Featured Trades: (NEW YORK STRATEGY LUNCHEON)

 

Last Chance to Buy a Ticket for the Thursday, March 31 New York Strategy Luncheon. The Mad Hedge Fund Trader's Global Strategy Update will be held at 12:00 noon on Thursday, March 31, 2011.

The event will be held at an exclusive private club on Central Park South.?? A three course lunch will be followed by a 30 minute PowerPoint presentation and a 45 minute question and answer period. I'll be giving you my up-to-date view on stocks, bonds, currencies commodities, precious metals, and real estate. Enough charts, tables, graphs, and statistics will be tossed at you to keep your ears ringing for a week.

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. To buy a ticket for $279, please visit my store. I look forward to meeting you, and thank you for supporting my research.

Featured Trades: (AIRLINE STOCKS COULD BE READY FOR A TAKEOFF)

 

3) Airline Stocks Could Be Ready for Take Off. When I was a young, clueless investment banker at Morgan Stanley 30 years ago, the head of equity sales took me aside to give me some fatherly advice. Never touch the airline industry. The profitability of this industry is totally dependent on fuel costs, interest rates, and the state of the economy, and managements haven't the slightest idea of what any of these are going to do.

At the time the industry had just been deregulated, and was still dominated by giants like Pan Am, TWA, Eastern Air, Western, Laker, and a new low cost upstart called People Express. None of these companies exist today. It was the best investment advice that I ever got.

If you total up the P&L's of all of the airlines that ever existed since Orville and Wilber Wright first flew in 1903 (their pictures are on my new anti-terrorism edition pilots license), it is a giant negative number, well in excess of $100 billion. This is despite the massive government subsidies that have prevailed for much of the industry's existence. The sector today is hugely leveraged, capital intensive, heavily regulated, highly unionized, offers customers terrible service, and is constantly flirting with, or is in bankruptcy. Its track record is horrendous. They are a prime terrorist target. A worse nightmare of an industry never existed.

I become all too aware of the travails of this business while operating my own charter airline as a sideline to my investment business. The amount of paperwork involved in a single international flight was excruciating. Every country piled on fees and taxes wherever possible. The French air traffic controllers were always on strike, the Swiss were arrogant, and the Italians unintelligible. The Greek military controllers once lost me over the Aegean Sea for two hours, while the Yugoslavs sent out two MIGs to intercept me.

While flying a Red Cross mission into Croatia, I got shot down by the Serbians, crash landed at a small Austrian Alpine River, and lost a disc in my back in the process. I had to make a $300 donation to the Zell Am Zee fire department Christmas fund so their crane could life my damaged aircraft out of the river. Talk about a tough business!

All of this leads me to conclude that there may be an opportunity here in airline stocks. The industry has once again been decimated by high oil prices, taking stock prices down to single digits. Many of these stocks have fallen so far, they have essentially become long dated call options on the companies with equivalent pricing. So for a little upfront cash you get a lot of bang for your buck.

A Darwinian concentration has taken place over the last 30 year that has concentrated the industry so much that it would attract the interest of antitrust lawyers, if it weren't losing so much money. Delta and United now control 50% of the US market, American 15%, and Southwest 10%, giving a 75% share to the top four carriers. The industry has fewer seats than in 1982; while inflation adjusted fares are down 40%.

They have taken yet another bloody nose from high oil prices, but this time they are covering a lot of this with higher fares, fees, and fuel surcharges. I can't remember the last time I saw an empty seat on a plane, and I travel a lot.

The real kicker here is that stock in an airline is in effect a free undated put on oil. If Khadafy suddenly chokes to death on a falafel, and the fear premium for crude disappears, these stocks would soar. You could easily have a five bagger on your hands.

I would vote for the airline that has been least adept at hedging its forward fuel needs through the futures market. That would be American Airlines (AMR). That means they will hurt the most now, but rake it in the most on any oil price pull back. And even if the decline in fuel prices turn out to be modest, a recovering US economy should boost profitability, given its recent maniacal pursuit of controlling costs. Just the missing pretzels alone should be worth a few cents a share in earnings. And no, I didn't get free frequent flier points for writing this piece.

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Maybe I Should Consider a Different Career

Featured Trades: (POST MORTEM ON THE YEN)

 

3) Yen Post Mortem. Since my bet that the Japanese yen would decline clearly didn't work, I thought I would sift through some alternative theories in an attempt to understand why this trade came undone so badly. After all, every loss is a lesson, best to be learned. You would think that with weak economic growth, horrendous demographics, feeble corporate management, inept national leadership, an incompetent central bank, and an enormous reliance on high priced imported energy and commodities, the yen would be the ideal currency to short.

Wrong and double wrong. For the second year in a row my short position in the yen has been my one loser of the year, condemning me to a series of stop outs. I know I have a lot of illustrious company, but that is never an excuse for taking a hit to the P&L. So I thought it might be instructive to examine alternative theories for the future of the yen, which see not, imminent weakness, but strength.

My old friend, Eisuke Sakakibara, the former Japanese vice minister of finance known in the foreign currency markets as 'Mr. Yen,' says that the ?79 of today is not the same as the ?79 of 15 years ago. Since then the country has suffered from relentless deflation, causing the prices of goods and services to plunge.

As a result, the yen today buys much more than it did in the previous millennium. That means that the currency should continue to appreciate, to at least ?70. American investment bank, JP Morgan, recently put out a report employing similar logic, arguing that the yen could go as high as ?50- ?60 before reversing. This has never happened in the history of modern developed economies, which is why this possibility never showed up on my radar, nor few others.

When a cat touches a hot stove and gets burned, it never goes near that stove again, even when it is cold. I feel like that cat. Since the dollar's 'flash crash' against the yen last week that took it from ?80 to ?76 in a nanosecond, the G-7 has come into the markets with a lot of big talk, but only a few feeble $6 billion rounds of token intervention. Yet, here the yen still hovers around ?80.

I think I've had enough of the yen for a while, and will happily watch from the sidelines. I'm not buying the breakout. The 'Madness of Crowds' comes to mind.

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Once Burned, Twice Forewarned

 

1) Welcome to World War III. If there was ever a war that had to happen it is our new military engagement against Libya. Khadafy had made enemies with so many governments as the enfant terrible of the Middle East that putting together a coalition to depose him was a piece of cake. No arm twisting or fake intelligence about weapons of mass destructions needed here. Even Al Qaida hated Khadafi.

Call it 'shock and awe' light. I love it. The leadership is Arab, the French provide close air support, Egyptians the ground troops, and the Italians the pasta and the Tuscan wine (praise the Lord and pass the Antinori?). We just sit back out of harm's way and use up our inventory of outdated tomahawk missiles, while testing out the new models. Think of it as no more than a training exercise for the US. And we do all of this under the mantle of a UN approval. For us it really is a push button war. It is more like a video game that hand to hand combat.

You knew that things were going to play out differently this time when the Arab League voted to support the Libyan rebels and asked for UN assistance. For the past 60 years, this impotent international organization has done nothing but issue periodic rants against Israel and Zionism. This is the first time they have ever done anything useful.

Look at the line up in the coalition, and every national leader found it expedient from a domestic political point of view to take on Libya. The UK, France, Italy, Saudi Arabia, the UAE, Egypt, Jordan, and the US. Everyone needs a weak enemy they can defeat and claim credit for. Keep in mind that Libya's only ally in this fight is Zimbabwe, and it is providing only moral support.

Even President Obama, whose strong words and decisive action will no doubt boost his chances in the 2012 election. All of a sudden, protecting the Libyan people has become a top national priority. Who knew? Did I hear the word 'oil'? The word in Israeli intelligence is that the move was made not to save lives, but oil production facilities. After all, if you want to know what's happening in Libya, you have to call Tel Aviv.

It is also important to note that yet another country has discovered that the weapons and the decades of training they paid the Russians hundreds of billions of dollars for are utterly useless. Targeting coordinates were programmed into cruise missiles while enemy bases were still under construction. The CIA has kept a satellite parked overhead for daily updates. All that was missing was the political will to pull the trigger. Khadafy's supports can do little but fire their AK-47's in the air in utter frustration.

Does Anyone Here Know How to Drive a Manual?

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If you gave the Joint Chiefs of Staff a map of the Middle East and asked them their favorite target, Libya would be at the top of the list, and Iraq and Afghanistan would be at the bottom. While Libya looks big on a map, it is really a thin strip of coast 20 miles deep and 1,000 miles long. Its military resources are concentrated if confined, easily targeted areas. Its army consists of only 10,000, many mercenaries earning $1,000 a day. Who said there weren't well paid jobs around? The unemployed obviously aren't trying hard enough.

I predict that they will dig Khadafy out of some wretched hole in a few months, put him on trial for war crimes and terrorism, and the world will say good riddance. Sorry, but that's the Marine pilot in me coming out. That will leave the US with a pro-Western government in a major oil producing country whose massive offshore fields it was only just starting to develop.

Looking for a Good Lawyer

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The market reaction to our third Middle Eastern war in two decades was totally predictable. Traders hate uncertainty and love fact. This brings falling asset prices during the sabre rattling stage and soaring ones when the first shots are fired. If you don't believe me look at the charts for stock market indices at the onset of the 1991 and 2002 Gulf wars.

How Do You Spell 'Foreign Aid'?

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It's off to the races for oil again, as Libyan crude is now probably off the market for years to come. Macro Millionaire followers are thanking their lucky stars that, having sold oil at $107, they covered at $97. Here we are again at $106 for West Texas intermediate and $116 for Brent. It's been that kind of year.

Semper Fi.