March 20, 2004

Baptism, Tourism

We interrupt this blog to let you know I'll be away until Thursday of next week (the 25th). I'm on my way to Paris for a baptism (becoming a god father), and then, playing host to my college-aged nephew on his first visit to Europe. See you Thursday. (If something uber urgent happens, I'll be sure to check in.)

March 19, 2004

Quote of the Day

Busy banging out the April issue. But did run across this quote by Kofi Annan on the U.N. Oil-for-food program in Iraq. As I reported in the run-up to the war last spring, the largest recipients of U.N. contracts to do business with Saddam's oil regime were Germany and Russia. There were then, and are now, a lot of rumors of, well...impropriety, Halliburton style. "It is highly possible there has been quite a lot of wrongdoing," Annan said today. Sounds like a man who knows there were a lot of hands in the cookie jar...and knows it's only a matter of time before it's front page news. It ought to have been front page news long before this. But it's not the kind of story that fits the "it was all about U.S. lust for oil" mold. Instead, it shows there was a lot of U.N. sanctioned lusting for oil contracts going behind closed doors. Perhaps the U.N. would do better in Iraq than the U.S. Perhaps. But then again, perhaps the U.N. is full of opportunistic crooks hiding behind the veneer of international authority. Maybe more than perhaps.

France finds a friend in China

Taiwan is holding an election tomorrow. The Chinese aren't happy. And neither, apparently, is whoever tried to kill pro-independence candidate Chen today. The French, for their part, are content to find a major power that will conduct joint military exercises with them. If you were being charitable, who else were the French going to conduct joint naval exercises with? Their good friends the British? Their even better friends the Americans? Why not the Chinese? If you were being uncharitable, you'd say the French would stoop pretty low--even to the point of abetting attempted Chinese intimidation of a free election--to take an anti-American position. BBC NEWS | Asia-Pacific | China drill before Taiwan poll: "This will be China's most comprehensive naval exercise with any foreign navy,' said Xinhua, quoting Ju Xinchun, captain of the Chinese guided missile destroyer, Harbin. China held its first ever joint naval exercises last year, when it conducted separate drills with both Pakistan and India. This will be its first exercise on the high seas with a major Western power, said Xinhua. The French government confirmed the exercises but denied there was any significance in their scale or timing. 'They are part of the regional cooperation between the two navies, which was expanded after last year's visit to France by Chinese President Hu Jintao,' said a spokesman for the French Foreign Ministry in Paris. "

March 17, 2004

Quote of the Day: Globalization's Unexpected Wars of Scarcity

It is just now dawning on middle class Europeans and Americans that while rising standards of living and prosperity all over the world are worthy humanitarian goals, they have real economic consequences. Consequences that are going to make getting and keeping wealth a lot tougher in Europe in America. The most obvious consequence is the one getting all the headlines: the jobs/wealth transfer as the global division of labor rewards the low-cost East and guts the high-cost West. It's true within Europe as the EU expands east. And it's been true in the U.S. ever since NAFTA, and even more so now with the rise of outsourcing in Asia. Less obvious is an even bigger threat that goes beyond jobs. There's a geopolitical game of grand strategy underway to secure the world's raw materials. Rising middle class societies consume energy and raw materials in huge quantities. Now that India, China, Indonesia, and others are coming into their own economically, it means there are more competitors for scarce resources. And it means that competition might be more than economic. Without noticing it, we may have quietly entered a new age of total economic warfare for commodities. If you're an investor in a country without large energy reserves (or solid friendships with countries that DO have them), you may be a lot closer to a radical change in your standard of living than you realize. A report published by the Fleet Street Letter here in London revealed that in the event of an interruption in natural gas supplies, England has less than 48 hours of energy reserves at peak energy demand. That's not much margin for error--even in a world that wasn't threatened constantly by terrorism or the budding rivalries of ambitious and not necessarily friendly competitor nation states. If you're an investor in the raw materials themselves, the Age of Scarcity can at least provide you with a measure of personal prosperity. You may not know who's ultimately going to win the war for the world's oil. But you know that the contest for it will see prices rise. And not just for oil. The secular bull market in commodities which began two years ago has some very powerful forces behind it--forces that could make patient investors very wealthy. More on this in the April issue. As you might guess, I'm very bullish on closed-end commodity funds and exchange traded funds and will have several new recommendations that make it easy for you to buy the entire energy sector in one single stock. Meanwhile, there's also a new world energy order to figure out--something I'll be doing here at the Insider day by day and week by week. Today, we'll finish with a quote from what looks to me like a Korean website called on a potential conflict between the U.S. and China over...oil. Emphasis added is mine. "China is putting all efforts into securing a supply of energy from across the world. In January, China and Saudi Arabia entered into a contract to jointly explore and produce natural gas. China and Saudi Arabia’s state-owned Aramco formed a $3 billion petroleum chemical joint venture. All these moves make the U.S. uneasy as it depends on two key allies in the region, Saudi Arabia and Egypt, for control of the Middle East. Some signs suggest that Saudi Arabia and China are developing a weapons-for-oil deal. "A government-sponsored energy policy group in the U.S. estimated that the U.S.’s dependence on foreign oil, which rose to 50 percent in 2003 from 30 percent in 1985, will reach 70 percent by 2020. "This is why the U.S. sees China’s search for stable energy sources as a challenge to its world hegemony. Along with the conflict over trade, military rivalry, and the space development race, the competition over energy will be an important axis of the U.S-China competition over international dominance. It explains why China does not support the war in Iraq. " By the way, notice that the authors of the piece assume that the U.S. aspires to or has "world hegemony." I'm not sure how many Americans are aware of just how distrustful of American motives most other people in the world are right now, not just North Koreans. In fact, a Pew Research poll released today showed that most people outside America view the war in Iraq as an American effort to control Middle Eastern oil and dominate the world. Some Americans probably think that too, of course. But the point is, there is probably far more disagreement over the War on Terror today in the West than there was even one year ago. Europe seems invigorated to take a new approach and exercise some diplomatic muscle. Whether it will work or not is a differnt matter. I have my doubts about "muscular pacifism." Bit it will certainly make for an interesting spring, summer, and U.S. election.

Chart of the Day: What's Opera Doc?

The Lennar puts I recommended to SOA readers are looking much better yesterday on the heels of yesterday's news that February housing starts were down 4%. Building permit requests were also off 1.5%. We're still at near record levels for housing activities, which should, in my view, comfort housing bears. How long can something remain "at record levels" before returning to non-record levels? That said, the performance in the housing market reminds me of the old Bugs Bunny cartoon "What's Opera Doc." You remember it, it's the one where Bugs plays Brunhilde and Elmer Fudd plays Siegfried in an animated reproduction of Wagner's Der Rings Des Nibelungen. Bugs makes the opera singers face turn blue when he makes him hold a high note...a high C I think...for an impossibly long time. I remember watching it when I was younger and getting short of breath just watching. To me, the housing market looks all blue in the face as well.

China Correction

Apologies for another error I made yesterday. I was in the middle of a post on unrestricted warfare when I was called away. I meant to save the post and publish it later. Instead, I published the unfinished post. I've finished it today, with a few more comments and some highlights. And as I said, more in the April issue. regards, Dan

March 16, 2004

Jumbo Jet with Fighter Escort

Just missed getting a picture of it...but several miles west of here a jumbo jet just raced across London at a fairly low alititude, followed on both sides by military fighters. Let's hope it was an official escort.

What is Unrestricted Economic Warfare?

You may be wondering what I meant when I said there was a deliberate economic attack on America. Well, truthfully, it's not all that controversial or unusual. It's just that Americans don't think about economic competition in combative terms. The American conception of capitalism is that it's value neutral and beneficent, bestowing on all participants the benefits of rising wages, living standards, and personal security. That probably seemed especially true when Americans had the highest wage jobs in the world, produced the world's manufactured goods, and were net creditors. The world is different today. China manufactures. India has a growing services industry. Nearly every industrialized country is capable of producing cheap manufactured goods. There is a great deal of economic parity. Which is another way of saying the world is highly competitive. This is good for consumers. It means prices for consumer goods tend to stay low, or even fall. But national governments see it in a different light. They have trade policies to manage, and currencies. This makes nation states much more likely to view economic competition in a more...combative light. Rather than competing in some ideal free market state, nation States are more likely to employ a wide variety of policies, most quite legal, to preserve or enhance their competitive advantage. This isn't an entirely new line of thinking. The U.S. government has used farm subsidies and more recently, steel subsidies, to curry favor with domestic political constituencies. However, there's a much broader variety of economic tactics a nation state can employ to try and gain an economic edge. The Chinese--at least their military thinkers--have already put some thought into this. More on this in the April issue. For now, an excerpt below from "Unrestricted Warfare." Emphasis added is mine. Some terrorist organizations pursue political objectives by combining means such as throwing bombs, taking hostages, and making raids on networks. To stir up the waters and grope for fish, the likes of Soros combine speculation in currency markets, stock markets, and futures markets. Also they exploit public opinion and create widespread momentum to lure and assemble the "jumbos" such as Merrill Lynch, Fidelity, and Morgan Stanley and their partners [19 ]to join forces in the marketplace on a huge scale and wage hair-raising financial wars one after the other. Most of these means are not by their nature military (although they often have a tendency to be violent), but the methods by which they are combined and used certainly do not fail to inspire us as to how to use military or non-military means effectively in war. This is because nowadays, judging the effectiveness of a particular means is not mainly a matter of looking at what category it is in, or at whether or not it conforms to some moral standard. Instead, it mainly involves looking at whether or not it conforms to a certain principle; namely, is it the best way to achieve the desired objective? So long as it conforms to this principle, then it is the best means. Although other factors cannot be totally disregarded, they must fulfill the prerequisite that they be advantageous to achieving the objective. That is, what supra-means combinations must surpass is not other [means], but rather the moral standards or normal principles intrinsic to the means themselves. This is much more difficult and complex than combining certain means with certain other means. We can only shake off taboos and enter an area of free choice of means -- the beyond-limits realm -- if we complete our picture of the concept of beyond-limits. This is because for us, we cannot achieve objectives merely by way of ready-made means. We still need to find the optimum way to achieve objectives, a correct and effective way to employ means. In other words, to find out how to combine different means and create new means to achieve objectives. For example, in this era of economic integration, if some economically powerful company wants to attack another country's economy while simultaneously attacking its defenses, it cannot rely completely on the use of ready-made means such as economic blockades and trade sanctions, or 195 military threats and arms embargoes. Instead, it must adjust its own financial strategy, use currency revaluation or devaluation as primary, and combine means such as getting the upper hand in public opinion and changing the rules sufficiently to make financial turbulence and economic crisis appear in the targeted country or area, weakening its overall power, including its military strength. In the Southeast Asian financial crisis we see a case in which the crisis led to a lowering of the temperature of the arms race in that region. Thus we can see the possibility that this will happen, although in this case it was not caused by some big country intentionally changing the value of its own currency. Even a quasi-world power like China already has the power to jolt the world economy just by changing its own economic policies. If China were a selfish country, and had gone back on its word in 1998 and let the Renminbi lose value, no doubt this would have added to the misfortunes of the economies of Asia. It would also have induced a cataclysm in the world's capital markets, with the result that even the world's number one debtor nation, a country which relies on the inflow of foreign capital to support its economic prosperity, the United States, would definitely have suffered heavy economic losses. Such an outcome would certainly be better than a military strike.

Charts of the Day

Hat tip to for great work as always. Below, three bullish percentage charts. The first shows the financial sector. The second, the S&P 100 and 500 respectively. Notice all the moving averages turning down, with the short-term MAs picking up speed. There aren't too many proxies for financial stocks in the ETF world that trade cheaply. There is the Amex broker/dealer index (XBD) that I mentioned last week. The trouble here is that trading is thin and the options are expensive. If you're looking for confirmation that financials and financial services are breaking down....check out the three iShare charts below. First, IYF, the Dow Jones U.S. Financial Sector Index Fund (38% banks, 21% diversified financials, 20.8% insurance, 11.4% securities brokers, 7.8% real estate.) Next, IYG, the Dow Jones U.S. Financial Services Index Fund (54% banks, 29% diversified financials, 16% securities brokers) And finally, IXG, the S&P Global Financials Sector Index Fund (49% banks, 26.9% diversified financials, 19% insurance, and 3.5% real estate.) How do you trade it? Right now, XLF and XBD are the only of the indexes shown above that show any significant options activity. Odd that so many ETFs make it possible to trade all sorts of sectors...except financials and broker dealers. Absent an index or sector put, you can cherry pick and go after the highest flyers. How about Bank of America? It's out $675 million (to be split with its new partner Fleet Boston) for granting high dollar clients the right to do some late trading in mutual funds. Is that priced into the stock? Is a slow-down in mortgage lending? Is a surge in credit defaults...or derivatives losses...or equity losses?

The Dollar Report

This is the note I've been sending out to new readers who are asking why they have to pay for the dollar report. If you have more questions, don't hesitate to ask. Dan Dear Reader, If you're a new subscriber to SI and are wondering what's in the dollar report I advertised yesterday, and why it's not material you can read about in SI already, please check out this link In the November issue of SI, I wrote about how to sell the dollar, listing three separate ways (dollar index futures options, puts of course, bond price puts, and bond yield calls.) As I noted in yesterday's short note, the safest, least riskiest way to be "short" the dollar is to buy gold. The ways listed above, and the trades listed in the dollar report, require you to invest money that you may well lose. That's fine of course. And you may still be interested. The trades area also the kind of thing that require you to be able to get in and out quickly and to follow options prices daily. Again, not a problem for some traders. However, they are not the kinds of trades I'd make in Strategic Investment, and that's why the report is sold separately. SI's main goal in a bear market (and I believe we're in a mighty one) is not to lose money. I think betting against the dollar could be lucrative. But it's a speculative investment. And I'm not going to recommend a speculative investment as if it were on par with, for example, gold stocks. Second, the dollar report was put together with the input of a great team of traders and analysts, and includes some great support. It contains seven different recommendations on how to invest in a falling dollar (some you've already read about in SI, some you haven't because I'd say they're too risky for risk-averse investors.) In short, the report is worth every bit of its $99 price. If you don't want to buy it, don't. I'll continue to cover the dollar story in SI and make moves when I think the time is right. If you still think you're getting shortchanged, you're free to exercise your money back guarantee whenever you want. You'll feel better, and so will I. Regards, Dan

Quote of the Day

"The Fed is in a position – not that they'd admit it – where if they tighten too aggressively, they run the risk of triggering an unwanted drop in real estate prices." John Lonski, Moody's.

March 15, 2004

Chart of the Day

This is the one week a month I put together the 16-page monthly print issue. So blogging well be intermittent. I did join a new sight this weekend, and post this chart of world stock markets. You can see it looks a lot like a Dow or S&P chart, the main reason being how much of the world is tied in with the dollar standard, for better...and also for worse.

Quote of the Day

"We are in the midst of a truly pathetic case of inflating our way to a financial debacle and economic impoverishment. And, damn right, there will be a backlash. Not only are many of our workers being priced out of the global marketplace, they are taking on enormous debts in the process. Come the unavoidable bust, there will be the natural search for scapegoats and villains. There will be a move toward protectionism, isolationism, and nationalism." Doug Noland,