1)I managed to get my former Morgan Stanley client on the phone, Templeton emerging market honcho Mark Mobius. This is almost impossible to do, since Mark virtually lives on his Gulfstream, jetting near and far in search of the next great undiscovered investment pick. Mark is the only guy I know who has been studying emerging markets longer than I, as long as I don?t count that time I almost got my ass shot off in Algeria in 1968. We?ve both been doing this since most of the populations in these countries were barefoot. Emerging markets are still the place to be, especially China, Thailand, Brazil, Mexico, Turkey, and South Africa, but don?t take your eye off the ball, because the volatility in these markets can be huge. China will continue to lead the global market recovery. Commodities are a buy, as are their producing stocks. You also want to own consumer stocks in countries where there are rising standards of living.?? Russia took it on the nose last year, but will get bailed out by a rising price of oil, and in any case, is economically much stronger than its last crisis in 1998.?? If you are going to play in this space, it is best to diversify to spread around?? risks. No country has a monopoly on making money. Also be patient and invest for the long term. These markets can be tough to trade. All great advice to live by. I think you need to keep the emerging market ETF (EEM) and the China ETF (FXI) permanently on your radar.

2) I had a chat with Bill Gates, Sr. last night, co-chairman of the Bill and Melinda Gates Foundation, the world?s largest private philanthropic organization. There, a staff of 800 help him manage $30 billion. The foundation will give away $3.1 billion this year, a 10% increase over last year. Some $1.5 billion will go to emerging nation health care, and another $750 million to enhance American education. The foundation?s spending in Africa has been so massive, that it is starting to have a major impact on conditions, and is part of the bull case for investing there. The fund happens to be one of the best managed institutions out there, having sold the bulk of its Microsoft (MSFT) stock just before the dotcom bust and moving the money into Treasuries. Mr. Gates? pet peeve is the precarious state of the US K-12 public education system, where teaching is not as good as it could be, expectations are low, and financial incentives and national standards are needed. When asked about retirement, he says ?having a son with a billion dollars puts a whole new spin on things.??? Now a razor sharp 83, his favorite treat is the free Net Jet miles he gets from his son Bill every year. In his memoir Showing up for Life, he says a major influence on his life was his Scoutmaster 70 years ago. Being an Eagle Scout myself, I quickly drilled him on some complex knots, and he whipped right through all of them. The world needs more Bill Gates Srs.

3) Henry Blodget?s Clusterstock (http://www.businessinsider.com/clusterstock) has this great service called the ?Chart of the Day?, which occasionally sends out some real lulu?s. Take a look at the chart below, which illuminates the incredible decline in American home equity since 2007, plunging from 100% to 50% of GDP. We are rapidly approaching the 1965 level, and could reach a percentage not seen since the fifties this year. If you know any ?green shoots? cheerleaders out there, you better e-mail them this chart. If Americans have just lost much of their largest asset, who is going to spend us out of this recession?

4) Since I am an avid collector of investment scam stories, I?ve got to update you on what?s been coming out of Switzerland. Two Japanese nationals were caught smuggling $134 billion in US Treasury bonds from Switzerland to Italy in a false bottom suitcase. No that is not a typo, that is ?b? for billion. The two were mysteriously let go the next day. The blogosphere is exploding with conspiracy theories about the paper, which is almost certainly fake. Are there now so many T bonds out there that $139 billion of bogus ones can easily disappear into the mix? Personally, I see North Korea?s and the Japanese yakuza?s fingerprints all over this. Fake bonds can?t be traded, but I can think of any number of banks in Switzerland that would unwittingly accept them as collateral. But collateral for what? Why do I expect George Clooney and Brad Pitt to pop up on this one. (Ed note: please see gratuitous attempt to include George Clooney?s photo in a financial newsletter for the female readers).

QUOTE OF THE DAY

?Some of the green shoots may be poison ivy,? said Art Cashin, director of floor operations at UBS Financial Services.

1) Ho hum. Another day of financial reform debate. Another day of closing the barn door after the horses have bolted. Please stop scratching your fingernails on the chalkboard, will you? What has the market come to? The volatility index (VIX) spikes 7% in one day, and we only get a 187 point drop in the Dow. It?s getting so you can?t even get a decent crash going. Thank goodness I?m not a Master of the Universe anymore. Life in that industry is about to become incredibly boring.

2) Here?s a follow up on my call to buy wheat yesterday. There is a new fungus out there called UG 99 which has the potential to wipe out 80% of the world?s wheat crop. It has been doing damage to crops in Africa for the last ten years, and if it escapes to Asia, where wheat is a major part of the diet, the results could be disastrous. Sygenta (SYT) is the world leader in producing the fungicide for this particularly nasty form of wheat rust, and has already seen its stock double over the past eight months. Unfortunately, ridiculous European fears about genetically modified crops and ?Frankenfoods? have discouraged further research in the field. There is no money in wheat, so companies like Monsanto and Du Pont focus their attentions on rice, soybeans, and canola, which see more processing and are therefore less subject to the EC restrictions. Needless to say, if UG 99 makes it to Asia, or Heaven forbid, here, the effect on prices would be unimaginable. See the long term bull case for grains. There will be no food bailout. The Fed can?t print calories.

3) Last January I was extremely positive about building long equity exposure in Russia, one of the two BRICKS that is a big energy exporter. I predicted that the RSX would deliver double the upside of the S&P 500. Well I lied. It actually came in at 2.4 times the US market performance. It even would have worked as a pairs trade, long Russia, short the US. This turned out to be an oil play on steroids, and a recovery in the ruble 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 shaving interest rates from the nosebleed territory of 13%. There is plenty of room for further cuts. Russia is not out of the woods yet. Some 30% of the $780 billion in corporate debt is due for rollover this year, the unemployment rate is at 9.5% and climbing, and ruble short term rates are at a sky high 15-20%. It also doesn?t help that they lock up oligarchs on bogus tax charges, and will expropriate foreign assets, as they did with Shell, at the drop of a hat. But none of my investors told me I could only do business with nice people who gave me a warm and fuzzy feeling. I had to bribe my late wife out of Moscow?s notorious Lubyanka prison once. But a rising oil price atones for all sins. Use this dip in crude to add to your positions, but watch out for the volatility.

4) If we are just on the verge of entering a long term bull market for nuclear energy, as I mentioned in my earlier piece, then you would have to expect the same for nuclear fuel producers. Last year, the US consumed 55 million pounds of ?yellow cake? or uranium oxide, but produced only 4 million pounds. The rest came out of stockpiles or from imports, much if it from the reprocessed Russian nuclear warheads. The new Dept. of Energy under Dr. Stephen Chu has made a big priority of making loan guarantees available to expand nuclear capacity from a lowly 20% of our total grid. The price of uranium is also rising, dragged up by crude, and has bounced 25% from a low this year of $40/pound, to $50. You can take a look at Austin, TX based Uranium Energy Corporation (UEC), which could start production at its Golead mine next year.

QUOTE OF THE DAY

?A nation of sheep will beget a government of wolves,? said the legendary CBS correspondent Edgar R. Morrow.

1)I heard a little tidbit yesterday that makes me feel like I just ate a bad fish taco. Frontline, the world?s largest tanker company, says that it has 100 million barrels in storage, the equivalent of five days of US consumption, the result of the spectacular contango situation that exists in the crude futures market. Traders have been buying front month crude, storing it, and reselling it one year out for non leveraged profits of up to 75%. With spot now at $72.12, and futures for December delivery selling at $75.56, that spread has narrowed to an annualized 9.53%. The last crude top was made by the filling of the Strategic Petroleum Reserve. Could this intermediate top be put in by the filling of the world?s excess tanker fleet? This makes me worried not just about crude, but all of my longs in commodities and their producing stocks, the S&P 500, the BRICK?s, and everything else that has enjoyed a torrid doubling since the beginning of the year. Could gold?s poor performance this week, which dropped from $990 to $935, be the canary in the coal mine? And by extension, is it time to take profits on my short Treasury positions by selling the TBT, which has also doubled? There are just too many charts hanging around their 200 day moving averages to dismiss this lightly. I hate to sound redundant, but selling in May is looking more clever by the minute. Cash is King.

2)After spending time with the Sierra Club last week, I thought I?d pop next door to San Ramon and get the other side of the story from Dave O?Reilly, CEO of Chevron (CVX). The original Standard Oil of California and one of the Seven Sisters, Chevron has a storied history. It discovered the Ghawar field in Saudi Arabia in the thirties, the world?s largest, and later took over Gulf Oil (from Paul Getty), and Texaco. It is now the largest company in California.?? David says the world needs 245 million barrels/day to function. The problem for the US is that over the last 20 years demand has increased by 4 million b/d, while depletion has cut domestic production by 4 million b/d. The 8 million b/d gap can only be met with imports, which is why Chevron now earns 75% of its earnings from overseas, doing battle with Nigerian rebels and uncooperative foreign governments. The net net is that oil prices are going up. All alternative sources will need to be developed to deal with this widening gap, be it wind, solar, biofuel, or nuclear. Chevron is in fact the world?s largest producer of geothermal energy, accounting for 2% of its total supplies, is also the state?s largest installer of solar panels, and has invested $300 million in biofuel research. This is more than just ?feel good? money. The real impediment is that capital turnover in the energy industry is extremely slow. Coal fired power plants can last a century, and our 245 million cars last 15-18 years. Some of today?s low mileage clunkers will still be on the road in 2030. Even with the best efforts, Chevron will get three quarters of its revenues from oil in 2050. There is 100 years worth of investment in our current energy infrastructure and it won?t be replaced overnight. We will be lucky if we can cut CO2 emissions by 25% by 2050, a far cry from the Sierra Club?s 90% goal. The quickest way to cut emissions is to convert our coal fired power plants to natural gas. When Chevron took over Texaco in 2001, it inherited its legal headache in a $27 billion lawsuit over clean up of the Lago Agrio field in Ecuador, a hot button with environmentalists. Now David, a modest Irish engineer who came up through the research side of the company, has to be escorted by bodyguards at public events.

3) The seventies are about to make a comeback. No, don?t drag your leisure suits, bell bottoms, and Bee Gee?s records out of your storage facility. I mean the nuclear industry, which has been in hibernation since the accident at Three Mile Island in 1979. There is absolutely no way we can deal with our energy crunch without a huge expansion of our nuclear capacity, which sits at a lowly 20% of our power generation. France has already achieved this, getting 85% of its electric power from nuclear, followed by Sweden at 60%, and Belgium at 54%. Unless you?re a nuclear engineer, you are probably unaware that the technology has moved ahead four generations. The first one produced the aging behemoths we now see on coasts and rivers, which used high grade fuel that would melt down if someone forgot to flip a switch. Generations two, three, and four never got off the drawing board. Generation five is not your father?s nuclear power plant, relying on a new form of fuel embedded in graphite tennis balls that is just strong enough to generate electricity, but too weak to risk a disaster. This eliminates the need for four foot thick reinforced concrete containment structures, which accounted for 50% of the old design?s cost. Low grade waste can be stored on site, not shipped to Nevada or France. The permitting process is being shortened from 15 years to four by confining new construction to existing facilities instead of green fields, urged on by a less fearful public and even some CO2 conscious environmentalists. At least 30 new reactors are expected to start construction in the US over the next five years, and over 90 in China. There has got to be an equity play here. The Market Vectors Nuclear Energy ETF (NLR), which has jumped an impressive 78% to $25 since March, is the easiest way in. You can also buy its largest components, like Cameco (CCJ), the world?s largest uranium producer, or ??lectrict?? de France (EDF SA) which has the monopoly in France and is developing a major export business.

4) I can tell you right now that cap and trade is going to win the political battle over a carbon tax, hands down. Don?t waste a nanosecond of your time even thinking about it. Nobody wants to be tarred with pushing a new tax, and Wall Street is gearing up to make a fortune in the new trading vehicle. Europe has already adopted the system, and a Paris based exchange called Bluenext, partnered with NYSE Euronext, trades Certified Emission Reduction credits (CERS?s). Some 4-6 million CER?s trade each day worth $50-$75 million. After peaking last year at ???30, CER?s crashed to ???7.5 in February and then bounced to ???12.72 today. They are traded in 1,000 unit lots, and are backed up with far month futures contracts. Check out their cool website at http://www.bluenext.eu/. Morgan Stanley and Goldman Sachs have already set up trading operations in the instrument. The EC government grants CER?s to green companies, which them sell them to big polluters, which must buy them to expand thei
r business. The costs are passed on to consumers. The system contributed to a 3.8% reduction in CO2 emissions in Europe last year. The current world market for carbon credits is $126 billion, but if the US joins the system that will jump by $1 trillion. I was involved in the creation of the Japanese equity warrant market in the early eighties, and I can tell you that new, poorly understood markets with spreads wide enough to drive a truck through are a license to print money for the early players. Perhaps there is hope after all for the legions of traders, market makers, brokers and analysts left unemployed by last year?s collapse.

QUOTE OF THE DAY

?Le laisser-faire, c?est fini,? said French President Nicolas Sarkozy, as only he can say it.

1) I chatted with Jeff Rubin last night, former chief economist with CIBC World Markets, who reaffirmed my own hyper-bull case for crude in bucketfuls.? He was in San Francisco, admiring our civic planning and mass transit system, as part of a tour to promote his new book ?Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization.?? We are in the bottom of the ninth inning of the hydrocarbon age. The next super spike will take us to over $100/barrel within 12 months of the beginning of an economic recovery, and much higher after that. The problem is that we are losing 4 million barrels/day through depletion just when demand is increasing. The only offset will be dirty, foul, huge carbon footprint, $100/barrel Canadian tar sands, which will double, to account for 40% of our imports. The biggest increase in consumption is in OPEC itself, where consumption has ballooned to 13 million barrel/day and oil is being wasted on a prodigious scale, compared to only 7 million b/d in China. Gas there costs only 25 cents/gal, utilities in Saudi Arabia pay only three cents/gallon for bunker fuel, and Dubai is blowing 3,000 b/d equivalent running an indoor ski resort. Oil over $100/barrel will bring globalization to a screeching halt. Economies will go local because it will cost too much to transport goods, as we have in the past. No more California avocados in Toronto. More importantly, no more Chinese steel in the US, or any other heavy exports, which will lead to a resurgence in domestic manufacturing and the jobs that come with it. Last year $90 of the $600 cost of Chinese steel went to shipping costs. $10/gal gasoline will take 50 million of our 240 million cars off the road. Even if we replace them with electric cars, we don?t have the power grid to juice them. Chinese exports will collapse, but so will their Treasury purchases, meaning no more bailouts for us. Oops. Subprime neighborhoods will get plowed back into farmland so we can eat. I think Jeff is dead on about oil prices. But as necessity is the mother of invention, some of his? predictions about their impact on international trade are a bit extreme for me.

2) Just another update on my core short in long dated US Treasury bonds, the TBT, which hit a new high for the year of $60, up 72% from my initial call . The nine to eleven year note auction went off OK, despite its enormous size. What drove the yield on the ten year to a seven month high of 3.99%, the 30 year to 4.67%, and herded buyers into the TBT was the May US budget deficit of $190 billion, an all time record, despite massive inflows of income tax revenues.? There was also word that Russia didn?t want to buy any more US government debt because they hated the dollar. After having spent four decades on the front lines of the cold war, I have to pinch myself when I hear stuff like this. The news sent equities on a 200 point intraday swoon. If higher rates and $70 crude don?t go away, they are going to kill the stock market. Everyone is holding their breath for the 30 Treasury bond auction tomorrow. The time to pay the piper is coming, and his rates are going up.

3) The Dana Point, California St. Regis Monarch Beach Hotel has defaulted on a $70 million loan, while lenders have repossessed the ?W? Hotel in San Diego. Thus, the spotlight is again refocused on the next phase of the financial crisis, where an army of shoes are falling. A torrent of tenant bankruptcies is creating ?see through? buildings in cities throughout the country, which are becoming as abundant as Priuses at an Obama rally. Some players see a further three year bleed that could take property prices down another 40% from here. Large, publically traded REITS have used the three month stock market rally to raise $11.5 billion in new equity that will enable to reduce debt and leverage, as well as buy up of weak competitors and distressed property. Look at Simon Properties Group (SPG), up 128% from the March lows. The saving grace here is that the recent bubble was nowhere as inflated as the S&L crisis in the early nineties. But cap rates may have to climb to the double digit levels we saw then before this period of punishment ends. Cash rich hedge funds are circling.

4) The Western US has found a new wrinkle in the housing collapse, where homeowners are desperately struggling to cut living costs to meet the next doubling of their adjustable rate mortgage payments on their underwater houses. Raising horses can cost more than children, so Nevadans are turning them loose to join herds of wild mustangs, to dodge the $30,000/year it costs to board and care for them. Local populations are exploding, eating local ranchers out of house and home, who depend on public grazing lands to feed commercial livestock. Mustangs are the feral descendents of horses which escaped the conquistadores, and there are now thought to be 30,000 out there, down from a 19th century peak of 2 million. The Bureau of Land Management has another 30,000 in pens, and is making 10,000/year available for adoption at $125/each. The problem is that many adopt ?pets? who then flip them to Canadian slaughterhouses, which cater to the odd French taste for horseflesh. To see how this works, watch Clark Gable?s last film, The Misfits. Madeleine Pickens, the wife of famed oil trader Boone Pickens, has offered to take the BLM?s entire herd and put them out to pasture at an undisclosed million acre location. If there is anyone who could have an undisclosed million acres, it is Boone. I have frequently run into majestic and beautiful mustang herds over the years while camping in the remote desert (no, I don?t go to Burning Man). Reminding me that there is still some ?wild? in the ?West?, I will miss them if they are gone.

QUOTE OF THE DAY

?There will be no energy bailout. The Fed can?t print BTU?s,? said Jeff Rubin, former chief economist at CIBC World Markets.

1) Get me out of oil! I love a core long position in this commodity, and expect it to hit $200 before I join the AARP. But we have really gone too far, too fast, and are seriously in overshoot territory. Industry traders have been taking advantage of the greatest contango of all time, buying the front month contract, taking delivery, keeping it in storage, and reselling it forward to reap returns of up to 50%. And that is without leverage! Clever analysts are resorting to Google Earth to spy on storage facilities via satellite. Non industry players have been buying it as a dollar replacement. Crude burns better than dollar bills. As a result, crude in storage has ballooned to record levels. All fine and good when the price is going up. But crude can't stay this high once the sugar high that is sustaining the economy burns off. Better to bail now at $70 and buy it back at $50 once reality sets in. And for Heaven sakes, don't try to get to clever by shorting the stuff!

2) I have watched many countries go bankrupt over the years, as my collection of defaulted bonds hanging on my wall attests. Governments borrow so much that the cost of the debt service exceeds the national budget, so the country has no choice but to quit paying.?? I am starting to see disturbing parallels here. Bush took the national debt from $5 trillion to $12 trillion, and Obama will inflate it to $17 trillion by the end of 2010, boosting it to a frightening 82% of GDP. The cost of the borrowing is rising too. Today a 1% jump in bond yields raises the federal interest burden by $50 billion. The Congressional Budget Office says that figure will explode to $170 billion in ten years. Can you see the same hockey stick, hyperbolic, exponential growth in obligations that I do? Interest rates will soar to double digits, the dollar will crash, and private borrowers will get crowded out of the market, taking the economy into the tank. People blanche when I tell them that my target for the PowerShares US Lehman leveraged short government bond ETF (TBT) is $200, but the logic is inescapable.

3) I met with Dr. Christina Romer, chairman of the Council of Economic Advisors, who practically tore my ear off proselytizing her new found religion, health care reform. Appointed by Obama to advise him on all things economic, Dr. Romer had this hot potato dropped in her lap six weeks ago in one of her daily briefings to the President. With the enthusiasm and ebullience of a new found convert, Dr. Romer laid out goals that were nothing less than revolutionary. She plans not to just 'socialize' medicine, but to fundamentally rebuild the entire health care infrastructure of the US. Tax incentives will be created to encourage value over volume. People can keep existing plans they like. Technology will be applied to cut costs, not only to come up with more complicated and expensive cures. Existing subsidy programs for the poor will be folded into the new plan, offering coverage to 46 million uninsured.?? Providers will get cash incentives for prevention. Individuals will gain the advantages of risk pooling. Pre-existing conditions will be covered.?? All of this will be made revenue neutral through the taxation of employer paid insurance and savings through new efficiencies. If the administration can pull all of this off, the benefits will be huge. An annual 1.5% reduction in health care costs will add 8% to GPD and increase family incomes by $10,000/year by 2040. This will boost corporate profitability and competitiveness, labor mobility, the quality of life, and reduce the budget deficit and unemployment. Failure will see health care spending rocket from the current 18% to 33% of GDP in 30 years, and the number of uninsured explode to 76 million. Romer spewed out statistics as only an economics PhD from MIT can. Oh, and now or the stuff you care about. The economy will shrink in Q2, see no growth in Q3, and turn positive by Q4. The issue doesn't affect me, as I have always avoided health care, insurance, pharmaceutical, and biotech stocks like the plague; they being subject to capricious government approvals, and therefore inherently unpredictable. These are the opening shots of a political dogfight that will ensue over the next three months and dominate the media.

4) America's economy was powered by personal computers in the eighties, the Internet in the nineties, and credit cards and subprime loans in this decade. So what is America's next gig? I think conversion of the global energy grid to alternative sources is the best candidate. If you took this out of the realm of geeky engineering graduate students and high school science projects and made this a national priority and a defense issue, it could become a major GDP driver for decades. Using the broadest possible definitions, the number of green jobs could grow from one million today to 37 million in 20 years, or 17% of the total work force. Since many of these jobs are in local construction and installation they can't be exported. Last year, 8,000 megawatts of wind power was built, the equivalent of seven large coal fired plants, accounting for 42% of all new power generation. If the US develops cost competitive clean energy while China is still stuck using the expensive dirty stuff, it will have a competitive advantage that could reverse the terms of trade with the Middle Kingdom. The US would also have superior technology that it could sell to the rest of the world. I can tell you that green energy is one of the few themes that gets a hearing with venture capitalists these days, and this will be a major stock market driver down the road. I know this is all long term stuff, but remember buying Apple (AAPL) at $4 in the early eighties?

QUOTE OF THE DAY

'In a social democracy with a fiat currency, all roads lead to inflation,' said legendary hedge fund manager Bill Fleckenstein.