'Ten year government bonds yielding 2.5% are an accident waiting to happen,' said hedge fund legend Leon Cooperman of Omega Advisors.
Featured Trades: (PEAK LIGHT), (THE FIBER OPTIC CABLE SHORTAGE)
3) Now It's Peak Light. Many of the big telecommunications investments of the last decade were made possible because the cost of long distance transmission was essentially free, thanks to the massive overbuilding that took place during the dotcom boom.
That era may be coming to a close. It has required ten years to take up the slack, but it now appears that we are finally running out of fiber optic capacity. Take a look at the chart below showing an exponential growth of fiber optic demand, while the supply is leveling off. The big driver here has been the explosion of high bandwidth applications, such as online video, gaming, and the profusion of smart phones. That is the conclusion that is coming out of recent telecom industry conferences.
What are the implications for you and me? Count on your phone, cable TV, and broadband bills to go up. Also expect the profit margins of the big carriers, like Comcast (CCS), to shrink. More importantly, this means that there is a great investment opportunity setting up here.
I am always looking for exponential growth in demand to overwhelm linear supply, sending prices rocketing, as we are now seeing across the board in commodities and food. The only thing that could upset the apple cart here is a sudden technological breakthrough that would enable a rapid, cheap growth in capacity, as we saw in the nineties. But there is nothing remotely like that in the immediate pipeline.
I will be looking for companies that are narrow pure plays that capitalize on this trend. If anyone knows of any, please e-mail some ticker symbols to me at madhedgefundtrader@yahoo.com. For now, I just thought you'd like to know that this trend is out there.
About to Become Scarce?
Featured Trades: (THE EURO AND GLOBAL RISK APPETITE), (FXE)
4) The Euro is the New Canary in the Coal Mine. Short term traders and long term investors should be keeping a laser like focus on the Euro/dollar exchange rate these days, as it has emerged as the canary in the coal mine for global risk appetite.
We live in a binary world now, and the European currency seems to have the highest correlation with the risk appetite of every description. When the markets are in 'risk on' mode, watch the Euro rocket. US stocks, emerging markets, bonds, commodities, and precious metals head off to the races. When the Euro falls back, markets are in 'risk off' mode, investors run for their bunkers, and the price of everything declines. This applies not just to your risky, marginal positions, but to all of them. It's really that simple.
Hint: the Euro has had a great run since early June, posting a 20% gain, a big move for a currency in such a short time. So the amount of risk in all markets is high right now. Just thought you'd like to know. That ski chalet at Lake Tahoe's Incline Village is beckoning as we speak.
Is the Euro Getting Reading to Sing?
Featured Trades: (RARE EARTHS), (MCP), (AVARF), (LYSCF)
2) Bring on the Rare Earth Wars. One of my many former employers, the Singapore Straights Times, reported yesterday that China planned to cut rare earth export quotas by 30% next year. The story comes on the heels of a voluntary ban of exports to Japan on September 21, after their arrest of a Chinese fishing boat captain (click here for 'Have You Seen Molycorp Lately').
Traders went apoplectic, taking my lead stock, Molycorp (MCP), up a mind boggling 30% in three days, matched by a 27% pop in Canada's Avalon Rare Metals (AVARF), and a 10% gain by Australia's Lynas Corp. (LYSCF). Lynas is now up an unbelievable 473% since I first recommended it five months ago (click here for 'Rare Earths Are About to Become a Lot More Rare'). This is like hitting four back-to-back home runs (I'm using baseball metaphors this week, since the hometown San Francisco Giants are in the play offs).
As China controls 97% of the world's rare earth production, and consumers are desperate to lock in supplies so they can build everything from hybrid cars to iPods to heat seeking missiles, you can expect to hear a lot more about this space. I have already seen the odd story showing up in the mainstream media. Not only that, in the future I expect to see similar developments across the entire resource space, including precious metals, copper, iron ore, molybdenum, tin, nickel, aluminum, and all of the food groups. We are on the eve of the era of The Great Resource Shortage.
Featured Trades: (MONGOLIA), (IVN), (RTP), (975:HK), (MONGOLIA MINING)
3) Get On Board With Mongolia Mining. The 3:00 am phone call was scratchy, broken, and barely intelligible. Would I be willing to accept a collect call from Ulan Bator, the capital of Mongolia? My man on the ground there was on the line with a stock idea that I absolutely had to get involved with. Mongolia Mining (975:HK) had just listed its shares on the Hong Kong Stock Exchange at $7, had already moved up to $8.30, and was headed for higher altitudes.
Mongolian Mining is the country's major producer of metallurgical coal, which it sells to neighboring China to stoke the insatiable demand of its steel mills. The deal came out at a rich 13.6 times 2011 forecast profits, and 9 times 2012 earnings. The issue was led by JP Morgan, lending it some extra credibility with wary foreign investors. It raised $700 million for the company, which plans to invest the funds in road and rail upgrades to its open pit at Ukhaa Khudag in Southern Mongolia.
This is expected to take output from 1.8 metric tonnes in 2009 to 15 million tonnes by 2013. Mongolia has a major price and shipping advantage over existing suppliers of coking coal in the US and Australia, so the Middle Kingdom is expected to take everything Mongolia Mining can produce.
I have written extensively about Mongolia in the past as one of the one great 'pre-emerging' markets now coming on to the scene (click here for 'I Told You to Buy Mongolia!'). Until now, investors have been limited to indirect plays, like Ivanhoe Mines (IVN) and Rio Tinto (RTP). The great thing about Mongolian Mines is that being a local company with substantial government ownership, it will get first priority of essential licenses, permits, and approvals, putting it at the head of the queue, in front of foreign competitors. In developing economies, who you know is often more important than what you know.
I keep hearing things that are incredibly bullish for Mongolia. It has the world's biggest unexploited coal reserves and the richest untapped copper deposit. It is poised to become the fifth leading gold producer. It has large latent oil fields in the south, which begin production next year. And it has the world's largest customer sitting on its doorstep. With emerging markets, natural resources, and hard assets definitely the flavor of the decade, there is an easy double in Mongolia Mines --once this market picks up a head of steam.
Fill Her Up. It's a Long Way to China
Featured Trades: (IRAQI OIL), (SLB), (HAL), (BHI), (WFT)
2) The Gold Rush in Iraq. There is a Gold Rush Underway in Iraq, with major implications for the rest of us. The success of the recent oil auctions in Iraq is creating a windfall for American oil services companies.
Schlumberger (SLB), Baker Hughes (BHI), Weatherford (WFT), and Halliburton (HAL) have committed to drilling 2,500-3,000 new wells per year and building new pipeline and shipping terminal infrastructure that could make Iraq the world's largest oil exporter. The value of these contracts may reach a massive $60 billion over the next six years, and could generate $1 billion in new revenues for each company per year.
Two offshore terminals are already under construction, and another two are on the drawing board. If successful, the project will boost the country's oil production from the current 2.5 million barrels a day to 12 million b/d by 2016.
Iraq's oil production peaked at 3 million b/d in 1979, and then went to nearly zero after it invaded Iran. I remember those days well, as I was issued a visa to accompany Saddam's troops to Tehran, only to see it cancelled when the Iranians were able to mount a counter offensive. I still have the dessert camos and telephoto lenses need to cover the desert war, although the pants, regrettably, no longer fit.
Iraq's oil industry never recovered. UN sanctions limited the regime to minimal 'official' exports that covered humanitarian imports like baby food and drugs. Tanker trucks smuggled out through Jordan what they could, with the proceeds going directly to Saddam's family. When the US invaded, bails of hundred dollar bills were found stashed in private homes, the proceeds of these black market deals.
American oil engineers were shocked by the poor state of Iraq's energy infrastructure after 40 years of neglect. It all has to be rebuilt from scratch. If the new Iraqi government can provide the necessary infrastructure, and stabilize the political and security environment, it will become one of the largest changes to the landscape for international trade in decades.
Those are all very big 'ifs'. It will dump another Saudi Arabia's worth of crude on the market. It will also go a long ways towards meeting China's insatiable demand for oil, as well as that of other emerging economies, and put a long term cap on prices.
Of course, this is the scenario that antiwar activists and conspiracy theorists feared eight years ago, but no one thought it would take so long to play out. With an oil man as president, a vice president from Halliburton, and a secretary of the army from Enron, who can blame them.
Early in the planning of the war there was an expectation the US could defray some cost of the war with newly freed oil exports. I know, because I was there, my eight years in the Persian Gulf earning me an appointment as an outside consultant. I bailed when I saw the whole project was hopeless. Ever notice that Iraq's oil industry was never targeted during either gulf war? These are usually prime targets in modern warfare.
This is so important that I can't believe no one else is talking about it. Yes, I know you'll feel guilty making money off of a pariah stock like Halliburton, but you can always donate your profits to the Sierra Club.
Iraqi Oil No Longer a Roman Candle
Featured Trades: (IAN BREMMER OF THE EURASIA GROUP),
(GOOG), (SPX), (EZU), (FXI), (FXE), (EWA), (EWC), (EWY), (EWT), (THD), (IDX), (EWS), (EWZ), (ECH), (EWW), (RSX)
4) The Big MarketView From 30,000 Feet. There is a new war underway between two forms of capitalism. The traditional type is driven by the big global multinationals we all know and love which are being aggressively challenged by a new form of state capitalism, of which China is the prime practitioner. While it is too early to predict the outcome of this conflict, it is clear that western style multinationals are currently on the defensive. Witness the all out assault on Google (GOOG), whose business was so attractive that the Chinese government launched a concentrated hacker attack to grab technology and market share, both from within, and from outside the company.
I gleaned these incredibly useful insights from Ian Bremmer, president of the Eurasia Group, one of the top independent political research and analytics firms in the world. Ian received a BA at Tulane and a PhD from Stanford in political science. He has been at the forefront of bringing together the once disparate worlds of international investment and political science, a space once inhabited only by a few globetrotting journalists like myself, and commands a religious following among the large hedge funds and mutual fund groups.
Ian gave me a tour de force of the international investment landscape, where to put your money, and where to avoid. The US (SPX) is the smartest kid in the 'dumb class', and is clearly losing out in this new global competition. But it is still in the game, with the world's largest economy and an overwhelming lead in technological innovation and higher education. But the future GDP growth rates will be shadows of their former selves and, at 17.2%, real unemployment will remain chronically high. You might as well take any forecast now flogged by the major research houses and cut it in half.
Europe (EZU) is in dire straits, with economic growth rates plummeting. The big question is whether Germany pulls out of the EC, not Greece. Having nearly busted its own economy with the reunification with East Germany two decades ago, it doesn't want to replay that movie. The bad news: we won't know the outcome for five years. There is no visible support for the euro (FXE) anywhere. Take that newly cheapened European summer vacation, sip all the latte you want, and enjoy those topless beaches, but keep your investment capital in friendlier climes.
While the Middle Kingdom (FXI) is now ascendant, it is not without its challenges. They lag in local innovation, suffer a nightmarish environmental crisis, and down the road, will endure a demographic shortfall that will mirror Japan's. But Ian thinks that Jim Chanos's prediction of a crash in China is 'farcical', and that the country has at least a good five year run ahead of it.
The best places in the developed world to park your money and forget about it are in Canada (EWC) and Australia (EWA), which prosper from bounteous commodity and energy exports, stable political regimes, small populations, the rule of law, and conservative banking and financial regulation. Canada enjoys having the world's largest customer on its doorstep without any of the overheads.
While South Korea (EWY) has an economy that is the envy of many, it runs a gigantic 'fat tail' risk from North Korea, which could blow up at any time. The outlaw regime recently sank a South Korean warship and executed its minister of finance. A total collapse could stick the south with a massive reunification bill it can ill afford, and don't forget those loose nukes. Taiwan (EWT) looks like a no brainer as a takeover target by an acquisitive China, the financial, and not the military kind.
The fate of the monarchy in Thailand (THD) is now a hard fought battle, and it is better to fish elsewhere until the fires burn out. Indonesia (IDX) is nearly a model country these days, and should be the fifth country in 'BRIC', with huge energy and commodity exports and a rapidly growing middle class. Singapore (EWS) also looks great, with an incredibly well managed population of only 3.5 million, massive reserves, a high educational level, and sophisticated manufacturing base.
On the other side of the world, South Africa (EZA) is not just a gold story with a great structural foundation, it will also cash in on the rise of a consumer class in the rest of Africa. Brazil (EWZ), long a hedge fund darling, still looks good, but its glory days are behind it as it transitions to a more conservative government. Other enticing Latin American picks include Chile (ECH) and Mexico (EWW). Russia (RSX) is not just an oil story, but also a consumer one, but faces daunting demographic challenges.
Ian is also a prolific author, bringing out two new books in the past year, which are a must read for any serious global macro investor. They include The Fat Tail: The Power of Political Knowledge for Institutional Investing, and The End of the Free Market: Who Wins the War Between States and Corporations. To prove he is not a total wonk, Ian openly admits to being a card carrying member of the Stanford bowling team. Entirely composed of Russian speakers, they were appropriately known as the 'Bolsheviks
Readers can purchase their own copies of The End of the Free Market at a big discount through Amazon clicking here. To buy The Fat Tail, please click here.
Featured Trades: (SAN FRANCISCO STRATEGY LUNCHEON)
1) Last Chance to Meet the Mad Hedge Fund Trader at the San Francisco Strategy Luncheon. Last April, I predicted that a huge demographic push would send the prices of commodities soaring, that the economy would threaten a double dip, but not actually do it, and that emerging markets were a great place in which to invest. I also advised that gold, silver and other precious metals, along with the Canadian and Australian dollars would be a great place to hide out. Finally, I foresaw a major long term bull market in the food group.
Come join me for lunch at The Mad Hedge Fund Trader's semiannual Global Strategy Update, to find out what happens next. I will be conducting it in San Francisco at 12:00 noon on October 22, 2010. A three course lunch will be followed by a 30 minute PowerPoint presentation and a 45 minute question and answer period.
I'll be giving you my up to date view on stocks, bonds, currencies commodities, precious metals, and real estate. And to keep you in suspense, I'll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $199.
I'll be arriving two hours early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at the Marines' Memorial Association at 609 Sutter Street, San Francisco, CA 94102. The club is only two blocks from the city center at Union Square and the Powell Street cable cars.
I look forward to meeting you, and thank you for supporting my research.
Featured Trades: (CHINA), (SHANGHAI), (FXI), ($SSEC)
iShares FTSE/Xinhua China 25 Index ETF
South Korea iShares Index ETF
Thai Capital Fund, Inc.
Singapore iShares ETF
iShares MSCI Turkey Investable Market Index Fund ETF
iShares MSCI Chile Investable Market Index Fund ETF
Brazil iShares ETF
PowerShares India Portfolio ETF
Market Vectors Russia ETF Trust ETF
2) Time to Double Up on China. Last week, I posted an extensive piece on my evening with the Chinese Intelligence Service, concluding that it was time to get back into the Middle Kingdom (click here for the piece). It proved to be a timely call, as QEII has since gone global, taking the Shanghai index up 11% since then, the move this week being particularly explosive. Yesterday, we blasted through the 200 day moving average, suggesting that this move may have the legs of Secretariat.
I really like the idea of increasing my weighting in China here. Both the Chinese, and the many trading partners I talk to, tell me that things are going well there, that inflation is under control, and rumors or its imminent demise are premature by at least a decade. Jim Chanos, please widen your circle of contacts.
The recent international action has been predominantly in the second tier emerging markets which I have been aggressively pushing, including Indonesia (IDX), Chile (ECH), Thailand (TF), Singapore (EWS), and South Korea (EWY), while the mainline BRIC's slept. Many of these 'emerging, emerging' markets are now up 50% or more on the year. I can really see cash rotating out of these virile, young sprinters back into the established BRIC long distance runners as a great risk control measure. That way, if you get a sudden risk reversal, and markets can turn on a dime these days, your downside will be much less.
With Ben Bernanke fitting both turbochargers and superchargers to the printing presses in Washington as I write this, I loathe to tell anyone to sell anything, even their Beenie Baby collection. So use any new cash inflows from new and existing clients to add to positions on dips not only China (FXI), but Brazil (EWZ), India (PIN), and Russia (RSX) as well. If you have been following the advice of this letter all year, you should have new cash pouring in through the transome.
No! No! Don't Sell Me!
Featured Trades: (INDONESIA), (IDX), (EIDO)
Market Vectors Indonesia Index ETF
iShares MSCI Indonesia Investable Market Index ETF
3) Indonesia is On Fire. Who said quantitative easing wouldn't work? The only problem is that you have to speak Bahasa, eat nasi goreng, and live South of the equator, to take full advantage of Uncle Ben's munificence. Since the rumblings about a global, synchronized QEII began in September, $2 billion a day has been flooding into emerging markets, and Indonesia has been at the top of the list.
Some of the happiest days of my life were spent in this bucolic tropical backwater during the seventies. My investment in the ETF (IDX) on launch day has made me happier still, soaring by 360% since inception (click here for the call). A rupiah that has been steadily appreciating against the dollar has added a nice double leveraged effect to the upside.
Despite the triple digit return, it could still be early days for the world's largest Muslim country. Some $9 billion in foreign capital has poured into the local rupiah denominated bond market, and a further $2.5 billion has been plopped down in the stock market. Multinationals have made a further $8 billion in direct investments, a capital flow you know I always love to follow. The prices for its largest commodity and energy exports have been rising.
The government has been targeting almost Chinese levels of GDP growth of 7%-8%, and private analysts say than that 6.5% will be achieved this year and next. Stocks are not cheap at a 13.5 multiple, but how much should you pay for earnings that are growing 25% a year? Next month, President Obama will visit the land of his childhood to highlight stable relations between the two countries, to help sew up some trade deals, and no doubt, to visit his former pet monkey
IDX has had the field to itself until now, as local Indonesian stocks are not easy to buy for US based online traders. Then in May, BlackRock launched its own entrant in the field (EIDO), which has basically since gone straight up. While Indonesia is no longer as cheap as it once was, it still deserves a place in every emerging market portfolio. This could be the next China.
Not a Bad Place to Park Some Cash