I have had an extremely hot hand this year, pushing the 2013 performance of my Trade Alert Service above a stellar 30%. So I am going out on a limb here and predict that the S&P 500 is about to grind up to a new all time high.
Since 2009, Federal Reserve governor, Ben Bernanke, has clearly made our central bank?s top priority jobs and growth, at the eventual expense of a higher inflation rate. The higher stock and home prices, a vast monetary expansion enabled, has also created a huge wealth effect. This is spurring newly emboldened investors to pour more money into risk assets everywhere, save commodities and precious metals. This creates more consumption, and, in the end, finally, more jobs.
Thanks to Ben?s efforts, stock prices have financially reached what most traditional analysts consider ?fair value? after a long four-year slog. The historic 50 year range for price earnings multiples is 9-22, and here we sit today, dead center at 15.5, assuming S&P 500 earnings of $100/share.
But this time, it?s different. Ten year Treasury yields at 2.05% today, are about 400-500 basis points lower than seen during past stock market peaks. Even after the $85 billion sequestration hit, Washington is still pumping $800 billion a year into the economy, even though the recovery is four years old. And Ben Bernanke shows no sign of taking the punch bowl away anytime soon.
This is why, having failed to break 1,485 of the downside on the heels of the Italian election disappointment on February 25, the index has little choice but to gun for the upside target of 1,585.
Health of this market top is vastly more robust than previous ones. Currently, 85% of the stocks in the (SPX) are trading above their 200 day moving averages, compared to only 50% when markets peaked in 2007, when the market actions was far more concentrated in a handful of stocks.
Such a broad base suggests that a lot of managers are still underinvested, and that the pain trade is to the upside. This is why the February correction that everyone was waiting for never came, and why we saw an incredibly bullish ?time? correction instead of a ?price? one. I was expecting as much.
Indeed, the technical outlook for the market is becoming increasingly positive as is obvious from the charts below. We have seen several successive new highs for the Dow transports for many weeks now, an index of a much more economically sensitive group of stocks.
Look at an equal weighted index of the S&P 500, like the (RSP), and it has already hit a new all time high, a huge plus. Finally, the NASDAQ (QQQ) looks like it is, at long last, putting its lost decade behind it by breaking to new ten-year highs.
Still, there are some qualifications here. The Dow needs to stay above 14,198 for the rest of March for this breakout to be valid. So far, so good. The capitalization weighted (SPX) is also approaching its high in the most overbought condition since 2007, with RSI?s well into the 70 territory. That means a round of profit taking will hit once we do hit a new high.
Another development that has technical analysts extremely excited is that many leadership stocks are catapulting off of bases that took 10-12 years to form. The number of new decade highs greatly exceeds the new lows. This has many chartists calling for a further move in the main indexes up another 10% from here.
Every bull market ends in overvaluation, often an extreme one, and sitting here at fair value, we are not even close for this cycle. Not a day goes by now that I don't get emails from readers asking what to do with cash here. I think the safer bet will be to go with high quality, high growing names where a hefty dividend gives you a cushion against any short-term volatility.
That list would include KKR Financial (KKR) (7.4%), Atlas Pipeline (APL) (7.7%), Linn Energy (LINE) (7.7%), and Transocean (RIG) (4.2%). You could also do worse than American Express (AXP), (1.30%), and Bristol Myers-Squib (BMY) (3.80%).
Party on!
Party On!
According to my old friend, Rick Sopher, chairman of LCH Investments in London, the top ten hedge funds have earned $153 billion for their investors since inception.
Rick, who runs his business from an elegant flat on posh Eaton Square, compiled the list after a comprehensive survey of the still operating 7,000 hedge funds worldwide. It is dominated by marquee names like Steve Cohen's SAC Capital, Bruce Kovner's Caxton, and Louise Bacon's Moore Capital. Of the 100 largest funds, 95% have returned much of their investors' original capital, and are using the remaining profits to trade on.
Of course, the numbers show a huge survivor bias. They don't include the hundreds of billions of dollars lost by now shuttered 'wanabee' managers during the financial crash, largely with highly leveraged fixed income, spread oriented, 'low risk' strategies. Many of these are still in liquidation, peddling illiquid assets for pennies on the dollar through online auctions and elsewhere.
The numbers highlight the increasing barbell nature of the hedge fund industry. The biggest funds continue to attract the big bucks, and a steady wave of defections from Wall Street, are funding hundreds of new startups. But many mid-tier firms are getting nothing and are struggling to stay in business.
One of my biggest disappointments with the Obama administration so far is his continued support of the ethanol boondoggle. The program was ramped up 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 far 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.
Few consumers are aware of how big the ethanol industry has grown in such a short period. 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 nearly 40% during the same period. Corn grown for ethanol now occupies 10% of the total arable land in the US.
Ethanol's impact on food prices has been huge. It is the sole reason why corn is trading at the $7 handle, instead of $3. You also have to add in the inflationary effects on downstream grain consumers, like the food manufacturers and the cattle industry. While spendthrift, obese Americans burn food so they can drive chrome wheeled black Hummers to Wal-Mart, much of Africa and Asia starve. A global food crisis is not that far off.
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. They also have ideal weather. 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.
Ethanol has become such of big industry that it now commands a fairly large footprint in Washington, fielding armies of lobbyists to keep the subsidies and tax breaks flowing from the appropriate agricultural committees. The problem for the rest of this is that once these lobbies become entrenched they are almost impossible to get rid of. Think of an advanced case of scabies. Remember the tobacco lobby?
Better to drink ethanol than burn it, I say.
Global Market Comments
March 7, 2013
Fiat Lux
Featured Trade:
(APRIL 19 CHICAGO STRATEGY LUNCHEON),
(HERE COMES THE NEXT PEACE DIVIDEND), (AAPL), (USO), (SPX), (UUP), (TLT), (GLD), (SLV), (CU), (CORN), (SOYB)
Apple Inc. (AAPL)
United States Oil (USO)
S&P 500 Index (SPX)
PowerShares DB US Dollar Index Bullish (UUP)
iShares Barclays 20+ Year Treas Bond (TLT)
SPDR Gold Shares (GLD)
iShares Silver Trust (SLV)
First Trust ISE Global Copper Index (CU)
Teucrium Corn (CORN)
Teucrium Soybean (SOYB)
Come join me for lunch for the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Chicago on Friday, April 19. A three-course lunch will be followed by a PowerPoint presentation and an extended question and answer period.
I?ll be giving you my up to date view on stocks, bonds, foreign 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 an hour 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 a downtown Chicago venue on Monroe Street that will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.
When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, you don?t think I talk to all of those generals because I like their snappy uniforms, do you?
The word is that the despotic, authoritarian regime in Syria is on the verge of collapse, and is unlikely to survive more than a few more months. The body count is mounting, and the only question now is whether Bashar al-Assad will flee to an undisclosed African country or get dragged out of a storm drain to take a bullet in his head. It couldn?t happen to a nicer guy.
The geopolitical implications for the US are enormous.? With Syria gone, Iran will be the last rogue state hostile to the US in the Middle East, and it is teetering. The next and final domino of the Arab spring falls squarely at the gates of Tehran.
Remember that the first real revolution in the region was the street uprising there in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.
At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy IPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have failed to cater to these desires
When Syria collapses, the Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process. Secretary of State Hillary Clinton has stiffened her rhetoric and worked tirelessly behind the scenes to bring about the collapse of the Iranian economy.
The oil embargo she organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 25%.? Iranian banks are about to get kicked out of the SWIFT international settlements system, which would be a deathblow to their trade.
Let?s see how docile these people remain when the air conditioning quits running this summer because of power shortages. Iran is a rotten piece of fruit ready to fall of its own accord and go splat. Hillary is doing everything she can to shake the tree. No military action of any kind is required on America?s part.
The geopolitical payoff of such an event for the US would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.
Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic tax $1.43 trillion tax cut for not just the US, but the entire global economy as well (87 million barrels a day X 365 days a year X $90 dollars a barrel X 50%). Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare.
At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.
The implications for the financial markets will be enormous. The US will reap a peace dividend as large or larger than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom. A collapse in oil imports will cause the US dollar to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the US government gone as a major new borrower, interest rates across the yield curve will fall further.
A peace dividend will also cause US GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, bonds, commodities, precious metals, and food. The Dow will soar to 20,000, the Euro collapses to parity, gold rockets to $2,300 and ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60-year bull market in bonds ends.
Some 1.5 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up. We will enter a new Golden Age, not just at home, but for civilization as a whole.
Wait, you ask, what if Iran develops an atomic bomb and holds the US at bay? Don?t worry. There is no Iranian nuclear device. There is no Iranian nuclear program. The entire concept is an invention of American intelligence agencies as a means to put pressure on the regime. The head of the miniscule effort they have was assassinated by Israeli intelligence two weeks ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).
If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises we have seen are done for CNN?s benefit, and comprise no credible threat.
I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.
If the collapse of Iran was going to lead to a global multi decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, led by the technology sector and banks, offering no pullbacks for latecomers to get in. That is exactly what they have been doing since mid-December. If you think I?m ?Mad?, just check out the big relative underperformance of oil on the chart below.
Here?s The Next Big Short
Global Market Comments
March 6, 2013
Fiat Lux
Featured Trade:
(APRIL 12 SAN FRANCISCO STRATEGY LUNCHEON),
(INVESTING IN A STATE SPONSOR OF TERRORISM),
(AFK), (GAF), (EZA),
(THE LONG VIEW ON EMERGING MARKETS),
(EWZ), (RSX), (PIN), (FXI)
Market Vectors Africa Index ETF (AFK)
SPDR S&P Emerging Middle East & Africa (GAF)
iShares MSCI South Africa Index (EZA)
iShares MSCI Brazil Capped Index (EWZ)
Market Vectors Russia ETF (RSX)
PowerShares India (PIN)
iShares FTSE China 25 Index Fund (FXI)
Come join me for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in San Francisco on Friday, April 12, 2013. An excellent meal will be followed by a wide-ranging discussion and an extended 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. Tickets are available for $189.
I?ll be arriving at 11:00 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 a private club in downtown San Francisco near Union Square that will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store at www.madhedgefundtrader.com/category/luncheons/.
How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped? Another country lost four wars in the last 40 years. Still interested? How about a country that suffers one of the world?s highest AIDs rates, endures regular insurrections where all of the Westerners get massacred, and racked up 5 million dead in a continuous civil war?
Then, Africa is the place for you, the world?s largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo. Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms.
Goldman Sachs has set up Emerging Capital Partners, which has already invested $2 billion there. China sees the writing on the wall, and has launched a latter day colonization effort, taking a 20% equity stake in South Africa?s Standard Bank, the largest on the continent. There are now thought to be over one million Chinese agricultural workers in Africa.
The angle here is that all of the terrible headlines above are in the price, that prices are very low, and the perceived risk is much greater than actual risk.
Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. These numbers remind me of those found in Japan during the fifties, right after it lost WWII.
The reality is that Africa?s 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure.
For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It?s like the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years, because the risks were so high.
This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has 29% of its holdings in South Africa and 20% in Nigeria. There is also the SPDR S&P Emerging Middle East & Africa ETF (GAF). For more of a rifle shot, entertain the iShares MSCI South Africa Index Fund (EZA). Don?t rush out and buy these today. Instead, wait for emerging markets to come back in vogue. I will send you a trade alert when this is going to happen.
Meet Your New Business Partner
I managed to catch a few comments in the distinct northern accent of Jim O'Neil, the fabled analyst who invented the 'BRIC' term, and who has been kicked upstairs to the chairman's seat at Goldman Sachs International (GS) in London.
Jim thinks that it is still the early days for the space, and that these countries have another ten years of high growth ahead of them. As I have been pushing emerging markets since the inception of this letter in 2008, this is music to my ears.
By 2018 the combined GDP of the BRIC's; Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), will match that of the US. China alone will reach two thirds of the American figure for gross domestic product. All that?s required is for China to maintain a virile 8% annual growth rate for eight more years, while the US plods along at an arthritic 2% rate. China's most recent quarterly growth rate came in at a blistering 8%.
?BRIC? almost became the 'RIC' when O'Neil was formulating his strategy a decade ago. Conservative Brazilian businessmen were convinced that the new elected Luiz Ignacio Lula da Silva would wreck the country with his socialist ways. He ignored them and Brazil became the top performing market of the G-20 since 2000. An independent central bank that adopted a strategy of inflation targeting was transformative.
This is not to say that you should rush out and load up on emerging markets tomorrow. American big cap stocks are the flavor of the day, and as long as this is the case, emerging markets will continue to blend in with the wall paper. Still, with growth rates triple or quadruple of our own, they will not stay ?resting? for long.
