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The Mad Hedge Fund Trader-Monday

Mad Hedge Fund Trader — Tue, 09 Mar 2010 14:35:00 GMT

Global Market Comments
March 8, 2010

Featured Trades: (FEBRUARY NON-FARM PAYROLL), (YEN), (EUROYEN CROSS), (SPX), (GOOG), (AAPL), (GS),
(BARTON BIGGS),
(OEF), (MSFT), (INTC), (CSCO), (ORCL),
(FXI), (PIN), (EWY), (THD), (EWT), (EWH),
(TUR), (PLND), (RSX), (EWZ), (USO).

1)Something Amazing is Happening With the Payroll Figures. The February non-farm payroll showed a further loss of 36,000 jobs, versus an expected loss of 75,000, and the unemployment rate remained unchanged at 9.7%. December was revised up by 41,000 and January was revised down by 6,000, so netting everything out there was essentially no change. Those hired now exactly equal those fired, about 3 million a month. There were continued big losses in construction, and decent gains in temps. This month I decided to take advantage of former Labor Secretary Robert Reich’s course on labor statistics which I took at UC Berkeley, and dig through the supporting data at the Bureau of Labor Statistics website (click here for the link at www.bls.gov/ ). Something amazing is happening. There is a barbell effect in the labor markets which no one seems to see, which is rendering the aggregate payroll figures meaningless. There is a barbell effect taking place, where the 40% who have been jobless for more than six months, who worked in the bubble industries of real estate, housing, and construction, are never going to see their jobs come back. The 60% who are short term unemployed, who recently lost jobs in finance, accounting, and health care, are getting rehired very quickly. In fact, 20% of the jobless are getting rehired in only six weeks. There is another effect at work. While the employment rate for those with no high school diploma is 16%, the kind of worker who lost their manufacturing jobs to China, the jobless rate for those with college degrees is only 4.5%. This is proof that the dying sectors of the US economy is delivering the highest unemployment rates, and that America is clawing its way up the value chain in the global race for economic supremacy. It is what America does best, creative destruction with a turbocharger. There is a third influence here, which could be huge. The BLS only contacts existing businesses for its survey. It doesn’t survey companies operating out of someone’s garage in startup mode. Given the huge ongoing dislocations in our industrial structure and the incredible advances in software, the Internet, and cloud computing, this could be one of the biggest job creators of all. So far, it is not being counted at all. The bottom line is that payroll figures are much better than they appear at first glance. Red Alert! The markets don’t know this.

2) Is a Big Global Risk Reversal Underway? Has the Mother of All Carry Trades Begun? The financial markets had been expecting dire payroll numbers, thanks to the huge snow storms that hit the East. I am going to go way out on a limb here and bet that the snow will be gone by June. In fact, without the snow, the February payroll number could have been as high as a positive 100,000, and that we may actually see this in the March figures to be released in a month. I think the current report is spectacularly good news, because it suggests that the rise in jobless claims is now at its apex, and is about to reverse and return to earth. Mind you, we aren’t going back to 5% unemployment anytime soon, but any number showing job gains will have a hugely positive psychological effect. It will be an improvement that the markets don’t expect, don’t believe in, and therefore will catch them seriously off guard. This means that the global risk reversal trade that started on January 11 may be over, and that big hedge funds are about to start adding on positions across the entire range of financial instruments. That great bell weather of global risk taking, the Euro/Yen cross is telling us as much, having popped from ¥120 to ¥123.5 on the payroll news. You also see this in the Ausie/Yen cross, and outright yen markets. Those who managed to catch my recommendation to short the yen at ¥88.40 on Thursday bagged an instant profit of ¥2. This is a trade that could go on for the next year, and you should be selling rallies in the Japanese currency from here. The mother of all carry trades has begun. This is good news for stocks and emerging markets. I’m not expecting anything dramatic here, maybe single digit gains in the indexes, and double that for single stocks. Use Apple (AAPL), Google (GOOG), and Goldman Sachs (GS) as your Sherpas, because they are the current markets leaders. Focus on big cap technology. It will also juice commodities, oil, and precious metals. These numbers put another nail in the coffin of the 30 year Treasury bond, which I have been despising all year.

3)Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, what to do about Japan was the topic of the day, and I was bullish. Today, Barton can say with “real certainty” that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years. Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT). The easy way in here is to simply buy the S&P 100 ETF (OEF).The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all. Barton sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a “new normal” of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the last decade to only 2.5 % in this one. But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation. Looking at the world as a whole, Barton thinks Asia is the place to be. A bubble may be developing in China, but it is at least 3-5 years off, and there will be plenty of money to be made until then. India is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea, Thailand, H-shares in Hong Kong, and Turkey are also lining up in Barton’s sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland and Russia. Traxis is short Brazil, because it has already had a great run, and because the country still faces some severe social problems. Commodities had their run last year, and won’t do much from here, but they aren’t going to crash either. He sees oil grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds will be deflation driven for the next year, but are definitely not for your “Rip Van Winkle” investor, as they represent poor value for money. Real estate is dead money. To hear my interview with Barton at length, please click here

QUOTE OF THE DAY

“Rupert Murdoch is very smart and is a great leader, but he’s made a mistake. He’s buried in ink, and in my view, there won’t be any newspaper business ten years from now. Fortunately, we’re buried in television and movies, and they’ll be here forever,” said Sumner Redstone, chairman of Viacom and CBS.

This is not a solicitation to buy or sell securities
For full disclosures click here at www.madhedgefundtrader.com/Disclosures.html
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

The Mad Hedge Fund Trader-Friday

Mad Hedge Fund Trader — Mon, 08 Mar 2010 16:57:00 GMT

Global Market Comments
March 5, 2010

Featured Trades: (JAPAN), (YEN), (YCS),
(GOLD), (GLD),(NEM),
(NATURAL GAS), (UNG),
(HEDGE FUND RADIO), (BARTON BIGGS)

1)I’m hearing from my buddies in Japan that while things are already quite bad in that enchanting country, they are about to get a whole lot worse, and that it is time to start scaling into a major short in the yen.

Australia and China have already raised interest rates, to be followed by the US, and eventually Europe. With its economy enfeebled, the prospects of Japan raising rates substantially are close to nil, meaning the yield spread between the yen and other currencies is about to widen big time. In the case of the Australian dollar, that works out to 4% per annum. Leverage up ten to one, and pile on anticipated capital gains brought in by a weakening yen, and you have a real carry trade on your hands. That will generate hundreds of billions of dollars worth of cascading yen selling as hedge funds dog pile in. It’s macro investing at its finest.

Until now, the government has been able to finance ballooning budget deficits caused by two lost decades, but those days are coming to an end. Japan is quite literally running out of savers. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank.

The national debt has rocketed to 190% of GDP, and 100% when you net out government agencies buying each other’s securities. Japan has the world’s worst demographic outlook. Unfunded pension liabilities are exploding. Other than once great cars and video games, what does Japan really have to offer the world these days, but a carry currency?

Until now, the government has been able to cover up these problems with tatami mats, because almost all of the debt it issued has been sold to domestic institutions. Now that this pool is drying up, there is nowhere else to go but foreign investors. With Greece and the rest of the PIIGS at the forefront, and awareness of sovereign risks heightening, this is going to be a much more discerning lot to deal with.

That great bell weather of global risk taking, the Euro/Yen cross is telling us that the mother of all carry trades has already started. On the release of Friday’s surprisingly positive nonfarm payroll numbers, the cross popped from ¥120 to ¥123.5, sending shorts scampering. You also see this in the Ausie/Yen cross, and outright yen markets. I have been piling clients into short positions since Thursday at the ¥88 handle, and they have already bagged an instant profit of ¥2.

You could dip your toe in the water here around ¥90. In a perfect world you could sell it as it double tops at the 85 level. My initial downside target is ¥105, and after that ¥120. If you’re not set up to trade in the futures or the interbank market like the big hedge funds, then take a look at the leveraged short yen ETF, the (YCS). This is a home run if you can get in at the right price.

2)If you are wondering where the bull market in gold went, take a look at the chart below of gold priced in Euros. The chart for gold priced in yen look just as healthy. The latest filings with the Securities and Exchange Commission show that the largest hedge funds are still adding to their already substantial positions. Soros Fund Management, with $25 billion under management, tripled its holdings in the gold ETF (GLD) in the fourth quarter of 2009. Tudor Investment Management quadrupled its holding in Newmont Mining (NEM), the largest miner of the barbaric relic in the US. Hedge fund giants, David Einhorn of Greenlight Capital and John Paulson of the Credit Opportunity Fund, have also been boosting substantial positions. These guys are not day traders, and are clearly in for the long haul. With some technical analysts arguing that gold still has several more months to go to digest the massive 80% gain it made off of the October, 2008 $680 low, that may be the wise approach to take.

3)The poster boy for everything that can go wrong with an ETF is undoubtedly the one for natural gas, the (UNG). If you had studiously done all of your homework in September and concluded that natural gas was severely oversold and about to go up 40%, you would have been dead right. If you then went out and bought the UNG you would have then lost 40%, as you can see from the chart below. You would think at first glance that this is a chart for an inverse gas ETF, which it isn’t, because such an instrument doesn’t exist. This dreadful state of affairs was brought about by the intricacies of contango, where far month contracts in the futures markets are trading at premiums to the front month. As each month expired, the managers of UNG bought fantastically rich forward contracts, and then rode them all the way down to spot, as they were mandated to do by their prospectus. They then repeated this exercise every month. If the contango continues indefinitely, the UNG will eventually approach zero. Since we are discussing CH4, I have to tell you that the outlook does not look great. We are just coming out of one of the worst winters in history, and NG only managed a rally from the $2.40 low to six bucks and change. Gas in storage is about to rise again, and gas producers are racing to out produce each other in the hope of offsetting falling prices with increased volumes. This is all happening with new discoveries occurring almost daily, thanks to the new miracle fracting technology. It seems that now one only need poke a straw in their backyard to obtain a lifetime supply of clean burning energy. And I read today that Poland is about to lead the charge deploying fracting technology in Europe. They must be sweating bullets in Qatar, which just invested $50 billion in gas exporting facilities. Moral to the story: don’t just punch in a symbol and hit enter. Read the damn prospectus first.

4) My guest on Hedge Fund Radio this week is Barton Biggs, founding partner of mega hedge fund Traxis Partners. Barton is a former colleague and mentor of mine at the Wall Street giant, Morgan Stanley, where we spent nearly a decade sparring with each other over the international investment landscape. Barton is an ex Marine officer (semper fi) who went to business school, earning an MBA from New York University. He started in the business in 1961, when he joined brokerage house EF Hutton, and went on to start one of the first ever hedge funds. Barton then joined Morgan Stanley in 1973, were he was a managing director for 30 years, founding Morgan Stanley Investment Management. He eventually served on the firm’s board of directors. Barton was rated, more than once, the number one global strategist by Institutional Investor Magazine. He left Morgan Stanley to start Traxis Partners in 2003. Hedge Fund Radio is broadcast 24/7 around the world for free. To access this online program and archives of past shows, please go to my website by clicking here

QUOTE OF THE DAY

“When you have a wave of bank crises, it is often followed by a wave of sovereign debt crises. There are a lot of countries with elevated debt levels, a lot of countries at risk….It’s amazing how many countries have amnesia about their default rates,” said Dr. Kenneth Rogoff, a Harvard professor and former Chief Economist at the IMF.

This is not a solicitation to buy or sell securities
For full disclosures click here at www.madhedgefundtrader.com/Disclosures.html
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

The Mad Hedge Fund Trader-Thursday

Mad Hedge Fund Trader — Fri, 05 Mar 2010 16:54:00 GMT

Global Market Comments
March 4, 2010

FOR PAID SUBSCRIBERS ONLY

Update on the Best Technical Call in the Market

Featured Trades: (TBT), (TBF), (XEU),
(AISIE/EURO CROSS), (AUSIE/YEN CROSS), (YEN), (XJY),
(CRUDE), (USO), (GOLD),
(COPPER), (NATURAL GAS), (UNG)

1) Update on the Best Technical Call in the Market, by Charles Nenner, available to paid subscribers only. To subscribe, please to to by online store by clicking here

Come Join Me for Lunch!

Mad Hedge Fund Trader — Thu, 04 Mar 2010 16:37:00 GMT

Come join me for lunch for the Mad Hedge Fund Trader’s Global Strategy Update, which I will be conducting in a number of venues around the country this year. The first two will be held in San Francisco on April 23, and in New York on May 7. A three course lunch will be followed by a 45 minute PowerPoint presentation and a 30 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. Premium tickets are available for $250, and standard tickets for $95. 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 San Francisco lunch will be held at 12:00 noon on Friday, April 23, at the Marines’ Memorial Association. The club can be found at 609 Sutter Street, San Francisco, CA 94102. For visitors from out of town, I have reserved a block of rooms at the Marines’ Memorial Association, which is an excellent four star hotel only two blocks from the city center at Union Square and the cable cars. They are available at a special member’s discounted rate of $169 for weekdays and $179 for weekends.

The New York lunchwill be held at 12:00 noon on Friday, May 7, at the New York Athletic Club. The club can be found at 180 Central Park South, New York, NY 10019.

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 shop.madhedgefundtrader.com/

The Mad Hedge Fund Trader-Wednesday

Mad Hedge Fund Trader — Thu, 04 Mar 2010 05:12:00 GMT

Global Market Comments
March 3, 2010

Featured Trades: (JON NAJARIAN), (OPTIONMONSTER), (AUSSIE/EURO CROSS), (ETHANOL), (CORN)

1)How does an NFL linebacker develop a series of computer algorithmsthat give him a crucial edge when trading the market? That is thequestion I hoped to answer when I interviewed Jon Najarian, founder andCEO of OptionMonster (click herefor the site at www.optionmonster.com/ ). Jon’s proprietaryprogram, called Heat Seeker ®, monitors no less than 180,000 trades asecond to give him an early warning of large trades that are about tohit the stock, options, and futures markets. To give you an idea of howmuch data this is, think of downloading the entire contents of theLibrary of Congress, about 20 terabytes, every 33 minutes. His firmmaintains a 10 gigabyte per second conduit that transfers data at 6,000times the speed of a T-1 line, the fastest such pipe in the civilianworld. Jon then distills this ocean of data into the top movers of theday, which he puts up for free on his website, and offers much moredetailed analysis through a premium subscription product. “As with theNFL,” says Jon, “you can’t defend against speed.” The system catchesbig hedge funds, pension funds, and mutual funds shifting largepositions, giving subscribers a peak at the bullish or bearish tilt ofthe market. It also offers accurate predictions of imminent moves insingle stock and index volatility. Jon started his career as alinebacker for the Chicago Bears, and I can personally attest that hestill has a handshake that’s like a steel vice grip. Maybe it was hisbrute strength that enabled him to work as pit trader on the ChicagoBoard of Options Exchange for 22 years, where he was known by his floorcall letters of “DRJ”. He formed Mercury Trading in 1989 and then soldit to the mega hedge fund, Citadel, in 2004. Jon developed his patentedalgorithms for Heat Seeker® with his brother Pete, another NFL player(Tampa Bay Buccaneers and the Minnesota Vikings), who like Jon, is aregular face in the financial media. Jon thinks that if China isserious about throttling back its economy, it will have a dampeningeffect on global financial markets for some time. The S&P 500 isgoing to stick around the 1100 level, and commodities are going to stayin a big sideways range. Volatility is going to die. To hear myinterview with Jon at length, please click here

2) Last night the Reserve Bank of Australia raised overnight cash ratesfrom 3.75% to 4%, spurred on by a healthy, resource fueled economy anda booming jobs market. The move put a spotlight on the Aussie/Eurocross, which I recommended traders buy a month ago at $AUS 62.5 (click here forthe call). With the cross now tickling 67, traders are sitting pretty,with the chart going, as Dennis Gartman likes to say “from the lowerleft hand corner to the upper right.” The trade quite simply gets youlong a country where everything is going right, and short a regionwhere things are deteriorating by the day. The yield spread between thetwo currencies is now wide enough to drive a truck through, call that alorry, and that gap looks to broaden further. Call this “Cross Trading101 for Dummies,” but sometimes the easiest trades work the best,because so many investors can understand them.

3)One of my biggest disappointments with Obama so far is his continuedsupport of the ethanol boondoggle. The program was initiated by theBush administration to achieve energy independence by subsidizing theproduction of alcohol from domestically grown corn. Add clean burningmoonshine (yes, it’s the same alcohol-- C2H5OH), whose combustionproducts are carbon dioxide (CO2) and water (H2O), to gasoline andemissions also go down. The irony is that if you include all theupstream and downstream inputs, the process consumes more energy thanit produces. It also demands massive quantities of fresh water, whichsomeday will become more valuable than the oil the ethanol is supposedto replace, turning it into toxic waste. Never mind the image ofspendthrift, obese Americans burning food so they can drive chromewheeled black Hummers to Wal-Mart, while much of Africa and Asiastarves. Ethanol consumption of corn has soared from 1.6 billionbushels in 2006 to an anticipated 4.3 billion bushels this year.Ethanol’s share of our total corn crop has skyrocketed from 14% to 33%during the same period. This ignores the reality that Brazil, theworld’s largest ethanol producer, can ferment all the ethanol it wantsat one third our cost because they make it from much more efficientsugarcane, which has five times the caloric content of corn. However,protective import quotas and tariffs prevent meaningful quantities offoreign ethanol imports. Bush financed all of this wasteful pork,because Iowa has an early primary, giving it an outsized influence inselecting presidential candidates, and has two crucial Senate seats aswell. 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 theSenate (1-1), so the ethanol program not only lives on, it isprospering. Shame, and double shame. Better to drink it than burn it, Isay.

QUOTE OF THE DAY

“The dollar hating crowd is hating themselves now. Things in Europearen’t improving any time soon,” said Jon Najarian of OptionMonster.

This is not a solicitation to buy or sell securities
For full disclosures click here at www.madhedgefundtrader.com/Disclosures.html
The "Diary of a Mad Hedge Fund Trader"(TM) and the "Mad Hedge FundTrader" (TM) are protected by the United States Patent and TrademarkOffice
The "Diary of the Mad Hedge Fund Trader" (C) is protected by the United States Copyright Office

The Mad Hedge Fund Trader-Tuesday

Mad Hedge Fund Trader — Wed, 03 Mar 2010 14:59:00 GMT

Global Market Comments
March 2, 2010

Featured Trades: (30 YEAR TREASURY BOND), (TBF), (TBT),
(RSX), (IDX), (THD), (PIN),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR)

1)Louise Yamada, one of the most widely followed technical analysts in the market, says the 29 year bull market in Treasury bonds is coming to a close. Looking at the 200 year history of interest rates in the US, such bull markets are historically 22-37 years in length, and this one is definitely looking long in the tooth. Although doubters insist that you’ll never get a collapse in bonds in a deflationary environment, Louise says that all bond peaks occur in such conditions. Yields show prolonged, saucer like bottoms, much like we are seeing now. She also says that retail interest in such paper also surges when interest rates are at multi decade highs, as we saw clearly with last year’s flow of funds. When foreign buyers lose interest in our debt, the 30 year Treasury bond is the first place their lack of interest will show up. The charts for the 30 year are setting up a perfect head and shoulders top, and when the yield break through 4.8%, watch out. The next stop may be 7%. Her advice is that if you are going to stay in the government bond market, shorted your duration as much as possible. My advice? Sell the 30 year bond futures, which today are selling at 119, up 2 ½ points from last week’s low. If Louise’s scenario plays out, it will take the futures well below 100. If you can only sleep at night with less leverage, buy the (TBF) and the (TBT). We are about to enter the golden age for these short bond ETF’s.

2) If you wonder why I recommend a shower after investing in Russia, Bill Browder will give you the reasons at length on his YouTube video (click here for the link ). Bill is the founder and CEO of Hermitage Capital Management, one of the firms that pioneered equity investment in the former Soviet Union in the nineties. After a decade of pursing a campaign of activist investing that brought major changes in corporate governance in big companies like Gazprom and Sberbank, a mafia connected government struck back with a vengeance. It deported Browder in 2005, arrested his lawyer, and pressured him to provide false testimony again his boss, which he refused. A year later, the man died in prison from “natural causes.” The Russian government then seized Browder’s operating companies, but fortunately for investors, not before he was able to sell off $4.5 billion in holdings and spirit the funds out of the country. Browder, who is of Russian descent, and whose grandfather was chairman of the America Communist Party, says his case is but the tip of the iceberg. Major multinationals like Shell, BP, and Ikea have also been the victims of corruption and faced arbitrary seizure of assets by the well connected. This lawlessness is the reason why Russian companies perennially trade at single digit multiples. They are cheap on paper, but carry hidden, unquantifiable risks. Browder has since refocused his interests, and is now managing $1.2 billion in other safer emerging markets, like Indonesia (IDX), Thailand (THD), and India (PIN). No doubt that investing in Russia is a double edged sword. It offers enormous oil reserves and natural resources, with GDP flipping from a -7.9% rate in 2009 to an expected 3.2% this year. Russia’s stock market (RSX) brought in a blazing 125% return in 2009. But you run the risk of a knock on the door in the middle of the night.

3) If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis. Investment in fresh water infrastructure is undeniably going to be a recurring long term investment theme. One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world’s population, up to 90% of the fresh water is already polluted, some irretrievably so with toxic heavy metals. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% over the next 20 years. Underground water sources in the US, like the Oglala Aquifer, which took nature millennia to create, are approaching exhaustion. Take a look at the photo below, which I pulled off the NASA website, showing dramatic falls in the water tables in the largest food producing areas of India and Pakistan, as measured by the Gravity Recovery and Climate Experiment (GRACE) satellite. While membrane osmosis technologies exist to convert sea water into fresh, they require ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of last year’s stimulus package was similarly spent. It says a lot that when I went to the UC Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds! At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which brought in a positively effervescent 46% return in 2009. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world’s greatest per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

QUOTE OF THE DAY

“We got past Pearly Harbor. We will win the war, and it’s going slightly our way. The spillover from the financial panic into the real economy was huge,” said Berkshire Hathaway (BRK/A) CEO, Warren Buffet.

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
Futures trading involve a high degree of risk and are not suitable for everyone

The Mad Hedge Fund Trader-Monday

Mad Hedge Fund Trader — Tue, 02 Mar 2010 14:31:00 GMT

Global Market Comments
March 1, 2010

Featured Trades: (CY, (YUAN), (AGU), (POT) (MON), (DBA),
(COPPER), (FCX), (CHILE), (ECH)

1) Since I have been setting off distress flairs warning of an inevitable revaluation of the Chinese Yuan, I thought you would be interested to hear about what popped up on my radar on Friday. No lesser authority than the Beijing based 21st Century Business Herald reported that The Ministry of Commerce and the Ministry of Industry and Information Technology have been running computer models to see how much of a Yuan appreciation the textile, shoe, garment, and toy industries could handle without breaking. The result was that these traditionally low margin industries would start to lose money with a Yuan 3%-5% higher than it is today. This is a classic government ploy that I have seen many times before where the government leaks a story to minor media for the sole purpose of gauging international reaction. Call it the opening gambit in the Yuan revaluation negotiations. Of course, 3%-5% is a laughably insignificant bump up. But it does give some basis to the perennial Chinese complaint that the bulk of the profits on their labor are made via mark ups in the US, and not at the factory. If a Chinese manufacturer assembles an IPOD for $20, sells it to Apple for $25, which then retails it for $200, you can understand their distress. Expect more trial balloons like this in the near future, and keep your focus on the ETF, the (CY.

2) During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields. Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won’t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. In 2009 one of the greatest crop yields in history, brought on by perfect summer weather, delivered one of the largest grain crops in history. Fall rains and an early frost meant that much of this bounty ended up rotting in the field, providing the backdrop for price rises of 30% across the board. The US Dept. Of Agricultural January crop report then predicted that we are going to see a replay of record production this year, slamming prices once again, and delivering limit down moves in the futures markets. But the weather may not cooperate, as it did last year. The net net of all of this is that food prices are going up, a lot. Entertain core long positions in corn, wheat, and soybeans on this dip, as well as the second derivative plays like Agrium (AGU), Potash (POT) and Monsanto (MON). You might also look at the PowerShares Multi Sector Agricultural ETF (DBA). These will all surpass last year’s stratospheric highs at some point.

3) Special Report on copper for paid subscribers only.

QUOTE OF THE DAY

“Inventories generate recessions, they don’t generate recoveries,” said my old buddy, David Gerstenhaber, President of Argonaut Capital Management.

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
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Futures trading involves a high degree of risk and may not be suitable for everyone.

The Mad Hedge Fund Trader-Friday

Mad Hedge Fund Trader — Mon, 01 Mar 2010 18:33:00 GMT

Global Market Comments
February 26, 2010

Featured Trades: (TOYOTA), (TM), (PALLADIUM), (PALL),
(RESIDENTIAL HOUSING), (XH

1)Since I am probably the only person in the country who once worked for Toyota, speaks Japanese, and worked in the White House Press Corps, and am therefore fluent in the ways of Washington, I feel obliged to comment on yesterday’s Congressional hearings on Toyota. There, Akio Toyoda, president of the Toyota parent and grandson of the founder and English speaking Yoshimi Inaba, president of Toyota Motor North America, Inc. faced the firing squad. It was the usual Congressional theater, with the member from Kentucky, where non union Toyota plants are located, listing off the firm’s charitable donations to the community, while the one from Michigan launching a vicious, no-holds-barred attack. The language spoken by the two Japanese couldn’t have been more different. Toyoda spoke the words of inherited wealth, of a ruling shogun, of privilege, and of condescension. Inaba talked like the hardscrabble warrior that he was, who spent 40 years clawing his way up the Toyota organization ladder. I think the entire crisis happened because Toyota management believed in their products to such incredible extremes that any criticism was viewed merely as the unhappy grumblings of competitors. Similarly, the quality of Japanese products became so ingrained in the minds of American regulators that they too fell asleep at the switch, giving the company a free pass on the rising tide of consumer complaints. On top of this, you can pile the Japanese cultural preference against sending bad news up the command chain. This is one reason why Japan lost WWII, and is why the suicide rate in the country is so appallingly high. When the bill finally came due, the price tag was 37 dead in acceleration accidents, and a witch hunt on national TV. Toyota’s management will make sure, literally on pain of death, that every product rolling off the assembly line from here will be models of engineering perfection. The stock has held up amazingly well so far, probably because it is mostly owned by strong hands, with few traders involved. Not only should you buy the stock when global markets return to risk accumulation mode, you should buy a Toyota car as well. It will be the only time in your life that you can find them at a discount.

2) Since the run up to the Toyota hearings began, the palladium ETF (PALL) has dropped about 10%, giving up all of the gains that occurred after my January 27 story on the white metal (click here for the piece). The sell off happened because traders assumed the dent to Toyota’s reputation would mean fewer car sales, less demand for catalytic converters, and less need for palladium or platinum. The crazy thing about this logic is that those dumping Toyotas will buy a vehicle from another car maker instead, maintaining demand for catalytic metals at their current level. Maybe it was the wholesale flight from all hard assets that took the poor man’s platinum down. Watch your screens.

3)I just thought I’d repost my interview with Toyota USA president Jim Lentz in the wake of his testimony in front of congress this week. He looks like he aged about ten years since I saw him in November. In journalism they tell you to always be nice to people on the way up, because you meet them again on the way down. Now there are rumors of a criminal prosecution of Jim.

“I spent an evening chewing the fat with James Lentz, the president of Toyota Motor Sales, USA, (TM) who let loose some incredibly insightful views on the long term future of the global economy. I have been following Toyota for 35 years, hobnobbing with senior management, touring their factories in Japan, and driving their marvelously engineered products. It is far and away one of the best run multinationals, with awesome research resources, spending $9 billion a year on R&D, but are also one of the most secretive organizations on the planet. If the CIA only kept its secrets so well! Peak oil is going to hit in 2017-2020, making gasoline prohibitively expensive. Toyota is racing to get as many hybrids out there as possible by then, converting a Mississippi factory from Highlanders to the hugely popular Prius. In Japan there is a backlog of 200,000 orders for these cars, and Toyota makes a profit on every one. The plug in version of this car will be fleet tested in the US next year, and sold to the public from 2012. But hybrids, which reduce emissions by 70%, compared to conventional cars, are just a transitional solution until the technology for hydrocarbon free alternatives, like electric only and fuel cells, mature in the 2020’s. The US car market will come in at 10 million units this year, but will rebound to 15-16 million units by 2015. At 9.3 years, the average age of the American car fleet is the oldest on record, and replacement demand will be huge. New car based consumer societies are also emerging in Argentina, Mexico, Thailand, and Indonesia. The American car industry, accounting for 4% of GDP and 10% of total employment, isn’t going away, as many fear. However, it will evolve beyond current recognition. Toyota is certainly putting its money where its mouth is, with an $18.2 billion investment in 14 American factories, directly employing 34,000, and indirectly another 380,000. Long term, I love this stock. James has worked for Japan’s largest car maker for 26 years, but still can only order one beer in that impossible pictographic language. By the time the evening was out, I made sure he could order a second, and a third, in Japanese.”

4) The US Department of Housing and Urban Affairs certainly peed on the parade of those blowing horns and banging drums because they believed the real estate market was recovering. Seasonally adjusted new home sales for January came in at a paltry 309,000, the lowest figure on record, and a gut wrenching decline of 11.2% from the previous month, versus the expected gain of 3.8%. It just doesn’t get any worse than this. Sure, the horrendous weather in the Northeast was a factor. But the harsh reality is that, with enormous federal and state tax incentives soon to expire, the life support that kept this industry alive is about to see the plug kicked out. Once the Fed ends the TALF, mortgage rates are going up, even is overnight rates remain rock bottom, putting another stake through the heart of this market. Unemployment is going to stay pitilessly high, sending consumer confidence into another death spiral. For what it’s worth, I never bought the whole green shoots thing, viewing the enormous gains seen in stocks over the last year as nothing more than one giant dead cat bounce. The XHB, the homebuilders ETF, held up remarkably well. But let’s face it, the life has already been squeezed out of this sector. There is nothing left to short. There are going to be so many great trading opportunities this year that you shouldn’t even think about tying your capital up in a house. Rent, don’t buy.

QUOTE OF THE DAY

“It’s very difficult to navigate a business through a paradigm shift. You must hard wire your system to second guess all the time, questioning what is next, and then what is next. You’ve got to retain optionality for both investment portfolios and the business your run to navigate this well,” said Mohamed El-Erian, co-chairman of the bond house PIMCO.

The Mad Hedge Fund Trader-Thursday

Mad Hedge Fund Trader — Fri, 26 Feb 2010 15:29:00 GMT

Global Market Comments
February 25, 2010

Featured Trades: (“EUREKA”), (SPX),
(VIX), (USO), (FCX), (GLD), (TBT),(TBF), (CHK),
(UNG), (COAL), (BTU), (LUMBER), (WY),
(HEDGE FUND RADIO)

1)After speaking to a gaggle of economists, portfolio managers, and traders the last few days, I’ve had one of those “Eureka” moments as the markets have shown their hands. Those that delivered the dramatic, heart stopping moves last year, like stocks, commodities, oil, precious metals, and junk bonds are on the slow boat to nowhere. Last year’s wall flowers, like currencies and Treasury bonds, are trending nicely, delivering plungers some serious coin. What’s more, I think these trends, or non trends, will continue for the next several months. That means that the S&P 500 (SPX) will remain around a tedious 1050-1111 range, and that implied volatilities (VIX) for relevant options will continue to bleed to a lower level. This market is a portfolio manager’s worst nightmare, and a trader’s dream come true. They, the nimble and click happy, can sell into every rally and buy each dip, confident that stocks will neither crash, nor break out to new highs. They say markets have to climb a wall of worry. This one has to climb Mount Everest. Commodities (FCX) , oil (USO), and precious metals (GLD) are showing the same indecisive behavior. The cross trades I have been recommending, long Aussie/euro, Canadian/euro, and short the euro/yen, have been delivering reliably all year. I have also been able to wrest away a couple of points from the 30 year Treasury bond markets (TBT), (TBF). The March futures have peeled back from a 119.5 high on February 5, and fallen as low as 116.5 yesterday. This is all happening because the markets are now transitioning from last year’s parabolic dead cat bounce to the 2%-2.5% growth scenario that I am predicting for this decade. Political gridlock and the attendant noise level don’t help either. Keep selling the rallies, like the one today, because I think we’re on our way to the 112 handle by the summer. You’ve got to work with the market you have, not the one you want, and these trades could be your bread and butter for the next several months.

2)After my year in the White House Press Corps, I vowed never to return, and took a really long shower, hoping to scrub every last spec of prejudice, self interest, and institutionalized dishonesty off of my battered carcass. But sometimes I see some maneuvering that is so unprincipled, crooked, and against the national interest that I am unable to restrain my fingers from the keyboard. I’m talking about the absolutely merciless hatchet job the coal producers are inflicting on the natural gas industry. Coal today accounts for 50% of America’s 3.7 trillion kilowatts in annual power production. Chesapeake Energy’s (CHK) Aubrey McClendon says correctly that if we just shut down aging conventional power plants over 35 years old, and replace them with modern gas fired plants, the US would achieve one third of its ambitious 2020 carbon reduction goals. The share of relatively clean burning natural gas of the national power load would pop up from the current 23% to 50%. Even the Sierra Club says this is the fastest and cheapest way to make a serious dent in greenhouse gas emissions. So what do we get? The press has recently been flooded with reports of widespread well poisonings and forest destruction caused by the fracting processes that recently discovered a new 100 year supply of ultra cheap CH4. While the coal industry has had 200 years to build a formidable lobby in Washington, the gas industry is a neophyte, their only public champions being McClendon and T. Boone Pickens. But memories in Washington are long, and Obama & Co. recall all too clearly that this was the pair that financed the Swift Boat Veterans for Truth that torpedoed Democrat John Kerry’s 2004 presidential campaign. What goes around comes around. This will be unhappy news for the 23,000 the American Lung Association expects coal emissions to kill this year. Can’t the coal industry be happy selling everything they rip out of the ground to China? There! I’ve had my say. Now I’m going to go have another long shower.

3)Long term readers of this letter know that I, alone in the forest, have been a huge bull on lumber futures for the past year. The draw was a double play on low interest rates, and a subsidy fueled recovery of new home construction, and a rising tide of imports by China. A soggy greenback was another incentive, as was decades of mill closures, both by environmentalists and economists that left the supply/demand balance so finely tuned that prices could rise on the purchase of a single rail car of two by fours. And up they went, from $1.35 to a high of $2.80 by last week. I also recommended Weyerhaeuser (WY), which managed a double. I have to tell you that the bloom is now coming off the rose. The dollar is strong, eating into exports, and Chinese demand is starting to flag as the Mandarins in Beijing slam on the monetary brakes. And the long awaited homebuilding recovery? With a tsunami of foreclosures about to hit an already distressed market, that is looking more like a 2020 than a 2010 affair. Best case? We grind sideways with other commodities for the reasons that I have listed above. Worst case? We burn to the ground once more. Bottom line? Time to get out of Dodge and leave it for Bambi.

4) My guest on Hedge Fund Radio this week is Jon Najarian, the co-founder of the online trading platforms, OptionMonster and TradeMonster. Jon started his career as a linebacker for the Chicago Bears, and I can personally attest that he still has a handshake that’s like a steel vice grip. Maybe it was his brute strength that enabled him to work as pit trader on the Chicago Board of Options Exchange for 22 years, where he was known by his floor call letters of “DRJ.” He formed Mercury Trading in 1989 and then sold it to the mega hedge fund Citadel in 2004. OptionMonster uses a patented algorithm developed by Jon called “Heat Seeker”®, which spots unusual trading patterns by monitoring the 180,000 transactions per second that occur in the financial markets. Jon is going to talk to us about the state of the financial markets, online research, and the tricks involved in becoming a winning trader. You can log into Hedge Fund Radio anytime from anywhere in the world for free by clicking here

QUOTE OF THE DAY

“The total breakdown of the system is ahead of us. It may come in four, five, or ten years, and it will devastate the world economy. By bailing out the issuers of derivatives, the Fed actions have only postponed the day of reckoning,” said Marc Faber, publisher of the Gloom, Doom & Boom Report.

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
Futures trading involves a high degree of risk and may not be suitable for everyone.

The Mad Hedge Fund Trader-Wednesday

Mad Hedge Fund Trader — Thu, 25 Feb 2010 16:37:00 GMT

Global Market Comments
February 24, 2010

(SPECIAL JOSEPH STIGLITZ ISSUE)

1)The great thing about interviewing Joseph Stiglitz over dinner is that you don’t have to ask any questions. You just turn him on and he spits out one zinger after another. And he does this in a kibitzing, wizened, grandfatherly manner like one would expect from a character that just walked off the set of Fiddler on the Roof. The unfortunate thing is that you also don’t get to eat. The Columbia University professor and former World Bank Chief Economist animatedly talked the entire time, and I was too busy feverishly taking notes to ingest a single crouton.

Stiglitz argued that for 30 years after the end of the Great Depression there was no financial crisis because a newly empowered SEC was on the beat, and everything worked. A deregulation trend that started under Reagan began stripping away those protections, with the eventual disastrous repeal of Glass-Steagle in 1999. The philosophical justification adopted by many economists, including Fed chairman Alan Greenspan, was that unfettered markets always lead to efficient outcomes.

This belief was based on simplistic models assuming that markets were always perfect, always open, and that everyone had perfect information. Stiglitz’s own work on “information asymmetry,” which earned him a Nobel Prize in economics in 2001, pulled the rug out from under this theory, because it showed that one party to a transaction always has more information than the other, often the seller.

The banks used this window to introduce super leveraged derivatives that had never been regulated, studied, or even understood. They then clawed open accounting loopholes that were so imaginative that not only were shareholders and regulators deceived about how much risk was involved, senior management was clueless as well. Instead of managing risk, they created risk.

A 2006 GDP that was 80% derived from real estate transactions and a savings rate that fell to zero meant that a severe crash was a sure thing. President Bush’s response was to unleash an extreme form of “trickle down economics,” with the banks given $700 billion with no conditions attached. Intended to recapitalize the banks so they could resume lending to the mainstream economy, much of the money ended up being paid out in bonuses and dividends. Of the $180 billion used to rescue AIG, $13 billion went to Goldman Sachs, and much of the rest went to German and French banks. No wonder Main Street feels cheated.

The financial system is now more distorted than ever, with major institutions wards of the state, and smaller banks that actually lend to consumers and small businesses going under in record numbers, because the playing field is so uneven. There are too many structural conflicts of interest. The “once in a 100 year tsunami” argument is merely a justification for changing nothing. Banks would rather maintain the fiction that the loans on their books are good, than make adjustments, meaning there will be more foreclosures in 2010 than in 2009 or 2008. No financial system has ever wasted assets on this scale, and the end result will be a national debt many trillions of dollars larger.

The $787 billion stimulus package was too small, and should have been at least $1.2 trillion, but there was no way Obama was going to get more out of this Senate. The 40% of the stimulus that was tax cuts will get saved and create no immediate beneficial effects on the economy. More money should have gone to the states, which unable to deficit spend, are now a huge drag on the economy. But even this meager package was able to prevent the unemployment rate from rising from 10% to 12%, as it was set to do. The inadequacy of the first package means a second is almost a certainty. Any major spending cuts will produce “Hoover” outcomes.

The outlook for the economy is bleak, at best.

Well, I don’t get to chat at length with a Nobel Prize winner every day, so I thought I’d give you the full blast, even though I had to leave a lot out. I’ll talk more about markets tomorrow.

QUOTE OF THE DAY

“The only surprise to me is that so many people were surprised,” said Nobel Prize winning economist Joseph Stiglitz, about the financial crisis he predicted.

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Mad Hedge Fund Trader — Wed, 24 Feb 2010 18:04:00 GMT

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The Mad Hedge Fund Trader-Tuesday

Mad Hedge Fund Trader — Wed, 24 Feb 2010 17:32:00 GMT

Global Market Comments
February 23, 2010

Featured Trades: (PETER SCHIFF),
(ALUMINUM), (VANCOUVER OLYMPICS)

1)Will Peter Schiff become the first “Tea Party” member of the US Senate? Peter Schiff certainly hopes so. The argumentative fund manager is trying to capture the seat vacated by outgoing Democrat Chris Dodd in the upcoming November election. The Republicans of the last administration weren’t “real” ones, Peter insists, but Democrats running under the Republican banner, with the same old profligate, government growing, deficit spending policies. Peter’s job is to give the American people the stiff medicine they deserve, which he admits may lead to his own undoing. He argues that the august body will need his expertise when a looming financial crisis hits that will send inflation and interest rates skyrocketing, stock and bond markets crashing, and the failure of more financial institutions. Civil unrest is coming. Gold and emerging market stocks will be the only place to hide out and preserve your wealth. Peter, who runs a China fund, says it is least likely to crash, as it has enormous savings with which to bolster its own economy. He believes the next financial crisis, which will be far greater than the last, and will be triggered when emerging nations decide to quit recycling their ballooning surpluses into US Treasury bonds, and start reinvesting in their own economies. The devaluation of the dollar will be so severe that it would shut the US off from much of the world’s production, as imports become too expensive. He believes that “100 years worth of depreciation will be compressed into just a couple of years.” In the end, you won’t be able to buy “a stick of gum” with a dollar. Peter argues that the US government is a “cancer on the economy,” and the Fed “has managed the economy into the ground,” with couples having to work overtime to bring in the same income that a single wage earner did 30 years ago. Although Peter’s emerging market, precious metals, and commodities based strategy took a major hit in 2008, early believers who bought in 2000 were always above water. It’s just a matter of trading greater returns for greater volatility. "The United States economy is like the Titanic, and I am here with the lifeboat trying to get people to leave the ship,” said the Senatorial candidate. Peter obtained his degree in finance from the University of California at Berkeley in 1987. In 1996 he set up Euro-Pacific Capital, a firm that has successfully focused on investing in foreign stocks, bonds, gold, and commodities. Peter was also the economic advisor to libertarian Ron Paul’s 2008 presidential campaign. If you want to participate in Peter’s Senate campaign, you can go to his website at www.schiffforsenate.com . To listen to my complete interview with Peter Schiff on Hedge Fund Radio, please go to my website by clicking here

2)I thought I’d regurgitate an article on aluminum (aluminium to you Brits) that appeared in the Financial Times last week, which echoes the concerns I raised about the vanishing contango in oil. You’ll remember that this involves buying at the spot price of $2,050/tonne, selling forward, and reaping returns now running, in aluminum’s case, at an annualized 5.85%. This works because the financing cost is effectively zero, and storage costs in warehouses has been depressed by the Great Recession. Some 75% to 90% of the world’s physical aluminum stocks, or some 4.5 million tonnes, are now tied up in the trade, enough to build 68,000 Boeing 747’s. This suggests that the arbitrage has driven smelters to produce aluminum far in excess of real demand. There can’t be that many Bud Light drinkers out there. All fine and dandy, except, what happens when interest rates rise, the first baby steps of which we saw on Thursday? Answer: instead of rolling expiring contracts forward, they dump metal on the spot market, causing prices to crash. The trade shows the lengths to which money has fled into all hard assets of every description, not just aluminum and oil, and the risks that come along with this. When you hear commodity traders whine about how divorced prices have become from real demand, this is the reason. So much of the economy has become addicted to free money, that weaning could prove to be a painful and even violent affair.

3)The Canadian Royal Mint, an institution whose products I have frequently recommended, is using the Vancouver Winter Olympics to promote its lustrous wares with great success. Inflation has hit the Olympics big time. Figure skater Dorothy Hamill may be forgiven for feeling shortchanged, because the combined 6 grams of precious metals in her gold medal she won in 1976 is worth only $105 today. Legendary speed skater Bonnie Blair did better at the 1994 Lillehammer games with a gold medal today worth $175. By comparison, snowboarder Sean White struck it rich with his gold medal win last week worth $501 of the glittery stuff. Has gold been a great investment, or what? However, that pales in comparison to the expected $8 million a year in product endorsements the 24 year old carrot top is expected to reap.

QUOTE OF THE DAY

"The United States economy is like the Titanic, and I am here with the lifeboat trying to get people to leave the ship... I see a real financial crisis coming for the United States," said international fund manager and US Senate candidate Peter Schiff.

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
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Futures trading involves a high degree of risk and may not be suitable for everyone.

The Mad Hedge Fund Trader-Monday

Mad Hedge Fund Trader — Tue, 23 Feb 2010 06:17:00 GMT

Global Market Comments
February 22, 2010

Featured Trades: (DISCOUNT RATE), (TBT),
(TBF), (EURO), (GREECE), (ABX), (GOLD)

1)Make no mistake. The shot has been fired across the bow, the chink has appeared in the armor, and the crack has opened up in the dike. The Fed’s move to raise the discount rate on Thursday from 0.5% to 0.75% may have been technical, widely telegraphed by the Fed minutes, and an unwind of an artificial spike down in rates the economy no longer needs. Sure there was only $15 billion in loans outstanding at the Fed window, against $1 trillion in excess bank reserves. But it was definitely an UP move for rates. The liquidity tide that has been floating all asset boats has reversed and is starting to recede. We’re about to find out who has been swimming without a swimming suit. The train is leaving the station. Next week the TALF expires, eventually sucking another $1.5 trillion out of the system. The Fed is reverting from its role as the lender of first resort back to its traditional role as the lender of last resort. Inflationary expectations are going to rise. While overnight rates are going to remain miniscule, probably for the rest of the year, the long end is going to take this less well. That means that one of the steepest yield curves in history is about to become a lot steeper. I’m thinking the face of Half Dome. Now I know that I have been predicting that a short in 30 year Treasury bonds will be THE great trade of 2010. But don’t pop the champagne bottles just yet. Without more aggressive Fed action, the rise in long rates is unlikely to be a sudden, panicky spike. So while you can comfortably sit with non leveraged short play like the TBF, you are going to have to nimbly trade the leveraged ones like a demon, such as the TBT, to keep the cost of carry from eating you alive. You are still sailing upwind against a 4.7% yield, and you can multiply that with leverage. Think of it more as a slow ground offensive, than a lightning fast aerial assault. But it will grind us inevitably closer towards a major triggering event that will bring real fireworks, my favorite being a failed Treasury auction. If your spouse has a divorce lawyer pounding on your door unless you buy a house tomorrow, make sure you do so with a 30 year fixed. It will be the last time you see sub 5% mortgages rates in your lifetime. Better yet, dump the spouse.

2)OK, so if you fire buckshot long enough you eventually hit a barn, a broken clock is right twice a day, and even a blind squirrel eventually finds an acorn. But you have to admit that my warning that paid subscribers received in my 2010 Annual Asset Allocation Review that the euro was about to blast through from the $1.44 to the $1.30’s, and eventually the $1.20’s is looking pretty prescient. I made the call because the dollar hating trade had become so one sided that a move in the opposite direction was a mathematical certainty. One sign of a great trade is that reasons for it to work you never thought of start popping up like mushrooms in a heavy winter rain after you strap it on. Accidents happen in its favor. Since my call, I have had quite an education about the European currency. The Greeks are notorious tax cheats, and have yet to forgive the Germans about WWII atrocities. Only six individuals in the Land of Plato paid more than $1 million in taxes last year. Goldman Sachs helped the government produce bogus numbers to gain entry to the EC in the first place. Greece’s economy peaked in 450 BC, and has been in default for most of the last 200 years. Antipathy against American bankers was so extreme that someone bombed the Athens office of JP Morgan. The markets are now baying for blood, wanting to discount the Euro either collapsing to parity against the greenback, or flying apart altogether. The only uncertainty is that this melodrama has a lot longer to drag out. Rome was not rebuilt in a day. By the way, if you want to take out a paid subscription for $149, I’m still happy to send out my annual forecasts. Please hurry up though before they all come true.

3) I love applauding brilliant management moves, especially when they add value to companies which I have been recommending for some time. That is the case with Peter Munk’s Barrick Gold (ABX), which announced that it is spinning off its African mines to create African Barrick Gold, to be separately listed on the London Stock Exchange. The assets in question are four mines in Northwest Tanzania which produced 716,000 ounces of gold last year, some 9.6% of Barrick’s total production. In one fell swoop, the move will create the largest listed gold company in London, adding $435 million in cash to Barrick’s balance sheet. Barrick, the world’s largest gold producer, will retain 75% of the new company. The flotation will enable Barrick to monetize the multiple over book value, effectively turning paper into gold. It is a clever move that Munk could well have lifted out of the US Treasury’s playbook. It also builds a firewall between his riskiest assets, those in politically unstable Tanzania, and the more stable parent. Having once stared down the wrong end of a Tanzanian soldier’s AK-47 during a leftist coup d’état in the Seychelles, I can personally vouch for the value of such insurance. Munk clearly believes that the demand for all types of gold backed assets is set to soar, be they gold bullion, ETF’s, coins, or just plain paper. As Peter Munk has forgotten more about gold that I will ever know, I’ll put by money behind him. The bottom line message for you and me: buy more gold for the long term.

QUOTE OF THE DAY

“People are comparing this recession to previous deep recessions we had in the seventies and eighties. The problem is that you had a larger manufacturing sector then than you have now. The process of deindustrialization has been going on since WWII. With each recession we lost a tremendous number of jobs, which don’t come back,” said my former Morgan Stanley colleague, David Gerstenhaber, President of Argonaut Capital Management. David, you learned well!

The Mad Hedge Fund Trader-Friday

Mad Hedge Fund Trader — Sun, 21 Feb 2010 15:27:00 GMT

Global Market Comments
February 19, 2010

Featured Trades: (GOLD), (GLD),
(STIMULUS PACKAGE),
(SQM), (ENS), (XIDE), (ZB,

1)I took advantage of my membership in the World Gold Council to download their “Global Demand Trends” report released today, a must read for avid followers of the barbaric relic (click here for the link at www.gold.org/ ). If you don’t want to read the 25 page opus, I’ll summarize the reserved, but unabashedly, bullish outlook. While total identifiable physical demand in 2009 shrank 11% to 3,385.8 tonnes, toss in investment demand and it jumped 11%. Q4 YOY demand in the three largest consuming markets rose across the board. India was the largest market (6,390 tonnes, up 57%), followed by China (3,775 tonnes, up 45%), and the US (3,295 tonnes, up 24%). A decade long trend of central bank selling reversed, with treaty sales mandated by the creation of the European Central Bank winding down, the last three quarters of 2009 showing net buying. The highlight was the Reserve Bank of India’s much ballyhooed 200 tonne purchase in October. Additional purchases by other emerging market central banks are expected to follow. Persistent high unemployment rates around the world are expected to keep the growth of jewelry demand muted. Get a stronger than expected economic recovery and it’s off to the races. The chaos of 2008-2009 assures that investment demand by money managers looking for diversification and portfolio insurance promises to rise going forward. The growth of the ETF industry, with GLD catapulting to become the second largest such fund with an unbelievable $38.5 billion in assets, no doubt is a big help. Bottom line: more buyers and fewer sellers mean prices have to rise over the long term. BUY.

2)Since the one year anniversary of Obama’s stimulus plan has generated much debate over whether it has been a success or a failure, I’d thought I’d pass on this wonderful pie chart from Clusterstock. Of the $792 billion package, 23% has been spent, 12% issued in tax cuts, and 19% is in the pipeline. That leaves 31% more to be spent, and another 15% in tax cuts to be implemented in this and future years. At first glance, the stimulus seems clevery back-end loaded to achieve maximum advantage for the Democrats on Election Day in November. A deeper analysis shows that it is a lot harder to spend $792 billion than you think. Believe me, I’ve tried. You can’t exactly go down to Home Depot, buy some materials, and put a bunch of guys you found on Craig’s List to work. The immense size of Washington’s projects mean the planning and approvals can stretch out for years. You don’t snap your fingers and get a new bullet train from Los Angeles to San Francisco built. Remember also, that for every $10 the feds pump into the economy, the states take back $4 in budget cutbacks, leaving a modest, at best, net impact on the economy. Which state is the biggest beneficiary of government largesse? With a Republican in the White House for eight out of the last nine years, solidly Democratic California was absolutely starved of government spending, and therefore, had the most large, shovel ready projects when the package passed. In fact, the weary residents of the Golden State only get 77 cents back from each $1 they pay the Treasury in taxes. The local freeways have broken out with a rash of orange cones so severe it would put a junior prom night to shame. It’s just in time too. The potholes were about to shake my poor ’96 Toyota Corolla to death.

3) Long time readers of this letter know that I have been a huge bull on lithium plays, my pick in the sector, Sociedad Quimica Y Minera (SQM), bringing in a handy 250% pop off the lows in 2009. Since I’m in a report reading mood, I thought I would sit back in my Aeron office chair, put me feet up on my polished beech desk, and plow through the numerous submissions forwarded to me by readers who attended the first “Lithium Supply and Markets Conference” in Santiago, Chile in January. The bad news is that a truly economic, price competitive lithium battery is still some ways off. Prices for lithium-ion batteries for hybrid electric vehicles (HEV) need to drop by 50% and those for plug-in hybrid electric vehicles (PHEV) by 67%-80% in order to compete on a level playing field. Gasoline has 64 times more energy per unit of weight than lithium batteries, but this advantage is partially offset by electric motors that are four times more efficient than conventional piston engines. Lighter weight cars and other design improvements, like recapturing power when braking, shrink the lead further. Dr. Steven Chu’s Department of Energy is pouring money into research on an amazingly wide front, and strides are being made with different electrodes (silver, sulfur, manganese), leading to rapid advances in inorganic chemistry. The challenges are formidable, with overcharged large lithium ion batteries prone to explode or catch on fire, or internally or externally short circuit. The conservative big car companies, Toyota and Honda, have stuck with proven nickel metal hydride batteries offering half the power per weight, and are understandably reluctant to make the needed multibillion dollar investments until more is known about the long term life of lithium batteries. Another wrinkle is that Bolivia, the Saudi Arabia of lithium salt reserves, has effectively nationalized the industry before it got off the ground, limiting its investment in development to $350 million. As the production of EV’s, HEV’s, and PHEV’s is expected to ramp up to 5 million vehicles a year by 2020, this could be a problem. Many in the industry expect that lithium prices will not be driven by demand from car makers, but by the price of oil. Take crude up to $150 again, and all of a sudden, everything works. Unlike past battery car movements, this one is not going away. The intelligent way to approach the industry now is to invest in low cost producers of proven battery technology, like Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP), and ZBB Energy (ZB. Leave the pie in the sky stuff for later. Unlike past battery car movements, this one is not going to end up crushed in a junkyard. I’ll let you know how my lithium battery powered all electric (EV) Nissan Leaf, on sale in December, works out.

QUOTE OF THE DAY

“Blaming greed for the Wall Street crash is like blaming gravity for an airplane crash,” said Steve Forbes, publisher of Forbes magazine.