Mad Hedge Fund Trader

SPECIAL DEMOGRAPHIC ISSUE

Featured Trades: (EEM), (VNM)

1)Desperate homeowners counting on a “V” shaped recovery in residential real estate prices to bail them out better first take a close look at global demographic data, which tells us there will be no recovery at all. I have been using the US Census Bureau’s population pyramids as long leading indicators of housing, economic, and financial market trends for the last four decades. They are easy to read, free, and available online at http://www.census.gov/. It turns out that population pyramids are something you can trade, buying the good ones and shorting the bad ones. These graphical tools told me in 1980 that I had to sell any real estate I owned by 2005, or face disaster. No doubt hedge fund master John Paulson was looking at the same data when he took out a massive short in subprime securities, earning himself a handy $4 billion bonus in 2007. To see what I am talking about, look at the population pyramid for Vietnam. This shows a high birth rate producing ever rising numbers of consumers to buy more products, generating a rising tide of corporate earnings, leading to outsized economic growth without the social service burden of an aged population. And what happened 40 years ago? The Vietnam War, where two million young people were killed who otherwise would have been enjoying their gold years now. This is where you want to own the stocks and currencies.

2)Now look at the world’s worst population pyramid, that for Japan. These graphs show that a nearly perfect pyramid drove a miracle stock market during the fifties and sixties which I remember well, when Japan had your model high growth emerging market economy. That changed dramatically when the population started to age rapidly during the nineties. The 2007 graph is shouting at you not to go near the Land of the Rising Sun, and the 2050 projection tells you why. By then, a small young population of consumers with a very low birth rate will be supporting the backbreaking burden of a huge population of old age pensioners. Every two wage earners will be supporting one retiree. Think low GDP growth, huge government borrowing, deflation, and a terrible stock and housing markets. Dodge the bullet.

3) If demographics truly is destiny, then America’s future sucks. Brace yourself. We are turning into Japan. As a silver tsunami of 80 million baby boomers retires, they will be followed by only 65 million from generation “X”. The intractable problems that unhappy Japan is facing will soon arrive at our shores. Boomers, therefore, better not count on the next generation to buy them out of their homes at premium prices, especially if they are still living in the basement. They are looking at best at an “L” shaped recovery, which means no recovery at all. The only thing that can possibly save us is a rising tide of immigration, bringing in more young workers. Oop’s! The last administration did everything it could to shut out immigrants by building huge, multibillion dollar walls on our borders. What are the investment implications of all of this? Get your money out of America and Japan, and pour it into Vietnam, China, India, Brazil and Mongolia and other emerging markets with healthy population pyramids. You want the wind behind your investment sails, not in your face with hurricane category five violence. Use this dip to load the boat with the emerging market ETF (EEM).

4) Now that we have figured out that Vietnam is a great place to invest, we welcome the news that the Van Eck group has launched its own Vietnam Index Fund (VNM). The venture will invest in companies that get 50% or more of their earnings from that country, with an anticipated 37% exposure in finance, and 19% in energy. This will get you easily tradable exposure in the country where China does its off shoring. Vietnam has been one of the top performing stock markets this year, at its peak rising by an amazing 110%.  It was a real basket case last year, when zero growth and a 25% inflation rate took it down 78% from 1,160 to 250. This is definitely your E-ticket ride. Vietnam is a classic emerging market play with a turbocharger. It offers lower labor costs than China, a growing middle class, and has been the target of large scale foreign direct investment. General Electric (GE) recently built a wind turbine factory there. You always want to follow the big, smart money. Its new membership in the World Trade Organization is definitely going to be a help. Until now, the only way to get involved with this country was to go through the tedious process of opening a local currency brokerage account, or buy a region sub emerging market ETF. I still set off metal detectors and my scars itch at night when the weather is turning, thanks to my last encounter with the Vietnamese, so it is with some trepidation that I revisit this enigmatic country. Throw this one into the hopper of ten year long plays you only buy on big dips, and go there on vacation in the meantime. Their green shoots are real. But watch out for the old land mines.

Lawrence Delevingne

William D. Cohan profiles Larry Summers in the December issue of Vanity Fair and confirms what we’ve long known: the star economic counselor has been his own worst enemy.

The whole thing is worth a read, but here are some highlights:

• Iris Mack, a former derivatives specialist at the Harvard Management Company (responsible for investing Harvard’s endowment) claims that a betrayal by Summers lead to her termination. “I would say that there is 99.9999999999999999 percent probability that Summers had a hand in my departure,” she wrote Cohan in an e-mail. (Summers replies he had nothing to do with Mack’s firing and could not have, because she did not work for or report to him. “[Mack’s] allegations were the subject of thorough internal and external reviews and found to be without merit,” says a Harvard spokesman.)
• Long-time critic Cornel West tells Cohan: “I think that both as Harvard president and now as head of the National Economic Council that with Summers you have this tension between braininess and a certain lack of long-term vision…and I really believe we need some long-term vision right now. The smartness and the brilliance, on the one hand, is fine, but I feel like you also have to treat others with a courtesy or a civility or even a decency at times.”“
• Larry has not had the jobs he’s had because he’s misunderstood,” Treasury Secretary Tim Geithner tells Cohan. “He’s had them because some of the best leaders in our country understand quite well how much he has to offer.”
• Robert Rubin agrees, telling Cohan that “what [Obama] saw in Larry is what so many people have seen in Larry: not just a very bright guy, but a guy who sees many different dimensions of issues, sees the competing points of view… will keep sort of relentlessly searching to see if there’s some better way of looking at something.”

Read the full thing here.

Zero Hedge

The melt up in stocks on no volume was fully expected after the worst possible employment news to come in over 20 years: the market-economy disconnect is now complete, and all stocks are freeriding purely on Bernanke’s printing press. At least gold vigilantes are beginning to whisper in Bernanke’s ear he can go fornicate himself and his dollar destruction deathwish: let’s see what happens when gold melts up ala the S&P to 1,200, 1,300 and maybe 1,500 in a few short weeks: can you spell panic at the Fed? Also next up: failed auctions, the only question is when and by whom…Oh wait, those never happen right… yeah, until they do.

David A. Banister

We have come a long way since early March of this year. After bottoming at 666, the SP 500 Index has rallied as high as 1101 at its recent peak pricing. I wrote about the market bottoming and my outline for a bull rally prediction back in late February. My targets at the time were 10,400 on the Dow and 1140 on the SP 500 index. Since we came within 3% of those targets, I believe the next leg for the market is a corrective movement to the downside. The bounce up that we are getting now is likely temporary, and will be followed by another bout of selling. My methodology uses a confluence of factors to determine direction and price targets. A combination of Elliott Wave Theory, sentiment indicators, technical analysis patterns, and cyclical movements. We are looking for the SP 500 to pullback into the 840-880 ranges before a significant pivot bottom, and are moving our trading positions from very bullish and aggressive to defensive. I continue to favor the gold stocks on a strong pullback to accumulate for a five year bull market that began in early August of this year.

To wit, the SP 500 has retraced a normal A B C pattern to the upside following a cataclysmic 5 wave pattern from October 2007 to March of 2009. The 8 month rally is roughly 50% of the 17 months of decline that preceded it into early March. With the sentiment readings back at very high bullish levels, many small cap stocks rolling over, and leadership spread amongst fewer and fewer equities, it is time for a corrective decline. We see this bounce ending shortly to the upside, followed by another bout of selling.

Our advice is to maintain higher than normal cash positions at this time, accumulate Gold on large dips, and wade into Gold Stocks on a big drop as well. We also plan to recommend the occasional use of Bear ETF’s for defense and insurance on our portfolios.

David Banister Active Trading Partners

CalculatedRisk