Featured Trades: (FXE)

2) Time to Short the Garlic Eaters. The garlic eaters don't want to repay their debts, and the beer drinkers don't want to lend them any more money. That pretty much sums up the financial tensions that exist within Europe right now. The PIIGS countries of Portugal, Ireland, Italy, Greece's, and Spain are lurching from one emergency financing to the next. Never mind that much of that money was borrowed to buy Mercedes, BMW's and Volkswagens, which enriched Germany's economy mightily.

This is one of many reasons why I think the Euro will continue to fall against the dollar, possibly to as low as the mid $1.10's some time this year. The US is growing, and Europe is not. American interest rates are rising, while Europe's are not. This always attracts capital to flow out of the low yielding currency and into the high yielding one, which is creating a rising tide of buyers of greenbacks and sellers of Euro's.

The Euro has just enjoyed a five cent rally against Uncle Buck. Last week, the Spanish and Portuguese bond issues came off better than expected. Germany's Chancellor Angela Merkel hinted they might bend a little on terms. The UK's CPI came in hot. Then China and Japan came in and said they would happily take down a chunk of the high yielding debt. With ten year Japanese Government Bonds yielding a paltry 1.23%, can you blame them?

That is the logic behind my recommendation to buy the June, 2011 $132-$129 put spread on the (FXE), the main Euro ETF. This involves buying the June $132 puts and selling short an equal number of June $129 puts for a net cost of $1.18. The recent sigh of relief has taken the Euro up to the top of a two month trading range at $1.34. So I am going to take the gift and put out a small short here. A $100,000 portfolio should put 5% of its capital into this trade, which works out to 42 contracts on each side.

The position reaches its maximum profitability if the Euro closes at or below $1.29 on June 17, 2011. That would pump the value of the spread from $1.18 to $3.00 for a gain of $1.82, or 182%. The June expiration gives this plenty of time to work. Then will bind out if the garlic eaters, and the 'Macro Millionaires' who strapped this baby on, have the last laugh.

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Would You Want to Owe Her Money?

Featured Trades: (GOLD), (GLD), (DGZ), (GLL)

1) All That is Gold Does Not Glitter. In the wake of gold's panic inducing $30, one day sell off on Friday, players across the hedge fund universe are reassessing their relationship with the barbarous relic. What started out as a long term commitment is suddenly morphing into a short term fling, or maybe even a one night stand.

The yellow metal is now down $80 from its $1,450 peak set only two weeks ago. The technical analysts among you will recognize the chart as screaming a 'head and shoulders top', which bodes ill for short term price movements. It has definitively broken the 50 day moving average at $1,383, and you can bet that many traders spent the three day weekend gauging their tolerance for additional pain.

Gold is now facing some daunting challenges. High prices have cause scrapping of old jewelry to quadruple, unleashing fresh new supplies on to the market. Have you received a torrent of 'come ons' from websites offering to buy your old gold? That's what I'm talking about. Rising interest rates are also adding some tarnish, as gold yields nothing, and costs money to store and insure. A panoply of new gold related ETF's have diverted buying away from the physical metal towards paper surrogates.

It is no longer a secret that gold is one of a few places to protect your wealth from the coming surge in inflation that Ben Bernanke's printing presses assure. So by now, everybody and his brother are in on the trade with a big fat long position. I am a firm believer in the 'canoe' theory of investment management. If too many people bunch up on one side of the craft, the whole thing tips over. Finally, gold failed my 'cleaning lady' test. When Cecelia started asking me how to buy Mexican gold pesos, I knew it was time to start entertaining short plays.

Gold has been on a tear for the last seven months, rising by a thrilling 28% in a year, much of it powered hedge fund money of the hottest sort. So a serious bout of profit taking is way overdue. With US equities, particularly financials and tech stocks, the flavor of the day, you can count on many of them to take profits on the yellow metal and reallocate to paper assets. The fact that the world is now solidly in a 'RISK ON' mode also solidly favors some gold liquidation.

The easy target here is the October support level of $1,320, down $40. If we get some good momentum going, traders will start throwing up on their shoes, and we could touch the 200 day moving average at $1,270. My friend, technical analyst to the stars, Charles Nenner, thinks that in a worst case scenario at gold could plunge to as low as $1,000 (click here for my radio interview).

Thanks to the yellow metal's recent popularity, the are a profusion of instruments with which you can play the downside. You can buy the 1X bear gold ETF (DGZ), or the 2x version (GLL). You can short gold futures on the CME.

I am going to go for the easy money here and try to capture a $4 bite of the down move of the main gold ETF (GLD). With $57 billion in assets, it is the world's second largest ETF, right after the (SPY). It is ripe for some profit taking. Last week, it saw 16 tons of sales worth some over $700 million. It will be interesting to see if the ETF can handle liquidations on this scale, whether it might trigger a total melt down in gold, and how many camels you can fit through the eye of a needle.

The set up that best works here is the $132-$128 put spread. This involved buying the March $132 puts for $3.65 and going short an equal amount the $128 puts for $2.15 to cheapen my cost of admission. $128 in the (GLD) equates to the $1,320 October support for the spot physical metal. The position reaches maximum profitability with a print at or below $128 in the (GLD) on March 18. That would bring in a gain of $2.50, or a return of $166% in two months.

If the geopolitical situation suddenly worsens, and it's off to the races for gold again, then you lose your $1.50. The great thing about spreads like this is that your risk is quantifiable and limited, so you can sleep at night. No sudden black swans are going to wipe you out overnight, as outright short positions in the futures or the ETF can.

Mind you, I think gold is still going up long term, and that the old inflation adjusted high of $2,300 is a chip shot in a couple of years (click here for 'The Ultra Bull Case for Gold'). This is just a little counter trend scalp to keep me from falling asleep this afternoon that might be good for a few weeks or months.

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Suddenly, Gold Has Acquired a Bitter Taste

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The Gold Peso

(SPECIAL TREASURY BOND ISSUE)

Featured Trades: (THE TREASURY BOND CRASH IN PROGRESS)

1) The Case Against Treasury Bonds. If you want to delve into the case against the future of US Treasury bonds in all its glory, take a look at the November/December issue of Foreign Affairs, the establishment bimonthly journal read by academics, intelligence agencies, and politicians alike, which I am sure you all have sitting on your nightstands. In a well researched and thought out article penned by Roger C. Altman and Richard N. Haass, the road to ruin ahead of us is clearly laid out.

The US has no history of excessive debt, except during WWII, when it briefly exceeded 100% of GDP. That abruptly changed in 2001, when George W. Bush took office, despite his loss of the popular vote. In short order, the new president implemented massive tax cuts, provided expanded Medicare benefits for seniors, and launched two wars, causing budgets deficits to explode at the fastest rate in history. To accomplish this, strict 'pay as you go' rules enforced by the previous Clinton administration were scrapped. The net net was to double the national debt to $10.5 trillion in a mere eight years.

Another $2.5 trillion in Keynesian reflationary deficit spending by president Obama since then has taken matters from bad to worse. The Congressional Budget Office is now forecasting that, with the current spending trajectory and the new tax compromise, total debt will reach $23 trillion by 2020, or some 160% of today's GDP, 1.6 times the WWII peak.

By then, the Treasury will have to pay a staggering $5 trillion a year just to roll over maturing debt. What's more, these figures greatly understate the severity of the problem. They do not include another $9 trillion in debts guaranteed by the federal government, such as bonds issued by home mortgage providers, Fannie Mae and Freddie Mac. State and local governments owe another $3 trillion. Double interest rates, a certainty if the current commodity price inflation continues, and our debt service burden doubles as well.

It is unlikely that the warring parties in Congress will kiss and make up anytime soon. It is therefore likely that the capital markets will emerge as the sole source of any fiscal discipline, with the return of the 'bond vigilantes.' They have already made their predatory presence known in the profligate nations of Europe, and they are expected to arrive here imminently. Such forces have not been at play in Washington since the early 1980's, when bond yields reached 13%, and homeowners paid 18% for mortgages. Since foreign investors hold 50% of our debt, policy responses will not be dictated by the US, but by the Mandarins in Beijing and Tokyo. They could enforce a cut back in defense spending from the current annual $700 billion. They might even demand a retreat from our $150 billion a year commitments in Iraq and Afghanistan.

Personally, I think the US will never recover from the debt explosions engineered by Bush and by 'deficits don't count' vice president Chaney. The outcome has permanently lowered standards of living for middle class Americans and reduced influence on the global stage. But I'm not going to get mad, I'm going to get even. I am going to make a killing profiting from the coming collapse of the US Treasury market through buying the leveraged short Treasury bond ETF, the (TBT). Sure the 40% gain since august has been nice, but it is only the appetizer. My recently joined 'Macro Millionaires' have been able to book a quick 20% profit. The main course has yet to come. I am sticking to my long term forecast for this fund of $200, and that is despite a hefty and rising cost of carry of nearly 1% a month.

Have a nice day.

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Damn, I Should Have Voted for Gore!

(SPECIAL TREASURY BOND ISSUE)

Featured Trades: (AFRICA), (GAF), (EZA), (AFK)

3) Feel Like Investing in a State Sponsor of Terrorism? How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped? Another country lost four wars in the last 40 years. Still interested? How about a country that suffers one of the world's highest AIDs rates, endures regular insurrections where all of the Westerners get massacred, and racked up 5 million dead in a continuous civil war?

Then, Africa is the place for you, the world's largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo. Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms.

Goldman Sachs has set up Emerging Capital Partners, which has already invested $2 billion there. China sees the writing on the wall, and has launched a latter day colonization effort, taking a 20% equity stake in South Africa's Standard Bank, the largest on the continent. There are now thought to be over one million Chinese agricultural workers in Africa.

In fact, foreign direct investment last year jumped from $53 billion to $61 billion, while cross border M & A leapt from $10.2 billion to $26.3 billion. The angle here is that all of the terrible headlines above are in the price, that prices are very low, and the perceived risk is much greater than actual risk.

Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. These numbers remind me of those found in Japan during the fifties, right after it lost WWII.

The reality is that Africa's 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure.

For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It's like the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years, because the risks were so high.

This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has rocketed by 89% from the March lows to the recent highs, and has 29% of its holdings in South Africa and 20% in Nigeria. There is also the SPDR S&P Emerging Middle East & Africa ETF (GAF), which reeled in a blistering 103% gain. For more of a rifle shot, entertain the iShares MSCI South Africa Index Fund (EZA). Don't rush out and buy these today. Instead, wait for emerging markets to come back in vogue, I send you are trade alert when this is going to happen.

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Meet Your New Business Partner

Featured Trades: (ALASKA OIL SPILL), (DIG)

3) Storm Clouds are Gathering for Oil. Spill six barrels of oil in a remote basement in Northern Alaska, and all of a sudden, 15% of the US oil supply is cut off. That was the response of officials at the Trans Alaska Pipeline over the weekend, no doubt hyper sensitized to accidents in the wake of last year's Gulf oil disaster. BP happens to be the largest shareholder in the line. Does anyone see a coincidence?

The 640,000 barrels a day we get from the home of Sarah Palin, dog sleds, and moose sausage is expected to start flowing again soon. But the event does underscore the fragility of our energy supplies. This is why I think we are going to $110 to $120 sometime this year, and $300 within this decade. The $5 a gallon gasoline this assures explains why I will soon take delivery of a black, all electric Nissan Leaf with a solar roof panel. It is also why my newly enriched Macro Millionaires own the 200% leveraged oil major basket ETF, (DIG), in their trading book, which hit a new all time high today. If you need further convincing about the short, medium, and long term case for oil, take a look at the chart below.

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