The Mad Hedge Fund Trader-Friday
Global Market Comments
February 5, 2010
Featured Trades: (RESIDENTIAL REAL ESTATE),
(XLK), (GOOG), (CSCO), (PHO), (CGW), (FXI), (GS)
QUOTE OF THE DAY
“We’re not going to be able to kill our way or buy our way to success in Afghanistan,” said General James E. Cartwright, vice chairman of the Joint chiefs of Staff.
This is not a solicitation to buy or sell securities
For full disclosures click here
The "Diary of a Mad Hedge Fund Trader"(TM) and the "Mad Hedge Fund Trader" (TM) are protected by the United States Patent and Trademark Office
The "Diary of the Mad Hedge Fund Trader" (C) is protected by the United States Copyright Office
February 5, 2010
Featured Trades: (RESIDENTIAL REAL ESTATE),
(XLK), (GOOG), (CSCO), (PHO), (CGW), (FXI), (GS)
1)It’s time for me to take my weekly
dump on the residential real estate market. The two charts below
suggest that we have three more years to go until we finally hit
bottom. One gives the median house price-to-annual rent ratio, showing
that ownership is still 15% more expensive than renting. Some analyst
expect that home prices will fall until the two reach parity. I think
house prices could fall a little below the cost of renting to
compensate owners for the capital risk of home ownership, a possibility
made abundantly clear by the recent crash. Once burned, twice
forewarned. There is also the difficulty of obtaining new financing to
contend with, as well as the coming onslaught of new foreclosures. The
second chart establishes a price trend line going back to 1970, and
assumes we return to trend. This suggests that we have a further 15% to
fall until we get to a final bottom sometime in 2013. This fits nicely
with historical data showing that real estate busts are typically six
years in duration. There is nothing better than three independent data
sources and analysis that arrive at the same conclusion. Do you think
anyone at Wells Fargo, Fannie Mae, or the Fed looks at these scenarios?
They didn’t three years ago. Renew that lease.
2) I have always considered the US military to have one of the world’s greatest research organizations. The frustrating thing is that their “clients” only consist of the President and a handful of three and four star generals. So I leapt at the opportunity to have dinner with General James E. Cartwright, Vice Chairman of the Joint Chiefs of Staff. Meeting the tip of the spear in person was fascinating. The four star Marine pilot is the second highest ranking officer in the US armed forces, and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes. As he spoke, I was ticking off the stock, ETF, and futures plays that would best capitalize on the long term trends he was outlining. The cycle of warfare is now driven by Moore’s Law more than anything else (XLK), (CSCO), (GOOG). Peer nation states, like Russia, are no longer the main concern. Budgeting for military expenditures is a challenge in the midst of the worst economic environment since the Great Depression. Historically, inertia has limited changes in defense budgets to 5%-10% a year, but last year defense secretary Robert Gates pulled off a 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap. The war on terrorism will continue for at least 4-8 more years. US troops in Iraq will wind down to 35-50,000 by August to support a large State Department presence. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. However, a 30,000 man surge there over the next 18 months will bring an improvement on the ground situation. Iran is a big concern, and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program. Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable. Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites. We may have to lose a few institutions in an attack to get congress to change the law and accept the legal concept of “voluntarism” . General Cartwright said “Anyone in business will tell you that they’re losing intellectual capital on a daily basis.” The START negotiations have become complicated by the fact that for demographic reasons, Russia will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI). The Russians are trying to cut the cost of defending against the US so they can spend more on defense against a far larger force from China. I left the dinner with dozens of more ideas percolating through my mind, which I will write about in future letters.
3)The business section of the New York Times ran a full page ad yesterday from Smith & Wollensky, one of my old hang outs at Morgan Stanley, offering “Steak for Stock”. Bring in share certificates, and the steak restaurant will give you today’s market equivalent value in food. Bring in two shares of Goldman Sachs (GS) (yesterday’s close $157), and you get four prime filet mignons, fabulous sides, and two bottles of reserve Napa wine. Deliver two shares of Citigroup (C), and they’ll serve you a half portion of creamed spinach. Have they found a great way to beat the capital gains tax, or what? Just digest your unrealized gains and dispose of them accordingly. The ad ends by saying they will even accept stock for General Motors. That will probably get you a breath mint at the cash register.
2) I have always considered the US military to have one of the world’s greatest research organizations. The frustrating thing is that their “clients” only consist of the President and a handful of three and four star generals. So I leapt at the opportunity to have dinner with General James E. Cartwright, Vice Chairman of the Joint Chiefs of Staff. Meeting the tip of the spear in person was fascinating. The four star Marine pilot is the second highest ranking officer in the US armed forces, and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes. As he spoke, I was ticking off the stock, ETF, and futures plays that would best capitalize on the long term trends he was outlining. The cycle of warfare is now driven by Moore’s Law more than anything else (XLK), (CSCO), (GOOG). Peer nation states, like Russia, are no longer the main concern. Budgeting for military expenditures is a challenge in the midst of the worst economic environment since the Great Depression. Historically, inertia has limited changes in defense budgets to 5%-10% a year, but last year defense secretary Robert Gates pulled off a 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap. The war on terrorism will continue for at least 4-8 more years. US troops in Iraq will wind down to 35-50,000 by August to support a large State Department presence. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. However, a 30,000 man surge there over the next 18 months will bring an improvement on the ground situation. Iran is a big concern, and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program. Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable. Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites. We may have to lose a few institutions in an attack to get congress to change the law and accept the legal concept of “voluntarism” . General Cartwright said “Anyone in business will tell you that they’re losing intellectual capital on a daily basis.” The START negotiations have become complicated by the fact that for demographic reasons, Russia will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI). The Russians are trying to cut the cost of defending against the US so they can spend more on defense against a far larger force from China. I left the dinner with dozens of more ideas percolating through my mind, which I will write about in future letters.
3)The business section of the New York Times ran a full page ad yesterday from Smith & Wollensky, one of my old hang outs at Morgan Stanley, offering “Steak for Stock”. Bring in share certificates, and the steak restaurant will give you today’s market equivalent value in food. Bring in two shares of Goldman Sachs (GS) (yesterday’s close $157), and you get four prime filet mignons, fabulous sides, and two bottles of reserve Napa wine. Deliver two shares of Citigroup (C), and they’ll serve you a half portion of creamed spinach. Have they found a great way to beat the capital gains tax, or what? Just digest your unrealized gains and dispose of them accordingly. The ad ends by saying they will even accept stock for General Motors. That will probably get you a breath mint at the cash register.
QUOTE OF THE DAY
“We’re not going to be able to kill our way or buy our way to success in Afghanistan,” said General James E. Cartwright, vice chairman of the Joint chiefs of Staff.
This is not a solicitation to buy or sell securities
For full disclosures click here
The "Diary of a Mad Hedge Fund Trader"(TM) and the "Mad Hedge Fund Trader" (TM) are protected by the United States Patent and Trademark Office
The "Diary of the Mad Hedge Fund Trader" (C) is protected by the United States Copyright Office
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