Featured Trades: (TURKEY), (TUR), (TKC), (TURKISH LIRA)
iShares MSCI Turkey Investable Market Index Fund ETF

 

1) Turkey Is On The Menu. The boarding of a Turkish ship by Israeli commandos and the international brouhaha that it sparked has thrown a searing spotlight on that emerging nation. Several hedge fund friends and now a few readers of this newsletter in Istanbul have urged me to explore this intriguing nation further. So I thought I would use this otherwise slow news day to do exactly that.

I first trod the magnificent hand woven carpets of the Aga Sophia in the late sixties while on my way to visit the rubble of Troy and what remained of the trenches at Gallipoli, a bloody WWI battlefield. Remember the cult film, Midnight Express? If it weren't for the nonstop traffic jam of vintage fifties Chevy's on the one main road along the Bosporus, I might as well have stepped into the Arabian Nights. They were still using the sewer system built by the Romans.

Four decades later, and I find Turkey among a handful of emerging nations on the cusp of joining the economic big league. Q1 GDP grew at a blazing 11.4% annualized rate, second only to China, exports are on a tear, and the cost of credit default swaps for its debt is plunging. Prime Minister Erdogan, whose AKP party took control in 2002, implemented a series of painful economic reform measures and banking controls which have proven hugely successful. Since the beginning of this year, Turkey's ETF (TUR) has outperformed BRIC poster boy China's ETF (FXI) by a whopping 11.8%.

Foreign multinationals like general Electric, Ford, and Vodafone, have poured into the country, attracted by a decent low waged work force and a rapidly rising middle class. The Turkish Lira has long been a hedge fund favorite, attracted by high interest rates. With 72 million, the country ranks 18^th in terms of population and 17^th in terms of GDP, some $615 billion. It has a near perfect population pyramid; with young consumers greatly outnumbering expensive retirees (click here for more depth in my 'Special Demographic Issue').

Still, Turkey is not without its problems. It does battle with Kurdish separatists in the east, and has suffered its share of horrific terrorist attacks. Inflation at 8% is a worry. The play here long has been to buy ahead of membership in the European Community, which it has been denied for four decades. Suddenly, that outsider status has morphed from a problem to an advantage.

Growing economic power brings political influence with it. The last year has seen Turkey broker settlements in the Balkans and facilitate the Iranian uranium swap with Russia. Some analysts claim this new flexing of diplomatic muscle has a pronounced Islamic, anti American bent. Remember, Turkey refused transit rights to US forces during the invasion of Iraq.

The way to play here is with an ETF heavily weighted in banks and telecommunications companies, classic emerging market growth industries (TUR). You also always want to own the local cell phone company in countries like this, which in Turkey is Turkcell (TKC). Turkey is not a riskless trade, but is well worth keeping on your radar.

US Dollar/Turkish Lira Inverse Chart

A Turkish Population Pyramid to Die For

Featured Trades: (THE NEXT 100 YEARS)

3) What Will the World Look Like in 100 Years? George Friedman, geopolitical forecaster and founder of the Austin, Texas based private intelligence firm, Strategic Forecasting (Stratfor) (click here for the link at https://www.stratfor.com/ ), delivers a fascinating list of future political, military, and economic scenarios in his new book, The Next 100 years: A Forecast for the 21^st Century.

Friedman claims the current Islamic assault on the West is failing, and will cease to be a factor on the international scene within the decade. Russia will take another run at becoming a superpower, which will fail by 2020, and leave the country even more diminished than it is today. When standards of living in China level off or reverse in the 2020's, chronic resource shortages could cause the Middle Kingdom to implode and break up. China is far more fragile than we realize.

Japan may deal with stagnant economic and population growth the same way it did during the 1930's by invading China as early as 2030. Japan may also take a bite out of indefensible Siberia when it remilitarizes. Poland (click here for 'Where to Play the Dead Cat Bounce in Europe'), a unified Korea (click here for 'The Economic Miracle that is South Korea') , and Turkey (see above) will develop into regional military and economic powers in their own right.

Friedman then describes a theoretical war by a coalition of Turkey and Japan against the US in 2050, resulting in an American victory, which leads to a new US golden age in the second half of the century. Scramjet engines make possible the development of unmanned hypersonic aircraft which can launch a precision attack any place on the planet in 30 minutes. Warfare will move into space and be fought from 'battle stars,' which will also become major energy sources for earth. Friedman kind of lost me when he predicted that the next Pearl Harbor could come from Japan, but not from the sea going aircraft carriers of old, but from caves on the moon.

The big challenge towards the end of the 21^st century will be the emergence of a Hispanic nation in the Southwest, which is culturally isolating itself by not integrating with the rest of the country. This could lead to the secession of several states, or a new war with Mexico, which by then, will develop into a major power in its own right. I think to avoid a second Civil War and offload some huge state deficits, Washington just might say '?Adios!'

You can argue that someone making many of these predictions is looney. But if you had anticipated in 1970 that China would become America's largest trading partner, the Soviet Union would collapse, Eastern Europe would join NATO, the US would enter a second Vietnam War in Afghanistan, and oil would hit $150 a barrel, you would have been considered equally nutty. I know because I was one of those people. It does seem that long term forecasters have terrible track records.

All in all, the book is a great armchair exercise in global realpolitics, and an entertaining contemplation of the impossible. More than once, I heard myself thinking 'He's got to be kidding.' To get preferential pricing from Amazon on this thought provoking tome, please click here.

Featured Trades: (POT), (MON)

 

4) More on the Grains. I managed to catch an interview with Charlie Rentschler at New York boutique investment bank, Morgan Joseph, one of the top agricultural analysts in the industry, known as the 'Farmer from Harvard.' He says that investment in the sector is a frustrating and unpredictable mix of bugs, weeds, and weather, tossed in with capricious government policy and volatile commodity prices. The industry is enjoying enormous productivity increases, thanks to new genetic seed varieties, narrowing rows for planting which accept more corn seeds in the ground,? automatic GPS steered tractors, and farms requiring less tillage, enabling more acres to be planted. Ethanol now accounts for a staggering 10% of the arable land in the US and one third of the corn crop, and is having a huge upward push on prices. It has ratcheted corn up from the $2 to $4/bushel range, and soybeans from $4 to $10/bushel. His first pick is Saskatchewan fertilizer producer Potash (POT), which is benefiting greatly from rising prices and soaring demand from China, followed by Monsanto (MON), which I, myself, have been pushing for a year. After a period of weakness triggered by the government's January crop report predicting huge increases in corn plantings this year, which is cutting the knees from under prices, I expect to see a long term bull market in food prices. Wait for the markets to price in another perfect year, buy, and then wait for the weather to turn bad, as it invariably does.

Featured Trades: (AMZN), (KINDLE)

 

1)? Amazon Conquers All With the Kindle. I knew Jeff Bezos back in the eighties as this always cheerful quant in Morgan Stanley's bond department who had this incredibly annoying laugh.? He blew us all away when he took off on his own, used innovative technology to discover the immense profits to be found in long tale markets, and built Amazon (AMZN) into the world's largest book seller, practically overnight. Now I learn that the alpha male of internet distribution is selling more Kindle books than old fashioned hard copies, at a ratio of 1.8 to one. I expected this, but not for another five years. Once again, the rate of technological progress has caught me flat footed. This development is the result of a brilliant strategic move by Bezos to slash prices of his Kindle eReader from $259 to $189, thus, under-pricing Steve Jobs' cheapest competing IPad by a stunning 62% (click here for Apple's Next Stop: $1,000). Kindle books are vastly cheaper than hard copies that range from $20-$40, carry no shipping cost, and are delivered instantly. Some 81% of Amazon's Kindle book offerings cost less than $9.99, and 1.8 million pre 1923 published books are free.? Kindle books are even price competitive with paperbacks. Some analysts believe that the 3 million new IPad owners are buying more ebooks from Amazon than Apple, whose offerings are pricier. I will miss the musty smell of an old, hand tooled, leather bound tome almost as much as my wooden slide rule, six track tapes, and manual adding machines. In order to get the new price for a Kindle at Amazon, please click here.

Featured Trades:? (US ECONOMY), (BAC), (C), (MS),
(ANTI BUSINESS OBAMA)

3) The Hard Numbers About Obama's Anti Business Campaign. I'm a numbers guy, OK? Give me a set of hard data, and I'm happy to draw my own conclusion. Save the argument, the persuasion, and the spin for someone else. You may have heard from the media lately that President Obama hates business, is anti business, and is derailing the economic recovery with his anti business policies. So I set out on a hunt for the hard numbers to support these assertions, and found the chart below of S&P 500 earnings going back to 1935. When the diligent former junior Senator from Illinois took office in January, 2009, inflation adjusted earnings, at $7/share, were the lowest in 75 years. They have since rebounded 857% to $60 a share, and most analysts are pegging $75 a share for 2011, close to an all time high. This has been the most rapid recovery of corporate earnings in the history of the country. So, I thought, this can't be right. What about Obama's relentless attacks on greedy banksters and Wall Street fat cats? So I hurried to www.stockcharts.com to see how these pariah institutions have fared. Since inauguration day, Bank of America's (BAC) stock has rocketed by 220%, while my alma mater, Morgan Stanley, is up a healthy 32%. I thought the financial reform bill was supposed to drive these people out of business. What about GDP? It must be terrible. But when I check the data it showed that the economy has grown during the last 18 months, and that GDP is actually at an historic peak. No matter how hard I searched, the only data I could find showed that business has prospered mightily under Obama, with many, like Citigroup (C), up 102%, rescued from the edge of bankruptcy. Then I had my Eureka moment. There has been so much talk about jobs lately that maybe the Department of Labor would help. Aha! Sure enough, the unemployment rate has plunged, and I mean absolutely crashed, from 7.8% to 9.5% (click here for the link at http://www.bls.gov/ ) . That explains why jobs have emerged as the central issue in this year's congressional races, how Sarah Palin has suddenly become a labor economist, and how Fox News has morphed into the 'Where Are the Damn Jobs' channel. Wait a minute! Didn't the Bush administration create only 1 million jobs in eight years, compared to 23 million by President Clinton? Wait a minute! This must be some sort of statistical anomaly. What about the talking heads on TV? Isn't employment supposed to be a deep lagging indicator? I'm confused. Help me out here, guys. I think I'll go back to looking at my numbers.