'The commodities are overdone here. But if we get a break next year, I would think that is a great buying opportunity,' said Jeremy Grantham, the legendary founder of money manager Grantham, Mayo, Von Otterloo.
SPECIAL FOREIGN EXCHANGE DOUBLE ISSUE
2011 FORECASTS
Featured Trades: (FXE), (EUO)
Currency Shares Euro Trust ETF
ProShares Ultra Short Euro ETF
2) Has The Euro Turned? The call that a turn in the dollar was imminent by Brown Brothers Harriman's Mark Chandler is looking more prescient by the day (click here for the call). September and October was all about pricing in Ben Bernanke's quantitative easing, and that is looking pretty much done. The next play in this soap opera will see 'uncertainty' emigrate from the US to Europe, sending the dollar off to the races and the Euro in for rehab. Lindsay Lohan, eat your heart out.
A reemergence of the 'PIIGS' disease, concerns about the deteriorating quality of the lesser sovereign credits in Europe, is now unfolding as the triggering event. US interest rates rising at the long end are adding fuel to the fire, shifting interest rate differentials overwhelmingly in Uncle Buck's favor. It also helps that 95% of traders are bearish on the dollar, the surest indicator you'll ever see that it is about to go the other way. To quote hockey great, Wayne Gretzky, 'You don't want to aim where the puck is, but where it's going to be.' While America's trade deficit remains massive, that shortfall is being overwhelmed by enormous amounts of foreign capital pouring into our stock and bond markets, on which Ben has painted a giant bullseye.
It all adds up to the $1.4250 print we saw on the Euro two weeks ago marking the high. Rallies from here in the European currency are to be sold. Players new to the space can achieve this through buying the (EUO) ETF, a leveraged 200% short bet against the Euro. Looking at the charts and the momentum, we could see a plunge below $1.33 by year end. Analysts are targeting $1.17 sometime next year, which would out the EUO at $24, a tidy 24% potential return. Overshoot could take us as low as $1.10, taking the EUO to $26 and a gain of 37%. Don't go on this date without protection, so keep a stop at $1.42.
The Fat Lady is Singing for the Euro
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Follow Wayne Gretzky's Advice on Where to Aim
SPECIAL FOREIGN EXCHANGE DOUBLE ISSUE
2011 FORECASTS
Featured Trades: (FXA)
Currency Shares Australian Dollar Trust ETF
3) Why I'm Singing 'Waltzing Mathilda' in the Shower. If you want to participate in the global carry trade in its purest form, take a look at the Australian dollar. The central bank has been the first and fastest to raise interest rates because of rocketing commodity prices and booming business with China.
They call Australia 'The Lucky Country' for a reason. It has that perfect combination of huge resource and energy exports, a strong economy, rising interest rates, a small population to support, and great looking women.
For a start, you get a nice yield pickup of an annualized 4.75% by strapping on this trade, which is the interest paid on overnight Australian dollar deposits. Leverage up five times as many forex traders do, and that balloons to 23.75%. That's what you make on the spread if this currency goes nowhere. If more investors pile into this trade after you, or if the yield spread widens, then you can count on a substantial capital gain on top of this. Now you know how so many traders earn their bread and butter. If you want to know how the big boys are coining it, this is the way.
There is only one thing wrong with this trade. It has been running for two years now appreciating an eye popping 75% against Uncle Buck, from 58 cents all the way up to 102.50. That gives it something of a 'last year's trade' flavor. There are hundreds of billions of dollars ahead of you from the big hedge funds, so there is a risk you could get shaken out if you get involved here, especially if you use leverage. So I would only start to scale in after a 10%-20% pull back, which we may see sometime in 2011, especially if my strong US dollar scenario pans out. So for now, just keep a pin up of the Aussie on your locker room wall.
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My Favorite Australian
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Another Favorite Australian
SPECIAL FOREIGN EXCHANGE DOUBLE ISSUE
2011 FORECASTS
Featured Trades: (FXC)
Currency Shares Canadian Dollar Trust ETF
4) The Loonie Takes Flight. Many of the same arguments that make the Aussie so attractive on a long term basis also apply to the Canadian dollar, which forex traders affectionately call the 'loonie'.
The Bank of Canada has been consistently raising interest rates, the first G-7 country to do so, making it one of the highest yielding currencies out there. Overnight loonie rates are now at an attractive 1%, which beats the daylights out of the 0% you get now with US dollars. The central bank has had to cool off a white hot real estate market, and an economy that has been growing nicely. No double dip up here.
I have been a fan of the Canadian dollar for some time now (click here for the call), expecting that parity was just a matter of time. Canada is a huge commodity exporter, the largest foreign supplier of oil to the US (bet you thought it was OPEC), with a small, hard working, English speaking (well, almost) population. They also do banking the old fashioned way up North, with the government requiring 20% reserves that limits leverage to 5:1, versus the 100:1 seen at the peak with some of our banks. That means they missed the financial crisis, and the soul searching, angst ridden self examination and re-regulation that followed in the US.
There will be more to come, with at least another decade of commodity bull markets to follow, the source of the country's lifeblood. Expect more rate rises, and a strong Canadian currency to follow. However, the loonie shares the same problem with the Aussie in that it is not a new trade. So better to confine it to your watch list for now, and not play until we see a decent 5%-10% dip. Until then, here is a gratuitous picture of my favorite Canadian, Pamela Anderson to study. It's the only one I could find where she has clothes on. And no, I don't know how to sing 'I'm a Lumberjack, and I'm OK.'
My Favorite Canadian
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Another Favorite Canadian
Featured Trades: (TREMORS IN THE MARKET)
1) Tremors in the Market. Yes! There is risk in the market! That was the hard lesson learned by latecomers to Ben Bernanke's quantitative easing party who, having watched the prices of all assets climb relentlessly for the last 2? months, jumped in at the end and got burned. Perhaps they didn't want to be the last one in the locker room at the country club to profess their admiration for everything hard this year.
Let's start with a forensic examination of the wreckage. There were gut wrenching plunges in everything that had raced up the most, including precious metals, copper, sugar, coal, the commodity currencies, and technology stocks. The markets with weaker fundamentals that hadn't moved much, like the broader US stock indexes, managed only a whimper instead of a bang.
There were more possible triggers than found in an Agatha Christie murder mystery. My favorite is the weakness of the Euro, which I have been predicting is the new canary in the coal mine for global risk taking (click here for the piece). Another smoking gun is the hike in Chinese interest rates, which calls into question their economic miracle that is enriching everyone. Also suspicious is a computer glitch at the Federal Reserve that scared traders into thinking that the central bank's first bond purchases for QE2 had been a complete failure.
Suffice it to say that the trading short term books had piled risk higher than Mount Everest, and also had a hair trigger to bail at the first sign of trouble. Could it be as simple as buy the rumor and sell the news?
You can use days like Friday as a great crystal ball for the future. This is what the shadowy spirits are communing to us. That it is a binary '?RISK ON', '?RISK OFF WORLD'. When things go bad, there is no place to hide but cash. The CFTC raised silver margin requirements, and corn and sugar get trashed? Even flight to safety, Treasury bonds were unloaded in size. Everything went up the most went down the most, regardless of fundamentals. And that we are dealing with a substantially higher level of risk than only a couple of months ago.
Living in California, one gets used to monthly earthquakes that rattle the dishes, rock the water in the swimming pool, and scare small children, but little more, so we ignore them. However, we all know that 'The Big One' that will flatten the city is coming someday. I think the current pull back is only a minor tremor. But the 'Big One' for the markets is coming, and could unfold as early as the next quarter. Please tighten up your stops and your risk control accordingly.
What is the Market Trying to Tell Us?
Not the 'Big One'
Featured Trades: (TOYOTA), (TM)
2) Taking Toyota Out for a Spin. After silver's meteoric rise last week to nearly $30, I decided to take some profits and launch my own personal stimulus program. So I cashed in a chunk of my position, shoveled $50,000 in cash into a backpack, and sent a friend off to buy a new car. As the price of the white metal soared past $27, $28, and $29, I kept calling her on her cell phone, and kept directing her to increasingly more expensive dealers. First, it was Hyundai, and then Ford. My confused friend finally ended up at Toyota, where she picked a new Highlander Limited Hybrid, a seven passenger, 280 hp V-6, four wheel drive SUV that gets 28 miles per gallon. It also talks to you.
I had more than transportation on my mind when I sent her on the errand. Nearly 40 years ago, when I was starving in Japan while waiting for the financial journalism thing to start paying off, I took a weekend job in Hakone to teach managers at Toyota Motors (TM) how to speak English. Their Plan was to learn our impossible language and then start aggressively marketing their low priced cars in the US.
As we approached the hotel, I saw a dozen men lined up out front wearing cheap polyester suits, starched white shirts, and conservative ties. Each one took turns picking up a baseball bat and beating the daylights out of a severely shredded dummy on the ground before them, screaming a maniacal samurai scream. I asked my driver what the hell was going on. He deadpanned: 'They're beating the competition.'
This was back when Toyota made laughably tiny cars that looked like a giant ostrich eggs on wheels and had to get a running start to get up a freeway onramp. By 2006, the company had seized 18% of the US car market, and GM and Chrysler were wearing toe tags. I guess I taught them well enough.
Today Toyota, the world's largest car maker, has been slammed by the perfect storm that has taken its share down a gut churning 25% from its 2010 peak. They took eight years to find a defect in an American made accelerator component that caused thousands of accidents, and dozens of deaths, forcing a worldwide recall of 10 million vehicles. Toyota is one of the worst performing stocks in the market this year.
To me, this all adds up to a great screaming? 'BUY.' You can start with the recall, the largest in history, covering eight models, which promises to be speedy, lavish and generous. It prompted a production shut down, an unprecedented measure in auto history. The company is going all out to reinforce customer loyalty. Toyota still makes great cars. And let's face it, many people would rather die than drive an American car, the Mad Hedge Fund Trader included.
It's usually a great idea to buy when there is blood in the streets, and in the auto industry it doesn't get any worse than this. Toyota has become the BP of the auto industry. I know the Toyoda family well, and they have assured me that they are pulling out all the stops to restore their brand, as well as their own name. When heads roll in Japan, they really do.
There are a few additional angles here. Since the company is Japan's largest exporter, it would benefit greatly from any weakness in the yen, which I consider as the world's most overpriced currency. Think of the stock as a long dated yen put. Look at the charts for Ford, US cars sales, and the palladium used for catalytic converters, and it is obvious that the world is seeing a surge in global car sales.
I know the philosophy, and the strengths of this company intimately, and they will come roaring back. Let the ruckus over the recall burn out, and add Toyota to your 'buy on dips' list. Keep in mind that this is not a day trade, but something to bury in your portfolio and then lose behind the radiator. It will also not be immune from the calamities that strike the stock market.
Meet My New Wheels
Featured Trades: (NUCLEAR POWER), (NLR), (CCJ)
3) Nuclear Energy Makes a Comeback. Better drag your leisure suits, bell bottoms, and Bee Gee's records out the attic. The seventies are about to enjoy a rebirth.
The nuclear industry, which has been comatose since the accident at Three Mile Island in 1979, is gearing up for one of the greatest comebacks of all time. There is absolutely no way we can deal with our impending energy crunch without a huge expansion of our nuclear capacity, which sits at a lowly 20% of our total power generation. France has already achieved 85%, followed by Sweden at 60% and Belgium at 54%, and the last time I checked, none of these Europeans were glowing in the dark. The BP disaster only brings the day of reckoning closer.
Unless you're an underpaid nuclear engineer toiling away in total obscurity at some university, you are probably unaware how far the technology has moved ahead in the last 30 years. Generations I and II produced the aging 'joint use' behemoths we now see on coasts and rivers, which generated both electricity and fuel for atomic weapons, but could potentially melt down if someone forgot to flip a switch. Think Chernobyl. Generation III has spent decades trapped on the drawing board.
There are over 100 Generation IV designs, and many are certain to get built. The most popular is known as a 'pebble reactor,' which relies on a new form of fuel embedded in graphite tennis balls cooled with helium that is just hot enough to generate electricity, but too weak to allow a disaster. Also known as a Very High Temperature Reactor (VHTR), these plants enable a 50% increase in thermal efficiencies. The built-in safety of the design let's you eliminate many redundant backup systems, cutting costs. No surprise that the only operating prototype is in China. Low grade waste can be stored on site, not shipped to Nevada or France. Other feasible designs include using thorium fuels, fast neutron reactors, and liquid lead, sodium, or salt cooling variants. Plants are also about to get a lot smaller too.
Speeding the resurrection of this once dead industry is some cheerleading from none other than the same demonizing, apocalyptic environmentalists that shut the industry down thirty years ago (remember Jane Fonda in The China Syndrome?) That is helping shorten the permitting process from 15 years to four by confining new construction to existing facilities instead of green fields.
Nuclear power generates no carbon dioxide, an important consideration if we're all about to suffocate on the stuff. Each new nuclear plant will take one or two of our 400 coal fired plants offline. Do you think they noticed that there has not been one nuclear death in the US since the sixties, while tens of thousands died globally in coal mining disasters or from the black lung that follows?? And I'm not even counting millions of respiratory illnesses brought on by ubiquitous air pollution. That's why at least 30 new reactors are expected to start construction in the US over the next five years, and over 100 in China.
I stampeded readers into the great equity plays in this sector a year ago, which have done spectacularly well since (click here for the call). The Market Vectors Nuclear Energy ETF (NLR) is the easiest way in, and has popped by 29%.
This ETF's largest component and the world's largest uranium producer, Cameco (CCJ) (click here for their website) was sucked into the commodities and hard asset boom, and rocketed by an eye popping 42%. As with all of my other commodity recommendations, don't chase here, but wait for the inevitable 20%-30% pull back that will come in 2011. So for now, just put this on your 'watch list'.
And while you're at it, you might start practicing those moves for your 'hustle' once again.
Three Mile Island
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Better Start Practicing Your 'Hustle'
Featured Trades: (HAS THE EURO TURNED?), (FXE), (EUO)
ProShares Ultra Short Euro ETF
Currency Shares Euro Trust
3) Has The Euro Turned? The call that a turn in the dollar was imminent by Brown Brothers Harriman's Mark Chandler is looking more prescient by the day (click here for the call). September and October was all about pricing in Ben Bernanke's quantitative easing, and that is looking pretty much done. The next play in this kabuki drama will see 'uncertainty' emigrate from the US to Europe, sending the dollar off to the races and the Euro in for rehab. Lindsay Lohan, eat your heart out.
A reemergence of the 'PIIGS' disease, concerns about the deteriorating quality of the lesser sovereign credits in Europe, is now unfolding as the triggering event. US interest rates rising at the long end are adding fuel to the fire, shifting interest rate differentials overwhelmingly in Uncle Buck's favor. It also helps that 95% of traders are bearish on the dollar, the surest indicator you'll ever see that it is about to go the other way. While America's trade deficit remains massive, that shortfall is being overwhelmed by enormous amounts of foreign capital pouring into our stock and bond markets, on which Ben has painted a giant bullseye.
It all adds up to the $1.4250 print we saw on the Euro last week marking the high. Rallies from here in the European currency are to be sold. Players new to the space can achieve this through buying the (EUO) ETF, a leveraged 200% short bet against the Euro. Looking at the charts and the momentum, we could see a plunge below $1.33 by year end.
The Euro is Moving into Rehab With Lindsay Lohan
So They Do Love Me After All?
Featured Trades: (CISCO), (CSCO)
4) The Cisco Shock. When a great company announces a surprise, temporary setback that sends the stock plunging, I am drawn like a starving great white shark to fresh blood in the water. All it took was a matching of earnings expectations for this great technology firm to crater 13% in minutes, triggering stop losses, the gnashing of teeth, and the rending of great swatches of hair. This is not a commentary on Cisco itself, but of the fragile, over extended nature of the markets at this lofty altitude.
Of course, the big surprise came from a sudden drop off in sales to state and local governments, who are big users of video conferencing products. Somehow, it escaped notice in the recent midterm election that spending cuts always lead to falling sales and swinging great job losses. This is what it really looks like up close and ugly. I have been warning readers about this all year, but it seems I have few readers in Washington, and those that do mostly use the hard copies to line the bottoms of their bird cages. The other disappointment came from the cable industry, which is cutting back capital investment while its lunch is being relentlessly eaten by the Internet.
At $20.52 a share, Cisco offers a PE multiple of 10 times, versus a market average of 15, the prospect of a dividend next year, and at 12%-17%, one of the most consistent long term growth outlooks of anyone. Did I mention that they get a majority of their sales from overseas, where growth rates are posting white hot double digit rates? Buy this baby on dips to catch a Q1, 2011 rebound. Despite the sorry state of the US economy, demand from the Internet for Cisco's high end routers from data centers continues to grow at blistering rates.
Got Any Cisco For Sale?
Featured Trades: (KARL DENNINGER ON HEDGE FUND RADIO),
(ONLY BUY COMPANIES YOU HATE),
(SPX), (INDU), (BAC), (C ), (JPM), (WFC),
(AAPL), (GOOG), (QQQQ),
(BP), (GS), (C), (PFE), (MO)
1) Karl Denninger of Market Ticker on Hedge Fund Radio.
Karl Denninger of Market Ticker thinks there is a secondary banking crisis around the corner that will trigger a cascading collapse in the stock market, and another government bailout. TARP 3 anyone? We could reach 3,000 in the Dow and 300 in the S&P 500.
This is one of many controversial and incendiary opinions about the state of the global financial markets Karl voiced to me in a wide ranging interview on Hedge Fund Radio. Karl says the idea that we are going back to an S&P 500 of $105-$110 in the face of the soaring cost input factors is totally laughable.
Bernanke is making the same mistake we saw in 1933. The nightmare scenario for him is a coincident dollar and stock market selloff. The risk of hyperinflation will force him to back off on easy money. If the market goes up by 30% and the dollar devalues by 30%, then you haven't made any money. When cost push pressures show up, corporate earnings are going to disappear. Companies like Kimberly Clark are reporting the largest raw material cost increases in history. Even Apple is seeing cost push problems.
'Foreclosure Gate' will be much worse than expected. There is upwards of $200 billion worth of exposure just on the 'put back side'. The large banks also have second line exposure on their own balance sheets that is at least as big, if not bigger. In dollar terms, interest income has been good, but their spreads have been collapsing.
Banks problems may become impossible to hide in 3-6 months. They are passing around the losses trying to hide the truth. Banks made their earnings in the recent quarter by taking down reserves. Not providing for these risks is absolute fancy.
The 900 pound gorilla in the room is the second line problem, which is mostly concentrated in the top banks, including (BAC), (C ), (JPM), (WFC). Industry wide, only $1 trillion of $3.5 trillion in real estate losses has been realized, and at some point, someone is going to have to swallow. Wells Fargo is the most leveraged, could be the first to go, with $1 trillion in off balance sheet exposure, including all of the garbage they took in from Wachovia.
Are you wondering why financials have done so poorly this year? Investors are still laboring under the false premise that these firms are too big to fail and that the government won't let anything bad happen to them. It is assumed that in the worst case, they will see flat earnings and no EPS growth for the next couple of years. Karl thinks that is incredibly na??ve. The big pension funds that own most of these stocks are going to get hosed.
The majority of money has been made in the bond market. Karl hates to buy near a top.
Commodities are starting to look scary. The 'softs' have delivered parabolic moves which never end well. Oil breaking through $100 could be the triggering event for the corporate margins crash which takes the stock market down. Break $87 and it's off to the races. This will cause tremendous damage to the economy.?? Then bring in the 'RISK OFF' trade, because everything will go down, starting sometime in 2011.
Until then, you can day trade, play in the futures market, and make plenty of money. Just keep everything on a tight leash. Stay away from positions that are hard to get out of. Dollar strength could be the key triggering event. Europe could also be another. And then there are potential black swan events, like state attorney generals halting the foreclosure process.
Karl believes the technology sector is very over extended. Apple (AAPL) is now 20% of PowerShares QQQ Trust (QQQQ). Apple's success is attracting competition. Google Android sales have suddenly rocketed, a tectonic ship for the market. LG and Samsung are more attractive than Google (GOOG) or Apple, because they supply the processors and screens. Intel at $20 doesn't look bad, especially if it breaks the 200 day moving average to the upside. In so many areas in the tech world, he loves the companies but hates the prices.
Karl Denninger is the publisher of the daily blog, Market Ticker. He was the CEO and one of the founders of MCSNet, a Chicago area Internet and networking company which he sold in 1998. Since then, Karl has been a successful independent trader. In 2007, he started posting Market Ticker, a highly entertaining and prescient, if not irreverent daily blog. He also created TicketForum, an online trading forum. In 2008, Karl received the Reed Irvine Accuracy In Media Award for Grassroots Journalism for his coverage of the market meltdown. To learn more about Karl Denninger, you can visit his website at http://market-ticker.org/ . To listen to my lively interview with Karl on Hedge Fund Radio in full, please click here.
Does Anyone See 300 Here?
Does This Look Overextended to You?