'Inflation steals from savers, and inflation is the logical consequence of printing too much money,' said Oracle of Omaha, Warren Buffett.
Global Market Comments
March 23, 2010
(SPECIAL TEXAS ISSUE)
Featured Trades: (JOHN MAULDIN), (SPX),
(XEU), (EEM), (GLD), (CMGTX), (TBT),
(JAMES BAKER, III)
1) Son of Texas and financial seer, John Mauldin, believes the stock market could shed 40% in the near future (SPX). John is the president of Millennium Wave Advisors, LLC, a Dallas, Texas based investment advisor, with $600 million in assets under management. John worries that the velocity of money, an indicator of how many times a dollar is reused in the economy, is collapsing. This ratio, which is defined by the GDP divided by the money supply, bottomed at 1.15 in 1946. It peaked at a breathtaking 2.2 times in 1997, near the top of the Dotcom bubble. The ratio has been retreating ever since, has recently accelerated down to the 100 year mean, but still has much farther to fall to get to the bottom of the 100 year range. The collapse of velocity signals the end of a 50 year super cycle in lending. For you and I, this means lower economic growth for perhaps another decade. It is partly the result of banks getting generous funding from the Treasury, and then sitting on it. The bucks simply stop there. It suggests that no matter how much money the government pumps into the economy, it might as well be pushing on a wet noodle. The gold bugs have got it all wrong, simply focusing on money supply growth and expecting hyperinflation. A lot of money can sit and go nowhere. The inflation will come back with a vengeance when the economy revives and banks finally resume lending. With so much new money being created in the last two years, the chances of the Fed being able to head this off are close to nil. Similarly, the bond vigilantes may have to wait a couple of years for their big move down in the 30 year Treasury bond (TBT). When the bond markets call ?times up,? the US will be forced to embark on some highly deflationary spending cuts. If this happens during a recession, it could be a disaster. John thinks there will be a substantial slowdown in growth in Q3 and Q4. With anticipated federal tax increases of 2% of GDP in 2011 added to a further 1% in state tax hikes, the recovery will be strangled in its crib. That?s when the risk of a double dip recession explodes. Over 3-4 years higher taxes could add up to a burdensome 9% drag on GDP. John says that emerging markets (EEM) will decouple from the US and keep powering up, as this is where the real economic growth is (EEM). He has been a gold bull since 2002 (GLD), when it was below $300/ounce, and isn?t backing off from that position, but prefers to own it against Euros at this point. He thinks the entire premise for the existence of the European currency (XEU) is questionable, and sees it eventually moving to parity against the dollar. John doesn?t manage money directly himself, but outsources assets with market timers employing a number of different models. One firm he has particular success with is CMG in Philadelphia (CMGTX). He really only selects individual stocks in the biotech area, which he thinks have the potential to develop into a bubble, and has a variety of small cap and microcap holdings. Not pulling any punches, John said that the Republican leadership of the last congress was ?criminally incompetent? in the way they unnecessarily squandered surpluses and spent their way into oblivion, leaving us without dry powder to fight the current crisis. John has an incredibly diverse past, which includes a degree from Rice University, a stint at divinity school, and time spent running a check printing company which led him into newsletters. Today, his two letters, Outside the Box and Thoughts From the Frontline, go out on the Internet to 1.5 million readers a week. John is the publisher of three investment books, The Millennium Wave, Just One Thing, and Bulls Eye Investing. To learn more about John?s many activities in the markets, please visit his website at http://johnmauldin.com/ . To catch my entire insightful interview with John Mauldin on Hedge Fund Radio, please go to www.madhedgefundtrader.com/ and click on the ?Today?s Radio Show? menu tab on the left.
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2) ?We have 3,500 nuclear weapons left over from the cold war we don?t need, they take 20 seconds to re-aim, we?re not afraid to use them, and by the way, they?re already aimed at you.? That is the approach James Baker III thinks America should take with Iran, Ronald Reagan?s Chief of Staff and Secretary of the Treasury and George H.W. Bush?s Secretary of State. At the same time we should be talking to the regime in Tehran, while doing everything we can to support the reformers, tighten sanctions, and enlist Europe?s help. Baker does not see a military solution in Iran, even though their potential to create instability in the region is enormous. This was one of dozens of amazing insights I gained spending an evening chatting with the wily Texas lawyer during an evening in San Francisco. Baker is happy to take on the ?America Bashers?, pointing out that the US still plays a dominant role in the UN, NATO, the IMF, and the World Bank. It still accounts for 25% of GDP, and its military is unmatched. The US spread globalization, and the spectacular growth of China and India is largely the result of open American trade policies, raising standards of living globally.? But the US can?t take its leadership role for granted. The biggest threats to American dominance are the runaway borrowing and entitlements. US debt to GDP will soar from 93% to 100% in three years, the highest level since WWII. This is unsustainable, is certain to bring a return of inflation, and unless dealt with, will lead to a long term American decline on the world stage. Massive trade and capital flow imbalances also have to be addressed. The 80 year old ex-Marine, who confesses to being the only Treasury Secretary in history who never took an economics class, believes that the advantageous rates that the government now borrows at are not set in stone. Baker is the man who engineered an end to the cold war with a whimper, and not a bang. He thinks that ?even our power has its limits,? and that there is a risk of strategic overreach.?? While conditions in Iraq still look dicey, there is a good chance that we can pull out combat troops by August, and all troops by 2011, and leave a stable country. With the US politically evenly divided, Congress has degenerated from debating teams into execution squads, and consensus is impossible. The media are partly to blame, especially bloggers who propagate wild conspiracy theories, as confrontation sells better than accommodation. Regarding the financial crisis, we need to end ?too big to fail? and embark on re-regulation, not strangulation. All in all, it was a fascinating few hours spent with a piece of living history who still maintains his excellent contacts in the diplomatic and intelligence communities.
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QUOTE OF THE DAY
Early in the political career of James Baker, III, when he was campaigning in the Texas panhandle, a voter approached him with a question. ?Does anyone ever tell you that you look a lot like James Baker, III?? he asked. Baker answered, yes, I get that a lot.? The man responded, ?that must really piss you off.?
Global Market Comments
March 17, 2010
Featured Trades: (RESIDENTIAL REAL ESTATE),
(TRES AMIGAS TRANSMISSION PLANT),
(SPX), (DOLLAR BILL)
(TRES AMIGAS TRANSMISSION PLANT),
(SPX), (DOLLAR BILL)
1) It?s time for my annual review of the residential real estate market in the High Sierra mountain hamlet of Incline Village, Nevada, and I am sad to report that antidepressant addiction among realtors there is still at epidemic proportions. This is the town on the shores of sparkling Lake Tahoe that is the home to the Godfather III, former junk bond king Mike Milliken, the mythic arms dealer Adnan Khashoggi, and a high school with one of the worst drug problems in the Silver State. Devoid by edict of the down market fast food restaurants that afflict most of America, Incline boasts two municipal golf courses where, at 6,300 feet, the air is so thin that your drive travels an extra 50 yards because the air is so thin. Incline is also a Mecca for libertarian millionaires drawn by the absence of a state income tax. Unfortunately, they also possessed the financial sophistication to buy trophy waterfront homes, extract cash-out refi?s all the way up, invest the proceeds in the stock market, and lose it all in the subsequent crash. The result has been a meltdown of Biblical proportions in the housing market. Of the 8,000 homes in the village, 400 are for sale at distressed prices and another 400 or more discouraged sellers hang over the market. Brokers report a brisk business in short sales, foreclosures, and sales on the Washoe County court house steps at prices down 60%-70% from the 2006 peak. With jumbo financing now an extinct species, the high end market has ceased to exist. One fabulous property on tony Lakeshore Drive, with every imaginable upgrade (a heated driveway?), originally listed at $14 million and sold for $4 million. Only cold, hard cash talks here. The only consolation is that conditions are much worse in Las Vegas. The optimists concede that prices could stay down for another decade. The pessimists can already be found at the bottom of the lake with the Godfather?s Fredo Corleone.
2) A few years ago, I went to a charity fund raiser at San Francisco?s priciest jewelry store, Shreve & Co., where the well heeled men bid for dinner with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area?s premier hotties, who shall remain nameless. Suffice to say, she has a sports stadium named after her. The bids soared to $6,000, $7,000, $8,000. After all, it was for a good cause. But when it hit $10,000, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his new date back to me for $9,000.? I said ?no thanks.? $8,000, $7,000, $6,000? I passed. It was embarrassing. The current altitude of the stock market reminds me of that evening. If you rode gold from $800 to $1,220, oil from $35 to $80, and the FXI from $20 to $40, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now? I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands. But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: ?There is a time to fish, and a time to hang your nets out to dry.? At least then I?ll have plenty of dry powder for when the window of opportunity reopens for business. One of the headaches in writing a letter like this is that while I publish 1,500 words a day for 250 days a year, generating about half the length of War and Peace annually, you really need to tinker with your portfolio on only a dozen or so of those days. So while I?m mending my nets, I?ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again. And no, I never did find out what happened to that date.
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3) Until now, the country?s power grid has been divided into three unconnected chunks, making transnational transmission impossible, leading to huge regional mispricing. While California and New York suffered from brown outs and sky high prices, electricity was given away virtually for free in Texas. A group of power companies is now proposing to build the $1 billion Tres Amigas superstation in Clovis, New Mexico that would connect all three grids. The plant would use advanced superconducting technology that will send five gigawatts of power down cables cooled at 300 degrees below zero. The facility would solve a major headache of alternative energy planners, and will no doubt accelerate development. It would allow the enormous wind farms on the drawing board in the Midwest to ship energy to the power hungry coasts. Ditto for the mega solar projects proposed in the Southwest deserts, and the big geothermal plants being built in Nevada. With Obama sending tidal waves of government cash towards the sector, the timing couldn?t be better. It is also great news for major alternative suppliers like First Solar (FSLR). Some of these projects might now actually make some sense.
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4) If you want to impress your friends with your vast knowledge of financial matters, then here are the Latin translations of the script on the backside of a US dollar bill. ?ANNUIT COEPTIS? means ?God has favored our undertaking.? ?NOVUS ORDO SECLORUM? translates into ?A new order has begun.? The Roman numerals at the base of the pyramid are ?1776.? The better known ?E PLURIBUS UNUM? is ?One nation from many people.? The basic design for the cotton and linen currency with red and blue silk fibers, which has been in circulation since 1957, carries enough symbolism to drive conspiracy theorists to distraction. An all seeing eye? The darkened Western face of the pyramid? And of course, the number ?13? abounds. Thank freemason Benjamin Franklin for these cryptic symbols, and watch Nicholas Cage?s historical adventure movie National Treasure. The balanced scales in the seal are certainly wishful thinking and a bit quaint. Study the buck closely, because there are going to be a lot more of them around.
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QUOTE OF THE DAY
?When it? raining gold, reach for a bucket, not a thimble,? said Oracle of Omaha Warren Buffet.
Global Market Comments
March 15, 2010
March 15, 2010
Featured Trades: (CHARLES NENNER), (SPX), (DOW), (YEN), (PALLADIUM), (PALL), (DEMOGRAPHICS)
1) After much pleading and cajoling, I managed to get a no holds barred, no stone unturned 40 minute interview with technical analyst to the stars, Charles Nenner of Charles Nenner Research in Amsterdam, for Hedge Fund Radio. Bottom line: A? second deflationary tidal wave could hit the US as early as April. If it does, the Dow is going to crash, possibly heading for a double bottom at 6,000, and bonds are going up for the rest of the year. Oh, and by the way, crude oil futures are discounting war with Iran by 2013. Charles has a long career that includes stints at medical school, Merrill Lynch, Rabobank, and 12 years at Goldman Sachs. He has spent three decades developing his proprietary Cycle Analysis System, which generates calls of tops and bottoms for every major market in the world. Charles developed a huge following after 2007, when he accurately nailed the top in the Dow at 14,500 and urged his clients to put on short positions when everyone else was predicting that the market would keep grinding higher. I have been following Charles? daily research reports myself for two years, and found them to be uncannily accurate. Today, Charles counts major hedge funds, banks, brokerage houses, and high net worth individuals among his clients. You can find out more about Charles? work by clicking here to get to his website at his website at www.charlesnenner.com. This will no doubt be the hottest show of the year. Listen in before listeners blow up my server, melt my fiber optic pipes, and bring the entire Internet to a screeching halt, as they did last time. To catch the entire sizzling interview, please click here to get to Hedge Fund Radio.
2) I love making very long term forecasts, because they give tremendous insights into the future of the global economy, and because at my advanced age, I won?t live long enough to see if I am right or wrong. I pulled this chart off of Paul Kedrosky?s Infectious Greed website which shows GDP growth rates for a 100 year period from 1950 to 2050. It shows why you should be infatuated with emerging markets (EEM) like Brazil (EWZ), China (FXI), and India (PIN), lukewarm about the US (SPX), and avoiding Europe and Japan like the plague. It also gives the underlying argument behind my long term currency calls to stay short the yen. The basic trade is to be long countries and currencies with high growth rates, and be short, or at least stay out of, countries and currencies with low growth rates. As exciting as this chart is, I really don?t see myself living another 40 years to 2050. But who knows? Maybe if I take some of those pills they sell late at night on CNBC? What are they called? Extenze?
3) My editor in charge of the ?I Told You So Department? is having a busy year. Not only did we catch the dead market in equities, the collapse of volatility, the selloff in the Euro and the yen, the rallies in the Ausie/Euro and Ausie/Yen crosses, and the bounce in Toyota, we now have Palladium (PALL) to crow about. Palladium hit a two year high of $477 an ounce last week and speculative longs in the market have hit an all time high. I discussed the potential of the ?poor man?s platinum? in January (click here for the piece). My sources at the London Metals Exchange tell me that investment demand from big hedge funds is clearly overwhelming traditional demand from the auto industry, who use it to build catalytic convertors. The ETF (PALL) has popped 17% since my initial call. Watch this space.
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4) Since I am in the long term forecasting business, it was with some fascination that I caught the Associated Press report that minority children born this year may exceed white children for the first time. Whites lost their majority in San Francisco many years ago, and will do so in California as a whole in the near future. The report said that the US will have a ?minority? majority by 2050. Whites now account for 2/3 of the population. While minorities now dominate only 10% of counties, they account for 40% of new births. Demographers say the trend will be reinforced by a large number of Hispanic women entering their prime child bearing years, who historically have more children than other races. More white women are delaying childbearing, reducing fertility. As demographics is destiny, this is bound to have huge political and economic ramifications for the country going forward. It is also going to influence the marketing priorities of corporations. A decade ago Betty Crocker anticipated this trend by using shorter, darker skinned models on the boxes of its cake mix boxes. Companies that target specific ethnic groups are going to gain a competitive advantage. Furthermore, the rate of interracial mixing is accelerating at a tremendous rate. In California, 50% of all Chinese woman and 60% of Japanese women marry whites. This is amazing, given that this was illegal until the Civil Rights Act was passed as recently as 1962. Millennials are virtually color blind. Personally, I think genetically recessive blonde haired, blue eyed people, who sprang out of a mutation in the Caucuses 7,000 years ago, may completely disappear in 200 years. Pure Caucasians themselves may eventually go too, as they only account for 15% of the world?s population, and that number is falling.
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QUOTE OF THE DAY
?If you can?t make yourself loved, make yourself feared,? said Meyer Amschel Rothschild, founder of the banking dynasty.
Global Market Comments
March 11, 2010
Featured Trades: (PCY), (TBF), (TM), (THE PACIFIC)
NOTE TO SUBSCRIBERS: There will be no letter tomorrow, as I am taking a research day.
1) Get Ready for the April Surprise. I have a feeling that the markets are on a final countdown, but don?t know it yet. No, I am not talking about the next issue of the TV show 24. On April Fool?s Day, the Fed brings to a close its $1.25 trillion program to prop up the mortgage market in which essentially all home mortgages are ending up, either directly or indirectly, on the books of our esteemed central bank. As we approach this rendezvous with destiny, a growing number of hedge funds are piling on the short side of the bond market, betting that nobody will be there when the purely commercial market is reborn. It harks back to an old Wall Street saw that ?Success has many fathers, but failure is an orphan?. I expect stocks to rally until then, bonds to grind down, and yields possibly climbing as high a 4.00% on the ten year Treasury bond. This pessimism will drag mortgage rates up 15-25 basis points. The government will help the process along with increasingly bloated new issuance. This is a good reason why the credit markets have become ultra sensitive to developments in Japan, California, Dubai, Greece and other PIIGS (oink!). Seasonally, we are in a period of weak bond prices. To really throw the fat on the fire, the highly anticipated March nonfarm payroll, the number of the month, will be released the next day. When everybody and his dog is positioning for something to happen at a certain time, you can count on either the opposite to happen, or for nothing to happen. I vote for the former. After all, who is overweight mortgage backed securities these days? The market has been closed for 18 months, and everything institutions still own is probably down by a third in value. Look for an upside surprise in the nonfarm payroll report to produce a peak in equities and bond yields, an intermediate bottom in bond prices, and a reversal of everything from there. My bet is that the drastic jump in home mortgage rates that many are forecasting for April is going to do a no show. This is just a humble trader?s musings.
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Not a Great Fixed Income Allocation
2) Where to Hide. I am constantly asked where to find safe places to park cash by investors understandably unhappy with the risk/reward currently offered by the markets. Any reach for yield now carries substantial principal risk, the kind we saw, oh say, in the summer of 2007. I have had great luck steering people in the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY) for the last seven months, which is invested primarily in the debt of Asian and Latin American government entities, and sports a generous 6.44% yield. This beats the daylights out of the one basis point you currently earn for cash and the 3.66% yield on 10 year Treasuries. The big difference here is that PCY has a much rosier future of credit upgrades to look forward to than other alternatives. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. With US government bond issuance going through the roof, the shoe is now on the other foot. A price appreciation of 120% off one year lows tells you this is not exactly an undiscovered concept. Still, it is something to keep on your ?buy on dips? list.
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3) Those of you who wisely bought Toyota (TM) when there was literally blood in the street a month ago are now sitting on a healthy 10% profit (click here for the link at https://madhedgefundtrader.com/February_3__2010.html ). Those of the short term trading persuasion may want to book some profits here. Only this morning there was yet another dramatic report about a Highway Patrol officer who bravely placed his vehicle ahead of a runaway Prius racing down a San Diego freeway at 94 miles an hour in order to stop it. I thought a Prius could only go this fast if you dumped it out the back of an airplane, or parked on San Francisco?s Kearney Street. Another recall on brake pedals was triggered. I have no doubt that many of these stories are true. I also have no doubt that many of them are hoaxes in search of a class action law suit hungry, ambulance chasing lawyer. The odor of the US car makers and the unions is also in the room, who have lost market share to Toyota for 40 years and are looking for payback. We rue the day that lawyers were first allowed to advertise on TV. Toyota is now the butt of jokes from David Letterman, Jay Leno, and even the Academy Awards. I have no doubt this incredibly well run company will resurrect. Their dominant share of the global car market isn?t going away. If my scenario of a yen collapse to ?120 to the dollar in a year comes true, their foreign earnings will absolutely go through the roof. But they may have to pay more penance and cry a little more in public before they return to greatness in the minds of consumers.
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4) TV Review. I highly recommend the HBO miniseries that premiers this Sunday night called The Pacific, which dramatizes the history of the First Marine Division during WWII. This is the Pacific version of the Band of Brothers and is made by many of the same people. My uncle, Col. Mitchell Paige (click here for the link to his site at http://www.homeofheroes.com/mitch/index.html ), who won the first Medal of Honor of the war, was a technical consultant to the project before he passed away in 2003. In one night, he managed to single handedly mow down 2,000 suicide attacking Japanese with three Browning 30 caliber, water cooled machine guns, thus saving Henderson Field, and shortening the war by a year. I still have the samurai sword that he retrieved from the battlefield the next morning. My father was with the First Marines at Guadalcanal, I flew for them during Desert Shield and Desert Storm, and my nephew joined to fight in Afghanistan and Iraq. Maybe I?ll find out why dad never spoke a single word about what went on there.
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Dad at Guadalcanal, 1942 (on right)
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QUOTE OF THE DAY
< p style="text-align: center;">?The American public has a whole new mindset about buying things than they had a couple of years ago,? said Oracle of Omaha, Warren Buffett.
Global Market Comments
March 10, 2010
Featured Trades:
(WARREN BUFFET?S ANNUAL LETTER),
(BRK/A), (SPX), (GS), (GE), (BYDDF)
1)Sorry about the absent letter yesterday. A virus took out my computer, and it consumed eight hours to reformat the hard drive, find all of my user keys and passwords, and reload the software. Trolling the world wide web for those undiscovered investment pearls, I pick up more viruses than a drunken sailor on a three day pass. And this is with my antivirus software set to update every four minutes. Norton just can?t keep up with this stuff. I spend a lot of time on sites in that great wellspring of disease, China. Last year, I got a virus that ate my BIOS. There was nothing I could do but take my desktop to the dump. The pictures which many of you find so entertaining are a particular problem. Don?t even think about doing a search for ?girl wearing lowriders? or you?ll be down at Best Buy shopping for a replacement within the hour.
2) One of the many reasons that any stock market moves from here will be capped (SPX) is that the mutual funds that provided the steroids for last year?s parabolic move are running out of money. Equity mutual funds are now down to 3.5% in cash holdings, barely enough to cover the normal flow of subscriptions and redemptions. It also explains why each subsequent rally in stocks is happening on increasingly diminishing volume. My friend Dennis Gartman of The Gartman Letter elucidated another reason. Now that we are at the one year anniversary of the bull market, those brave and clever enough to have bought early are seeing their paper profits qualify for long term capital gains. From here on, the number of such holdings increases, raising the level of potential selling. Such fortunate holders may want to sell because 1) The gains could evaporate at any time, so it?s better to take the money and run. Remember, ?buy and hold? is dead.? 2) Obama & Co. may raise capital gains tax rates 3) the longer they wait, the more the tax advantaged positions increase, generating more potential sellers. The bulk of the stock market rally happened in the first three months, from March to May, 2009. Remember, ?Sell in May and go away?? Still, zero interest rates incite a lot of perverse behavior, as I saw around every corner in Japan in the late eighties, hence the slow grind up in the market we are witnessing.
3) It is always a delight to peruse Warren Buffet?s annual letter to the happy shareholders of Berkshire Hathaway (BRK/A), who I consider the greatest investment mind of our generation. To show you how well Warren has performed, look how the shares once owned by his son, Peter, have done. When Peter reached adulthood, dad gave him a small number of shares to do what he wanted with. Peter sold them immediately, and the proceeds were enough to buy some groovy sound equipment. Today, those shares are worth $72 million. Obviously, the apple does fall far from the tree. Plowing through the 20 page opus, I found it chock full of great management insights and homespun homilies. They also include observations of the harsh realities of our world, like the fact that the big Wall Street Banks are nothing more than a school of hungry sharks. I?ll list the highlights below, and feed out the better quotes in my Quote of the Day section in future letters. For those interested in reading the full letter, as well as its predecessors going back to 1977, please click here for the link
* In 2009, Berkshire managed to bring in an impressive 20.3% increase in book value, versus a 9.3% gain for the S&P 500, an appreciation of $21.8 billion.
* Warren will only invest in simple businesses he can understand and evaluate. In an earlier day, that would have meant missing out on radio, aircraft, and TV, and today it means missing the Internet, cloud computing, and social networking.
* At the height of the financial crisis in September, 2008, Warren poured $15.8 billion into businesses. I?m guessing Goldman Sachs (GS), General Electric (GE), as well as his purchase of Wrigley.
* Warren has $20 billion in cash, one of the lowest levels in a long time, but he sleeps well at night.
* He makes no effort to woo Wall Street. He?s looking for partners, not day traders.
* He offers a fascinating description of the insurance business where he uses a gigantic $62 billion free float to finance everything else.
* He talks a lot about GEICO, my insurance company as well as his, and not just because I drive home every day past a man in a cute gecko costume. He?s been visiting the company since 1951. How many managers can make such a claim?
* His choice of industries is interesting: casualty insurance, regulated utilities, railroads, and an assortment of manufacturing, service, and retailing businesses (How can you not like See?s Candies?). All boring, unsexy businesses that are huge cash flow generators. Pure Buffet.
* In a year, housing problems should be behind us, except in the high end (McMansions) and areas where the overbuilding was extreme (South Florida and Las Vegas).
* He still owns 10% of BYD (Build Your Dreams), the Chinese battery company run by CEO Wang Chuan-Fu, who Charlie Munger describes as a combination of General Electric?s (GE) legendary manager, Jack Welch, and inventor Thomas Edison. I jumped on the bandwagon when he made his $232 million investment
the fall of 2007. He has since earned an 856% return. So have I.
* His $5 billion holding in POSCO mirrors my own interest in the Hermit Kingdom, South Korea, and has been another ten-bagger for him.
* Warren has $6.3 billion positions in derivatives, which in the past he has described as ?toxic waste?. I would love to see the terms on the deals he is getting. He, alone, makes the decisions on these.
* He ends the letter by asking readers to please come to the annual shareholders meeting by rail.
I could go on forever, so I?ll leave it to you to read the rest.
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QUOTE OF THE DAY
?I?ve said over the years that I don?t follow the ratings of the ratings agencies. I think people should make their own judgments about credit quality. We like it if we think something is misrated,? said Berkshire Hathaway?s Warren Buffet.
Global Market Comments
March 8, 2010
Featured Trades: (FEBRUARY NON-FARM PAYROLL), (YEN), (EUROYEN CROSS), (SPX), (GOOG), (AAPL), (GS),
(BARTON BIGGS),
(OEF), (MSFT), (INTC), (CSCO), (ORCL),
(FXI), (PIN), (EWY), (THD), (EWT), (EWH),
(TUR), (PLND), (RSX), (EWZ), (USO).
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1) Something Amazing is Happening With the Payroll Figures. The February non-farm payroll showed a further loss of 36,000 jobs, versus an expected loss of 75,000, and the unemployment rate remained unchanged at 9.7%. December was revised up by 41,000 and January was revised down by 6,000, so netting everything out there was essentially no change. Those hired now exactly equal those fired, about 3 million a month. There were continued big losses in construction, and decent gains in temps. This month I decided to take advantage of former Labor Secretary Robert Reich?s course on labor statistics which I took at UC Berkeley, and dig through the supporting data at the Bureau of Labor Statistics website (click here for the link at http://www.bls.gov/? ). Something amazing is happening. There is a barbell effect in the labor markets which no one seems to see, which is rendering the aggregate payroll figures meaningless. There is a barbell effect taking place, where the 40% who have been jobless for more than six months, who worked in the bubble industries of real estate, housing, and? construction, are never going to see their jobs come back. The 60% who are short term unemployed, who recently lost jobs in finance, accounting, and health care, are getting rehired very quickly. In fact, 20% of the jobless are getting rehired in only six weeks. There is another effect at work. While the employment rate for those with no high school diploma is 16%, the kind of worker who lost their manufacturing jobs to China, the jobless rate for those with college degrees is only 4.5%. This is proof that the dying sectors of the US economy is delivering the highest unemployment rates, and that America is clawing its way up the value chain in the global race for economic supremacy. It is what America does best, creative destruction with a turbocharger. There is a third influence here, which could be huge. The BLS only contacts existing businesses for its survey. It doesn?t survey companies operating out of someone?s garage in startup mode. Given the huge ongoing dislocations in our industrial structure and the incredible advances in software, the Internet, and cloud computing, this could be one of the biggest job creators of all. So far, it is not being counted at all. The bottom line is that payroll figures are much better than they appear at first glance. Red Alert! The markets don?t know this.
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2) Is a Big Global Risk Reversal Underway? Has the Mother of All Carry Trades Begun? The financial markets had been expecting dire payroll numbers, thanks to the huge snow storms that hit the East. I am going to go way out on a limb here and bet that the snow will be gone by June. In fact, without the snow, the February payroll number could have been as high as a positive 100,000, and that we may actually see this in the March figures to be released in a month. I think the current report is spectacularly good news, because it suggests that the rise in jobless claims is now at its apex, and is about to reverse and return to earth. Mind you, we aren?t going back to 5% unemployment anytime soon, but any number showing job gains will have a hugely positive psychological effect. It will be an improvement that the markets don?t expect, don?t believe in, and therefore will catch them seriously off guard. This means that the global risk reversal trade that started on January 11 may be over, and that big hedge funds are about to start adding on positions across the entire range of? financial instruments. That great bell weather of global risk taking, the Euro/Yen cross is telling us as much, having popped from ?120 to ?123.5 on the payroll news. You also see this in the Ausie/Yen cross, and outright yen markets. Those who managed to catch my recommendation to short the yen at ?88.40 on Thursday bagged an instant profit of ?2. This is a trade that could go on for the next year, and you should be selling rallies in the Japanese currency from here. The mother of all carry trades has begun. This is good news for stocks and emerging markets. I?m not expecting anything dramatic here, maybe single digit gains in the indexes, and double that for single stocks. Use Apple (AAPL), Google (GOOG), and Goldman Sachs (GS) as your Sherpas, because they are the current markets leaders. Focus on big cap technology. It will also juice commodities, oil, and precious metals. These numbers put another nail in the coffin of the 30 year Treasury bond, which I have been despising all year.
3) Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, what to do about Japan was the topic of the day, and I was bullish. Today, Barton can say with ?real certainty? that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years. Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT). The easy way in here is to simply buy the S&P 100 ETF (OEF).The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all. Barton sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a ?new normal? of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the la
st decade to only 2.5 % in this one. But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation. Looking at the world as a whole, Barton thinks Asia is the place to be. A bubble may be developing in China, but it is at least 3-5 years off, and there will be plenty of money to be made until then. India is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea, Thailand, H-shares in Hong Kong, and Turkey are also lining up in Barton?s sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland and Russia. Traxis is short Brazil, because it has already had a great run, and because the country still faces some severe social problems. Commodities had their run last year, and won?t do much from here, but they aren?t going to crash either. He sees oil grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds will be deflation driven for the next year, but are definitely not for your ?Rip Van Winkle? investor, as they represent poor value for money. Real estate is dead money. To hear my interview with Barton at length, please click here
QUOTE OF THE DAY
?Rupert Murdoch is very smart and is a great leader, but he?s made a mistake. He?s buried in ink, and in my view, there won?t be any newspaper business ten years from now. Fortunately, we?re buried in television and movies, and they?ll be here forever,? said Sumner Redstone, chairman of Viacom and CBS.
Global Market Comments
March 5, 2010
Featured Trades: (JAPAN), (YEN), (YCS),
(GOLD), (GLD),(NEM),
(NATURAL GAS), (UNG),
(HEDGE FUND RADIO), (BARTON BIGGS)
1) I?m hearing from my buddies in Japan that while things are already quite bad in that enchanting country, they are about to get a whole lot worse, and that it is time to start scaling into a major short in the yen.Australia and China have already raised interest rates, to be followed by the US, and eventually Europe. With its economy enfeebled, the prospects of Japan raising rates substantially are close to nil, meaning the yield spread between the yen and other currencies is about to widen big time. In the case of the Australian dollar, that works out to 4% per annum. Leverage up ten to one, and pile on anticipated capital gains brought in by a weakening yen, and you have a real carry trade on your hands. That will generate hundreds of billions of dollars worth of cascading yen selling as hedge funds dog pile in. It?s macro investing at its finest.Until now, the government has been able to finance ballooning budget deficits caused by two lost decades, but those days are coming to an end. Japan is quite literally running out of savers. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank.
The national debt has rocketed to 190% of GDP, and 100% when you net out government agencies buying each other?s securities. Japan has the world?s worst demographic outlook. Unfunded pension liabilities are exploding. Other than once great cars and video games, what does Japan really have to offer the world these days, but a carry currency?
Until now, the government has been able to cover up these problems with tatami mats, because almost all of the debt it issued has been sold to domestic institutions. Now that this pool is drying up, there is nowhere else to go but foreign investors. With Greece and the rest of the PIIGS at the forefront, and awareness of sovereign risks heightening, this is going to be a much more discerning lot to deal with.
That great bell weather of global risk taking, the Euro/Yen cross is telling us that the mother of all carry trades has already started. On the release of Friday?s surprisingly positive nonfarm payroll numbers, the cross popped from ?120 to ?123.5, sending shorts scampering. You also see this in the Ausie/Yen cross, and outright yen markets. I have been piling clients into short positions since Thursday at the ?88 handle, and they have already bagged an instant profit of ?2.
You could dip your toe in the water here around ?90. In a perfect world you could sell it as it double tops at the 85 level. My initial downside target is ?105, and after that ?120. If you?re not set up to trade in the futures or the interbank market like the big hedge funds, then take a look at the leveraged short yen ETF, the (YCS). This is a home run if you can get in at the right price.
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2) If you are wondering where the bull market in gold went, take a look at the chart below of gold priced in Euros. The chart for gold priced in yen look just as healthy. The latest filings with the Securities and Exchange Commission show that the largest hedge funds are still adding to their already substantial positions. Soros Fund Management, with $25 billion under management, tripled its holdings in the gold ETF (GLD) in the fourth quarter of 2009. Tudor Investment Management quadrupled its holding in Newmont Mining (NEM), the largest miner of the barbaric relic in the US. Hedge fund giants, David Einhorn of Greenlight Capital and John Paulson of the Credit Opportunity Fund, have also been boosting substantial positions. These guys are not day traders, and are clearly in for the long haul. With some technical analysts arguing that gold still has several more months to go to digest the massive 80% gain it made off of the October, 2008 $680 low, that may be the wise approach to take.
3)The poster boy for everything that can go wrong with an ETF? is undoubtedly? the one for natural gas, the (UNG). If you had studiously done all of your homework in September and concluded that natural gas was severely oversold and about to go up 40%, you would have been dead right. If you then went out and bought the UNG you would have then lost 40%, as you can see from the chart below. You would think at first glance that this is a chart for an inverse gas ETF, which it isn?t, because such an instrument doesn?t exist. This dreadful state of affairs was brought about by the intricacies of contango, where far month contracts in the futures markets are trading at premiums to the front month. As each month expired, the managers of UNG bought fantastically rich forward contracts, and then rode them all the way down to spot, as they were mandated to do by their prospectus. They then repeated this exercise every month. If the contango continues indefinitely, the UNG will eventually approach zero. Since we are discussing CH4, I have to tell you that the outlook does not look great. We are just coming out of one of the worst winters in history, and NG only managed a rally from the $2.40 low to six bucks and change. Gas in storage is about to rise again, and gas producers are racing to out produce each other in the hope of offsetting falling prices with increased volumes. This is all happening with new discoveries occurring almost daily, thanks to the new miracle fracting technology. It seems that now one only need poke a straw in their backyard to obtain a lifetime supply of clean burning energy. And I read today that Poland is about to lead the charge deploying fracting technology in Europe. They must be sweating bullets in Qatar, which just invested $50 billion in gas exporting facilities. Moral to the story: don?t just punch in a symbol and hit enter. Read the damn prospectus first.
4) My guest on Hedge Fund Radio this week is Barton Biggs, founding partner of mega hedge fund Traxis Partners. Barton is a former colleague and mentor of mine at the Wall Str
eet giant, Morgan Stanley, where we spent nearly a decade sparring with each other over the international investment landscape. Barton is an ex Marine officer (semper fi) who went to business school, earning an MBA from New York University. He started in the business in 1961, when he joined brokerage house EF Hutton, and went on to start one of the first ever hedge funds.? Barton then joined Morgan Stanley in 1973, were he was a managing director for 30 years, founding Morgan Stanley Investment Management. He eventually served on the firm?s board of directors. Barton was rated, more than once, the number one global strategist by Institutional Investor Magazine. He left Morgan Stanley to start Traxis Partners in 2003. Hedge Fund Radio is broadcast 24/7 around the world for free. To access this online program and archives of past shows, please go to my website by clicking here
QUOTE OF THE DAY
?When you have a wave of bank crises, it is often followed by a wave of sovereign debt crises. There are a lot of countries with elevated debt levels, a lot of countries at risk??.It?s amazing how many countries have amnesia about their default rates,? said Dr. Kenneth Rogoff, a Harvard professor and former Chief Economist at the IMF.
Global Market Comments
March 3, 2010
Featured Trades: (JON NAJARIAN), (OPTIONMONSTER), (AUSSIE/EURO CROSS), (ETHANOL), (CORN)
1)How does an NFL linebacker develop a series of computer algorithms that give him a crucial edge when trading the market? That is the question I hoped to answer when I interviewed Jon Najarian, co-founder of OptionMonster (click here for the site at http://www.optionmonster.com/ ).Jon?s proprietary program, called Heat Seeker ?, monitors no less than 180,000 trades a second to give him an early warning of large trades that are about to hit the stock, options, and futures markets. To give you an idea of how much data this is, think of downloading the entire contents of the Library of Congress, about 20 terabytes, every 33 minutes.
His firm maintains a 10 gigabyte per second conduit that transfers data at 6,000 times the speed of a T-1 line, the fastest such pipe in the civilian world. Jon then distills this ocean of data into the top movers of the day, which he puts up for free on his website, and offers much more detailed analysis through a variety of premium subscription products. Jon is also co-founder of an online brokerage called ?TradeMonster? off the back of this impressive research effort. ?As with the NFL,? says Jon, ?you can?t defend against speed.?
The system catches big hedge funds, pension funds, and mutual funds in the midst of shifting large positions, giving subscribers a peak at the bullish or bearish tilt of the major players in the market. It also offers accurate predictions of imminent moves in single stock and index volatility. Long and short vol traders take note. If anything, the profusion of? dark pools and high frequency trading, now thought to account for 50% of the daily? volume, makes Jon?s tools more valuable because that are exacerbating the quantitative nature of the markets. Some 200,000 traders are believed to be following Heat Seeker?s advice.
Jon started his career as a linebacker for the Chicago Bears, and I can personally attest that he still has a handshake that?s like a steel vice grip. Maybe it was his brute strength and ability to take abuse that enabled him to work as pit trader on the Chicago Board of Options Exchange for 22 years, where he was known by his floor call letters of ?DRJ?. He formed Mercury Trading in 1989, built it into a substantial business, and then sold it to the mega hedge fund, Citadel, in 2004.
Jon developed his patented algorithms for Heat Seeker? with his brother Pete, another former NFL player (Tampa Bay Buccaneers and the Minnesota Vikings), who like Jon, is a regular face in the financial media.
Jon thinks that if China is serious about throttling back its economy, it will have a dampening effect on global financial markets for some time. The S&P 500 is going to stick around the 1100 level, and commodities are going to stay in a big sideways range. Volatility is going to die.
To hear my interview with Jon at length on Hedge Fund Radio, please click here.
2) Last night the Reserve Bank of Australia raised overnight cash rates from 3.75% to 4%, spurred on by a healthy, resource fueled economy and a booming jobs market. The move put a spotlight on the Aussie/Euro cross, which I recommended traders buy a month ago at $AUS 62.5 (click here for the call). With the cross now tickling 67, traders are sitting pretty, with the chart going, as Dennis Gartman likes to say ?from the lower left hand corner to the upper right.? The trade quite simply gets you long a country where everything is going right, and short a region where things are deteriorating by the day. The yield spread between the two currencies is now wide enough to drive a truck through, call that a lorry, and that gap looks to broaden further. Call this ?Cross Trading 101 for Dummies,? but sometimes the easiest trades work the best, because so many investors can understand them.
3) One of my biggest disappointments with Obama so far is his continued support of the ethanol boondoggle. The program was initiated by the Bush administration to achieve energy independence by subsidizing the production of alcohol from domestically grown corn. Add clean burning moonshine (yes, it?s the same alcohol? C2H5OH), whose combustion products are carbon dioxide (CO2) and water (H2O), to gasoline and emissions also go down. The irony is that if you include all the upstream and downstream inputs, the process consumes more energy than it produces. It also demands massive quantities of fresh water, which someday will become more valuable than the oil the ethanol is supposed to replace, turning it into toxic waste. Never mind the image of spendthrift, obese Americans burning food so they can drive chrome wheeled black Hummers to Wal-Mart, while much of Africa and Asia starves. Ethanol consumption of corn has soared from 1.6 billion bushels in 2006 to an anticipated 4.3 billion bushels this year. Ethanol?s share of our total corn crop has skyrocketed from 14% to 33% during the same period. This ignores the reality that Brazil, the world?s largest ethanol producer, can ferment all the ethanol it wants at one third our cost because they make it from much more efficient sugarcane, which has five times the caloric content of corn. However, protective import quotas and tariffs prevent meaningful quantities of foreign ethanol imports. Bush financed all of this wasteful pork, because Iowa has an early primary, giving it an outsized influence in selecting presidential candidates, and has two crucial Senate seats as well. Well, it turns out that Obama needs Iowa even more than Bush, where the Democrats are ahead 3-2 in the House, and have a tie in the Senate (1-1), so the ethanol program not only lives on, it is prospering. Shame, and double shame. Better to drink it than burn it, I say.
QUOTE OF THE DAY
?The dollar hating crowd is hating themselves now. Things in Europe aren?t improving any time soon,? said Jon Najarian of OptionMonster.
