As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
Global Market Comments
April 16, 2014
Fiat Lux
Featured Trade:
(CHICAGO FRIDAY, MAY 23 GLOBAL STRAGEGY LUNCHEON),
(BUY SOLAR STOCKS ON THE DIP),
(FSLR), (SPWR), (SCTY), (TAN), (USO), (UNG), (XLU),
(THE ONE SAFE PLACE IN REAL ESTATE)
First Solar, Inc. (FSLR)
SunPower Corporation (SPWR)
SolarCity Corporation (SCTY)
Guggenheim Solar (TAN)
United States Oil (USO)
United States Natural Gas (UNG)
Utilities Select Sector SPDR (XLU)
Now that the stock market appears destined to soon enter correction territory, I have started searching for industries and companies that I want to buy at the bottom. The solar industry is at the top of that list.
Solar has a been a long time in coming. For decades, it was a niche energy source with very narrow following among scientists, the military, and Greenpeace activists. The problem was that it was just too expensive. It made sense only to those with unlimited budgets (the army), pursuing a political agenda (environmentalists), or when there was no other alternative power source (outer space).
Ironically, what really got the solar bandwagon moving was oil, which saw prices soar to $150 a barrel in 2008. That dramatically raised the breakeven cost of solar. Projects that only existed on paper suddenly made economic sense.
Then, Barack Obama was elected president. One of his first moves was to make available over $100 billion in subsidies for alternative energy projects of every description. All of a sudden, it was off to the races for solar.
This led to the first solar stock market boom in 2009. Some highflyers, like First Solar (FSLR) rose tenfold (it was a favorite ?BUY? recommendation of mine at the time). They were aided by states like sun-drenched California that mandated 20% of power consumption comes from alternative sources, to rise to 30% in the 2020?s.
This created an enormous solar and wind infrastructure throughout the west to meet the state?s voracious needs. Some 29 other states have passed similar laws with varying targets.
I inspected the centerpiece of the state?s solar strategy, flying over the gigantic Ivanpah facility in a wheezing, rented Cessna 172 in the barren, baking, but beautiful Mojave Desert. I brought plenty of extra water bottles and a compass in case I crash-landed and had to walk home.
It all looks like a film set from a science fiction movie, with 347,000 concave mirrors placed in enormous circles focusing light on hot water boilers atop three 460-foot towers. The plant opened in February, 2014 and is generating 377 megawatts of electricity, enough to power 140,000 homes in the Los Angeles area.
Planned a decade ago, the technology is now so primitive that it is unlikely to be ever used again. Far more advanced than film, solar is now taking over the world.
Then China came in and spoiled the party. Overproduction by poorly managed and weakly financed Chinese solar firms using inferior technologies quickly glutted the global market, and solar prices crashed by 80% or more. Many companies did not survive, such as the San Francisco Bay Area?s Solyndra, which defaulted on some $536 million in federal government loans (the feds got $143 million back).
This triggered a Darwinian clearing out of the industry, where only the strongest, the most innovative, and the most desperate survived. Technologies and efficiencies improved. The administration extended a helping hand by slapping hefty anti dumping tariffs on Chinese imports. The industry is lobbying for further restrictions. This all set the stage for a solar renaissance.
For the first time in history, solar is now cost competitive with conventional sources of power on a standalone, unsubsidized basis. As a result, the industry is exploding. In 2013, solar accounted for 29% of new power generation capacity in the US, after quasi-green natural gas, at 46%.
The advent of cheap solar roof panels and ?smart? electric meters in 43 states has enabled individuals to get in on the act. Such devices are now a standard feature on most new high-end homes. They genuinely do save money, especially when considering that utilities will bill you up to 50 cents per kilowatt hour for prime time consumption, compared to their average rate of 11 cents. There have been over 200,000 such installations in the past two years, half in the Golden State.
The Department of Energy wants to see solar grow from 1% of total generation today to 27% by 2050. This is creating the basis for a gigantic industry in the future. Hence, my interest as a long-term equity investor.
All of this will require a complete rethinking of the electric utility industry (XLU), which still uses a volume based business model that has remained unchanged for 120 years. The more they sold the more money they made.
The utility industry has mixed feeling about the new solar revolution. They are going to have to evolve from distributors of power for a single, large, capital-intensive source to an intermediary operation that buys and sells power between millions of users and producers. This is easier said than done, as this is the most conservative of American industries. People run to utilities in a bear market for a reason.
Only the other hand, moving towards solar and other alternatives gets them out of the carbon burning business, either through using coal or oil as fuel. There is not a utility in the country that isn?t swamped by lawsuits from well represented consumers claiming that the byproducts from burning these traditional fuels gave them asthma, lung cancer, or worse.
In the end, it won?t be a desire to save the environment, or the expediency to appear politically correct that will convert utilities to solar. It will be hard-nosed business sense.
The buy on the dip list is fairly short. The front-runner in this industry is the aforementioned First Solar (FSLR), which has been an industry leader for two decades. Not only is their US business booming, they have a gigantic project in western China that promises to spin off profits for years to come.
SunPower Corp (SPWR) has the attraction of a $1 billion order backlog. Or you can go generic and buy the Guggenheim Solar ETF (TAN), which tacked on and impressive 270% last year.
I am less enamored with Solar City (SCTY). It is in the business of installing roof panels on homes. It takes advantage of generous government subsidies and the current ultra low cost of financing to keep prices low.
As much as I applaud the long-term vision of founder, Elon Musk, his association with the company has given it a cult like status. That is good for the share prices, but bad for valuations, which are through the roof. A greater dependence on subsidies could hurt them in the future.
Some formidable challenges lie ahead. In 2017 the government?s investment tax credit for solar drops from 30% to 10%. Other state subsidies are expiring as well. If this coincides with a recession that triggers a collapse in the price of oil, we could be in for another great clearing out.
Hopefully, by then, steadily advancing technology will further cut costs by half, making it possible for more firms to survive.
Until then, let the sun shine in!
Global Market Comments
April 15, 2014
Fiat Lux
Featured Trade:
(FRIDAY APRIL 25 SAN FRANCISCO STRATEGY LUNCHEON),
(HOW LONG WILL THE RUN IN MASTER LIMITED PARTNERSHIPS CONTINUE?),
(LINE), (BWP), (USO), (UNG),
(PILING ON THE SHORTS AGAIN), (SPY)
Linn Energy, LLC (LINE)
Boardwalk Pipeline Partners, LP (BWP)
United States Oil (USO)
United States Natural Gas (UNG)
SPDR S&P 500 (SPY)
Boy, that was one hell of a recommendation I made back in 2012, getting readers to buy Master Limited Partnerships (MLP?s).
The share price for my favorite, Linn Energy (LINN), is unchanged from when I urged readers to pick it up. However, they have taken home nearly 25% in dividend payoffs during the same period. Not a bad return in this zero interest rate world.
The origins of the special tax breaks that led to the creation of these most complex of securities are lost in the sands of time. As I recall, they date back to a period when the US was chronically short of oil, and industry desperately needed the big ticket infrastructure to produce and deliver it.
They worked like a charm. Never underestimate the desire of the American investor to avoid paying taxes.
An MLP is a ?pass through? instrument that allows profits to move directly to end investors, thus bypassing corporate double taxation. That set up generates enormous yields that are particularly attractive to individual investors. Some 114 MLP?s now exist, and most can be bought on public exchanges as easily as stocks or exchange traded funds (ETF?s).
It is an old Wall Street nostrum to feed the geese while they are quacking, and investment bankers have done so in spades (see chart below). The number of initial public offering for MLP?s has soared in recent years, from just two in 1985 to a prolific 21 last year.
New issue volumes have become so prodigious that they are disrupting the dynamics of the secondary market. Investors are now unloading their existing MLP?s to make room for the new ones, setting back prices on existing issues. The same disease is also afflicting biotech stocks, where an overly ambitious new issue calendar triggered dramatic falls in the sector.
Will Wall Street kill the gold goose yet again?
MLP?s have benefited enormously from the fracking and horizontal drilling boom now unfolding across the United States. As a result, US energy demand is at a 30 year high, and so is the demand for energy infrastructure.
As I often tell my guests at my Global Strategy Luncheons, the smart play in natural gas, where supplies are burgeoning, is a volume play, and not a price play. MLP?s achieve exactly that.
To qualify for MLP status, a partnership must generate at least 90 percent of its income from what the Internal Revenue Service deems ?qualifying? sources. For many MLPs, these include all manner of activities related to the production, processing or transportation of oil, natural gas, and coal.
Energy MLPs are defined as owning energy infrastructure in the U.S., including pipelines, natural gas, gasoline, oil, storage, terminals, and processing plants. These are all special tax subsidies put into place when oil companies suffered from extremely low oil prices. Once on the books, they lived on forever.
In practice, MLPs pay their investors through quarterly distributions. Typically, the higher the quarterly distributions paid to LP unit holders, the higher the management fee paid to the general partner. The idea is that the GP has an incentive to try to boost distributions through pursuing income-accretive acquisitions and organic growth projects.
Because MLPs are partnerships, they avoid the corporate income tax, on both a state and federal basis. Instead of getting a form 1099-DIV and the end of the year, you receive a form K-1, which your accountant should know how to handle.
Additionally, the limited partner (investor) may also record a pro-rated share of the MLP?s depreciation on his or her own tax forms to reduce liability. This is the primary benefit of MLPs and gives MLPs relatively cheap funding costs.
The tax implications of MLPs for individual investors are complex. The distributions are taxed at the marginal rate of the partner, unlike dividends from qualified stock corporations. On the other hand, there is no advantage to claiming the pro-rated share of the MLP?s depreciation (see above) when held in a tax-deferred account, like an IRA or 401k. To encourage tax-deferred investors, many MLP?s set up corporation holding companies of LP claims which can issue common equity.
The popularity of MLP?s has caused a huge inflow of capital, which has caused yields to crash, from 25% during the dark days of 2009, to an average of 6.7% today. Still, yield starved investors threw money at MLP?s with both hands last year, an eye popping $11.9 billion, according to figures from the tracking firm, Morningstar.
As yields have plunged, risks have risen. In February, Houston based Boardwalk Pipeline Partners (BWP), out of the blue, dramatically cut its payout to investors. A panic ensued, chopping 62% off the value of the shares in the following weeks. No doubt, increased competition for pipelines from railroads was a factor.
To protect yourself you must go to the website and read the prospectus before sending a check to an MLP. Unfortunately, these are so complex that even degrees in securities and tax law might not be enough to help you. What do you do instead? Pray, as seems to be the strategy of most individual investors.
At the end of the day, oil has a big influence on MLP prices. So the antics of Vladimir Putin in the Ukraine are probably a welcome development for MLP holders, as it has helped boost the price of Texas tea from $91 to $105 since the beginning of 2014.
However, get a real recession, and one will be overdue in a couple of years, and the price of oil will collapse once again, causing MLP?s to revisit those subterranean 2009 lows. Mothballed drilling rigs and rusting pipelines don?t produce lease payments or pay dividends. These are the risks you are being paid to take with a double-digit yield.
The lesson here is ?be nimble, or die".
You Want This One
Not This One
How Long Will the MLP Run Continue?
This is a bet that the S&P 500 does not rocket to a new all time high by the May 16, 2014 expiration.
The news flow this morning is giving us an opportunity to re enter the short positions that I covered on Friday. Half of the opening 80-point pop in the Dow came from Citibank (C), which surprised to the upside with its Q1 earnings report.
We also got March retail sales +1.1%, better than expected.
We are down only 4.1% in this pullback, not even matching the 6% January dump, and we have clearly not suffered enough for our IPO sins. An eroding quantitative easing from Janet Yellen?s Federal Reserve is clearly taking a toll.
This rally could continue for a day or two more. But it has been so difficult to get short positions off in this correction that I don?t mind erring on the side of being a little early. The reversals ambush you at openings you can?t trade, and take no prisoners. We will probably get our reward on Friday in the next weekend flight to safety.
It is only because implied volatilities are so elevated that I can get this position so far out of the money off so richly, with only 23 trading days left until the May 16 expiration. The spring swoon has sent put prices through the roof, as panicking institutions rush to buy downside insurance a little too late.
Charts and technical analysis are far more useful and important in falling markets than rising one, as the downside crowd is far more dependent on this dismal science.
The fact that these charts are breaking down across markets on increasing volume is terrible news.
A sector rotation out of aggressive technology (XLK), financial (XLF), and discretionary stocks (XLY) into defensive consumer staples (XLP) and utilities (XLU) is a further complicating factor that is making matters worse.
During economic slowdowns, consumers postpone purchases of new iPhones and cars. They don?t for toilet paper and electricity.
Ten year Treasury yields approaching a five-month low is another nail in the coffin. Banks are falling because of the rocketing bond market, which is flattening the yield curve to the topography of Kansas, hurting profits.
All that is needed is a match to ignite a broader, more vicious selloff and Russian Prime Minister Vladimir Putin has a whole box of them!
1,760 in the S&P 500, here we come, the 200-day moving average!
Keep in mind that fast markets, such as the one we have, I can get you only ballpark prices at best. It?s every man for himself. Praise the Lord, and pass the ammunition.
?Real Estate is the new gold. It is the gold of 2014,? said Jeffrey Gundlach of Doubleline Capital.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen.
Further Update to: Trade Alert -(SPY)
Buy the S&P 500 (SPY) May, 2014 $188-$191 in-the-money bear put spread at $2.43 or best
Opening Trade
4-14-2014
expiration date: May 16, 2014
Portfolio weighting: 30%
Number of Contracts: 125
This is a bet that the S&P 500 does not rocket to a new all time high by the May 16, 2014 expiration.
The news flow this morning is giving us an opportunity to re enter the short positions that I covered on Friday. Half of the opening 80-point pop in the Dow came from Citibank (C), which surprised to the upside with its Q1 earnings report.
We also got March retail sales +1.1%, better than expected.
We are down only 4.1% in this pullback, not even matching the 6% January dump, and we have clearly not suffered enough for our IPO sins. An eroding quantitative easing from Janet Yellen?s Federal Reserve is clearly taking a toll.
This rally could continue for a day or two more. But it has been so difficult to get short positions off in this correction that I don?t mind erring on the side of being a little early. The reversals ambush you at openings you can?t trade, and take no prisoners. We will probably get our reward on Friday in the next weekend flight to safety.
It is only because implied volatilities are so elevated that I can get this position so far out of the money off so richly, with only 23 trading days left until the May 16 expiration. The spring swoon has sent put prices through the roof, as panicking institutions rush to buy downside insurance a little too late.
Charts and technical analysis are far more useful and important in falling markets than rising one, as the downside crowd is far more dependent on this dismal science.
The fact that these charts are breaking down across markets on increasing volume is terrible news.
A sector rotation out of aggressive technology (XLK), financial (XLF), and discretionary stocks (XLY) into defensive consumer staples (XLP) and utilities (XLU) is a further complicating factor that is making matters worse.
Ten year Treasury yields approaching a five-month low is another nail in the coffin.
All that is needed is a match to ignite a broader, more vicious selloff and Russian Prime Minister Vladimir Putin has a whole box of them!
1,760 in the S&P 500, here we come, the 200-day moving average!
Keep in mind that fast markets, such as the one we have, I can get you only ballpark prices at best. It?s every man for himself. Praise the Lord, and pass the ammunition.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don?t execute the legs individually or you will end up losing much of your profit.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months farther out.
Here are the specific trades you need to execute this position:
Buy 125 May, 2014 (SPY) $191 puts at?????$8.58
Sell short 125 May, 2014 (SPY) $188 puts at..??.$6.15
Net Cost:????????????????.....$2.43
Profit at expiration: $3.00 - $2.43 = $0.57
(125 X 100 X $0.57) = $7,125 or 7.13% profit for the notional $100,000 portfolio.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
Global Market Comments
April 14, 2014
Fiat Lux
Featured Trade:
(JULY 7 ROME, ITALY STRATEGY LUNCHEON),
(CASHING IN ON MY SHORTS),
(VXX), (VIX), (SPY), (TLT), (FXY), (QQQ),
(TESTIMONIAL),
(WHERE IS THE MARKET BOTTOM?),
(SPY), (QQQ)
iPath S&P 500 VIX ST Futures ETN (VXX)
VOLATILITY S&P 500 (^VIX)
SPDR S&P 500 (SPY)
iShares 20+ Year Treasury Bond (TLT)
CurrencyShares Japanese Yen Trust (FXY)
PowerShares QQQ (QQQ)