If volatility and lack of direction in the equity market are driving you nuts these days, thank your lucky stars you?re not in the oil market. Only last night, a Japanese supertanker plowed into a US Navy destroyer, causing prices to spike. That?s assuming that you had time to notice while sifting through numerous, contradictory leaks from Israeli intelligence about whether they will, or will not, imminently attack Iran. Oh, and don?t forget, demand from Europe is disappearing up its own tailpipe.
My take is that the administration is pursuing the correct policy on Iran. With Europe joining the embargo on June 30, and its major means of trade financed with the dispatch of Standard Chartered, Iran?s economy is now caught in a vice. With minimal domestic refining capacity, the country is drowning in its own oil, but facing several gasoline shortages. Some essential foodstuffs have doubled in price. These are key ingredients needed for the Arab Spring to spill into Iran. Then the country falls into our lap like an overripe piece of fruit, without a shot fired.
It could well be that none of this makes any difference to the price of crude. Like every other asset class, it has become hostage to the likelihood of another round of quantitative easing from the Federal Reserve. West Texas Intermediate has moved an impressive $18 off of its $77 low on the prospect of QE3 alone. All that is left is for Ben Bernanke to pull the trigger.
Our first chance at a hint will be at the Jackson Hole confab of central bankers on August 26. After that, we have to wait until the September 18-19 Open Market Committee Meeting for relief. It is safe to say that if Ben delivers, oil could be trading at triple digits very quickly. If he doesn?t, then we could be plumbing new lows shortly.
That put us in the same risk/reward dilemma for oil as with the equity markets. Note the imbalance. If we get QE3, then we can entertain $6 of upside. If we don?t, you are looking at $25 of downside. Hint: strapping on risk/reward trades like this is not how hedge fund managers get rich.
That makes me a happier buyer on the next big dip than a chaser up here. Names to focus on? ExxonMobile (XOM), Occidental Petroleum (OXY), and Cabot Oil & Gas (COG), as well as the master limited partnerships like Kinder Morgan (KMP), Enbridge Energy Partners (EEP), Trans Montaigne Partners (TLP), Linn Energy (LINE).
That?s all for today. It is hard to write brilliant, seamless prose when you?re brain dead and mindless from nine hours of jet lag. Besides, the whales are still on vacation at Southampton and the South of France, so my traditional sources of hot tips will remain dry for another week or so. Damn! I should have taken an extra week off to investigate economic conditions in the Greek Islands. With a Depression on, I hear that hotels that normally go for $2,000 a day can be had for $2,000 a week.
Back in March, oil broke the $110/barrel level and gasoline was rapidly approaching the $5/gallon level, threatening to derail Obama?s reelection campaign. The administration enlisted Europe to join it in a boycott of Iranian oil in an effort to get the Islamic republic to retreat from is program to develop a nuclear weapon. Iranian president, Mahmoud Ahmadinejad, responded by threatening to close the Straits of Hormuz, thus blocking exports to the west. It all had the makings of a first class crises that could have taken oil up to $125 or higher.
There was no way that the president was going to let Texas Tea to pee on his parade, so he took quick action to cut the knees out from under it. He threatened to release supplies from the Strategic Petroleum Reserve in Louisiana, which was chocked full. He browbeat the CFTC into substantially raising margin requirements for oil and other commodities with his attack on ?speculators?.
He then convinced Saudi Arabia to ramp up its production to the max, over 12 million barrels a day, to head off any ill-timed price spikes. The Saudis, believing it was time to discipline recalcitrant minor producing OPEC members, like Iran, with the threat of lower prices, happily complied.
Crude gave back $5 in the bat of an eyelash, and then launched a $33 downslide that had oil trading at the $77 handle on Monday. What Obama didn?t expect was an assist in his strategy to cripple oil prices from a flock of ?black swans?.
The next chapter in the European sovereign debt debacle pushed the continent into a more severe recession, cooling energy demand there. Libya has been bringing production on line faster than expected. Every downtick in China?s anticipated GDP growth rate shaves a few more dollars off oil. A shortage of pipeline capacity is causing oil to pile up at the massive storage facilities Cushing, Oklahoma, slowing export deliveries. It all adds up to a rare perfect storm for oil. To Obama?s delight, gasoline may be selling for the high $2 range in much of the country by the November election.
As I regularly harangue readers and attendees at my strategy luncheons, imminent America energy independence is the least understood but most important factor that will impact financial markets in the years ahead. Over the last two years, domestic production has soared from 8.5 million barrels a day to 10.5 million, thanks to the miracle of fracking technology, which I helped pioneer a decade ago. That?s more that we buy from Saudi Arabia annually.
North Dakota has just replaced Alaska as the second largest oil producing state. The boom there has been so rapid that massive RV camps of itinerate roustabouts now litter the Northern plains. In the meantime, imports have plummeted from 13 million barrels a day to only 9 million.
But I think the current crash in oil will be a temporary one. For a start, the Seaway pipeline reverses next week, breaking the Cushing bottleneck, enabling North Dakota oil to reach the Gulf ports. The current $78 oil price is already below the cost of the most important sources of supply, such as Canadian oil sands and deep offshore wells.
I think that financial markets will enjoy a ?RISK ON? rally starting from this summer as they start to discount the conclusion of the presidential election, the next European LTRO quantitative easing, and possibly a QE3 from the Federal Reserve. This could all pave the way for a rebound in oil to $90 or more.
So there is an attractive trade setting up here. You can buy the oil major ETF (DIG). Interesting single stock plays at these levels include ExxonMobile (XOM), Occidental Petroleum (OXY), and Cabot Oil & Gas (COG). You can also buy call spreads in the oil ETF (USO). A more cautious strategy might be to sell short out of the money puts on the (USO). Sure, the tracking error on this horrible ETF is huge, thanks to the contango, but at least you can take in the time premium.
My long term view on oil is that we spike one more time to $150-$200. Having spent 45 years studying the industry closely and knowing principals like Armand Hammer and Boone Pickens, I can tell you the one simple rule of thumb to observe with this industry. Doing anything costs extraordinary amounts of money and takes a really long time. The calloused men who run the oil majors don?t hesitate to spending tens of billions of dollars to finance projects in the most inhospitable parts of the world with 40 year payouts. No matter what we do today, it will be impossible to head off another severe oil shortage.
After that, we will fall to $10 as oil is removed from the global economy and is only used as a petrochemical feedstock for plastics, pharmaceuticals, asphalt, and jet fuel. This will happen because of the rise of cheap natural gas, alternative energy sources, more efficient building designs, a better power grid, the advent of low end nuclear power plants, and cars that get 100 miles per gallon or use no gasoline at all.
Of course the CEO?s of the oil majors laugh when I tell them this. I?m sure that the hay industry similarly laughed in 1900 if you told them about the coming demise of the horse as a mode of transportation. But it may take 40 year for us to get there. I hope I live to see it.
I am writing this report from a first class cabin on Amtrak?s California Zephyr en route from Chicago to San Francisco. The majestic snow covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sage brush and salt flats of Northern Nevada outside my window, so there is nothing else to do but to write. My apologies to readers in Wells, Elko, Battle Mountain, and Winnemucca. It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my immigrant forebears in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80.
After making the rounds with strategists, portfolio managers, and hedge fund traders, I can confirm that 2011 was the most hellacious in careers lasting 30, 40, or 50 years. With the S&P 500 up 0.4% 2011, following a roaring 0.04% decline in 2010, the average hedge fund was up a pitiful 1%, and thousands lost money.
It is said that those who ignore history are doomed to repeat it. I am sorry to tell you that we are about to endure 2011 all over again. You can count on another 12 months of high volatility, gap moves at the opening, tape bombs, a lot of buying of rumors and selling of news, promises and disappointments from governments, and American markets being held hostage to developments overseas.
If you lost money in 2011, you will probably do so again in 2012, and should consider changing your line of work. It takes a special kind of person to make money in markets like these; someone who thrives on raw data and ignores the hype and the spin, who invests based on facts and not beliefs, and who thinks all things can happen at all times.? In other words, you need somebody like me, as my 40% return last year will attest. Those who don?t think they are up to it might consider pursuing that long delayed ambition to open a trendy restaurant, the thoughtful antique store, or finally get their golf score down to 80.
If you think I spend too much time absorbing conspiracy theories from the Internet, let me give you a list of the challenges I see financial markets facing in the coming year:
*Long term structural issues will overwhelm short term positives.
*Corporate profits continue to grow, but at a much slower rate, reaching diminishing returns.
*2009 stimulus spending is a distant memory, and there will be no replays.
*Bush tax cuts expire, creating a 1% drag on GDP.
*An epochal downsizing continues by state and local governments, chopping another 2-3% off of GDP.
*A recession in Europe further reduces American growth by 1%.
*Expect an actual default out of the continent in 2012, certainly from Greece, possibly also from Portugal and Ireland.
*There will be no QE3, since QE2 never filtered down to the real economy. There is little the Fed can do to help us.
*Huge demographic headwinds bring another leg down in the residential real estate market.
*The first baby boomer hit 65 last year and it is now time to pay the piper on entitlements.
*The new hot button social issue will become ?senior homelessness,? as millions retire without a cent in the bank and are unable to find jobs.
*Falling home prices bring secondary banking crisis, but this time there will be no TARP and no bail outs
*Gridlock in Washington prevents any real government solution, and there is nothing they can do anyway.
*Candidates from both parties will attempt to convince us that their opponents are crooks, thieves, idiots, or ideologues, and largely succeed. That will leave the rest of us confused and puzzled, and less likely to invest or hire.
*Unemployment remains stuck at an 8-9% level, then ratchets up to 15%. The real, U-6 rate soars to 25%.
Now let me give you a list of possible surprise positives, which may mitigate the list of negatives above.
*American multinationals continue to squeeze more blood out of a turnip and post stellar earnings increases yet again.
*China successfully slams the breaks on the real estate market without cutting the rest of the economy off at the knees and engineers a soft landing with 7%-8% GDP growth.
*Europe somehow pulls a new treaty out of its hat that addresses its structural financial and monetary shortfalls a decade ahead of schedule.
*Through some miracle, the American consumer keeps spending at the expense of a declining savings rate. There is evidence that this has been going on since October.
The Election Will Not Be Good for Risk Assets
So, let me summarize what your 2012 will look like. The ?RISK ON? trade that started on October 4 will spill into the new year, driven by value players loading up on cheap multinationals, chased by frantically short covering hedge funds, hitting a peak sometime in Q1. The S&P 500 could reach 1,350. In Q2 and Q3 traders will have to deal with flocks of black swans, giving 4-7 months of the ?RISK OFF? trade. We should rally into Q4 as markets discount the end of the election cycle. It really makes no difference who wins. The mere disappearance of electioneering will be positive for risk takers.
I Said ?Black Swans,? Not Crows!
The Thumbnail Portfolio
Equities-A ?V? shaped year, up, down, then up again Bonds-Treasuries grind towards new 60 year peaks, then an eventual collapse Currencies-dollar up and Euro and Australian, Canadian and New Zealand dollars down Commodities-Look to buy for a long term hold mid-year Precious Metals-take a longer rest, then up again Real estate-multifamily up, single family down, commercial sideways
1) The Economy-The Second Lost Decade Continues
I am sticking with a 2% growth forecast for 2012. I see the huge list of negatives above that add up to at least a 5% drag on the economy. There is only one positive that we can really count on. Corporate earnings will probably come in at $105 a share for the S&P 500 this year, a gain of 15% over the previous year, and a double off the 2008 lows. During the last three years we have seen the most dramatic increase in earnings in history, taking them to all-time highs, no matter how much management complains about over regulation.
Can the magic continue? I think not. Slowing economies in China and Europe will fail to deliver the stellar gains seen in 2011, which account for half the profits of many large multinationals.? A global economy that grew at 4.1% in 2010 and 2.5% in 2011 will probably eke out only a subdued 1.5% in 2012. A strong dollar will further eat into foreign revenues.
Cost cutting through layoffs is reaching an end as there is no one left to fire. Growing companies can?t delay new hires forever. That leaves technology as the sole remaining source of margin increases, which will continue its inexorable improvements. So corporate earnings will rise again in 2012, but possibly only by 5%-10%? to $105-$110 for the $S&P 500. Hint: technology will be the top performing sector in the market in 2012, with Apple (AAPL) taking the lead.
Deleveraging will remain a dominant factor affecting the economy for another 5-8 years. Much of the hyper growth we witnessed over the past 30 years, possibly half, was borrowed from the future through excessive credit, and it is now time to pay the piper. We are still at the beginning of a second lost decade. Don?t expect a robust GDP while governments, corporations, and individuals are sucking money out of the economy. This lines up nicely with my 2% target.
Forget about employment. The news will always be bad. I believe that the US has entered a period of long term structural unemployment similar to what Germany saw in the 1990?s. Yes, we may grind down to 8% before the election. But the next big move in this closely watched indicator is up, possible as high as 15%. Keep close tabs on the weekly jobless claims that come out at 8:30 AM Eastern every Thursday for a good read of the financial markets to head in a ?RISK ON? or ?RISK OFF? direction.
With a GDP growing at a feeble 2% in 2012, and corporate earnings topping out at $105-$110 a share, those with a traditional buy and old approach to the stock market will fare better taking this year off. While earnings are growing, multiples will shrink from 13 to 12, multiple? for the indexes unchanged. It is also possible that the economy will never meet the textbook definition of a recession, that of two back to back quarters of negative GDP numbers.? But the market will think the economy is going into recession and behave accordingly. ?Double dip? will get dusted off one again. Remember how ?Sell in May and Go Away? has worked so well for the past three years? This year you may want to sell in January.
I am looking for some new liquidity from value players and additional short covering to spill over into the New Year, possibly taking us up to 1,325-$1,350. If we get that high, take it as a gift, as the big hedge funds will be very happy to pile on the leveraged shorts at the top of a multiyear range.
A continuing stream of positive economic data will also help. Since we don?t have the ?oomph? offered by the tax compromise and QE2 a year ago, look for equities to peak much earlier than the April 29 apex we saw in 2011. The trigger for this deluge could be a sudden spike in jobless claims as the temporary Christmas hires are fired combined with economic data that cools coming off a hot Q4.
Let me tell you why the value players up here don?t get it. A 2% growth rate doesn?t justify the 10-22 price earnings multiple range that we have enjoyed during the last 30 years. At best it can support an 8-16 range, or maybe even the 6-15 range that prevailed when I first started on Wall Street 40 years ago. That makes the current 13 multiple look cheap according to old models, but expensive in the new paradigm.
When the guys in the white coats show up to drag away the value managers, they will be screaming that ?They were cheap,? all the way to the insane asylum. What these hapless souls didn?t grasp was that we are only four years into a secular, decade long downtrend in PE multiples, the bottom for which is anyone?s guess.
After that, the way should be clear for a 25% swoon down to 1,000, which will happen sometime in Q2 or Q3. That will be caused by a ton of new short selling triggered by the break of the 2011 low at 1,070, which then get stopped out on the upside. The heating up of trouble with Iran is another unpredictable variable, which is really just a pretext for attacking Syria, their only ally. How will the market decline in the face of growing earnings? That is exactly what markets did in 2011, once the fear trade was posted on the mast for all to see?
Crash, we won?t, and this is what my Armageddon friends don?t get. To break to new lows, you need sellers, and lots of them. Those were in abundance in 2008, when the bear market caught many completely by surprise, everyone was leveraged to the hilt, and risk controls provided all the security of wet tissue paper.
This time around it?s different. Prime brokers now require a pound of flesh as collateral, especially in the wake of the MF Global Bankruptcy, and leverage as almost an extinct species. In the meantime, individuals have been decamping from stocks en masse, with equity mutual fund sales over the past three year hitting $400 billion, compared to $800 billion in bond fund purchases. That will leave hedge funds the only players at an (SPX) of 1,000, who will be loath to run big shorts at multiyear bottoms. You can?t have a crash if there is no one left to sell.
That gives us the juice to rally into Q4, just as the presidential election is coming to an end. It really makes no difference who wins, as long as one doesn?t get control all three branches of government. My money is on Obama, who has the highest approval rate in history with unemployment at 8.6%. The mere fact that the election is over will lift a cloud of uncertainty overhanging risk assets. It will be a real stretch to hope that stock markets will close unchanged in 2012, as we did in 2011. My expectation is for a single digit loss for 2012.
This Could? be the Big Trade of 2012
Equities will be no place for old men
3) Bonds?? (TBT), (JNK), (PHB), (HYG), (PCY)
The single worst call by myself and the hedge fund industry at large this year was that massive borrowing by the Federal government would cause the Treasury bond market to collapse. Not only did it fail to do so, it blasted through to new 60 year highs, sending ten year yields to 1.80%, which adjusted for inflation is a real negative yield of -1.5% a year.
Investors today will get back 80 cents worth of purchasing power at maturity for every dollar they invest. But institutions and individuals will grudgingly lock in these appalling returns because they believe that the losses in any other asset class will be much greater.
What I underestimated was the absolute perniciousness of today?s deflation. The price for everything you want to sell is continuing a relentless fall, including your home and your labor.? The cost of the things you need to buy, like food, energy, health care, and education, is rocketing. Globalization is the fat on the fire. I call this ?The New Inflation?. This goes a long way in explaining the causes behind a 30 year decline in the middle class standard of living.
The other thing I miscalculated on was how rapid contagion fears spread from Europe. When the world gets into trouble, everyone picks up their marbles and goes home. For the financial markets, that translates into massive buying of the core ?flight to safety? assets of the US dollar and Treasury bonds.
While much of the current political debate centers around excessive government borrowing, the markets are telling us the exact opposite. A 1.80%, ten year yield is proof to me that there is a Treasury bond shortage, and that the government is not borrowing too much money, but not enough. Given the choice between what a politician wants me to believe and the harsh judgment of the marketplace, I will take the latter every time.
So what will 2012 bring us? More of the same. For a start, we have seen a substantial ?RISK ON? rally for the past three months where equities tacked on a virile 20% gain. Bond yields have ticked up barely 30 basis points from the lows, not believing in the longevity of this rally for one nanosecond. That tells me that the next equity sell off could see Treasury yields punch through to new lows, possibly down to 1.60%. Given even a modest recession, bond yields could touch 1%.
Surveying the rocky landscape that lies ahead of me, I expect to get five months of ?RISK ON? conditions and a turbulent and volatile seven months of ?RISK OFF?. This augers very well for a continuation of the bull market in Treasuries at least until August.
This scenario does not presage a good year for the riskiest corner of the fixed income asset class - junk bonds, whose default rates are not coming in anywhere near where they were predicted just a few months ago. Don?t get enticed by the siren song of high yields by the junk ETF?s, like (JNK), (PHB), and the (HYG). There will be better buying opportunities down the road.
As for municipal bonds, we are seeing only the opening act of a decade of fiscal woes by local government. Still, there is a good case for sticking with munis. No matter what anyone says, taxes are going up, and when they do, this will increase muni values. The continued bull market in Treasuries will do the same.
So if you hate paying taxes, go ahead and buy this exempt paper, but only with the expectation of holding it to maturity. Liquidity could get pretty thin along the way. Be sure to consult with a local financial advisor to max out the state, county, and city tax benefits. And thank Meredith Whitney for creating the greatest buying opportunity in history for muni bonds a year ago.
Perhaps the best place to live in bond world is in emerging market debt, where you can participate via the (PCY). At least there, you have the tailwinds of strong economies, little outstanding debt, appreciating currencies, and already high interest rates. But don?t buy here. This is something you want to pick up at the nadir of a ?RISK OFF? cycle, when the dollar and Treasury markets are peaking.
(FXC)
The Fat Lady Will Have to Wait to Sing for the Treasury Market
Any trader will tell you to never bet against the trend, and the overwhelming direction for the US dollar for the last 220 years has been down. The only question is how far, how fast. Going short the currency of the world?s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer.
But once it became every hedge fund trader?s free lunch, and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic bear market corrections, which began in March and could continue for several more months, or even years.
The big driver of the currency markets is interest rate differentials. With US interest rates safely at zero, and the rest of the world chopping theirs as fast as they can, this will provide a very strong tailwind for the greenback for much of 2012. Use rallies to sell short the Euro (FXE), (EUO), the Canadian dollar (FXC), the high beta Australian dollar (FXA), and the lagging New Zealand dollar (BNZ). Australians could see a print of 85 cents before the bloodletting is over, and should pay for their upcoming imports and foreign vacations now, while their currency is still dear.
The Euro presents a particular quandary for foreign exchange traders, with a never ending sovereign debt crisis causing its death through a thousand cuts. Just look at Greece, with a budget deficit of 13% of GDP against the 3% it promised on admission to the once exclusive club. But this is not exactly new news, and traders have already built shorts to all-time records. Still, the next crisis in confidence could easily take the Euro to $1.25, and new momentum driven shorts could take us to the $1.17?s.
As far as the Japanese yen is concerned, I am going to stay away. How the world?s worst economy has managed to maintain the planet?s strongest currency is beyond me. The problems in the Land of the Rising Sun are almost too numerous to count: the world?s highest debt to GDP ratio, a horrific demographic problem, flagging export competitiveness against neighboring China and South Korea, and the world?s lowest developed country economic growth rate. But until someone provides me with a convincing explanation, or until the yen decisively reverses, I?ll pass. Let hedge fund manager, Kyle Bass, figure this one out.
For a sleeper, use the next plunge in emerging markets to buy the Chinese Yuan ETF (CYB) for your back book, but don?t expect more than single digit returns. The Middle Kingdom will move heaven and earth to in order to keep its appreciation modest to maintain their crucial export competitiveness.
This is my favorite asset class for the next decade, as investors increasingly catch on to the secular move out of paper assets into hard ones. Don?t buy anything that can be manufactured with a printing press. Focus instead on assets that are in short supply, are enjoying an exponential growth in demand, and take five years to bring new supply online. The Malthusian argument on population growth also applies to commodities; hyperbolic demand inevitably overwhelms linear supply growth.
Of course, we?re already nine years into what is probably a 30 year secular bull market for commodities and these things are no longer as cheap as they once were. You?ll never buy copper again at 85 cents a pound, versus today?s $3.40. You are going to have to allow these things to breathe. Ultimately, this is a demographic play that cashes in on rising standards of living in the biggest and highest growth emerging markets. You can start with the traditional base commodities of copper and iron ore.
The derivative equity plays here are Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE). Add the energies of oil (DIG), coal (KOL), uranium (NLR), and the equities Transocean (RIG), Joy Global (JOY), and Cameco (CCJ).
As much as I love the long term case for hard commodities, I am not expecting any action in the immediate future. Commodities will remain a no go area until it is clear whether China?s economy will suffer a soft or a hard landing, or continues to remain airborne. Use this year?s big ?RISK OFF? trade to acquire serious positions. If markets rally into year end, you might catch a quick 50% gain in the more volatile securities.
Oil has in fact become the new global de facto currency, and probably $30 of the current $100 price reflects monetary demand, and another $30 representing a Middle Eastern risk premium. Strip out these factors, and oil should be trading at $40.? That will help it grind to $100 sometime in early 2012, and we could spike as high as $120. After that, the ?RISK OFF? trade could take it back down to the $75 we saw in September.
Skip natural gas (UNG), because the discovery of a new 100 year supply from ?fracking? and horizontal drilling in shale formations is going to overhang this subsector for a very long time. Major reforms are required in Washington before use of this molecule goes mainstream.
The food commodities are also a great long term Malthusian play, with corn (CORN), wheat (WEAT), and soybeans (SOYB) coming off the back of great returns in 2010. These can be played through the futures or the ETF?s (MOO) and (DBA), and the stocks Mosaic (MOS), Monsanto (MON), Potash (POT), and Agrium (AGU). The grain ETF (JJG) is another handy play. Though an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cake walk. You can participate in this most liquid of asset with the ETF?s (PHO) and (FIW).
Let?s face it, gold is not a hard asset anymore, it?s a paper one. Since hedge funds and high frequency traders moved into this space, the barbarous relic has been tracking one for one with the S&P 500 and other risk assets.
The chip shot here is $1,500 on the downside, once the remaining hedge fund redemptions and other hot money are cleared out. If we have a real recession this year, $1,050 might be doable. Remember, the speculative frenzy is as great as it was in 1979, which saw the beginning of a 75% plunge in the yellow metal.
But the long term bull case is still there. Obama has not suddenly become a paragon of fiscal restraint. Bernanke has not morphed into a tightwad. When I pull a dollar bill out of my wallet, it?s as limp as ever.
If you forgot to buy gold at $35, $300, or $800, another entry point is setting up for those who, so far, have missed the gravy train. The precious metals have to work off a severely overbought condition before we make substantial new highs. Remember, this is the asset class that takes the escalator up and the elevator down, and sometimes the window.
If the institutional world devotes just 5% of their assets to a weighting in gold, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation adjusted all-time high, or more. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP). But you should only go into these as part of a broader ?RISK ON? move.
I would also be using the next bout of weakness to pick up the high beta, more volatile precious metal,+ silver (SLV), which I think could hit $50 once more. Palladium (PALL) and platinum (PPLT), which have their own auto related long term fundamentals working on their behalf would also be something to consider on a dip.
Here?s a Nice Busted Bubble
6) Real Estate
There is no point in spending much time on this most unloved of asset classes, so I?ll keep it brief. There are only three numbers you need to know in the housing market: there are 80 million baby boomers, 65 million Generation Xer?s who follow them, and 85 million in the generation after that, the Millennials.
The boomers have been desperately trying to unload dwellings to the Gen Xer?s since prices peaked in 2007. But there are not enough of them, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. If they have prospered, banks won?t lend to them.
Now consider the coming changes that will affect this market. The home mortgage deduction is unlikely to survive any attempt to balance the budget. And why should renters be subsidizing homeowners anyway? Nor is the government likely to spend billions keeping Fannie Mae and Freddie Mac alive, which now account for 95% of home mortgages.
That means the home loan market will be privatized, leading to mortgages rates 200 basis points higher than today. If this sounds extreme, look no further than the jumbo market for proof. It is already bereft of government subsidy, and loans here are now priced at premiums of this size. This also means that the fixed rate 30 year loan will disappear, as banks seek to offload duration risk to consumers. This happened long ago in the rest of the developed world.
There is a happy ending to this story. By 2025 the Millennials will start to kick in as the dominant buyers in the market. Some 85 million Millennials will be chasing the homes of only 65 Gen Xer?s, causing housing shortages and rising prices. This will happen in the context of a labor shortfall and rising standards of living. In fact, the mid 2020?s could bring a repeat of our last golden age, the 1950?s.
The best case scenario for residential real estate is that it bounces along a bottom for another decade. The worst case is that it falls another 25% from here. Only buy a home if your wife is nagging you about living in that cardboard box under the freeway overpass. But expect to put up your first born child as collateral, and bring in your entire extended family in as cosigners if you want to get a bank loan. Then pray that the price starts to go up in 15 years. Rent, don?t buy.
Rent, Don?t Buy
Well, that?s all for now. We?ve just passed the Pacific mothball fleet and we?re crossing the Benicia Bridge, where the Sacramento River pours into San Francisco Bay. The pressure drop caused by an 8,000 foot descent from Donner Pass has crushed my water bottle. The Golden Gate and the soaring spire of the Transamerica building are just around the next bend. So it is time for me to unglug my laptop and pack up.
I?ll shoot you a trade alert whenever I see a window open on any of the trades above. Good trading in 2012!
I am writing TO you from my first class seat on Singapore Airlines, winging my way the 12 hours from Hong Kong to San Francisco. While most airlines jettisoned their first class sections years ago as a cost saving measure, Singapore carried on to maintain its reputation as the best airline in the world. The small section at the front of the bus is populated with a few Chinese billionaires, Taipans, and CEO?s flying at shareholder expense. They are transported in untold luxury with a fully flat bed almost the size of a regular single and a 24 inch high HDTV with a vast movie library. The plane carries double the number of stewardesses on American airliners.
They say a change is as good as a vacation, and this trip certainly fit the bill. I covered 23,000 miles in 17 days, which is really a trip around the world, touching down in New Zealand, Australia, Singapore, Hong Kong, and mainland China. The people I met were fascinating, and included a Maori chieftain, an Australian media mogul, gold miners from Queensland, sheep farmers in New South Wales, Chinese bankers, a Singaporean F-5 combat pilot, and senior officials from the People?s Republic of China. I even managed to track down a Chinese renegade rare earth miner on his day off, and the good news is that he didn?t shoot me, as long as I didn?t take pictures.
I heard some amazing stories and gained some first class intelligence, which I will translate into killer trading opportunities. I will be feeding these out as fast as these old, arthritic and scarred fingers can type them. Alas, I can only knock out about 1,500 words a day before it starts to turn to mush and my back gives out. I will be publishing a series of Pacific country reports over the next four Fridays.
The market? Ohhhh, you want me to talk about the market! Let me give you my quickie read here. My fall rally kicked in right on schedule, my call to cover all shorts coming within a point of the actual bottom in the (SPX). This is the closest I have ever come picking an absolute bottom. After that, it was off to the races with a ?RISK ON? trade with a vengeance. Corporate earnings are coming in much better than anticipated.
This has triggered a buying stampede for all risk assets as hedge fund traders rush to cover shorts and conventional managers frenetically readjust substantial underweight positions they only recently achieved. This has truly been the year from hell, and the word is that 40% of active managers are underperforming their benchmarks by 250 basis points or more.
Having discounted a double dip recession that was never going to happen, Mr. Market is now backing that possibility out again. The net result of all this was to take the S&P 500 from a 1,075 bottom up 17% to just short of my target at the 200 day moving average of 1,275. The entire script unfolded exactly as I expected. Followers of my Macro Millionaire trading service got the memo in my October 8 webinar, The Short Game is Over, and have been laughing all the way to the bank since then. Their year to trade performance now stands at a new high of 42.13%.
The easy money in this move has been made, and we are now bumping up against 200 day moving averages across all equity classes. Expect a prolonged battle to be fought here. So this is not a great place to initiate new positions. Bonds have died, but yields have not risen as much as I would have thought, given the ebullience of the price action.
The (TBT) is the sole position I currently have in my portfolio, and it has only picked up a measly 23% in this move. I would have expected more.
Expect the rally to fail several times at these levels before they make further progress. There is a lot of hot money to flush out here before they can mount a break out to the upside. Take a look at the chart for crude oil and the (USO), which is telling you that this risk on will have longer legs than most expect. What will be the trigger? Surprise progress on the European sovereign debt crisis, or even a deliberate kicking of the can down the road.
One additional note. You have noticed some modifications to the website. No, it has not had a sex change operation to get even with me for my absence. I am launching a major upgrade, redesign, and improvement in functionality, plowing in new capital that thousands of new subscribers have afforded me. The final version will be up and running in a couple of days. But like all great birthing events, this was has not without surprises, difficulties, and setbacks.
Rather than willingly give up its toys to the new kid on the block, our hosting service has chosen to break them instead. In addition, moving over two War and Peace?s on the Internet, the extent of the content I have written over the past four years, is no piece of cake. It took Tolstoy seven years just to write it once, but that was in long hand with a quill pen, so I?ll forgive the old man.
For those who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Macro Millionaire? in the subject line, as we are getting buried in emails.
https://www.madhedgefundtrader.com/wp-content/uploads/2011/10/Screen-shot-2011-10-26-at-10.30.13-AM1.jpg316446madhedgefundtrader@yahoo.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngmadhedgefundtrader@yahoo.com2011-10-26 03:00:402011-10-26 03:00:40Winging My Way Back From China
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