Global Market Comments
February 16, 2010

Featured Trades: (CHINESE YUAN),
(CYB), (PLATINUM), (PPLT), (EWT)

1) The Chinese Yuan is just begging for a home run. Any doubts that it is a huge screaming buy should have been dispelled last week when news came out that China had displaced Germany as the world's largest exporter. The Middle Kingdom shipped $1.2 trillion in goods in 2009, compared to only $1.1 trillion for Deutschland. The US has not held the top spot since 2003. China's surging exports of electrical machinery, power generation equipment, clothes, and steel were a major contributor. German exports were mired down by lackluster economic recovery in the EC, which has also been a major factor behind the weak euro. Sales of luxury Mercedes and BMW cars, machinery, and chemicals have cratered.
Two back to back interest rate rises for the Yuan, and a snugging of bank reserve requirements to 16% by the People's Bank of China, have stiffened the backbone of the Yuan even further. That is the price of allowing the Federal Reserve to set China's monetary policy via a fixed Yuan exchange rate. Is it possible that Obama's stimulus program is reviving China's economy more than our own?
The last really big currency realignment was a series of devaluations that took the Yuan down from a high of 1.50 to the dollar in 1980. By the mid nineties it had depreciated by 84%. The goal was to make exports more competitive. The Chinese succeeded beyond their wildest dreams. There is absolutely no way that the fixed rate regime can continue. There are only two possible outcomes. An artificially low Yuan has to eventually cause the country's inflation rate to explode. Or a global economic recovery causes Chinese exports to balloon to politically intolerable levels. Either case forces a major revaluation. Of course timing is everything. It's tough to know how many sticks it takes to break a camel's back. Talk to senior officials at the People's Bank of China, and they'll tell you they still need a weak currency to develop their impoverished economy. Per capita income is still at only $5,000, a tenth of that of the US. But that is up a lot from $100 in 1978. Talk to senior US Treasury officials, and they'll tell you they are amazed that the Chinese peg has lasted this long. How many exports will it take to break it? $1.5 trillion, $2 trillion, $2.5 trillion? It's anyone's guess. One thing is certain. A free floating Yuan would be at least 50% higher than it is today, and possibly 100%. In fact, the desire to prevent foreign hedge funds from making a killing in the market is a not a small element in Beijing's thinking. The Chinese Central bank governor, Zhou Xiaochuan, says he won't entertain a revaluation for the foreseeable future. The Americans say they need it tomorrow. To me, that means about six months. Buy the Yuan ETF, the (CYB). Just think of it as an ETF with an attached lottery ticket. If the Chinese continue to stonewall, you will get the token 2.2% annual revaluation the swaps have been discounting. Since the chance of the Chinese devaluing is nil, that beats the hell out of the zero interest rates you now get with T-bills. If they cave, then you could be in for a home run.

2) Since you've been romancing gold, you should check out platinum, her younger, racier, and better looking sister who wears the low riders. The white metal had a 67% pop last year, compared to the more sedentary 44% appreciation seen in gold. While gold made a hard fought all time high, Pt has to rise a further 50% from here just to match its 2008 high of $2,200, suggesting that some catch up play is in order. I have always been puzzled by the fact that platinum is 30 times more rare than gold, but at $1,480 an ounce, it trades at a mere 30% premium to the barbaric metal. You have to refine a staggering 10 tons of ore to come up with a single ounce of platinum. The bulk of the world's 210 tons in annual production comes from only four large mines, 80% of it in South Africa, and another 10% in the old Soviet Union. All of these mines peaked in the seventies and eighties, and have been on a downward slide since then. That overdependence could lead to sudden and dramatic price spikes if any of these are taken out by unexpected floods, strikes, or political unrest. While no gold is consumed, 50% of platinum production is soaked up by industrial demand, mostly by the auto industry for catalytic converters. No lesser authority than Jim Lentz, the CEO of Toyota Motors Sales, USA, told me he expects the American car market to recover from the current 11 million units to 15-16 million units by 2015. That's a lot of catalytic converters. Jewelry demand for platinum, 95% of which comes from Japan, is also strong, as the global pandemic of gold fever spreads to other precious metals. You can trade Platinum futures on the New York Mercantile Exchange, where a margin requirement of only $6,075 for one contract gets you exposure to 50 ounces of platinum worth $75,000, giving you 12:1 leverage. Email me at madhedgefundtrader@yahoo.com if you want to learn how to do this. For those who like to get physical, the US mint issues Platinum eagles from 1997-2008 in nominal denominations of $100 (one ounce), $50 (?? ounce), $25 (1/4 ounce) and $10 (1/10th ounce) denominations. Stock traders should look at the ETF (PPLT).

3) The handful of Chinese army officers I huddled with in the underground bunker all stared intently at their watches. Three, two, one, and then KABOOM! At exactly 12:00 noon, the blast of distant artillery sent a five inch shell screaming over our heads and exploded into the hill above us. The ground shook under our feet, causing dust to drift down from the concrete ceiling above us.?? It was 1976, and The People's Republic of China just let lose its daily symbolic protest against its errant rebellious province, known locally as the Republic of China, and to you and me, as Taiwan. Fast forward 34 years later and the Middle Kingdom is sending salvos of money raining down on that prosperous island. Last year, China Mobile (CHL), the world's largest cell phone company, bought 12% of Far Eastone Telecommunications (4904.Taiwan). Although a small deal, it represented the first ever direct investment from China into Taiwan. The move could trigger a takeover binge by big Chinese companies of their offshore cousins. It was only a few years ago Taiwanese businessmen suffered long prison terms for just visiting, let alone investing in China, which they have done in a major, but surreptitious way, for 30 years. Readers of this letter are well aware of my aggressive recommendations to buy emerging markets China and Taiwan since the beginning of 2009. Now you have another reason to buy both. Closer ties between China and Taiwan auger well for the stock markets of the two high growth countries. The iShares MSCI Taiwan fund ETF (EWT) at one point were up an impressive 125% from the March lows, so if you see a substantial dip it might be a good idea to double up. I guess Beijing figured out that if you can't beat them, buy them. The proxy takeover bid is mightier th
an the sword.

Global Market Comments
February 10, 2010

Featured Trades: (SPX), (SDS), (BERNIE MADOFF), (CIA), (DBA), (MOO), (MON), (MOS), AGU), (POT)

1) Note to self. Don't do your midnight pee next to the bear box. They're called that for a reason. And I'm sorry that my shouting at the hungry, six foot tall black bear standing in front of me, no doubt attracted by my Cheetos, hot dogs, and marshmallows, woke up the campers at the 57 surrounding sites. Of course it was too dark to find my bear spray. My ursine challenger eventually saw the merit of my logic that the neighbor's bacon stuffed ice chest was more appealing than me, and lumbered off into the darkness. I have successfully avoided a bear of a different sort this year, those of the stock market kind (see my January 4 Annual Asset Allocation Review piece entitled 'I'd Rather Get a Poke in the Eye with a Sharp Stick Than Buy Equities'). Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor in a faith based rally. Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and speculation, not consumption. Puzzled CEO's of many stripes are seeing no recovery in their businesses whatsoever. I have used the big up days to sell short dated out-of- the-money calls which, mercifully, expired worthless. That's because I keep my favorite quote from John Maynard Keynes pasted to my monitor, 'Markets can remain irrational longer than you can remain liquid.' Sure we're going down more, but zero interest rates won't let us crash. Date that SDS position, a 200% leveraged bet that the S&P 500 is going to fall, but don't marry it.

2) I spent a sad and depressing, but highly instructional evening with Dr. Stephen Greenspan, who had just lost most of his personal fortune with Bernie Madoff. The University of Connecticut psychology professor had poured the bulk of his savings into Sandra Mansky's Tremont feeder fund; receiving convincing trade confirms and rock solid custody statements from the Bank of New York. This is a particularly bitter pill for Dr. Greenspan to take, because he is an internationally known authority on Ponzi schemes, and just published a book entitled Annals of Gullibility-Why We Get Duped and How to Avoid It. It is a veritable history of scams, starting with Eve's subterfuge to get Adam to eat the apple, to the Trojan Horse and the Pied Piper, up to more modern day cons in religion, politics, science, medicine, and yes, personal investments. Madoff's genius was that the returns he fabricated were small, averaging only 11% a year, making them more believable. In the 1920's, the original Ponzi promised his Boston area Italian immigrant customers a 50% return every 45 days. Madoff also feigned exclusivity, often turning potential investors down, leading them to become even more desirous of joining his club. For a deeper look into Greenspan's fascinating, but expensively learned observations and analysis, go to his website at www.stephen-greenspan.com.

4) Lunch with the Central Intelligence Agency is always interesting, although five gorillas built like brick shithouses staring at me intently didn't help my digestion. When Panetta passed through town on his way home to heavenly Carmel Valley for the holidays, I thought I'd pull a few strings in Washington to catch a private briefing. The long term outlook for supplies of food, natural resources, and energy is becoming so severe that the CIA is now viewing it as a national security threat. About one third of emerging market urban populations are poor, or about 1.5 billion souls, and when they get hungry, angry, and politically or religiously inspired, Americans have to worry. This will be music to the ears of the hedge funds that have been stampeding into food, commodities, and energy, since March. Panetta then went on to say that the current monstrous levels of borrowing by the Federal government abroad is also a security issue; especially if foreigners decide to turn the spigot off and put us on a crash diet. I was flabbergasted, not because this is true, but that it is finally understood at the top levels of the administration and is of interest to the intelligence agencies. Job one is to defeat Al Qaeda, and the agency has had success in taking out several terrorist leaders in the tribal areas of Pakistan with satellite directed predator drones. The CIA could well win the war in Afghanistan covertly, as they did the last war there in the eighties, with their stinger missiles supplied to the Taliban for use against the Russians. The next goal is to prevent Al Qaeda from retreating to other failed states, like Yemen and Somalia. Cyber warfare is a huge new battlefront. Some 100 countries now have this capability, and they have stolen over $50 billion worth of intellectual property from the US in the past year. As much as I tried to pin Panetta down on who the culprits were, he wouldn't name names, but indirectly hinted that the main hacker-in-chief was China. I thought Panetta was incredibly frank, telling me as much as he could without those gorillas having to kill me afterwards. I have long been envious of the massive budget that the CIA deploys to research the same global markets that I have for most of my life, believed to amount to $70 billion, but even those figures are top secret. Panetta's final piece of advice: don't even think about making a cell phone call in Pakistan. I immediately deleted the high risk numbers from my cell phone address book. Better take another look at the Market Vectors agricultural ETF (DBA), their agribusiness ETF (MOO), as well as my favorite ag stocks, Monsanto (MON), Mosaic (MOS), Potash (POT), and Agrium (AGU). Accidents are about to happen in their favor.

1) Beware of Greeks bearing bonds. That is the message the markets screamed at us this week, when yields on the sovereign debt issued by the home of Plato and Socrates rose a gut-wrenching 400 basis points against German bunds. The move is welcome news to the big hedge funds that piled into the Piigs trade over the New Year in expectation of the worsening of the credit worthiness of Europe's weakest members. To the uninitiated, this is where you go long the debt of German government agencies, a country that has passed a constitutional amendment to balance the budget by 2016. (Hellooooooo! Is anyone in Washington listening?). You then short in equal value amounts the debt of Portugal, Ireland, Italy, Greece, and Spain. This trade already delivered a home run in a matter of weeks, and could have more to go. I managed to catch this indirectly in my January 4 Annual Asset Allocation Review by warning that the dollar haters had become too numerous and were about to get a severe spanking, getting whacked mercilessly by a greenback punching through to the $1.30's initially, and eventually to the $1.20's. This was predictable because the dire straights of the EC's weakest members are certain to prolong the European Central Bank's zero interest rate regime far longer than ours. The debt levels in some of these countries make America look like a paragon of fiscal integrity. Some analysts are predicting that the Euro itself might not even survive the crisis. How long can a sober, conservative German grandfather be expected to indulge the disgraceful habits of its party animal, thrill seeking, drug addicted grandchildren? I fear not long.

2)Whenever I am confronted with non believers in gold, I love to pull out the chart below, showing the Dow Jones priced in the barbaric relic and smack them across the face with it. A 20 year bull market in the yellow metal took the stock index from 1.4 ounces in 1980 to a 40 ounce peak at the top of the dotcom bubble in 2000. It has been falling ever since, dropping to a mere 8 ounces by the end of last year. Today it is hovering at 9.2 ounces, but is definitely looking very heavy. When was the prior stock peak? In 1971, when massive deficit spending, spawned by the Vietnam War, forced the Nixon Shock, which freed gold to float from $34/ounce, sending the Dow fleeing from a 30 ounce valuation.?? Do you see any parallels with today? Iraq and Afghanistan maybe? If we return to the 1980 ratio, the Dow Jones has to either fall 85% to 1,540, or gold has to rocket 6.6 times to $7,300/ounce. With the printing presses in Washington running so loudly that my teeth are starting to chatter, I vote for the latter. The most likely outcome is some combination of the two, where we see stagnant or falling stock prices and rising gold. Do I hear $5,000/ounce anyone? My own $2,300 forecast, the old inflation adjusted all time high, is looking more conservative by the day. Me, conservative? Perish the thought!

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3) Hail to the Stock-Promoter-in-Chief! Given the spectacular performance of the stock market since Obama's inauguration, you might be forgiven for thinking that this was the best record in history. But you would be wrong by a big margin. A bounce back from the 1929 crash delivered an unbelievable 96.5% jump for Franklin Delano Roosevelt in the year leading up to March 4, 1933. He is followed by a postwar boom induced 30.9% appreciation that Harry S. Truman ushered in to January, 1946, the first time the Dow index recovered the 200 level in 17 years. Obama only comes in third with a relatively modest 29.5% pop since his inauguration a year ago. Who brought in the worst return? Jimmy Carter suffered a 19.6% fall during the chronic stagflation of the late seventies. The Vietnam War did likewise to Richard Nixon, with a 17% decline in 1969. Warning to Obama: after FDR's fabulous first year gains, the market struggled for eight more years, until an expected WWII win sent it on a long term upward trajectory. If this president thing doesn't work out for Obama, I guess he can always pursue a career as a Wall Street lawyer.

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QUOTE OF THE DAY

'By 2014, the GDP of emerging economies will surpass that of developed economies'?.The most attractive place in the world to invest right now is China' said David Rubenstein, CEO of the Carlyle Group.