Global Market Comments
October 28, 2009

Featured Trades: (ROACH MOTELS) (FCX), (COPPER), (DOLLAR), (ALTERNATE RESERVE CURRENCY), (LONDON OLYMPICS)

1) This is how you trade this market. Buy the dips on any pull back in any asset, keep a tight stop loss, and run like Hell if it get?s triggered. No doubling up or leaning in. There is only one problem with this strategy. This is how the entire rest of the world is trading! So after the first couple of mouse clicks to the downside, the markets will seize up, as they did last year.?? Anyone with a position larger than the change under your living room sofa cushions won?t be able to get out. Portfolio managers will helplessly watch as their positions get marked down with no trade. The world has been borrowing dollars at zero and buying anything and everything, and the time to pay the piper is fast approaching.?? Dr. Nouriel Roubini, the Turkish economics professor at New York University whose recent negativity has brought him guru like status, made some interesting points yesterday. The Fed is keeping rates low to hasten a recovery before the next election, but Wall Street is jumping on the gravy train and avariciously coining it, creating a new bubble worse than the last one. When the inevitable synchronous global crash happens, it will make last year?s affair look like a walk in the park. There will be no place to hide. If we learned anything last year, it?s that the global capital markets have become Roach Motels. You can check in, but you can?t check out.

2)Last February, I told you I would kill myself if you didn?t buy the world?s largest copper producer, Freeport McMoRan (FCX) (click here for the call). OK, I exaggerate. I said I would throw myself in front of a train. Who knows, I might have survived the train. Since you all followed my advice, you are all now as rich as Croesus, as the stock has since gone parabolic, from $15 to $85, up 560%. Providing the rocket fuel for this move was copper?s leap from $1.25 to $3.00.?? CEO Richard Adkerson is the kind of burly, no nonsense kind of guy you might expect to find in an afterhours bar near one of the many open pits the company works around the world. Although Q3 revenues fell from $4.6 billion to $4.1 billion YOY, FCX has reinstated its dividend, and is clearly back in the catbird seat. China is importing record amounts of copper both for stockpiling and consumption by it explosively growing auto, consumer, infrastructure, and power industries. Record gold prices, which FCX also mines, are giving a further boost. Projects mothballed last year are back on track, and idle equipment is going back to work. When I was at Morgan Stanley during the eighties, any association with the red metal was considered career death, as it was in the grips of a 20 year bear market, trading as low as 60 cents. The guy who covered our big client in the sector was nice enough, but people avoided his table in the company cafeteria in the GM building like he had AIDS. I have to pinch myself when I see copper?s performance today. I wonder where that guy is now?

3) Will people pleeease stop incessantly nattering about the possibility of China dropping the dollar as a reserve currency? What else are they going to use? Monopoly money? Taiwanese dollars? Collectable postage stamps? At $2.3 trillion and rising fast, the Middle Kingdom?s reserves are so enormous that no other currency in the world could accommodate the switch, and no other security offers the necessary depth and liquidity but US Treasuries. China only needs to breathe on any other market for it to skyrocket, we have seen in the relatively Lilliputian commodity markets this year. And really, how likely is it that China embarks on radical new monetary policies that suddenly halves the earnings of it?s exporters, as well as its 30 year hoard of accumulated savings? The demise of the dollar has been predicted more often than the ditching of Microsoft?s Windows as the global PC operating system, and is just as likely.?? Hate the greenback as much as you like, but there just isn?t any other alternative. I have been hearing these arguments ever since the US went off the gold standard in 1971. First there was a perennial Arab threat to price crude in a basket of currencies. Gee, they never seem to complain when the buck is going up. Then there was the speculated emergence of the ?Yen Block?, in the eighties, back when Japan was dominating international trade and the yen was bumping up against ??80 to the dollar. Remember the book ?Japan as Number One? What a laugh. Then we got all that European whining after the launch of the euro, when the weak dollar was every trader?s free lunch. Let?s face it, Europeans hate using someone else?s currency as the primary reserve instrument. Before the dollar, sterling was the de facto reserve currency, and was equally despised. So rather than waste time discussing this issue anymore, let?s talk about something more important, like who is going to win the World Series this year. I?m wearing my Yankees hat.

4) With the British economy mired in a vicious recession, many are wondering if hosting the 2012 London Olympics was such a great idea. The original plan was to convert the one square mile, Lower Lea Valley site into a new suburb, and sell the condos to hungry buyers at high prices. Market conditions today couldn?t be more hostile. Runaway cost overruns have pushed the budget from $2.8 billion to a back breaking $9.3 billion. The East London neighborhood is so bad that ?when you take the tube out there, life expectancy declines with every stop,? said one staffer. A profusion of undiscovered WWII bombs, a stone age cemetery, and a toxic waste dump have also caused delays. When I lived in England I flew over this area weekly to skirt the Eastern edge of the London air traffic control zone, and I will be charitable in calling this place an industrial wasteland. The last time the British attempted a major project like this, the 2000 Millennium Park, multibillion dollar losses resulted. But who can forget that great film Chariots of Fire? Maybe it?s worth it for the Brits after all?

Global Market Comments
October 26, 2009

Featured Trades: (CANADIAN DOLLAR), (FXC),
(AUSTRALIAN DOLLAR), (FXA), (NEW ZEALND DOLLAR),
(BNZ), (RSX), (OIL), (ZACHARY KARABELL)

1) It?s all about the dollar, which I have despised all year like the red headed stepchild it has become (click here for my initial recommendation). The assured onslaught of federal debt issuance headed our way will be the overriding investment consideration for traders and portfolio managers for the next decade. That will knock the stuffing out of the greenback against every currency except the Zimbabwean dollar, and even that will rally when you get a long overdue regime change. As the new currencies of barrels of crude oil, 100 pound ingots of copper, or rail cars of iron ore won?t fit into your wallets or purses, foreign currencies offer a great dollar alternative. There was once an argument that foreigners piled into these currencies to capture a huge yield pickup, but even that advantage is now gone, with almost everything now yielding nothing. The soggy buck also explains a lot of what is going on in our stock market, with companies earning most of their revenues from increasingly wealthy foreigners, like those in technology, energy, and commodities. As I write this, I am looking at new one year highs for my favorite picks of the former British crown colony currencies of the Canadian dollar (FXC), up 28% YTD, Australian dollars (FXA) up 49% , and New Zealand dollars (BNZ), up 80%? dollars. Their bounteous natural resources, Anglo-Saxon contract law, a semi common language, and vibrant ports make them the safe bet of choice. Sure, they are all overheated and way overdue for a short term pull back. But over the long haul, you can count on the loony to hit parity, to be eagerly followed by the Aussie dollar, and then the kiwi. And once again, I am including a gratuitous photo of my favorite Canadian, Pamela Anderson to pique your interest.

2) Last January I was extremely positive about building long equity exposure in Russia, one of the two BRICKS that is a big energy exporter (click here for the call ). I predicted that the Market Vectors Russia ETF (RSX) would deliver double the upside of the S&P 500 in the imminent bull market. Well I lied. It actually tripled, while the Dow eked out a measly 70%. It even would have worked as a market neutral pairs trade, long Russia, short the US. This was an oil play on steroids, and with crude then trading in the $30s, how hard of a call was that? A recovery in the ruble also gave you a nice hockey stick effect in the dollar traded ETF. The bounce in the Russian currency stopped the country?s reserve outflow dead in its tracks, and enabled the Russian Central Bank to start slashing interest rates from the nosebleed territory of 13%. There is plenty of room for further cuts. But Russia is not out of the woods yet. Some 30% of the $780 billion in corporate debt is due for rollover this year, and the unemployment rate is at 9.5% and climbing. It also doesn?t help that they lock up oligarchs on bogus tax charges, and will expropriate foreign assets at the drop of a hat, as they did from Shell and British Petroleum. But none of my investors told me I could only do business with nice people who gave me a warm and fuzzy feeling. A rising oil price atone for all sins, as any Middle Eastern sheik can attest. You might want to take a shower after you write the trade ticket, buy hey; sometimes you just have to follow the money. Just watch out for the volatility.

3) Zachary Karabell, president of River Twice Research, is one of the few original thinkers out there who also has a sense of humor. So there?s more than one? Zach has brought his considerable talents to bear on the current state of the Chinese-American relationship in a new book, Superfusion: How China and American became One Economy and Why the World?s Prosperity Depends On It.? International trade has fused the two countries into a single economic unit that accounts for a quarter of the world?s population and a third of its GDP, despite wildly different cultures, much like the loose confederation that makes up the European Community. The Middle Kingdom now has reserves of $2.3 trillion, which is overwhelmingly invested in the US. Where else can it go? That enabled them to step up and play an important role in the bail out of the US financial system this year. But it is an imbalanced agglomeration, with Americans over consuming and under saving and the Chinese doing the reverse. This has to stop, lest the symbiotic relationship tears itself apart. The tit for tat, storm in a tea cup, where the US imposed punitive import duties on Chinese tires and the they retaliated with a ban on American chicken feet (yes, they eat them, yuk!), is a recent example. The reality is that old, boring industries that once might have fought tooth and nail for protection are now migrating to China en masse and finding new life. Bet you didn?t know that General Motors sells more cars in China than in the US, some 1.6 million this year? Don?t hold your breath waiting for China to float the Yuan, as it is one of the few tools that give the Mandarins in Beijing direct control of a huge, disparate economy. Chinese military spending is so parsimonious that it won?t remotely comprise a threat to the US. What little they have is directed at potential regional aggressors, like Japan, India, and Russia. The greatest risk to the existing relationship is that Chinese growth continues so rapid, that it pits them against the world in resource bidding wars, which could get ugly. With crude at $82 and copper at $3, has that already started? The book is well worth a read for some excellent ?out of the box? analysis. Does anyone have any good recipes for chicken feet?

1) The black GM Suburban barreled into the parking structure at San Francisco?s posh St. Francis Hotel, its emergency lights flashing, and quickly disgorged a team of secret service agents. Behind them the armored Cadillac limo screeched to a halt, and out lept Barrack Obama, the President of the United States. He came to speak to a select group of wealthy, A-list, party faithful who had paid $15,200 each for the privilege of? having their picture taken with our famous president. Although the tension was so thick you could cut it with a knife, Obama firmly shook my hand with the controlled cool he is famous for, and produced the obligatory grin for the camera, as if on autopilot. The scene outside in Union Square was a mad house, with every fringe group but the Lemurians well represented, and the police struggling to prevent a shouting match between antiwar demonstrators and the anti-abortion activists exploding into violence. An Obama win in the California was never in doubt, with 85% of some districts going for the Democratic candidate. Yet,?? the Golden State was a mandatory stop for Obama as it generated the cash flow needed to fund wins in a half dozen battleground states. The support paid off, as dozens of desperately needed infrastructure projects started raining down upon us the second after the budget was passed, and no less than a half dozen UC Berkeley notables filed into the administration, with more waiting in the wings. I always thought that Obama was a man from the future, but he is 150 years from the future, and would bring upon us more rapid change than many even in his own party are able to digest. He is not an African American, but an African and an American, and bears no taint of slavery in his DNA. He is taking huge risks with the future of the country now, and may drive us all to ruin if his lofty plans don?t work out. But what choice does he have? The backdrop for the 2012 was either going to be the Great Depression II or a fragile recovery fueled by massive borrowing. Seems like a no brainer to me. I?ll just go out and short more dollars, laughing all the way to the bank. Call me a cynic, but as they used to say at Morgan Stanley, who is guilty of losing the $100 bill, the guy who dropped it, or the one who picked it up? You can find the photo on my Facebook page.

2) It warmed the heart to see my old Morgan Stanley (MS) colleague, Byron Wien, on TV. After my incendiary and iconoclastic interview with Bill Fleckenstein yesterday (click here to read), I thought I?d get the view from the other side of the street. Byron was our strategy guru at MS, then went on to mega hedge fund Pequot, and then parachuted comfortably into a co-chairman?s role at the all seeing, all knowing Blackstone. At 76, he looks pretty old and crotchety, but then he looked old and crotchety when I first met him 30 years ago. Byron gained his fame by annually publishing a top ten list of market surprises that traders believe are unlikely, but have a high probability of happening, which the clients used to absolutely eat up. His list for 2009 is looking pretty good. Back in January when the world was ending, Byron predicted that by year end, gold would blast through to a new high of $1,200, oil would rebound to $80, the S&P 500 would reach 1,200, Chinese growth would come in at 7%, ten year Treasuries would sell off to a 4% yield, housing would bottom, and Obama would become a hawk on Afghanistan. He could be batting ten for ten by year end. He argues that Christmas sales will come in better than expected, and the top line surge will enable the S&P 500 to climb the last leg to his target. We are close enough to his other targets to call it a win for him. When his next top ten list comes out in January, pay close attention.

3) One of the great pleasures of running an online business like this is that not a day passes without being totally amazed by the Internet. You may recall that last week I wrote a piece translating the arcane Latin found on a US dollar bill (click here for the story). What do I find in my in-box the next morning but a dozen new subscriptions from Romans! Who knew Romans were surfing the net? I mean the modern kind from Rome and other parts of Italy. It turns out that an Italian language investment website is screening the net for Italian language pieces, and to your dumb, garden variety search engine, Latin is close enough. If you want to give your Italian a real work out and see that I?m not making this up, click here . I haven?t been to Italy since I totaled a plane there taking off from Palermo, Sicily, which it turns out has one of the worst wind shear airports in Europe (it was a rental). So to my new Italian subscribers, I say, quoting Julius Caesar, vini, vidi, vici!

QUOTE OF THE DAY

?In the next two to three years, more money will be lost in long term Treasury bonds than was lost in the last two years in the stock market,? said Allan Lance of the Lance Letter.

Global Market Comments
October 16, 2009

Featured Trades: (RESIDENTIAL REAL ESTATE), (ETF?s), (CALIFORNIA WINE MARKET)

1) I can honestly say that I have worked for the worst boss on the planet, Rupert Murdoch, when I free lanced for his flagship newspaper, The Australian. No matter what I wrote about Japan?s trade down under in sugar, wheat, coal, iron ore, steel, or uranium, it was always ?bloody awful,? even though I was usually accurate, timely and right (and cheap). His visits to Tokyo were a total nightmare, and since I was the only one in the organization then who spoke Japanese, the chore to escort him always fell to me. I can tell you that the grandfatherly Rupert you see today is a cheap, watered down Chinese imitation of the tyrant who terrorized us 30 years ago. When good people were fired, which was often, they were overwhelmed by an immense sense of relief. That rant aside, his newly acquired toy, the Wall Street Journal, still occasionally publishes some useful information. The October 5 issue ran a survey of websites for Exchange Traded Funds, the most popular and rapidly growing investment vehicle to come out so far this century.? ETF?s make possible narrow, rifle shot bets on specific, markets, sectors, currencies, and commodities in both long and short, and leveraged or non leveraged formats. They are the perfect securities for a guy like me who is constantly trolling the world for opportunities. Morningstar (click here)? is the most comprehensive, handing out star ratings, as it does with mutual funds. Tom Lydon?s ever helpful ETF Trends (click here) , offers a paid subscription service, which publishes 8-10 specific ETF recommendations a day, based on his own investment strategy, which is somewhat similar to my own. For a free ETF data base and directory you can go to the ETF Guide (click here) . To check out the WSJ piece in its entirety, please click here .

2) Since I have been pelted daily with predictions that residential real estate has bottomed for the last two years, like hail in a Midwestern summer thun derstorm, I feel a public duty to tell you that is just not the case. Now that the state and federal moratoriums are off, foreclosures are accelerating. There are over a million Option ARM and Alt-A loan resets about to hit the fan. Since many owners will not see positive equity in their homes in their lifetimes, banks are seeing more walk aways and keys mailed in, often with tearful letters attached. The run up in mortgage rates from 4.5% to 5.5% has yet to hit the market. Some 18 million homeowners divert 50% of their incomes to pay for housing, double the 25% that is considered healthy, and many of them are losing jobs at a record rate. While the volume of units sold has rebounded, the action is dominated by speculators, flippers, and bottom feeders bidding for properties at 10-40 cents on the dollar, not exactly a sign of health. I like to visit the plethora of open houses in my neighborhood, but always find the dead broker hanging from the showerhead a bit of a downer for a Sunday afternoon. Call me when Ozzie & Harriet Nelson come back to the market. I listened to industry insiders call the bottom of the Japanese real estate market for 15 years, until they finally died, and the market is still a fraction of its 1990 high. I think we are closer to the bottom than the top in terms of price, but closer to the top than the bottom in terms of time. You can take that to the bank.

3) One of the great things about living in Northern California is the proximity to Napa Valley, one of the world?s preeminent wine making regions. But as children frolicked in huge tubs of merlot at the annual fall grape stomping ritual, nothing but sour grapes could be heard among the vineyard owners huddled in small furtive groups.? The California? market has crashed, with premium Napa Valley cabernet fetching only half the $4,000/ton achieved only two years ago. The weather hasn?t helped, with alternating hot and cold spells shrinking the harvest by 10%-20%.? The glassy winged sharpshooter pest is an ever present risk, and there are still some holdouts of the phylloxera plague that forced most grapevine roots to be torn up two decades ago. Plunging prices and shrinking volumes do not make a great business model. Napa had its own version of the subprime boom, with nouveau riche pouring in to buy starter vineyards brandishing vanity labels-no experience required. Today foreclosures on these trophy properties are rampant, and you can buy them for a dime a dozen. CALPERS, the California State Pension Fund?s $200 million investment in the sector is starting to smell like a three day old bottle of Thunderbird, not fit for use as salad dressing. The new age of frugality has consumers migrating en masse to the low end of the market, leaving high priced labels like Opus One and Grgich Hills (made famous by the cute movie Bottle Shock) stranded in the marketplace. Central Valley winemaker and low end mass marketer, Charles Shaw, known locally and unaffectionately as ?Two Buck Chuck,? is making a fortune buying bulk wine at bankruptcy auctions for 50 cents a gallon, bottling it at his Napa plant, and knocking it out as low end supermarket wine with the Napa appellation for, well, $2. It?s a great time to expand your portfolio to investment grade wine. At least you can drink your mistakes.

QUOTE OF THE DAY

?The only recovery that?s happening is the one on Wall Street. The one on Main Street hasn?t happened yet,? said Gary Kaminsky, the former managing director of Neuberger Berman, who thinks liquidity and fear of underperformance could drive stocks higher for the rest of the year.

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