'Hedge funds started out delivering equity type returns with bond type volatility. They now generate bond type returns with equity like volatility,' said my former Morgan Stanley colleague, Byron Wein, now co-chairman at Blackstone Advisory Services.
Featured Trades: (FXE), (IRELAND)
Currency Shares Euro Trust
1) Ireland Points the Way for the Euro. When you bend over backwards to kiss the magical stone at Ireland's Blarney castle, you can't help but notice a sign assuring you that your won't catch AIDS in your effort to obtain the gift of persuasion. However, the ancient stone is completely covered with lipstick. Investors in Ireland national debt certainly must feel like they contracted the dreaded disease this morning after rating agency Moody's announced a downgrade of the country's debt from Aa2 to Aa1. Ireland saw a real estate boom even more frenzied than our own, at the eventual price of $32 billion in bank bail outs. That has driven the country's debt/GDP ratio from 25% to 64%, and Moody's thinks it will eventually get to 100%. The bigger question is what all of this means for the Euro (FXE), which has spent that last two months getting talked down from a suicide leap (click here for my piece). Suddenly, the European currency has gone from being the leper with the least fingers to the most, thanks to the sudden economic slow down in the US. Credit default spreads for the PIIGS have been narrowing, traders are willing to give the European Central Bank's rescue package some grace, triggering a speedy unwind of one of the largest short positions in history. The European bank stress tests are expected to deliver the same arbitrary seal of approval that the American ones did. Hedge fund managers are choosing to take extended vacations at the Hamptons, Cannes, and Newport Beach than re-establish their Euro shorts. All of this means that the Euro could remain muscular through the summer. We'll get the first hint tomorrow when the troubled Irish tap the market for ?1-1.5 billion in new debt, and we find out how powerful that Blarney Stone really is.
Featured Trades: S&P Composite Real (Inflation-Adjusted) Total Returns
2) How we are Ten Years Into the Bear Market. As part of my never ending quest for truth, accuracy, and insight into the future direction of stock prices, I thought I'd pass on this chart from my friends at Business Insider showing that things are much worse than you think they are. It compares the current stock market performance with that seen after the 1929 crash, and makes the assumption that stocks peaked not in 2008, but in 2000. That means we are ten years into a bear market, not three. While our market is down during this period by 34% on an inflation adjusted basis, the previous Dark Age for stocks was down only 16% at this stage of the cycle. What's more, if you look at the second chart of Robert Shiller's cyclically adjusted PE multiples for the last 130 years, stocks are still over valued by 20%. The chilling conclusion here is that shares may have another decade of downside left, and the fair value for the S&P 500 is around 850. A momentum driven sell off, or another flash crash could easily take us lower. It is all just another excuse for me to avoid equities generally and to direct my advances towards commodities, currencies, precious metals, and emerging market stocks and bonds.
Featured Trades: (GS)
3) Way to Go, Goldman! I am somewhat annoyed with the SEC's settlement with Goldman Sachs (GS) last week, as I was within a hair's breadth of putting out a buy recommendation. The stock hit a low of $130, but being the tightwad that I am, was holding out for $125. The deal was clearly a win-win for both sides, the announcement causing the stock to pop an instant 15%.? The Obama administration can now rightly claim that they have punished the evil banksters, extracting $550 million, the largest settlement in history. The cost to GS came in at only 1% of the high end estimate that analysts were looking at, and they are now free to rape and pillage as they wish. Best of all, they ring fenced their civil liability, shattering the wistful dreams of countless class action attorneys. 'Kill all the lawyers', as Shakespeare wrote in King Henry VI! Who can argue with that? The 'fabulous' Fabrice Tourre was hung out to dry, which we all knew was going to happen. I still think GS is the preeminent powerhouse of the financial markets, and that their shares will outperform every measure. When the fox is still running the hen house, I'll bet on the fox any day of the week. Keep GS on your 'buy on meltdowns' list.
Featured Trades: (FXI)
iShares FTSE China 25 Index ETF
4) China Can't Boom Forever. Last week, China (FXI) announced that its first half GDP grew at a blistering 11.9% annualized rate, more than triple the growth seen here in the US. And this is how they're doing with central bank tightening in place! How long can this laudable performance last? Not forever, says the country's Development State Research Center of the State Council. The economic research think tank sees the Middle Kingdom on a gentle glide path from the current double digit growth rate down to as low as a 6% average by 2030, as it matures. Of course, I'm sure that reality will come in far choppier than this. I watched Japan do exactly this from the sixties to the present, its own growth rate falling from 10% to 6%, them 5%, 3%, and today's 1%. Suffice to say, make hay while the sun shines, and never stay married to your positions.
'The length and duration of every bear market is in direct proportion to the bull market that preceded it,' said Damon Vickers of hedge fund Nine Points Capital Management.
Featured Trades: (FXI), (WMT), (CMED),
(MR), (PTR), (CHL), (CYB)
iShares FTSE/Xinhua China 25 Index ETF
Wisdom Tree Dreyfus Chinese Yuan ETF
1) Exclusive Interview With Jim Trippon of the China Stock Digest on Hedge Fund Radio. Jim Trippon, of the China Stock Digest, says that investors better start scaling into China now, or risk missing the biggest economic opportunity of our lifetime. Quality growth stocks can be bought for price earnings multiples under 11, and often for 4-5 times, compared to an average 13 multiple for the S&P 500. You are already investing indirectly in the Middle Kingdom whether you realize it or not. Just take a stroll through Wal-Mart (WMT).
Jim has been publishing his widely followed China Stock Digest for six years, running a full time group of analysts out of offices in Shanghai, Hong Kong, and Houston. Financial markets in China are still primitive, with no options or futures, short selling, international accounts, arbitrage, spotty disclosure, and tough currency restrictions. Individuals account for up to 70% of turnover, compared to only 10%-20% in the US, which can lead to higher highs and lower lows in share prices.
Jim overcomes many of these obstacles through buying US GAAP audited, Sarbanes-Oxley compliant, American listed ADR's, or Hong Kong listed 'H' shares. Although these shares correlate highly with the US equity markets, a stock picking strategy focused on undervalued names will outperform over time with reduced volatility. This eliminates the need to reach for returns by taking on inordinate risk. Jim won't touch a company unless he sees a '3-5 bagger' in it.
Recent moves by Chinese authorities to remove restraints from the renminbi, or Yuan (CYB), give investors a potential double play. Rising share prices fueled by the steroids of an appreciating currency can create a 'J' curve effect for profits, much like I saw in Japan during the eighties.
Trippon blithely dismisses claims by naysayers, like Jim Chanos of Kynikos Associates, that a real estate induced crash in China is imminent (click here for my piece). Buyers in the mainland cities are required to put down deposits of 30-40% which they are unlikely to walk away from. This enabled the Mandarins in Beijing to spend their $500 billion reflationary budget last year on infrastructure instead of bank bailouts. If only they'd thought of that in the US! A GDP growth rate of 9% last year compared to an American economy that shrank, also tends to bail out a multitude of sins. If you need more reasons to invest in the Middle Kingdom, please read 'How China's Economy is Already Bigger than the US by clicking here.
Jim posts a model Chinese portfolio on his website for subscribers, and revealed a few of his favorite names. China Mobile (CHL) has a domestic monopoly, with more cell phone customers than the entire US population, and is still clocking impressive growth. Huge swaths of the country are leapfrogging land lines and going straight to mobile. PetroChina (PTR) will make a killing from the upwardly mobile, exponentially growing car market. China Medical Technologies (CMED) and Mindray Medical International (MR) will benefit from the extension of health services into the country's rural hinterlands.
Trippon admits to being an out of the closet scripophilist, and includes in his collection share certificates for the Titanic and the original Standard Oil Trust and bonds from the Revolutionary War. I confessed my own orientation in this direction, and admitted my holdings of shares in the Trans Siberian Railway, bonds for the construction of the Golden Gate Bridge, and a collection of Japanese wartime occupation currency from throughout Asia.
Jim started out his career as a CPA with Price Waterhouse, advising the pension programs of companies like Exxon and Shell Oil. He then struck out on his own to found one of the most widely read investment newsletter families in the US. They include the ETF Profit Report, the Dividend Genius, and the top rated China Stock Digest. Jim has published two books, Stay Rich Forever: Retirement Planning Secrets of Millionaires and How They Can Work for You, and Becoming Your Own China Stock Guru: The Ultimate Investor's Guide to Profiting From China's Economic Boom. To learn more about Jim, you can visit him at his website at http://www.chinastockdigest.com/ .
To listen to my interview with Jim Trippon on Hedge Fund Radio in full, please go to http://madhedgefundradio.com/ and click on the 'PLAY' arrow in the top right corner. Or, you can download it to your iPod.
Featured Trades: (SOYB), (CORN), (WEAT)
Teucrium Agricultural Trust Corn Fund
Teucrium Agricultural Trust Soybean Fund
Teucrium Agricultural Trust Wheat Fund
2) The Grains Are On Fire. I bet I'm the only guy you know whose wedding was filmed by the KGB. My friend, the TASS correspondent, Yuri, shot the entire assembled foreign press at the event at The Foreign Correspondents Club of Japan in the seventies, undoubtedly for their files in Moscow. No wonder they lost the cold war.
We've stayed in touch through the years, through the collapse of the Soviet Union and the many wars, revolutions, booms, and busts that followed. He now advises a Russian hedge fund. What else? He called me the other day to tell me I was right on track with my recommendation to buy the grains (click here for 'Going Back Into the Ags' ), because the heat in Russia and the Ukraine this year was unbearable, and their crop was coming in at 20% below expectations. Yields were plummeting, and this would be good news not only for wheat, but corn and soybeans as well.
The country was once known as the bread basket of Europe, which is why it was invaded by Napoleon in 1812 and the Germans in 1942. They still have a sizeable impact on global prices. I have also gotten an assist from my trading partner in Canada, Mother Nature, whose torrential rains have wrecked much of the canola crop this year, helping to drag the prices of the other oil seeds northward.
Since my initial call on June 24, soybeans (SOYB) have risen by 10% to $3.00, while corn (CORN) has popped 13% to $4.10, and wheat (WEAT) has soared by a white hot 27% to $6.15. With profits like these, who needs the stock market, anyway? No doubt cash is pouring into the ags now because of the lack of attractive alternatives in stocks, bonds, currencies, commodities, and real estate. OK, my horse came in to show, but I'll take that over a loser any day. I've noticed over the decades that when one does the hard research and gets the fundamental call right, all of the accidents and surprises tend to happen in your favor. That seems to be happening here. As for my old spy friend, I advised him to fill up a bathtub with cold water and soak in it to deal with the heat. That always worked when I was starving in Tokyo and couldn't afford air conditioning, despite temperatures at 99 degrees with 99% humidity. At least it cooled me off for 15 minutes.
Featured Trades: (BP)
3) Take the Money and Run from BP. If you followed my advice to buy BP at $29 on June 17 (click here for my piece), please sell it. It peaked at $40 yesterday. Take the easy money and run. I've never seen a better opportunity to buy the rumor and sell the news. The long awaited announcement that the April 22 blowout in the Gulf of Mexico was at long last capped has sent the stock on a tear. This limits the pariah firm's liability to $50 billion max, down from estimates that ran as high as several hundred billion dollars only days ago. The final answer won't be in until hell freezes over. Sure, if you end the moratorium on offshore drilling, get it back up to its old multiple, tack on higher oil prices, and take in $20 billion in asset sales or equity capital raises, you might be able to squeeze another $20 out of the trade. But do you really want to hang around and run the market risk? Or the dilution risk? BP now has 43,000 locals working to clean up the spill. Would you want to meet that payroll? Don't be the pig that gets slaughtered. A profit of 38%, some 76% if you used margin, and over 150% if you played the options is better than a poke in the eye with a sharp stick, especially in this miserable environment.
'Many times when you listen to sell side analysts, it's garbage in, garbage out on a lot of the opinions that they have,' said stock commentator Gary Kaminsky.
