'President Obama needs to explain that while these cuts will be painful, there is no way to solve our problems without shared sacrifice,' said Christina Romer, Obama's former Chairperson of the council of Economic Advisors.
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
It's very difficult for me to come up with a bullish scenario for the economy when I add up all the individual components,' said Meredith Whitney, a boutique research analyst.
(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: (TBT), (THE TECHNICAL CASE AGAINST BONDS)
2) The Technical Case for the TBT. Louise Yamada, one of the most widely followed technical analysts in the market, says the 29 year bull market in Treasury bonds is coming to a close.
Looking at the 200 year history of interest rates in the US, such bull markets are historically 22-37 years in length, and this one is definitely looking long in the tooth. Although doubters insist that you'll never get a collapse in bonds in a deflationary environment, Louise says that all bond peaks occur in such conditions. Yields show prolonged, saucer like bottoms, much like we are seeing now.
She also says that retail interest in such paper surges when interest rates are at multi decade lows, as we saw clearly with last year's flow of funds. When foreign buyers lose interest in our debt, the 30 year Treasury bond is the first place their lack of interest will show up. The dirty little secret among central banks these days is that they are all quietly directing new cash flows away from Treasuries into every possible alternative.
The charts for the 30 year are setting up a perfect head and shoulders top, and when the yield breaks through 4.8% to the upside, watch out. The next stop may be 7%. Her advice is that if you are going to stay in the government bond market, shorten your duration as much as possible. If Louise's scenario plays out, we are about to enter the golden age for the short bond ETF's, like the (TBT).
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(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: (THE POPULATION BOOM)
1) The Population Boom. On this most important day of the crop report, I thought that I would refer you to one of my favorite unconventional research sources, National Geographic Magazine. In their century long coverage of exotic places, cultures, and practices, they inadvertently shed light on broad global trends that deeply affect the rest of us. Plus, the pictures are great. The January 2011 issue celebrates the approach of the world's population to 7 billion, and the implications therein.
Long time readers of this letter know that demographic issues will be one of the most important drivers of all asset prices for the rest of our lives (click here). The magazine expects that population will reach 9 billion by 2045, the earliest date that I have seen so far. Can the planet take the strain? Early religious leaders often cast Armageddon and Revelations in terms of an exploding population exhausting all resources, leaving the living to envy the dead. They may not be far wrong.
A number of developments have postponed the final day of reckoning, including the development of antibiotics, the green revolution, DDT, and birth control pills. Since 1952, life expectancy in India has expanded from 38 years to 64. In China, it has ratcheted up from 41 years to 73. These miracles of modern science explain how our population has soared from 3 billion in a mere 40 years.
The education of the masses may be our only salvation. Leave a married woman at home, and she has eight kids, as our great grandparents did, half of which lived. Educate her, and she goes out and gets a job to raise her family's standard of living, limiting her child bearing to one or two. This is known as the 'demographic transition.' While it occurred over four generations in the developed world, it is happening today in a single generation in much of Asia and Latin America. As a result, fertility around the world is crashing. The US is hovering at just below the replacement rate of 2.1 children per family, thanks to immigration. But China has plummeted to 1.5, Europe is at 1.4, and South Korea has plunged as low as 1.15.
Population pressures are expected to lead to increasing civil strife and resource wars. Some attribute the genocide in Rwanda in 1999, which killed 800,000, as the bloody result of overpopulation. If you want to get a first class foundation in the demographic issue along with a lot of cool graphics and charts, read the story in full by clicking here. I'll be the one to tell you which stocks to buy to capitalize on these trends.
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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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'All of the irrational behavior has been squeezed out of the auto industry. Now, it's all about profitability,' said Mike Jackson, CEO of Autonation, the largest US car retailer.
Featured Trades: (LAS VEGAS STRATEGY LUNCH REVIEW)
1) Las Vegas Strategy Luncheon Review. It has been a full life. What else could I conclude, finding myself in a luxury suite at the Las Vegas Wynn Hotel with two dozen drunken twenty something's playing 'beer pong' at 2:00 am? It is amazing what some people can do with a ping pong ball.
If there was ever a city that needed a jolt of adrenaline for its economy like the annual Consumer Electronics Show, it is Sin City. Some 130,000 free spending techno geeks made sure that the casinos were packed, every top rate restaurant was sold out, and there was an hour wait to buy jet fuel for private aircraft at the airport. I overheard one lovely woman calling friends on the east coast urging them to fly out asap, as there 'were men everywhere!' I was so busy visiting with investors and subscribers that I didn't even have time to take advantage of a free invitation to the adult entertainment convention down the street to meet the porn stars. Now that is busy!
Every time I visit Las Vegas I feel like I'm an extra in the filming of the sequel of The Bachelor. While having breakfast, I couldn't help but notice a young man, nicely dressed in a suit and a tie, passed out in a rubber dingy floating in the middle of the swimming pool. Buddies were calling to him to paddle shoreward, eliciting only dull groans. A friend walked into the ladies room to find one hottie dressed to kill, but passed out on the floor, while a companion snorted cocaine. And why are they burning so much incense in a no smoking hotel?
On every trip here I always make my rounds speaking to blackjack dealers, waiters, cocktail hostesses, real estate agents, pit bosses, showgirls, and masseuses to get a grass roots read on the real economy. You can see from the pain in their eyes that these people have been through a financial meat grinder. I won't call it a 'thousand yard stare', but it is something close. The City Center and the Bellagio completed high rise condo towers, which are now mothballed. The Venetian Hotel is blighted with the skeletal remains of a new tower whose funding was pulled somewhere around the eighth floor. A clueless investor group sunk at least $3 billion into the massive and nearly completed a 3,339 room, 68 story Fontainebleau Resort, which now sits abandoned. Raider Carl Icahn bought the project for pennies at a fire sale, and is currently stripping it of assets. Instead of laying off 25% of his staff, Steve Wynn wisely cut everyone's shift from eight hours down to six to keep them all eating. One heard stories of desperate friends moving out of foreclosed homes at midnight to avoid the judgmental stares and shame from their neighbors.
The strategy lunch was held amidst a fleet of new Lamborghini's at the Dal Toro restaurant, with the meticulous service enjoyed by all. I never cease to be impressed with the sophistication of the readers who attend these functions. Almost all by now have upgraded to the 'Macro Millionaire' service, and as a result were rolling in new trading profits. Most sank their teeth into the (TBT) trade for an appetizer, feasted on Bank of America (BAC) as a main course, and gorged on Cisco System (CSCO) as a desert. There was much discussion on how long the gravy train will last, and the dozen or so factors that could derail it. Linda won the prize for the greatest distance traveled to the event, some 591 miles from Marin County, California. Spend you Zimbabwean dollars well.
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Lunch With the Lamborghini's
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