Wednesday, August 27, 2008

Basket Case Countries

I'm starting a list of basket case countries. These are countries with economy going to hell, because of mismanagement. Surprisingly, many of them have a lot of natural resources, or great climate suitable for modern agriculture, or both. This list is by no means complete, new candidates are welcome.

Of course, all countries are different. Some basket cases in the list have people dying of famine, when others don't. But in all cases economic situation is bad and becoming worse.

Why compile this list? Two reasons. First of all, these are countries where you don't invest. Second, sometimes government can change and new one bring some sensible changes. If you can catch such a moment, you can make a killing. You can also short candidate countries with hope that they develop into basket cases.

Mismanagement can be of two types:
Type 1: good intentions leading to hell
Type 2: government intentionally makes population poor, it's easier to suppress poor people.
Corruption is high in both cases. Some people can say that there is no corruption in North Korea, I disagree. Corruption by power is even worse than corruption by money and results are worse as well.

Type 1 is usually easier to change. Sometimes government understands its own mistakes, or it can be replaced peacefully or with minimal destruction. Type 2 is usually created by people who would try to keep power no matter what. Changes are possible with type 2 as well, China being the most famous example.

Basket cases:

Zimbabwe. That's the saddest story here. Ten years ago this country fed itself and about another population of the same size. Now it needs food help from international organizations. Political situation is well known: type 2 mismanagement.
North Korea. I don't think comment is needed. Type 2.
Iran. Type 1. Or 1.5 (both 1 and 2).
Turkmenistan. Type 2. Lots of natural gas and oil, spent on idiotic projects. People live at about average African level.
Uzbekistan. Much better living conditions than in neighboring Turkmenistan, but government is really bad. Type 2.
Sudan. Type 2.
Cuba. Type 2.
Belarus. Type 1.5 (Lukashenka might even want the best for his people, although I doubt it).
Syria. Type 2.
Venezuela. I think type 2, but somebody might make a case that Chavez is really concerned with well-being of his compatriots.

Candidates:

Bolivia. It's definitely type 1 and might escape the trap, although serious magic is required.
Argentina. Unless tax and spend government is replaced, it will be basket case. Despite being one of the best food producers in the world. Type 1.
Russia. Sad personal story for me, I was born in that country and still have friends and relatives there. Type 2. If my idea about what's going on is right, Putin takes country the same way Stalin took in 1930s. Development of last 5 years matches my forecasts way too good. Corruption by power is about to replace (or supplement) corruption by money.
Egypt. Type 1, candidate for the last 50+ years, but manages to balance on the edge somehow.
South Africa. Economic policy is almost OK so far, but politic development is making me wonder. Constant support of Mugabe of Zimbabwe, attempts to discredit obvious choice for the next president, Zuma, are not encouraging signs. Might become type 2 if my suspicions are right, I hope they are wrong.
Equador. Socialist or close to that government, type 1.

There are also the whole groups of countries which are always candidates:

Arab countries. Maybe Jordania and Iraq are exceptions, but it's too soon to tell.
Almost all Africa. Ghana and Botswana are the only exceptions, but even they can be destroyed by mismanagement.

I will continue soon. Keep reading.

Monday, August 25, 2008

Playing Rising Dollar

Started position in UUP today. This is the only pure way I know to bet on dollar: this ETF shorts a basket of currencies. Initial position is small, will buy more if it goes down. Might buy more even if it goes up, I just hope for some down move. Might also buy DRR, which is a pure play dollar vs Euro.

Interesting action in oil right now. Looks like traders are completely ignoring any news from Russia and surroundings, judging (properly, from my point of view) that Russia is not going to cut production. But a lot of other news affect price a lot. Last week moves were a little bit scary, although Thursday's $6 jump can be explained by switch from September to October contracts (maybe). Every hurricane affects price, which tells me that US oil production is very important for the market. I'm staying away. I still think oil is going down long term, but there too many variables in play and I don't want to short long term.

Again, thanks to all my readers. I welcome all comments and don't want to moderate them (so far). I might moderate if I see some flame, of course. But my answer to all critics is: I report all my trades here. If you think I'm wrong, go against me. We'll see who wins. It's a fair game, you pay your own money to go against mine. If you win, then you were right, no matter how good my idea was. If you lose, I was right.

Full disclosure: at the time of publication author had a long position in UUP and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Friday, August 22, 2008

Market Has No Memory

Of course, that's what Jim Cramer said lately. And, before him, Todd Harrison. And, if I'm not mistaken, great gray-bearded Doug Kass. But it doesn't make things any easier. Investing long term is dangerous, because we can run into depression. No great companies on the horizon, those would do great in any environment. The only long term theme right now is defense, Cold War II has started, if anybody has any doubt, just read Russian press. Wild mix of xenophobia, nationalism, irrational anti-western rant and plain stupidity. Right now those guys think they are ready to take on the world. Could be laughable if country didn't have nukes. So defense it is.

Trading is not easy either. I got lucky with Goldman Sachs and shorting oil lately. Correction: lucky with Goldman, oil was realization of the right idea. But, anyway, I don't see easy trades right now. Financials are close to be worthless. I know that GS is the best, but they are getting killed by market as group members. Shorting oil long term? I'm not crazy, would never short long term. Short Russia? Scary, and options on RSX are way too illiquid. So I'm waiting for something obvious (to me). Hit it to quit it, as Toddo would say.

OK, enough about being depressed by market. On Monday I have to buy something, unless there is a huge rally. Keep reading...

Full disclosure: at the time of publication author had no positions in any stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, August 20, 2008

I Am Too Bearish.

I don't remember myself that bearish since December 2001. Everything looks too bad. That might be contrary indicator. Or not. In any case, that means I have to buy something. My short term buy list now is very small: Raytheon, UUP or DRR (long dollar) and Google. Google would be an increase of a big position, little bit scary. On the other hand, it's a company with the best chance of prospering in the nearest future. And current environment is not about long term outlook with exception of defense. Nothing changes the fact of Cold War II.

I don't understand today's action in oil. Maybe it's just the technical correction Toddo was talking about lately.

Cramer woke up about Russia. I'm 100% agree with him. Sell everything around and forget about it.

Full disclosure: at the time of publication author had a long position in Google and no positions in other stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Monday, August 18, 2008

Gold Is Not Going To $1600

Jim Cramer reiterated his Gold $1600 price target. I love Jim, but sometimes he's so wrong. Deflation is coming, money will be more expensive, why gold would grow? Especially why would it double? One more problem with Jim's approach: I mentioned several times in my comments to Seekingalpha.com articles that it's impossible to talk gold prices without deep analysis of the biggest supplier, South Africa, and the biggest consumer, India. India sharply reduced consumption of gold lately. It looks like $900 gold is too expensive. Well, if India doesn't want $900 gold, why would it buy for $1600? And if consumer of roughly 30% of gold in the world reduces consumption, how do you raise the price? No way. Vietnam might be a big unknown of course, they were buying up to 20% of gold several months ago, but now communist government there just banned gold imports (communist governments can do it, you know). But even if they didn't, Vietnam is too small to continue at that rate.

Other topics:

Russia. I'm still extremely bearish. It's sell or sell short. Way too many reasons, war is just one of them. Pity surrounding states, but they go down too, at least until current conflict is stabilized (it can also involve Ukraine). After stabilization surrounding countries might be OK, but Russia itself is still a sell.

Commodities go down. In the world recession they can't go up, no matter what. Never happened, never will. Some may jump, oil might go up for a while if OPEC cuts output, but commodities as an asset class are going down. By the way, if OPEC is cutting soon, it will kill itself. Everybody is drilling like crazy, there is a huge shortage of rigs in the world, and if OPEC output is cut, this boom will continue. 1980s situation will repeat, with prices going down despite OPEC cuts and then dropping like a rock, destroying a lot of marginal producers. I've heard a lot of talk that oil can't go below 70 (or 60, or 45) because there are a lot of projects which are not profitable below that price. Bullshit, markets don't care about producers and their costs. Supply and demand, and currently it's not even oil supply and demand, not in the short term. It's supply and demand of future contracts. Same logic valid for any commodity. Commodity producing nations have their currencies go down. Brazilian real might be and exception, but so far it's not.

Dollar will go up. It might make a pause, even go down a little after last week's jump (I'm waiting for correction, will go long). Plenty of reasons, crisis, both economic and political is the most important. People are going conservative in crisis, and most conservative investment in the world, surprise, are US treasuries. There is nothing which can compare.

Theme of the day is defense. Defense contractors will absolutely go up. Raytheon is a huge winner in the agreement between US and Poland on anti-missile missiles deployment. Now it's also new Patriot complexes, there is a lot of money for Raytheon there.

Message to all readers: I don't pretend to be a messiah, I don't have a crystal ball. If you think that I'm wrong in everything or in something, just go against me in the market. I report all my trades here (but not their sizes, sorry), it's easy. Let's see which side wins. And of course, I always glad to get comments, whether you agree with me or not.

Full disclosure: at the time of publication author had no positions in any stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Saturday, August 16, 2008

Cold War II, Continued.

How US can win cold war? The same way we won last one: force Russia to spend on arms more than it can squeeze from population. I don't say "can afford" because USSR really could not afford level of arms production if it were normal country. Nor current Russia can afford current military/intelligence spending (it's ironic, we call what KGB is doing "intelligence", but it's not intelligent in any sense). Anyway, the biggest armament gap in the last 30 years was in electronic warfare. Most "experts" would say "In aviation", but it's wrong. Soviet/Russian aircraft are at least as good as US ones, and flying qualities of SU-27 and it' successors (SU-30, SU-35) make it the very best aero acrobatic jet in the world. F-15, the king of air for the last 30 years, is an excellent flier. Not as good as SU-27 though. But F-15 is the best weapon system in the world. Maybe F-22 will overshadow it sometimes. But it's outrageously expensive and wasn't combat tested yet. The difference between F-15 and SU-27? Electronic systems, radar first of all. Also missiles and their guidance systems. And who is making this stuff? Mostly Raytheon (RTN). There is also even more advanced weaponry, called "Electronic Warfare", or EW. But most of it so secret, we don't even know who makes it. My bet is that Raytheon is involved here big time as well.

Another case for Raytheon: I think that soon Baltic countries (Estonia, Latvia, Lithuania) are going to think of buying US fighter planes. If only they can afford it. F-16 most probably. And there is Ratheon stuff worth millions in every plane, and Raytheon missiles are coming with them too. Decision to deploy anti-missile missiles in Poland also means money for Raytheon.

General Dynamics is another very good military production company with great history, but it's not that high-tech oriented. Sure, I won't call current generations of nuclear submarines or M1 tank low-tech, but it's not the area where qualitative weapons race can destroy your opponent.

So I'm choosing Raytheon. Yes, military expense is evil. But the necessary evil. Let's make money on it instead of hand wrangling. I'm waiting for RTN to get down a little bit, then it's a buy. Usual caveats apply, life changes and my views and picks change as well. My job is in programming, and we use term "agile development" for particular style of code production. Let's do agile investment.

Full disclosure: at the time of publication author had no positions in any stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Tuesday, August 12, 2008

Deflation Is Here

Toddo (AKA Todd Harrison from Minyanville.com) declared deflation about half a year ago. Some writers said about it well before that. I wrote about it couple of times. The picture was distorted by commodities bubble, which itself was based on idiotic premise of big inflation coming up. I'd like to know how can inflation happen in period of debt destruction and slowdown of economy, which reduces velocity of money. Now commodities bubble exploded. If Russia's aggression in Georgia can't raise the price of oil, what can?

What can we do in deflation. Not much. It all depends on Fed, mostly on Bernanke. If uncle Ben can find three or four more rabbits in his hat, he just might reinflate economy, and we'll be OK. At this point, it will be time to buy banks. This is the time to buy not the best, but the worst, beaten down financials, which are struggling for their survival. Some of them might fail even when printing press done it's job, but if you buy a basket of them, you can still be up great. I see at least two candidates here: Washington Mutual (WM) and E-Trade (ETFC). That's the first thought.

If Bernanke fails, all bets are off. Cash is the king. The only way to make money on market during real, multi-year deflation is to find fast growing companies. There aren't going to be many. And it's not easy to find them. Another way might be to go short. Commodities are good targets, financials aren't going to do good either. But short is always a trade, you have to be crazy to go short long-term. And you need to really know what are you doing, because when going short, losses are not limited. Stops should be hard, I mean stop cover orders should be on broker's books.

Full disclosure: at the time of publication author had no positions in any stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Monday, August 11, 2008

The New Cold War

We are in a Cold War II. US and allies already gave up Georgia. The Putin's regime in Russia is more like Stalin's one with every coming day. Propaganda on official Russian TV and press would make Goebbels blush.

What does it mean for investments?

First of all, if you still have anything invested in Russia, get it out this week. May be you can do it next week. After that, just write it down. You gave KGB guys a present. They will thank you. Maybe some of your friends or relatives will be killed by Russian made weapons (they supply major terror supporting countries: Iran and Syria). I'm still looking at the best way of shorting Russia.

The fact that oil didn't move today is telling. Oil is going down more. It's probably time to get into DUG or DTO once again.

BP has too much money in Russia and around. Sell first, ask questions later. If you own some company you know has a lot of exposure to Russia or surroundings, sell. I mean, sell, sell, sell.

Buy US defense companies. I think Raytheon and General Dynamics are both good. Thinking of buying one right now. Boeing is a little bit scary because of big exposure to airline orders. GE is still "don't buy". Let's wait when it starts spinning off at least something. Doesn't matter who is the next president, he will increase spending on military. If not, will be told to do so by Congress. US gave up on Georgia, but we just can't give up on NATO allies. US will need more weapons and allies will also need more. Raytheon is also major contractor for anti-missile systems, which might come handy soon.

Currency situation: dollar is the king. As usual in crisis time. Europe is to close to Russia, developing countries are too vulnerable to market gyrations, commodity producing countries don't get as much as 3 months ago. Of course, if you, by chance, still holding Russian rouble, try to find a way to sell. It's going down. Russians prefer to hold dollars in uncertain times. Or Euro, but I bet on a greenback. I think, in a couple of years, Russia will nationalize everything and confiscate hard currencies from population, but for now, Russians will buy dollars. Russia is boasting 600 billion of currency reserves, it'll be gone in couple of years. They will find out a way to waste that. Especially now, when both price of oil and oil production in Russia is going down.

Full disclosure: at the time of publication author had no positions in any stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Friday, August 8, 2008

DTO Out.

Sold DTO today. 15% in a week is good. I'm pretty sure that long term oil is still going down, but current events carry too much risk. Russia vs Georgia, strange attack on pipeline which is actually going through Georgia. And, yes, pigs get slaughtered. And yes, going into weekend with this position was scary.

Events in Russia confirm my worst suspicions. Russia is not a place for your money. It's not a place for anyone's money. KGB goons running the country will take your money away sooner or later. Most probably sooner. Actually, I'm thinking of shorting Russia some way. VIP might be a good choice and it has options traded. Or one of the ETFs or CEFs: TRF, RNE, CEE. No options, but their 3 months charts look real great: you can sled on that downslope.

Full disclosure: at the time of publication author had no positions in any stocks mentioned. Positions can change any time.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Wednesday, August 6, 2008

Bear Market. Or Not.

This discussion is annoying. And the main problem is that it doesn't mean anything. Who cares if we are in bear market or not? It usually clear afterwards, and you can't make money looking back. You can only make money on what WILL happen. The only thing about market I know for sure is that we are in a long term sideways market, which started in March of 2000. Before that we were in 18 years of bull market. Jim Cramer declared bottom. Doug Kass doesn't agree. In the last 6 months Doug predicted market better. So my Modus Operandi is "buy dips, sell rips and don't miss sure trades". I honestly don't know what part of my portfolio will win. Experience of 2000-2004 shows that half of it will, making profit in total. I just don't know what half. But I still keep oversized (for me) cash position.

What I think about currencies? That's complex. I sensed Euro rise in 2003, made money on European Fund (traded then under ticker EF, now extinct). I still have significant part of my investment in companies registered outside of US and in funds invested abroad. But My current gut feeling is that US dollar bottomed and now will go up against Euro. Reason: Euro was thought as a better currency than dollar, but it offers less investment opportunities. And European economy officially tanked and now is going down faster than US one. I also think that currencies of countries with significant commodity exports will see their currencies go down with commodities. That includes Australian dollar, Canadian dollar, South African Rand, Mexican peso, Russian rouble. Brazilian real might be in the same company, but there are several factors in Brazil which might work for real. Brazil Central Bank is very afraid of inflation and raises rates at the smallest threat. And Brazil economy is much less dependent on commodities exports than other above mentioned countries. Or at least it's a perception, which quite often trumps reality. I don't have enough information to talk about other currencies. Swiss frank for me is a some kind of shelter currency, and I don't know whether I'm right or wrong. I have no idea of what moves Singapore dollar (and most other Asian currencies). Japanese Yen is an exception. I think Bank of Japan lost all control of it and it's totally dependent on yen carry trade. That means that yen should go down compared to US dollar short term, but long term is not clear. We might yet see dollar carry trade in six months...

Of course, I might be completely wrong on all counts.

Disclaimer: This article is not intended as an investment advice. Every person should make her/his own investment decisions based on all available information and advice from her/his own financial advisor.

Monday, August 4, 2008

New Month, New Worries.

Market is going down. It's so scary. Interestingly enough, though, none of my triggers kicked off today. I didn't buy anything because market didn't go down enough. Encouraging and frustrating. We'll live through it as well.

Don't know if Todd Harrison right. He keeps his long term portfolio in cash, awaiting deflation. I'm not that sure, so I keep in cash less than 15% now. But that's scary. Everybody and his dog talks about inflation. I'd love to see some a year from now. Alternative is way too scary. I hope that Fed doesn't move. I hope that Bernanke has enough fortitude to persuade others on the committee that we are on the edge of the precipice (if not beyond the edge already). Hope is the only thing remaining. Todd is right: nobody makes money in deflation, even bears.

But life doesn't end in recession. Not even in depression. Let's enjoy it!