Author: The Mad Hedge Fund Trader

Anyone who believes that housing is on the rebound, and that now is the time to buy, should take a very hard look at the numbers I dredged up for my spring lecture and luncheon tour.

There are 140 million personal residences in the US. Today, there are 26 million homes either directly or indirectly for sale. According to a survey by Zillow.com, a real estate appraisal website, 20 million homeowners plan to sell on any improvement in prices. Add to that 4 million existing homes now on the market, 1 million new homes flogged by companies like Lennar (LEN) and Pulte Homes (PHM), and 1 million bank owned properties.

Another 8 million mortgage owners are late on their payments and are on the verge of foreclosure, bringing the total overhang to 34 million homes. Now, let’s look at the buy side. There are 35 million who are underwater on their mortgages and aren’t buying homes anytime soon, nor are the 35 million unemployed and underemployed. That knocks out 50% of the potential buyers.

Here is where it gets really interesting.

There are 80 million baby boomers retiring at the rate of 10,000 a day. Assuming that they downsize over time from an average 2,500 sq ft. home to a 1,000 sq. ft. condo, and eventually to a 100 sq. ft. assisted living facility, the total shrinkage in demand is 4.3 billion sq.ft. per year, or 1.7 million average sized homes. That amounts to a shrinkage of aggregate demand for a city the size of San Francisco, every year.

You can argue that the following Gen-Xer’s are going to take up the slack, but there are only 65 million of them with a much lower standard of living than their parents. Throw in the disappearance of state and federal first time buyer tax credit. You can count on a jump in long term capital gains taxes and state and local property taxes, further diminishing property’s appeal. If you are looking for a final stick to break the camel’s back, how about eliminating, or substantially reducing the home mortgage interest deduction?

Add it all up, and there is a massive structural imbalance in residential real estate that will take at least a decade more to unwind. We could be looking at a replay of the same 26 year period from 1929 to 1955 when prices remained flat, and we are only 3 years into it!

A second down leg in the real estate market seems a no brainer to me, as is the secondary banking crisis that follows. Perhaps that’s why hedge funds have been big sellers of the homebuilder’s ETF (XHB).What’s a poor homeowner to do? Don’t ask me. I sold everything in 2005 when my research threw up these numbers, and have been happily renting ever since. And, if the toilet blocks up, I just call the landlord.

This guest post comes courtesy of The Mad Hedge Fund Trader. For more research such as this, see here.

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The good news is that you no longer have to be crazy to buy gold.

Until recently, certifiable believers chasing the barbaric relic were driven by a host of urban legends and conspiracy theories, such as the imminent bankruptcy of the US Treasury, Fort Knox holding only titanium bars that had been painted gold, Weimar style hyperinflation that is just around the corner, or the gold ETF (GLD) owning only paper, and not physical gold.

No more. The long term structural demand for the yellow metal is now so well known, that I can read about it in the tabloids while waiting in line at Safeway.

There is an emerging market central bank bidding war going on, with India and China trying to outmaneuver each other to raise their gold holdings to developed world levels.

The EC or the IMF may sate that demand by selling off their remaining holdings to bail out Greece. A rising emerging market middle class also brings large, newly enriched consumers from countries that have long cultural preferences for owning gold and silver over paper fiat currencies.

Now that we have decisively broken through to a new all time high, how high can we go? Surely peak gold is upon us.

Barrick Gold (ABX), the world’s largest gold producer, would not be hacking out new mines under incredibly harsh conditions at 15,000 feet in the Andes if there were easier supplies to develop.

My own long term gold forecast has been the old inflation adjusted high of $2,300. But, higher altitudes beckon. If you want to take gold up to its historic peak in world GDP last seen in 1980, that would see gold at $5,300. Also, keep in mind that the total world gold supply has increased since then from 110,000 tonnes to 170,000 tonnes.

For gold to recover the old peak percentage of the world monetary base, M3, it would need to rise to $5,700. Then there is the granddaddy forecast of them all. After the US allowed the price of gold to float from $34/ounce in 1971, it rose 2,500% to $850. An equal move of the 1999 $250 bottom would take us up to $6,250. I think I’d be a seller there.

The great thing about gold is that, absent a dividend or a coupon, you can never claim it is too cheap or too expensive. While the current production cost at the big mines is around $400/ounce., the only certainty is that there are now more buyers than sellers.

[Compare] the performance of gold so far to other bull markets of the last three decades, and it is clear that we are only just getting started.

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(This guest post comes courtesy of The Mad Hedge Fund Trader)

The success of the recent oil auctions in Iraq is creating a windfall for American oil services companies. Schlumberger (SLB), Baker Hughes (BHI), Weatherford (WFT), and Halliburton (HAL) have committed to drilling 2,500-3,000 new wells per year and building new pipeline and shipping terminal infrastructure that could make the country the world’s largest oil exporter. The value of these contracts may reach a massive $60 billion over the next six years, and could generate $1 billion in new revenues for each company per year. Two offshore terminals are already under construction, and another two are on the drawing board. If successful, the project will boost the country’s oil production from the current 2.5 million barrels a day to 12 million b/d by 2016. Iraq’s oil production peaked at 3 million b/d in 1979, and then went to nearly zero after it invaded Iran.

I remember those days well, as I was issued a visa to accompany Saddam’s troops to Tehran, only to see it cancelled when the Iranians were able to mount a counter offensive. I still have the dessert camos and telephoto lenses need to cover the desert war, although the pants, regrettably, no longer fit. Iraq’s oil industry never recovered. UN sanctions limited the regime to minimal “official” exports that covered humanitarian imports like baby food and drugs. Tanker trucks smuggled out through Jordan what they could, with the proceeds going directly to Saddam’s family. When the US invaded, bails of hundred dollar bills were found stashed in private homes, the proceeds of these black market deals.

American oil engineers were shocked by the poor state of Iraq’s energy infrastructure after 40 years of neglect. It all has to be rebuilt from scratch. If the new Iraqi government can provide the necessary infrastructure, and stabilize the political and security environment, it will become one of the largest changes to the landscape for international trade in decades. Those are all very big “if’s”. It will dump another Saudi Arabia’s worth of crude on the market.

It will also go a long ways towards meeting China’s insatiable demand for oil, and put a long term cap on prices. Of course, this is the scenario that antiwar activists predicted eight years ago, but no one else, especially the Bush administration, thought it would take so long to play out. This is so important that I can’t believe no one else is talking about it. 

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Last year, I suggested emerging market sovereign debt ETF’s as safe, high yielding investments in which to hide out in case the equity markets swoon again (click here for the call). With hedge funds scrambling to pile on more risk, and mutual funds now blatantly chasing performance, the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY) has exploded to the upside. It seems that the higher equities go, the more people want to buy safe bonds.

This ETF has 40% of its assets in Latin American bonds and 31% in Asia. The two-year-old fund now boasts $536 million in market cap and pays a handy 6.29% dividend. This beats the daylights out of the one basis point you currently earn for cash, the 3.80% yield on 10 year Treasuries, and still exceeds the 5.37% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single “A” US corporates. The big difference here is that the countries that make up the PCY have a much rosier future of credit upgrades to look forward to.

It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. Not so for the US, which has bond issuance going through the roof, and downgrade noises growing ever louder. A price appreciation of 130% over the past year tells you this is not exactly an undiscovered concept. Still, it is something to keep on your “buy on dips” list.

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(This guest post comes courtesy of The Mad Hedge Fund Trader)

Those who followed my advice to “buy” California at the bottom by loading up on the state’s beleaguered tax free municipal bonds (click here for the call) will be excited by the latest report from controller, John Chiang. The Golden State’s revenues are suddenly running far ahead of even the most optimistic expectations, suggesting that the corner has been tuned on its seemingly endless fiscal crisis.

March receipts came in $356 million above expectations, pushing the general fund revenues ahead of budget by a total $2.3 billion in the current fiscal year. Corporate income taxes were the main cash cow, no doubt powered by a booming technology sector, running 15.8% ahead of forecast.

The Land of Fruits and Nuts is far from out of the woods. There is still a daunting $22.6 billion budget deficit to deal with, sales tax receipts are still down, and the Bureau of Labor Statistics says there are 600,000 fewer employed than a year ago. Personal income tax receipts have also shrunk, suggesting that investors are sitting on longs and piling up big unrealized capital gains for the monstrous stock market rally.

Of course, it will be a long time before the legions of laid off teachers, firemen and policemen are hired back. The state is going to have to unload a few thousand prison guards before that happens. With California in the heat of the governor’ primary elections, this is good news no one seems to want to talk about. After a long famine, the state’s finances may finally be putting on some muscle. It is not too late to profit from this stealth recovery by picking up some municipal bond funds like (VCV), (NCP), and the (NVX).

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 What does the Debacle at Goldman Sachs Mean for Stocks?

I can tell you that the timing of the SEC’s GS announcement absolutely reeks, coming on a Friday at a market top, just as the debate about financial regulation has become the business at hand in congress. The case demolishes any Wall Street/Republican efforts to limit regulation to a few limp, token gestures.

Expect more teeth in any final bill, and a substantial clipping of the wings on risk taking by the major firms. Perhaps it was the failure of the government’s case against two fund managers at Bear Stearns that limited this to a civil, instead of a criminal case, with its lower burden of proof.

The real damage here is political and reputational, which has already been achieved with the Friday press announcement. The SEC can now rightfully claim that there’s a new sheriff in town, and this time he is not just slapping  wrists. GS will ring fence the case, attribute it to the actions of a single rogue individual, the “fabulous” Fabrice Tourre. Senior management will cry out that they are “shocked, shocked” that these activities were going on, as Claude Raines said in the classic film, Casablanca, and disavow any knowledge or responsibility.

Don’t believe for a second that GS will be permanently damaged by the affair, which will set up a long term buy for the stock. Even if they lose the case, total financial losses of $1 billion would amount to only $1.2 /share. Yet the sell off vaporized $15 billion in GS market capitalization. And the government’s case is weak, at best. The bigger threat to the industry, as a whole, is that this could become the new asbestos (check the ranking of CDO issuers right).

There were thousands of deals similar to the Abacus deal that got GS into hot water, and new class action suits are probably being written as you read this. The Europeans will join in, where a large part of the CDO losses were suffered. Again, no big deal. Look at the back of the prospectus of any deep pocketed Wall Street firm and you will find dozens of pending law suits. These are already some of the most sued people on the planet. Litigation is just another cost of doing business. Spread it out over decades and adjust down for settlements, and this is little more than a nuisance. Massive trading profits can cover a multitude of sins. The bottom line is that if the stock market goes down, it will be for a multitude of other reasons, not because of GS.

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Obama’s Secret Plan for Economic Revival. Obama’s strategy to extricate the US from its dire economic straights has been leaking out from Washington over the past few weeks. How does he wean the country off of massive stimulus programs, zero interest rates, and ballooning deficits? 

The former community activist from Chicago intends to let the economy do the heavy lifting, bringing the budget deficit down from a suicidal 10.6% of GDP to 3% of GDP, which can then be sustained indefinitely with a 3% real economic growth rate. Some 60% of this incredible shrinkage will be achieved through tax hikes, and 40% via spending cuts, which together will generate the needed $938 billion in savings. Here is the breakdown:

$331 billion-“bank responsibility fees” designed to address “too big to fail”
$252 billion-expiring Bush tax cuts for couples earning over $250,000 a year
$250 billion-scaling back the wars in Iran and Afghanistan
$105 billion-already announced spending freezes

I have a few problems with this scenario. What if the economy doesn’t grow at 3%? My own long term growth forecast is 2.5%. That creates a shortfall of $710 billion right there. What if interest rates go up? Double short term rates and the government’s debt service leaps from $385 billion to $770 billion. That’s a hole and a half. Are republicans going to cooperate on any of this? Only when Hell freezes over. If the Obama plan falls short of expectations, where will he go to raid the additional funds?

Put a national VAT tax, savings squeezed out of health care though a reduction of services, and cut backs in entitlements at the top of the list. If you think the noise coming out of Washington is unbearable now, you ain’t seen nothin’ yet. To me it all adds up to a collapse of the 30 year Treasury bond market (TBT). Funny, it seems that no matter where I focus my research, all roads lead to the TBT. Use this dip to re-establish longs, and set yourself up for your fourth round trip this year.

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 “Oh, how I despise the yen, let me count the ways.” I’m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. Those who followed me into a yen short at ¥88.5 on March 5 and held on until yesterday’s low of ¥93.25 are looking at a profit of 5.1% and a home run of 25.5% if you went with my recommended 500% leverage with a stop.

If you bought the leveraged short yen ETF (YCS), you clocked 10.4% on the move from $19.25 to $21.25. It beats the hell running with the lemmings in the S&P 500, doesn’t it? We are now within reach of my initial target of ¥95, which we could see as early as Friday. Those with hot hands who have been unable to sleep since they strapped this baby on might want to cash in there.

Others who are in for the long haul can sit back, get comfortable, and dig into the first chapter of Lady Muromachi’s 1,000 page Tales of the Genji. To remind you why you hate the Japanese currency, I’ll refresh your memory with this short list:

* With the world’s weakest major economy, Japan is certain to be the last country to raise interest rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets. Notice that the euro/yen cross has popped from ¥121 to ¥125 in the last three weeks.
* Japan has the world’s worst demographic outlook that assures its problems will only get worse. They’re not making Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With net net debt at 100% of GDP, Japan is at the top of the list.
* The Japanese long bond market, with a yield of 1.2%, is a disaster waiting to happen.
* You have two willing coconspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country’s beleaguered exporters.

This is all why, after catching a breather at ¥95, we’re going to ¥100, then ¥120, then ¥150. That works out to a price of $37 for the YCS, but it might take a few years to get there.

If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ¥305, and had just been revalued from ¥360. If we get a surprise with Friday’s nonfarm payroll figures, and you get a pop up in the yen, use the gift to increase your shorts in the futures and the (YCS). And no, this prediction is not an April fool’s prank.

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So with the US stock market up almost every day in March, investors are hanging you by your ankles outside a window on a high floor, threatening to let go unless you increase your allocation to equities. How do you escape from this dire predicament? Buy Chinese stocks, where the Shanghai index ($SSEC) has been in a slow sideways grind for the past nine months.

The recent move up in copper is hinting that there may be another leg up afoot in the Middle Kingdom.  China’s economy is still too strong by half, and has one of the few central banks in the world that is actually tightening. My friend, Dennis Gartman of The Gartman Letter tells me that a nice pennant formation is setting up in Shanghai that is breaking out to the upside. In any case, I always sleep better at night long equities in an economy that is growing at 8%-9%, than one that is poking along at 2%-3%.  The best way to play this is the China ETF (FXI).

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(This guest post comes courtesy of The Mad Hedge Fund Trader)

I was so busy writing about the collapse of the yen yesterday that I didn’t have a chance to comment on the nearly failed Treasury auction. The government offered for sale $42 billion five year bonds which came in at a surprisingly high yield of 2.605%, with a bid to cover ratio at an uncomfortably high 2.55. The traders now choking on this paper looked like they had been kicked in the scrotum, and falsetto voices were breaking out everywhere in an odd disharmony. 

Apparently, it is not a good idea to hold a bond auction a week before the Fed ends its $1.2 trillion quantitative easing program. The continuing debt crisis in Greece has many investors asking if the next shoe to fall will be on American soil. Some analysts suggested that the buyer’s strike was the result of the health care bill which passed on Sunday, paving the way for larger and longer deficits.

There were also suspicions that China was boycotting the issue to protest the “currency manipulator” hearings scheduled for congress on April 15. I vote for all of the above. The leveraged short Treasury bond ETF (TBT) certainly liked it, popping nearly 10% this week from $46.60 to $50.25. Don’t go apoplectic yet. I still think the zero interest rates and the disinflationary deep freeze will push the big break out for this fund further into the future. So keep trading the range at every opportunity. Deleveraging is such a bitch.

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A few years ago, I went to a charity fund raiser at San Francisco’s priciest jewelry store, Shreve & Co., where the well heeled men bid for dinner with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area’s premier hotties, who shall remain nameless. Suffice to say, she has a sports stadium named after her. The bids soared to $6,000, $7,000, $8,000.

After all, it was for a good cause. But when it hit $10,000, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer’s remorse came to me and offered his new date back to me for $9,000.  I said “no thanks.” $8,000, $7,000, $6,000? I passed. It was embarrassing.

The current altitude of the stock market reminds me of that evening. If you rode gold from $800 to $1,220, oil from $35 to $80, and the FXI from $20 to $40, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now? I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands.

But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: “There is a time to fish, and a time to hang your nets out to dry.” At least then I’ll have plenty of dry powder for when the window of opportunity reopens for business. One of the headaches in writing a letter like this is that while I publish 1,500 words a day for 250 days a year, generating about half the length of War and Peace annually, you really need to tinker with your portfolio on only a dozen or so of those days. So while I’m mending my nets, I’ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again. And no, I never did find out what happened to that date.

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See Also:

• Get Ready For The April Surprise
• Why The One-Year Anniversary Of The Rally Is Bad News For Stocks
• A Major Risk Reversal Is Underway, And The Mother Of All Carry Trades Has Begun

(This guest post comes courtesy of The Mad Hedge Fund Trader)

Get Ready for the April Surprise. I have a feeling that the markets are on a final countdown, but don’t know it yet. No, I am not talking about the next issue of the TV show 24. On April Fool’s Day, the Fed brings to a close its $1.25 trillion program to prop up the mortgage market in which essentially all home mortgages are ending up, either directly or indirectly, on the books of our esteemed central bank. As we approach this rendezvous with destiny, a growing number of hedge funds are piling on the short side of the bond market, betting that nobody will be there when the purely commercial market is reborn. It harks back to an old Wall Street saw that “Success has many fathers, but failure is an orphan”.

I expect stocks to rally until then, bonds to grind down, and yields possibly climbing as high a 4.00% on the ten year Treasury bond. This pessimism will drag mortgage rates up 15-25 basis points. The government will help the process along with increasingly bloated new issuance. This is a good reason why the credit markets have become ultra sensitive to developments in Japan, California, Dubai, Greece and other PIIGS (oink!). Seasonally, we are in a period of weak bond prices. To really throw the fat on the fire, the highly anticipated March nonfarm payroll, the number of the month, will be released the next day. When everybody and his dog is positioning for something to happen at a certain time, you can count on either the opposite to happen, or for nothing to happen.

I vote for the former. After all, who is overweight mortgage backed securities these days? The market has been closed for 18 months, and everything institutions still own is probably down by a third in value. Look for an upside surprise in the nonfarm payroll report to produce a peak in equities and bond yields, an intermediate bottom in bond prices, and a reversal of everything from there. My bet is that the drastic jump in home mortgage rates that many are forecasting for April is going to do a no show. This is just a humble trader’s musings.

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See Also:

• Here’s How Obamacare Is Going To Kill Free Trade
• BlackRock’s Bob Doll: This Recovery Is Real, Get On Board
• Rosenberg: If You Don’t Think Jobs Are Coming Back, Check Out These Charts

(This guest post comes courtesy of The Mad Hedge Fund Trader)

One of the many reasons that any stock market moves from here will be capped (SPX) is that the mutual funds that provided the steroids for last year’s parabolic move are running out of money. Equity mutual funds are now down to 3.5% in cash holdings, barely enough to cover the normal flow of subscriptions and redemptions. It also explains why each subsequent rally in stocks is happening on increasingly diminishing volume.

My friend Dennis Gartman of The Gartman Letter elucidated another reason. Now that we are at the one year anniversary of the bull market, those brave and clever enough to have bought early are seeing their paper profits qualify for long term capital gains. From here on, the number of such holdings increases, raising the level of potential selling.

Such fortunate holders may want to sell because 1) The gains could evaporate at any time, so it’s better to take the money and run. Remember, “buy and hold” is dead.  2) Obama & Co. may raise capital gains tax rates 3) the longer they wait, the more the tax advantaged positions increase, generating more potential sellers. The bulk of the stock market rally happened in the first three months, from March to May, 2009. Remember, “Sell in May and go away?” Still, zero interest rates incite a lot of perverse behavior, as I saw around every corner in Japan in the late eighties, hence the slow grind up in the market we are witnessing.

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See Also:

• The Amazing Recovery: Here’s Everything That’s Happened Since The Dow’s March 9, 2009 Low
• Lessons To Learn From The Incredible 12-Month Rally

(This guest post comes courtesy of The Mad Hedge Fund Trader)

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.

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See Also:

• Barton Biggs: Buy Farmland, Buy Guns, AND Buy Stocks
• Barton Biggs: Stock A Safe Haven With Food And Firearms To Protect Against Doomsday Pillagers
• Barton Biggs: The Average Rally Is 72%, So We Still Have A Long Way To Go

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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). 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.

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See Also:

• Good News: Unemployment Holds Steady At 9.7%
• CHART OF THE DAY: The Scariest Job Chart Ever
• What Today’s Jobs Numbers Really Mean For Our Economy

(This guest post comes courtesy of The Mad Hedge Fund Trader)

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 is close to nil, meaning the yield spread between the yen and other currencies is about to widen big time.

That will generate hundreds of billions of dollars worth of yen selling as hedge funds rush to pile on a giant carry trade. 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. You could dip your toe in the water here around ¥88.40. 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.

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See Also:

• The Lie Behind Japan’s Good Unemployment Numbers
• Japan Declares They’ll Kill Deflation THIS YEAR With The Loosest Monetary Policy You’ve Ever Seen
• Why There Is Nothing Japan Can Do To Stop Its Economic Demise

(This guest post comes courtesy of the author’s site)

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) on the next big dip. We are about to enter the golden age for these short bond ETF’s.

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See Also:

• Forget Europe And China, All Eyes Are Turning To Crumbling Treasuries
• Citi: China Sold Their Treasuries Because They Want To Buy Tons Of Gold
• China Secretly Buying U.S. Treasuries Because Deep Down They Can’t Get Enough.

(This post comes courtesy of The Mad Hedge Fund Trader)

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.

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See Also:

• Japanese Traders See $1 Trillion Clean Water Opportunity
• T. Boone’s Plan To Corner The Water Market
• Solar Projects Are Going To Need Plenty Of Water

(This guest post comes courtesy of The Mad Hedge Fund Trader)

Readers of this letter are aware that I have been recommending liquidation of longs in copper futures and physical ingots from the $3.55/pound January high on down, along with major producer Freeport McMoRan (FCX). When trading resumes at the Shanghai open on Sunday afternoon US time, you can expect prices to open up huge.

The 8.8 magnitude which decimated Chile on Saturday morning knocked out 27% of the world’s copper supply. Of the 19.7 million tons of the red metal produced globally in 2009, Chile accounted for 5.3 million tons. The earthquake was the fifth most powerful in history, and was the same magnitude that flattened San Francisco in 1906. While the epicenter is several hundred miles away from the main copper mining regions, Chile’s infrastructure has sustained major damage.

There is no way to get the ore to smelters, or ingots to the market. Mines can’t operate without fuel or electric power. Roads, rail lines, bridges, and ports have been damaged. Banks can’t carry out trade finance without communications. If you haven’t unloaded your copper yet, this is an ideal chance to do so. If the markets really get the bit between their teeth and make it as high as $4.00/pound there could even be a shorting opportunity in copper setting up. With the global economy coming off of last year’s sugar high, base metals are looking to go sideways at best in the near future, and possibly down.

You can also expect Chile’s stock market to get slammed when it reopens, whenever that is. If we get a major sell off, it could create a great buying opportunity for one of the few countries in Latin America that is doing everything right. I’ll be doing more research on this in the near future.

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See Also:

• Here’s What We Know Right Now About The Earthquake’s Effect On The Chilean Copper Industry
• Chile Struck By Massive 8.8 Magnitude Quake
• If Bolivia Is The Saudi Arabia Of Lithium, Then What’s Chile?*

(This guest contribution is from The Mad Hedge Fund Trader)

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.

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See Also:

• Boy, Lumber Is Just Getting Spanked
• Prechter: It’s The End Of The World
• Here’s A Trade Suggestion: Go Short John McCain