Diary Entry for Monday, January 25, 2016

Dear Diary,

4:30 PM Sunday-the day before - Thought I’d check my Bloomberg to see how the Asian markets were opening. Yikes! China is down big again. Looks like it is going to be a “RISK OFF” day. Better fasten my seat belt, put on my hard hat, and get ready for a rough day. No rest for the wicked. At least for the first 15 minutes of the trading day.

5:00 PM - Call from one of the top New York hedge funds. What’s going on with the market? The economy is presenting the best macro picture in 16 years, yet we had the worst start to the stock market in history. Bonds have had their best start since 1999. Good news is bad news, and bad news good. After three weeks, his traders are already worn out and gun shy from these gigantic, day-to-day triple digit swings. Worse, he is losing money.

I told him that a lot of this springs from year end effects. A ton of new money was allocated to equities this year, but has yet to be put to work. However, those with big gains in single names delayed their selling into January so they wouldn’t have to pay capital gains for 16 months, not until April 15, 2016. That’s why Apple (AAPL) has taken such a pasting.

What is confusing people is that while the pain caused by the oil price crash is immediate, the gains are long term. Net net, it is a huge plus for the 90% of the economy that doesn’t produce oil.

Markets will settle down soon and return to a normal trading pattern, and volatility (VIX) will back off its hefty $30 handle. But don’t kid yourself. With the bull market entering its seventh year, volatility will be higher this year than in the last. We aren’t trading the $600 handle in the (SPX) anymore.

I said he owed me a nice dinner at Masa at Time Warner Center on Columbus Circle, and we’ll meet up at my June New York Strategy Luncheon. I don’t care if it costs $500 a person. High end Japanese sake is cheaper than the best Bordeaux’s, because Chinese billionaires have bid up the prices so much.

Then he told me the real reason for his call. He knew I grew up near Hollywood, had dated several movie stars, and even appeared in a movie as an extra (Francis Ford Coppola’s Apocalypse Now). Perhaps, I had some insights on the upcoming Academy Awards on February 28?  His firm had put up the money to make the film, The Revenant with Leonardo DiCaprio. Is it worth seeing?  

I said only for the guys. I saw the film on the day it came out to gain insights on what my ancestors went through. Even on a good day, 1823 was disgusting, as it starts out with mountain men butchering animals. Then 20 men are massacred by Indians in the first five minutes. It goes downhill from there.

But as a film, The Revenant is a sure thing for a win for best picture, best actor, and best director. The black and white hues of the Rocky Mountains in winter are stunning. It is a must see for film junkies. And Leonardo finally learned how to act.

9:00 PM - Call from a friend at the People’s Bank of China in Beijing. Why are American hedge funds selling short his country’s stock markets?

While domestic investors obey dictates from Beijing, foreigners don’t. It has made managing the Middle Kingdom’s economy very difficult.

I said it’s very simple. No one believes your economic data releases for a nanosecond. Did you really just announce a 6.9% GDP growth for 2015, instead of the real number of 4.5%?

How did you collect data from 1.4 billion participants so fast? I didn’t know they were still smoking opium in China.

As a result, foreign hedge fund managers expect a hard landing for the Chinese economy, and for the turmoil to spill into international markets.

I assured my friend that I personally am not of this view. A country with $3.6 trillion in reserves never had a financial crisis that lasted more than a couple of months.

Then he asked, did I, by any chance, recommend the film, The Bridge of Spies, with Tom Hanks? Everyone in the Politbureau was seeing it.

“Absolutely,” I answered. I loved it. It was a very personal film for me as I spent a few years in West Berlin during the 1960’s. They absolutely nailed the atmosphere of the divided city during the period.

The movie covers the negotiations over the return of Francis Gary Powers, the American U-2 pilot shot down over Russia in 1960.

When I was on a NASA job testing Russia’s front line fighter jets in 1999, I was taken to a nearby museum on my day off. There was the wreckage of the unlucky U-2, which the Russians considered a national treasure.

I spotted a black nameplate with “Lockheed” etched upon it and I asked if I could take it home as a souvenir.

“No, No, No, No,” I was waved off.

As depicted in the film, I was arrested by the Volkspolizei attempting to smuggle German newspapers into the East and held in jail overnight. It was a very grim time.

There is also a nice family oriented back story, so it is safe to take the wife.

Berlin Just Isn’t the Same Anymore

9:30 PM - Hit the rack and try to catch some shuteye before the next call.

2:00 AM - One of my former staff members at Morgan Stanley calls me from a Private Bank in Geneva to tell me that the Euro (FXE) is getting the stuffing knocked out of it this morning. Is it time to buy?

I told him it might be. Since frightening market volatility will scare the Federal Reserve away from any more interest rate rises this year, the bull case for the dollar was dead in the water.

In the meantime, there are still enormous shorts in the beleaguered continental currency left over from last year. It is all a perfect formula for a gigantic short squeeze in the Euro.

Until European Central Bank president, Mario Draghi, takes more decisive action on quantitative easing, the short-term direction for the Euro may be up.

Then he moved on to the real purpose of his call. He was planning to take his wife out this weekend. Should they go to see The Big Short with Steve Carell, based on the book written by my friend, Michael Lewis.

I said only if she didn’t speak English. The film accurately depicts traders and hedge fund managers using f*** every other word in the conversations.

Beyond that, I liked it. It accurately depicts how extreme the leverage in the financial crisis was before the crash.

The early players on the short side took endless abuse from their investors, a problem I know well. Of course, the big Wall Street banks tried to squeeze them out of their positions with fake margin calls. And yes, strippers really did own five houses, all mortgaged to the hilt.

I really like how the flic showed the best hedge fund mangers not trusting any published research. They had to fly down to Florida to find out for themselves that prime credits were secured by owner occupied homes that were really sublet out to biker gangs.

I slammed the phone back on the hook and went back to sleep.

6:00 AM - My website administrator called me in a panic. My online store is down. A hack attack prompted PayPal to suspend my account. Since I am one of their largest customers, I call my account rep and get it reopened.

The North Koreans should know better than to try to take down my site. One call to Beijing and I could have them all shot. Go hack Sony instead. I hear it’s a lot easier.

7:00 AM - Another call from my website administrator. The website is down. My story on “2016 Annual Asset Class Review” (click here) brought a traffic spike that is causing the servers to melt. I am burning up the Internet.

Is it something I said?

10:00 AM - I get a call from a leading money manager in London’s Mayfair district. Europe is closing. With gold up $50 in a week, is it time to buy?

I said “Maybe.” Look at the long term charts, and it is clear that the barbarous metal is attempting to put in a major bottom.

World gold production fell for the first time in Q4 and will continue for the next four years by as much as 20%. After falling for five years, the commodity is “sold out.”

Russia is buying more to dodge the sanctions imposed by the US government. So is the Chinese central bank, which is attempting to diversify away from dollar assets.

All we need is for oil to bottom, and it will be off to the races.

The next big bull market for the yellow metal won’t begin until the 2020’s, when inflation returns for real. Then it should run to $3,000-$5,000. Not until then will gold bugs be able to afford new suits.

And go have a pint of bitter for me at the Pig & Whistle next door, will you. Tell the owner, Nigel, to put it on my running tab. He owes me from my last Manchester United win.

He then raved about last summer’s Armageddon film, Mad Max: Fury Road, a sequel to the old Mel Gibson franchise. Did I see it?

I did, and have been regretting it ever since. It is two hours of non-stop pointless violence. I almost walked out. I hate to think that this is the direction in which Hollywood is moving. But foreigners love these things. Explosions are easier to understand than the English language.

1:15 PM - My friend, JR, a senior executive at an oil major, calls from Houston. What the hell was going on with the price of oil (USO)? Only 18 months ago, it was at $107, then he blinked, and it was $26.

I said don’t worry. Oil will come back someday, driven by Chinese demand. It isn’t going to zero, or even the $20 handle. But investors are avoiding the sector like the plague until they find out who will be driven into bankruptcy by the sudden price collapse, and who will be left standing. The junk bond market (HYG) is suggesting that more than half of all energy issuers are going to default.

Eventually, the strong end up swallowing the weak (think Exxon (XOM)). However, major institutions have already started picking up shares in the companies with the best balance sheets, buying quality at a once in a generation discount.

Activists, like Carl Icahn, and the value players, such as Warren Buffet, are already involved.

In the meantime, buy some solar plays, like First Solar (FSLR). Sales are soaring, and costs are collapsing, setting up a ten bagger for the whole industry.

A five-year extension of the 30% alternative investment tax credit means government support for stretches as far as the eye can see.

He said thanks, and next time I was in town he would buy me a 24-ounce chicken fried steak at Billy Bob’s that spilled over both sides of the plate (2,500 calories). I can’t wait. I’ll let my doctor have the heart attack.

He then told me why he really called. He knew I was a science buff. His buddies down on the ranch had just seen The Martian and liked it. Should he bother?

I loved the film, and thought it was incredibly realistic. Somebody had done some serious research. It’s a truly inspirational film, even for those with no interest in space exploration. It also takes one through the problem solving process that every scientist employs.

My 12-year-old daughter was so motivated that she is building a serious rocket for this year’s 6^th grade science fair. Only last weekend, I almost blew my self up test firing one of her rocket engines, which uses powdered sugar and Potassium nitrate for fuel. It is amazing what kind of high explosive ingredients you can buy on Amazon these days.

Oh, and the film is really funny.

2:00 PM - Still haven’t started on the letter yet. I have been answering dozens of email requests for information about the Trade Alert Service. This always happens whenever I have a hot performance streak on. The watchers want to become players. With my five year return approaching 192%, new subscribers are pouring in.

4:45 PM - Well, I got the letter done, but I’m too late. The web editor has gone to the DMV to register his new Prius, and the backup has gone to the yoga studio.

5:00 PM - I put on a 60-pound pack and my heavy climbing boots and head out the back door on a ten-mile hike up Berkeley’s Grizzly Peak. Gotta stay boot camp ready! You never know when Uncle Sam is going to come calling again. Who cares if I’m 64? I can still hit a quarter on a tree at 50 yards with my Winchester Model 98 30-30.

I listen to an audio book on my iPhone 6, the seven volume Truman, by David McCullough about our 33rd president.

It is an amazing story.

Considered by most to be an average man at best, he dropped the atomic bombs on Japan, negotiated with Stalin at Potsdam, created the CIA and the Defense Department, desegregated the Army, ordered the Berlin airlift, went forward with the Hydrogen bomb project, stared down a megalomaniac senator McCarthy (Donald Trump?), and fought the Korean war to a draw.

By the time I hit the trail, a layer of thick fog already blankets the city below me.

9:00 PM - Back to my screens. The Euro has broken $1.08 again. Where was I last week? Asleep? Still, I am going to avoid the Euro for now. It has had such a sharp move down over the past year, that the risk of a sudden, rip your face off, short covering rally is ever present.

I rather keep some dry powder and buy it a few cents lower. At this point, The World is short the Euro. Maybe they read my letter?

10:00 PM - Time to call it a night and break out a bottle of Duckhorn merlot. Jeese Louise, it seems people only wanted to talk about the movies today. Has the market really that hard to trade?

The phone rings. Does anybody want my job?

Gunslinger for Hire