The financial world is centered in China this week of November 16 as the IMF (International Monetary Fund) leaders meet with Chinese and other global financial leaders.  The discussion is centered on how to improve the world's financial stability by perhaps rebalancing the global currencies against each other.  It is time the Chinese Remnibi is strengthed versus the dollar and the practice of indexing the Chinese currencies against the US dollar to protect Chinese labor advantage is discontinued.  This will also mean increased domestic consumption by the Asian economies as the Western economies save to reduce debt.  CNBC reported the following late Sunday night, Central Standard Time: 
 

IMF Managing Director Dominique Strauss-Kahn said the countries at the heart of global imbalances needed to take various measures to ease them.

In the case of China, that means an increasing emphasis on domestic demand, especially private consumption, Strauss-Kahn said in remarks prepared for a financial conference in Beijing.

"A stronger currency is part of the package of necessary reforms," he said. "Allowing the renminbi (yuan) and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorient investment."

His remarks come as U.S. President Barack Obama is in Shanghai on the first leg of a four-day visit that will grapple with economic imbalances and the future of the yuan.

Strauss-Kahn noted that Chinese authorities were already taking steps to boost household consumption, including health care reforms.

"But more can be done to secure a lasting, structural shift towards consumption, by expanding the scope of social policies, moving ahead on financial sector reform, and undertaking corporate governance reforms," he said.

Conversely, countries with large current account deficits need to increase savings, and for many of them, including the United States, fiscal consolidation must take priority for them, he said."
 

What does this shift imply for American based investors?  As the remnibi takes an increasingly important role in world trade and is gradually rebalanced to reflect the strength of the Chinese economy, it will cause investments in Asia to rise in value as the dollar declines against the Chinese currency with the resultant de-linking.  This trend will affect not only Chinese stocks, but also stocks trading in the markets of other major Chinese trading partners like Singapore, Taiwan, Indonesia, South Korea and of course, Hong Kong.  Those economies must rethink their own currency indexing strategies to maintain competitive trade parity and are very likely to emphasize indexing the remnibi as opposed to the US dollar.  Even Japan will probably see its currency strengthen versus the American currency as the Remnibi gains favor as an Asian trading currency.

Now is the time to acquire additional shares in Asian stocks, funds and ETFs.  Because of the recent runup in 2009, it will be better to average in a larger position over time rather than making a lump sum commitment.

I am making a bullish call and am selling UNG puts (Oct $18 - UNEVR) for $6.5 this Friday morning (September 18, 2009). While I don't like UNG longer term because I am concerned about the premium in the stock price (4.58% over NAV today, but was almost 20% at end of August) coming out with a ruling from the CFTC, still it is for now the only pure play on nat gas prices. And I see those prices recovering to at least $5 just on the idea of an economic recovery and even before the inventory runs down.

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Another Nat Gas play is PennWest (PWE), a major Canadian energy producer based in Calgary with more than 50% of its production in gas. I have owned PWE since 2002, in the form of Petrofund before that company's acquisition by PWE. Today I sold the December puts in PWE $15 for $1.60 (PWEXC). This gives me some upside from today's $14.40 price and downside protection to $13.40, which has been the recent base level for PWE. PWE was above $30 for two years up until July 2008 and has been over $40 in the past six years. A return to the $30 level will occur with a firming of Nat Gas prices above $8 / mmcf.

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I also am buying more UYG calls. I see UYG at $10 by the end of the year and it is now just above $6. There is a lot of room for improvement in the banking sector, even though it has come a long way already. The sector was down 85% (XLF went from $38 in 2007 to $6) in March. UYG was above $20 just prior to the Lehman collapse. It has retraced much less than half of that. I think another 30% to the upside is very likely before the "V" is completed, bringing us back to August 2008 levels. A 30% move in XLF will be a 60% move in UYG.

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A Mid-Year Checkup on some of Doug Kass' 2009 Predictions (made on December 31, 2008).  If he would review his own work from 8 months ago, he would not be so negative today:

2.  Housing stabilizes sooner than expected. President Obama, under the aegis of Larry Summers, initiates a massive and unprecedented Marshall Plan to turn the housing market around. His plan includes several unconventional measures: Among other items is a $25,000 tax credit on all home purchases as well as a large tax credit and other subsidies to the financial intermediaries that provide the mortgage loans and commitments. This, combined with a lowering in mortgage rates (and a boom in refinancing), the bankruptcy/financial restructuring of three public homebuilders (which serves to lessen new home supply) and a flip-flop in the benefits of ownership vs. the merits of renting trigger a second-quarter 2009 improvement in national housing activity, but the rebound is uneven. While the middle market rebounds, the high-end coastal housing markets remain moribund, impacted adversely by the Wall Street layoffs and the carnage in the hedge fund industry.

Comment:  This would have been a great idea to turn around housing; but it looks like housing prices are bottoming anyway, without much help from the Feds (I don't count the $8000 First Time Buyers program; way to narrow to have much effect);

3. The nation's commercial real estate markets experience only a shallow pricing downturn in the first half of 2009. President Obama's broad-ranging housing legislation incorporates tax credits and other unconventional remedies directed toward nonresidential lending and borrowing. Banks become more active in office lending (as they do in residential real estate lending), and the commercial mortgage-backed securities market never experiences anything like the weakness exhibited in the 2007 to 2008 market. Office REIT shares, similar to housing-related equities, rebound dramatically, with several doubling in the new year's first six months.

Comment:  Check out the REIT index and GGP; the Commercial RE market is recovering as Kass predicted with good benefits to banking and the economy;

4. The U.S. economy stabilizes sooner than expected. After a decidedly weak January-to-February period (and a negative first-quarter 2009 GDP reading, which is similar to fourth-quarter 2008's black hole), the massive and creative stimulus instituted by the newly elected President begins to work. Banks begin to lend more aggressively, and lower interest rates coupled with aggressive policy serve to contribute to an unexpected refinancing boom. By March, personal consumption expenditures begin to rebound slowly from an abysmal holiday and post-holiday season as energy prices remain subdued, and a shallow recovery occurs far sooner than many expect. Second-quarter corporate profits growth comfortably beats the downbeat and consensus forecasts as inflation remains tame, commodity prices are subdued, productivity rebounds and labor costs are well under control.

Comment:  Kass needs to drink his own Koolaid (nutritious), not that of the Ultra Bear crowd (poison)

5. The U.S. stock market rises by close to 20% in the year's first half. Housing-related stocks (title insurance, home remodeling, mortgage servicers and REITs) exhibit outsized and market-leading gains during the January-to-June interval. Heavily shorted retail and financial stocks also advance smartly. The year's first-half market rise of about 20% is surprisingly orderly throughout the six-month period, as volatility moves back down to pre-2008 levels, but rising domestic interest rates, still weak European economies and a halt to China's economic growth limit the stock market's progress in the back half of the year.

Comment:  Not optimistic ENOUGH; First half was right on, but 2nd half looks to be better than Kass' "surprise"

6. A second quarter "growth scare" bursts the bubble in the government bond market. The yield on the 10-year U.S. Treasury note moves steadily higher from 2.10% at year-end to over 3.50% by early fall, putting a ceiling on the first-half recovery in the U.S. stock market, which is range-bound for the remainder of the year, settling up by approximately 20% for the 12-month period ending Dec. 31, 2009. Foreign central banks, faced with worsening domestic economies, begin to shy away from U.S. Treasury auctions and continue to diversify their reserve assets. By year-end, the U.S. dollar represents less than 60% of worldwide reserve assets, down from 2008's year-end at 62% and down from 70% only five years ago. China's 2008 economic growth proves to be greatly exaggerated as unemployment surprisingly rises in early 2009 and the rate of growth in China's real GDP moves towards zero by the second quarter. Unlike more developed countries, the absence of a social safety net turns China's fiscal economic policy inward and aggressively so. Importantly, China not only is no longer a natural buyer of U.S. Treasuries but it is forced to dip into it's piggy bank of foreign reserves, adding significant upside pressure to U.S. note and bond yields.

Comment:  Right on with 10 year Treasury

7. Commodities markets remain subdued. Despite an improving domestic economy, a further erosion in the Western European and Chinese economies weighs on the world's commodities markets. Gold never reaches $1,000 an ounce and trades at $500 an ounce at some point during the year. (Gold-related shares are among 2009's worst stock market performers.) The price of crude oil briefly rallies early in the year after a step up in the violence in the Middle East but trades in a broad $25 to $65 range for all of 2009 as President Obama successfully introduces aggressive and meaningful legislation aimed at reducing our reliance on imported oil. The price of gasoline briefly breaches $1.00 a gallon sometime in the year. The U.S. dollar outperforms most of the world's currencies as the U.S. regains its place as an economic and political powerhouse.

Comment:  Wrong; stronger oil pricing than expected; no violence required;

11. State and municipal imbalances and deficits mushroom. The municipal bond market seizes up in the face of poor fiscal management, revenue shortfalls and rising budgets at state and local levels. Municipal bond yields spike higher. A new Municipal TARP totaling $2 trillion is introduced in the year's second half.

Comment:  Wrong; stronger economy than anticipated; (he cheats a little here with surprises in both directions, so that at least some of them will be right!)

12. The automakers and the UAW come to an agreement over wages. Under the pressure of late first-quarter bankruptcies, the UAW agrees to bring compensation in line with non-U.S. competitors and exchanges a reduction in retiree health care benefits for equity in the major automobile manufacturers.

Comment:  Right on

15. Focus shifts for several media darlings. Though continuing on CNBC, Jim "El Capitan" Cramer announces his own reality show that will air on NBC in the fall. At the time his reality show premieres, he also writes a new book, Stay Mad for Life: How to Prosper from a Buy/Hold Investment Strategy. Dr. Nouriel Roubini continues to talk depression, but the price of his speaking engagements are cut in half. He writes a new book, The New Depression: How Leverage's Long Tail Will Result In Bread Lines. "Kudlow & Company's" Larry Kudlow proclaims that it's time to harvest the "mustard seeds" of growth and, in an admission of the Democrat's growing economic successes, officially leaves the ranks of the Republican party and returns to his Democratic roots. Yale's Dr. Robert Shiller adopts a variant and positive view on housing and the economy, joining the bullish ranks and writes a new book, The New Financial Order: Economic Opportunity in the 21st Century.

Comment:  Funny comments on Nouriel Roubini; I bet he isn't even getting 1/4 of his price late last year

20. The Middle East's infrastructure build-out is abruptly halted owing to "market conditions." Lower oil prices, weakening European economies and a broad overexpansion wreck havoc with the Middle East's markets and economies.

Comment:  He was pretty close on this as the infrastructure projects were shut down in the first quarter, but are already coming back;  this is a good reason to own FLR;

Microsoft today at long last got a deal done with Yahoo! to partner on Search. This is the piece that has been most needed by Microsoft in its ongoing war with Google. Yahoo! has lost relevance on the Internet and needed a partner to take on the Google goliath (which as detailed earlier on Wealth-Ed is arrogant and deserves to be knocked down).  Microsoft will benefit and now becomes a more formidable opponent with almost 30% share in Search.

Bing, the new Internet Browser, was announced a few months ago and Windows OS7 is on the horizon for Microsoft, so don't write this computing pioneer off. The details of the partnership are not yet fully understood, but here is an early report from CNBC:

Microsoft  is not expected to pay an upfront fee to Yahoo , and the focus of the deal is on sharing revenue between the two companies.

Under the expected deal, Microsoft's new Bing search engine will power Yahoo's searches, according to Advertising Age, while Yahoo will handle the advertising sales, using Microsoft technology.

The deal should give Bing a giant boost in competing with Google's search engine. Google's search engine dominates the marketplace with 65 percent of U.S. Internet searches, according to figures provided by research firm ComScore. Last month, Microsoft had only 8.4 percent of the market and Yahoo 19.6 percent.

There is a chance a deal combining the powers of the second and third-ranked search engine companies would be blocked by antitrust regulators. Google and Yahoo dropped plans for an advertising partnership last year under opposition from the U.S. Department of Justice.

All of this should hurt Google and help Microsoft as will be seen in the stock value. I am a buyer of MSFT at this level and have recently doubled down by stake. $30 a share is possible by year end based on new growth prospects, existing market dominance in Office software suite and its tremendous cash hoard of $30B (which not so incidentally, is untouched by this deal, which at one time to purchase Yahoo! would have cost MSFT $47B).

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Here is a provocative take on an internet juggernaut: Google is nothing but a giant Ponzi scheme that is coming undone as I write.

This is not an accusation, but more a hypothesis.  What gives this hypothesis legs is a recent discovery that Google is aggressively cracking down on so-called “violators” of the terms and conditions of its "Adsense" program.  My own website recently fell victim to this ruthless and mindless activity.  We have been gradually building our readership and hence our traffic through the combined effort of good, original content of the financial kind, and a parallel effort to monetize our traffic so we can continue offering this commentary at no cost to the reader.  

As measured by various metrics tools for the internet, we were succeeding at Wealth-Ed.com and were just beginning to gain some traction with readers.  Our writings are picked up now by SeekingAlpha.com  and our insights and observations are available to many.  Our well-timed pieces on General Growth Properties and more recently on the prospects for natural gas ETF, UNG, caused our views to spike.  It was not through any illicit effort to create fictional traffic that our page views increased, but through hard and time consuming work combined with good luck and timing.  Naturally, as our traffic increased, so did the balance in our Google Adsense account. 

Then, without warning two weeks ago, our account was not suspended, but was permanently canceled by Google, apparently for all time.  And our Adsense revenues were absconded by Google.  Not just this website, but any other website we should ever develop is also barred from any relationship with the Adsense program.  Again, there was no warning, no real chance to appeal (only a token automated email appeal form that returned a computer generated rejection).  I was floored.  How can a company that claims it wants to “do no Evil” justify this malevolence?  Google is no longer the white knight, but has become Darth Vader.

We at “Wealth-Ed.com” could not believe that we were somehow singled out from the millions of similar websites that have been created and that utilize Adsense to help pay for the effort in some small way.  We had done nothing wrong that we knew of that violated Google’s rules.  The relationship between small website or blog developer and Google is supposed to be symbiotic.  Small websites like ours put Google on the map. 

Google attracts advertisers because it has such great reach and exposure through millions of small websites.  It needs the billions of webpages to provide the internet real estate and associated “eyeballs” to sell to its advertisers.  Google depends on small businesses and entrepreneurs more than any other internet or computer based software company.  Microsoft , SAP and Oracle all rely on large business customers for the bulk of their revenues.  But Google is almost entirely dependent on its ad-based business model that is dispensed through a myriad of startup websites.  “Wealth-Ed.com” and all other similar small, entrepreneurial webpages on the “net” allow Google to exist.

So, how does Google figure to go forward by biting the hand that feeds it?  This is a question that must be asked by any investor.  My only answer is that Google is in big financial trouble that is not yet revealed by their published financial statements.  This trouble comes from the same place that has exposed many other Ponzi schemes recently, most notably, Bernie Madoff’s.  As the economy falters and advertising revenues dry up, Google is losing its primary source of income.  It is no longer able to take money from one source, advertisers, and give it to another, Adsense ad posters, to keep the pyramid upright.

A good Ponzi requires a very convincing story which generates substantial public interest.  The Ponzi sponsor then monetizes this public interest by collecting funds with a promise of great returns.  The returns are generated by money brought in from other participants, not from any specific benefit created by the Ponzi artist.  The Google Ponzi speculation is a little more subtle, which also makes it a little harder to uncover.  Its scheme is supposedly made legitimate by a multi-paged, “fine print” contract that gives it the ability to shut down any website for just about any reason imaginable, or no reason at all except at the whim of Google.  But is this contract really legal and enforceable?

As we started researching the crackdown on small businesses, we uncovered that there are thousands of others in the same situation.  Many of our fellow small website developers have written about their own experience and loss of Adsense revenues.  Many describe that it happened to them just as it happened to us:  with no warning, no real chance of appeal, no one at Google to talk to, and unilateral confiscation of all their earned Adsense revenue.  One such participant, Aaron Greenspan's "Think Computer", was officed in the same county in California as Google, Santa Clara. Greenspan took Google to small claims court…and won!  (and then lost on appeal to a bevy of Google lawyers). I am sure Google knows that most web owners are not in a position to sue and wanted to drive the fruitlessness of litigation home by the appeal.  Once again, Google demonstrated its utter contempt of the same customers and business partners who have made it what it is.

As Google continues to cut off its advertising partners reducing the number of ad page views what will the advertisers think?  Google’s viewership will be greatly reduced and so will their ad traffic.  The advertisers will respond by cutting back even further on their advertising.  Google revenue will subsequently fall as will its profits, which may turn to losses given the enormous overhead created by the recent reckless moves by the management of Google. 

The Google stock has a lofty price and multiple to earnings.  It is valued as though it will continue to grow at 20% a year well into the future. But, if ad revenues and profits drop as we think they might, Google stock should be sold or shorted.  Google's latest attempt to remake itself into a full-featured business software company will cost it a king's ransom. Taking on Microsoft, Oracle and SAP on their own turf could be the demise of Google. Hubris has its costs. Shorting Google stock is how we plan to recoup our losses of Google Adsense revenue.