at 50 year lows. So he sees a best case scenario of flat prices until this record excess inventory of 2.5 million homes is worked off, which can't occur until 2012 at the earliest.
Personally, I think Peltier is being optimistic because he doesn't address the hurricane force headwinds of the retirement and downsizing of 80 million baby boomers, the parsimonious attitude of banks towards new borrowers, and the harsh reality of continued falling standards of living in the US. Continue to rent, not buy, and let the landlord worry about the rats in the attic.
Featured Trades: (HEDGE FUNDS)
2) Who Says Hedge Funds Aren't Adding Value? According to my old friend, Rick Sopher, chairman of LCH Investments in London, the top ten hedge funds have earned $153 billion for their investors since inception. John Paulson's fund alone, which made an absolute killing by shorting subprime mortgage debt instruments going into the housing crisis, came in tops with $26.4 billion in profits.
Rick, who runs his business from an elegant flat on posh Eaton Square, compiled the list after a comprehensive survey of the still operating 7,000 hedge funds worldwide. It is dominated by marquee names like Steve Cohen's SAC Capital, Bruce Kovner's Caxton, and Louise Bacon's Moore Capital. Of the 100 largest funds, 95% have returned much of their investors' original capital, and are using the remaining profits to trade on.
Of course, the numbers show a huge survivor bias. They don't include the hundreds of billions of dollars lost by now shuttered 'wanabee' managers during the financial crash, largely with highly leveraged fixed income, spread oriented, 'low risk' strategies. Many of these are still in liquidation, peddling illiquid assets for pennies on the dollar through online auctions and elsewhere.
The numbers highlight the increasing barbell nature of the hedge fund industry. The biggest funds continue to attract the big bucks, and a steady wave of defections from Wall Street, are funding hundreds of new startups. But many mid-tier firms are getting nothing and are struggling to stay in business.
'I'm sure there are gobs and gobs of money to be made in emerging markets,' said legendary hedge fund manager Bill Fleckenstein on Hedge Fund Radio.
Featured Trades: (SOLAR ENERGY PARITY), (FSLR)
3) Solar Energy is Poised to Achieve Cost Parity. After two years of relentless cost, the solar industry is about to reach the Holy Grail of parity with the cost of conventional power sources at around 10 cents per kilowatt hour, paving the way for and exponential growth in profitability.
For those of us who have been cheerleading this industry from the sidelines since the 1973 oil shock, it has been a long and tedious wait. We have traveled the long and winding road from primitive roof mounted water pre heaters to advanced thin film technology, with endless political battles along the way against frequently hostile and tight fisted administrations in Washington.
You can thank Germany, a country that ironically often lacks sunlight, where individuals and local utilities alike are putting the pedal to the metal to cash in on generous government subsidies. The goal is to push the Fatherland's alternative energy supplies from the current 12.5% of total generation to 20% by 2020. Local sources tell me that installed rooftop solar panels are expected to double this year.
Several US states have similar mandates. California, which has the lofty goal of 30% for alternative power, has just approved the building of a massive solar facility in the Mohave Desert just North of Los Angeles.
The net net is higher volumes and prices than the solar industry was expecting only six months ago. This will enable the big players in this space to wean themselves off of subsidies, stand on their own feet, attract more private capital, and shrink costs further through economies of scale.
Part of the economization story for American companies involved the offshoring of a substantial part of its manufacturing to China. It didn't hurt that the Middle Kingdom signed a contract with First Solar (FSLR) to build an enormous one square mile plant in the Western part of their country, which looks an awful lot like our Southwestern desert, to gain advanced technology. They no doubt also sought to defuse the threat of anti-dumping actions in the US against their own manufacturers.
I think the earnings leverage in this industry is now huge, and any upturn in oil prices, which I expect over the long term, will act on profitability like a shot of steroids. Equity investors have recently figured this out and have broken (FSLR) out of its recent range to the upside. Buy (FSLR), which has lived in my long term model portfolio for some time, on any serious dip.
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