Global Market Comments
June 10, 2013
Fiat Lux
Featured Trade:
(UPDATED 2013 SUMMER STRATEGY LUNCHEON SCHEDULE),
(LEARNING IN THE SCHOOL OF HARD KNOCKS),
(FXY), (YCS), (DXJ),
(THE NEW DEFLATION DEFINITION),
(THE WORLD IN 100 YEARS)
CurrencyShares Japanese Yen Trust (FXY)
ProShares UltraShort Yen (YCS)
WisdomTree Japan Hedged Equity (DXJ)
Come join me for lunch for the Mad Hedge Fund Trader?s Global Strategy Updates, which I will be conducting throughout Europe during the summer of 2013. 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, 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.
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 http://madhedgefundradio.com/ and click on ?LUNCHEONS?, and the city of your choice.
New York City - July 2
London, England - July 8
Amsterdam, Netherlands - July 12
Berlin, Germany - July 16
Frankfurt, Germany - July 19
Portofino, Italy - July 25
Mykonos, Greece - August 1
Zermatt, Switzerland - August 9
I always believe that any loss you don?t learn from is a loss wasted. One reason I know so much is because I have suffered a lot of losses, mostly at my own expense when I was young and stupid, well before the Trade Alert Service started.
So what did we learn from our most recent ill-advised attempt to profit from selling short the Japanese yen against the US dollar? Let me count the ways.
1) When the world?s largest short-term positions all key off of the identical stop loss points, watch out! The 15 minute 3% move we saw today was one of the sharpest in the 40-year history of the free floating foreign exchange markets. This is the bitter fruit of a crowded trade.
2) No one ever got fired for taking a profit. At one point, we had a 1.40 profit on this trade, leaving only 40 basis points left to expiration, instead of a -1.95% loss.
3) When there is nothing to do, don?t do anything.
4) Watch those stop losses. I think I?ll include underlying stop loss points in my Trade Alerts from here on out. It took an 8% move in two weeks to take us out of this one, which is unbelievable for the foreign exchange market. I thought a 5% safety margin was more than enough room to take us into expiration, but I was wrong. These days, the unbelievable happens on a regular basis, both on the upside and the downside.
5) Limiting position sizes to 10% of your total portfolio is a total winner. That?s why I?m laughing now, instead of crying, or looking for a new job on Craig?s List. At a certain point, leverage quits being investment and become reckless gambling.
6) Next May, sell and go away!
7) Never complain that I am not sending out enough Trade Alerts. I can understand why you want as many as you can get, as 90% have been profitable this year. Doing nothing doesn?t mean I have suddenly become lazy in my old age, am out spending my millions, or am developing dementia. It means the current risk levels in the markets are extremely elevated, as I warned you all many times, that the risk/reward ratio totally sucks, and that you are better off making room in your sock drawer for your cash than placing it in the market. ?Nothing to do? really does mean ?nothing to do.?
The next time you are in a hurry to get another Trade Alert, take a look at the profit and loss in this yen trade. Read it and weep.
It seems that all you hear about these days is deflation. That is certainly what the bond market is telling us, with my screen blaring at me a miserable 2.10% yield for the ten year Treasury bond.
But there is a new definition for this economic malady that applies to us hapless consumers. In the newest variety, the value of our income falls, while the prices of things we need to buy are going through the roof. It is a particularly pernicious form of deflation, as it is burning our candles at both ends at the same time.
Take a look at the chart below, showing the cost of college tuition versus the consumer price index and home prices. This hits home particularly hard, as I have just put three kids through college, and am reduced to riffling through the sofa cushions looking for spare change in order to meet the bills. When I graduated from the University of California in the seventies the tuition was $3,000 a year. Today it is $15,000, and climbing at a 30% annual rate.
The saddest part of the story is that rampant wage deflation means that recent graduates have a grim choice between taking a poorly paid job, or no job at all. That leaves them woefully unable to repay the student loans they ran up to obtain their rapidly devaluing diplomas. Stories of undergraduate debt loads of $100,000 or more are not uncommon.
And if you were planning on becoming a teacher, forget it, unless you want to move to Saudi Arabia, Russia, or South Korea. After watching tens of millions of jobs get shipped to China over the last decade, did you expect anything less? Just ad this problem to the ever-lengthening list of ways we are getting screwed.
George Friedman, geopolitical forecaster and founder of the Austin, Texas based private intelligence firm, STRATFOR Global Intelligence (click here for website), delivers a fascinating list of future political, military, and economic scenarios in his new book, The Next 100 years: A Forecast for the 21st Century.
Friedman claims the current Islamic assault on the West is failing, and will cease to be a factor on the international scene within the decade. Russia will take another run at becoming a superpower, which will fail by 2020, and leave the country even more diminished than it is today. When standards of living in China level off or reverse in the 2020?s, chronic resource shortages could cause the Middle Kingdom to implode and break up. China is far more fragile than we realize.
Japan may deal with stagnant economic and population growth the same way it did during the 1930?s by invading China as early as 2030. Japan may also take a bite out of indefensible Siberia when it remilitarizes. Poland, a unified Korea, and Turkey will develop into regional military and economic powers in their own right.
Friedman then describes a theoretical war by a coalition of Turkey and Japan against the US in 2050, resulting in an American victory, which leads to a new US golden age in the second half of the century. Scramjet engines make possible the development of unmanned hypersonic aircraft, which can launch a precision attack any place on the planet in 30 minutes. Warfare will move into space and be fought from ?battle stars,? which will also become major energy sources for earth. Friedman kind of lost me when he predicted that the next Pearl Harbor could come from Japan, but not via the sea going aircraft carriers of old, but from caves on the moon.
The big challenge towards the end of the 21st century will be the emergence of a Hispanic nation in the Southwest, which is culturally isolating itself by not integrating with the rest of the country. This could lead to the secession of several states, or a new war with Mexico, which by then, will develop into a major power in its own right. I think to avoid a second Civil War and offload some huge state deficits, Washington just might say ??Adios!?
You can argue that someone making many of these predictions is loony. But if you had anticipated in 1970 that China would become America?s largest trading partner, the Soviet Union would collapse, Eastern Europe would join NATO, the US would enter a second Vietnam War in Afghanistan, and oil would hit $150 a barrel, you would have been considered equally nutty. I know because I was one of those people. It does seem that long-term forecasters have terrible track records.
All in all, the book is a great armchair exercise in global real politics, and an entertaining contemplation of the impossible. More than once, I heard myself thinking ?He?s got to be kidding.? To get preferential pricing from Amazon on this thought provoking tome, please click here.
Global Market Comments
June 7, 2013
Fiat Lux
Featured Trade:
(AUGUST 1 MYKONOS, GREECE STRATEGY LUNCHEON),
(JUNE 12 GLOBAL STRATEGY WEBINAR),
(NEW NUCLEAR DEMOLISHED BY NEW NATURAL GAS),
(UNG), (NLR), (CCJ), (DUK), (NRG), (DRU),
(MAKE YOUR NEXT KILLING IN AFRICA),
(AFK), (GAF)
United States Natural Gas (UNG)
Market Vectors Uranium+Nuclear Enrgy ETF (NLR)
Cameco Corporation (CCJ)
Duke Energy Corporation (DUK)
NRG Energy, Inc. (NRG)
Dominion Resources, Inc. (DRU)
Market Vectors Africa Index ETF (AFK)
SPDR S&P Emerging Middle East & Africa (GAF)
Come join John Thomas for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting on the Greek island of Mykonos in the Aegean Sea on Thursday, August 1, 2013. 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 $249.
The lunch will be held at major resort hotel on the south shore of the island, which can be found by steering a course of 120 degrees 99 nautical miles from the port of Piraeus. Just make sure you don?t run aground on the island of Andros on the way, as the tides can be treacherous. The pirates on Mykonos have already been dealt with. Moorings can me made available for private visiting yachts offshore. I will email more details with your purchase confirmation.
Bring your broad brimmed hat, sunglasses, and plenty of SPF 50 suntan lotion. You will need them. The Greek islands are cooking hot this time of the year. The dress is casual. Those not wishing to view the clothing optional beach can have a chair with its back to the sea. Accompanying spouses and significant others will be free to bill drinks to my personal account as my guest. Together we will plot the future of western civilization.
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.
Four years ago, the dreams of a nuclear renaissance seemed close to coming to fruition. President Obama supported it. Congress passed a raft of new subsidies, tax breaks, liability caps, and cost overrun indemnifications, to grease the works. The goal was to bring the private sector back in a non-oil, non-carbon energy source which had seen no new construction in 34 years.
For a while, things were looking good. The Nuclear Regulatory Commission was flooded by 24 new applications for plants to join America?s 104 existing ones, from utilities largely in the southeast. Then a development far more devastating than the most egregious environmentalist lawsuit stopped the movement dead in its tracks. The price of natural gas crashed (UNG).
In 2008, CH4 peaked at $14/MM btu in 2008 in the wake of the last big oil spike to $149. It then utterly collapsed to $1.90, a vaporization of 86%. It was like someone snuffed your pilot light, turned all you gas burners on, and let your house blow up. Much of the industry was decimated, and gas investors got wiped out in droves. It also became one of my favorite short plays. Although gas has since recovered to $4/MM btu, it has completely demolished the economics of new nuclear.
At current prices, analysts now peg operating costs for new gas fired power plants at four cents a kilowatt-hour, compared to ten cents for nuclear. And this turns a blind eye to other problems endemic to nuclear, like expensive waste disposal, environmental litigation, lender nervousness, consumer backlash, humongous capital costs, and a long history of spectacular cost overruns.
It?s not like gas is going away anytime soon. Over the last five years, a new 100-year supply has been discovered in the US. Another 100 years is there, but exploration companies basically quit looking. What?s the point, when you are already drowning in the stuff. It turns out that about half of the land area of the United States is sitting on an exploitable natural gas field.
The finds assure US energy independence within 3-5 years, and will change the economy beyond all recognition. The risk is that gas gets cheaper, yet again, rather than ease nuclear?s competitive predicament. Just to bring nuclear back to even, gas has to roar back to $10/btu
The utilities have read the writing on the wall and are scrambling to lose their plans behind the radiator, post haste. Duke Energy (DUK), the poster child for new nuclear, has said it is calling off plans to build six new behemoths. Dominion Resources (DRU), in Wisconsin, is closing a nuclear plant which still has 20 years remaining on its license because it is simply too expensive to run. NRG Energy (NRG) dumped plans to build two Texas plants after blowing $331 million on preliminary planning and applications.
The new malaise in nuclear has placed a giant black cloud over the sector?s beleaguered ETF?s, including Market Vector Uranium + Nuclear Energy ETF (NLR) and Cameco (CCJ). Not only did these securities get the stuffing knocked out of them in the wake of Japan?s Fukushima tsunami and nuclear disaster, they have also suffered from this year?s general antipathy towards commodities.
I always had my misgivings about the return of big nuclear, the constructions of plants based on 50-year-old designs. There are too many other intelligent ways to do this from an engineering point of view. On the short list are alternative, cooler, non-weaponizeable fuels, like thorium. Small, modular, and even portable designs that mitigate and distribute risk is another idea. We may have to wait a while until better, more competitive nuclear strategies hit the market.
In the meantime, there are too many better fish to fry. Shop elsewhere.
What?s the Market for a Half Built Nuclear Plant?
Feel like investing in a state sponsor of terrorism? How about a country whose leaders have stolen $400 billion in the last decade and has seen 300 foreign workers kidnapped? Another country lost four wars in the last 40 years. Still interested? How about a country that suffers the world?s highest AIDS rate, regularly endures insurrections where all of the Westerners are 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. In fact, foreign direct investment last year jumped from $53 billion to $61 billion, while cross border M & A leapt from $10.2 billion to $26.3 billion.
The angle here is that all of the headlines above are in the price, that price is very low, and the perceived risk is much greater than actual risk. Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. The reality is that Africa?s 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies.
African GDP growth took off like a rocket in 2003, nearly tripling, thanks to the global commodity and precious metals boom and the taming of AIDS with free generic antiretroviral drugs. Equity markets don?t reflect this yet. The big plays are your classic early emerging market targets, like a rising middle class, banking, telecommunications, electric power, and other infrastructure.
For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It reminds me of the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years, because the risks were so high. This is long term back book stuff, and is definitely not for day traders. If you are willing to give up a lot of short-term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), and the SPDR S&P Emerging Middle East & Africa ETF (GAF).
Global Market Comments
June 6, 2013
Fiat Lux
Featured Trade:
(JULY 8 LONDON STRATEGY LUNCHEON),
(WHERE?S THIS MARKET BOTTOM?),
(SPX), (DXJ), (FXY), ($NIKK),
(THE ONE SAFE PLACE IN REAL ESTATE)
S&P 500 Index (SPX)
WisdomTree Japan Hedged Equity (DXJ)
CurrencyShares Japanese Yen Trust (FXY)
Nikkei Index ($NIKK)