While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
February 11, 2016
Fiat Lux
Featured Trade:
(THE BATTERY IN YOUR FUTURE), or
(THE GREENING OF EXXON),
(USO), (SNE), (TSLA), (XOM),
(SCAM OF THE MONTH)
United States Oil (USO)
Sony Corporation (SNE)
Tesla Motors, Inc. (TSLA)
Exxon Mobil Corporation (XOM)
Yesterday, I provided to you the evidence that oil may never again reach a triple digit price click here for ?Oil: It?s Different This Time? .
Today I am going to tell you what will replace it.
Sony Corp. (SNE) invented the lithium ion battery in 1991 to power its high end consumer electronics products. It is now looking like that was a discovery on par with Bell Labs? invention of the transistor in 1947 and Intel?s creation of the microprocessor in 1971, although no one knew it at the time.
Until then, battery technology was essentially unchanged since the first one was invented by Alessandro Volta in 1800 and Gaston Plante upgraded it to the lead acid version in 1859. That is the same battery that today starts your conventional gasoline powered car every morning.
The Sony breakthrough proved the springboard for a revolution in battery power. It has fed into cheaper and ever more powerful iPhones, electric cars, and even large scale utilities.
In 1995, the equivalent of today?s iPhone 6 battery cost $20. Today it can be had for $1.40 if you buy in bulk, which Apple does by the shipload. That?s a cost reduction of a mind blowing 93%.
Electric car batteries have seen prices plunge from $1,000/kilowatt in 2009 to only $200 today.
Tesla (TSLA) expects that price to drop to $150 when its $6 billion new ?gigafactory? comes online in Sparks, Nevada next year. The facility will produce cookie cutter off the shelf batteries made under contract by Japan?s Panasonic (Matsushita).
That will pave the way for the Tesla 3 in 2018, a low end $35,000 vehicle with a 200-mile range that will take over the global car market.
If you took existing battery technologies and applied them as widely as possible, it would have the effect of reducing American oil consumption from 22 to 18 million barrels a day. That?s what the oil market seems to be telling us, with prices at a 13-year low at $26 a barrel.
Improve battery capabilities just a little bit more and that oil consumption drops by half very quickly.
Both national and state governments are doing everything they can to make that happen.
The US is taking the lead here and now has a commanding technology lead over the rest of the world (I can?t believe the Germans fell so far behind on this one).
In 2009, President Obama chipped in $2.4 billion for battery and electric car development as part of his $787 billion stimulus package. He got a lot of bang for the buck.
So far, I have been the beneficiary of not one, but two $7,500 federal tax credits for my purchase of my Nissan Leaf and Tesla S-1. The Feds also chipped in another $13,000 for my new solar roof panels.
A reader told me yesterday that Sweden will ban the sales of gasoline and diesel powered vehicles from 2030. Japan wants electric and hybrids to account for half of its new car sales by 2020.
California has been the most ambitious, investing to obtain 50% of its power from alternative sources by 2030. Some 450,000 homes here already have solar panels, and these are not even counted in the equation.
Solar and wind are already taking over in much of Europe on a nonsubsidized, cost competitive basis.
At the current rate of improvement, electric cars will be cheaper than gasoline powered ones in only a few years. By 2030, a ten-pound battery in your glove compartment (glove box to you in London) will be able to take your car 300 miles. The cost of energy will essentially be free.
And guess what?
In a year, I will be able to use my solar panels to charge my 85-kilowatt Tesla battery during the day and then use it to power my home at night. That is enough juice to keep the lights on for three nights. Then, I will be totally off the grid, with utility bills of zero.
Tesla has denied it has such a program, but there is nothing to stop a third party from coming in and providing the service. All it would require is an app and 30 minutes worth of wiring.
To say this will change the geopolitical landscape would be a huge understatement. The one liner here is that oil consumers will benefit enormously, while the producers will get destroyed. I?m talking Armageddon, mass starvation levels of destruction.
In the Middle East, some 1 billion people with the world?s highest birth rates will lose their entire source of income.
Russia, which sees half its revenues come from oil, will cease to be a factor on the international stage, and may even undergo a third revolution. Take oil away, and all they have left is hacking.
Norwegians will have to start paying for their social services instead of getting them for free.
Venezuela, which couldn?t make it at $100 a barrel, will implode, destabilizing Latin America.
It going to be an interesting decade for we geopolitical commentators.
Further improvements in battery power per dollar will change the US economy beyond all recognition. This will be a big win for the 90% of the economy that consumes energy and an existential crisis for the 10% that produce it.
Public utilities will have to change their business models from power producers to distributors.
No less an authority than former Energy Secretary Dr. Steven Chu (another Berkeley grad) has warned the industry that they must change or get ?Fedexed?, much the same way that overnight delivery replaced the US Post Office.
US oil majors will suffer some very tough times, but won?t disappear. My bet has always been that they will buy the entire alternatives industry the second it becomes profitable.
After all, they are not in the oil business, but in the profit making business, and they certainly have the cash and the management and engineering expertise to pull this off. Exxon (XOM) will turn green out of necessity.
As is always the case, there are very few publicly listed stock plays in a brand new emerging technology like the battery sector. Many of the early stage entrants have already filed for bankruptcy and had their assets taken over for pennies.
It?s a business you want to be in because Citibank expects that giant grid scale batteries alone will be a $400 billion a year market by 2030.
When I visit friends at the oil majors in Houston, I chide them to be kind to that Birkenstock wearing long haired visitor.
He may be their future boss.
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
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
February 10, 2016
Fiat Lux
Featured Trade:
(OIL: IS IT DIFFERENT THIS TIME?)
(USO), (LINE), (CHK), (FCX), (KOL),
(THE BIPOLAR ECONOMY),
(AAPL), (INTC), (ORCL), (CAT), (IBM),
(TESTIMONIAL)
United States Oil (USO)
Linn Energy, LLC (LINE)
Chesapeake Energy Corporation (CHK)
Freeport-McMoRan Inc. (FCX)
Market Vectors Coal ETF (KOL)
Apple Inc. (AAPL)
Intel Corporation (INTC)
Oracle Corporation (ORCL)
Caterpillar Inc. (CAT)
A reader emailed me yesterday to tell me that while visiting his daughter at a college in North Carolina, he refilled his rental car with gas for $1.39 a gallon.
So I got the idea that something really big is going on here that no one is yet seeing. I processed the possibilities in my snowshoe up to the 10,000-foot level above Lake Tahoe last night.
By the way, the view of the snow covered High Sierras under the moonlight was incredible.
For decades, I have dismissed the hopes of my environmentalist friends that alternatives will soon replace oil (USO) as our principal source of energy.
I have long agreed with the views of my fracking buddies in the Texas Barnett Shale that it will be decades before wind, solar, and biodiesel make any appreciable dent in our energy makeup.
It took 150 years to build our energy infrastructure, and you don?t replace that overnight. The current weakness in oil prices is a simple repeat of a predictable cycle that has continued for a century and a half. In a couple years, Texas tea will be posting triple digits once again.
I always thought that oil had one more super spike left in it. After that, it will fade into history, reduced to limited applications, like making plastics and asphalt, probably sometime in the 2030?s.
The price for a barrel of oil should then vaporize to $5.
But given the price action for energy and all other commodities I?m starting to wonder if this time I?m wrong.
I have watched with utter amazement while Freeport McMoRan (FCX) plunged from $38 to $3. I was gob smacked to see Linn Energy (LINE), admittedly a leveraged play, crater from $32 to 30 cents.
And I was totally befuddled to see gas major Chesapeake Energy (CHK) implode from $65 to $1.
Has the world gone mad?
When the data don?t match your view, it?s time to change your view.
Maybe there won?t be another spike in oil prices. Could its disappearance from the modern industrialized economy have already begun?
That would certainly explain a lot of the recent eye-popping price action in the markets. In five short years oil has dropped 82%. It did this while global GDP grew by 20% and auto sales, and therefore gasoline demand, has been booming.
Of course, you could just call all of this a big giant reversion to the mean.
Over the past 150 years, the average, inflation adjusted price of oil has been $35 a barrel. The price for gasoline has been $2.25 a gallon, exactly where it was in 1932, and where it now is in much of the country.
I know all of these numbers because I once did a study to see if oil prices are rigged (conclusion: they are). How can the price of a commodity stay the same for 150 years?
Wait, the naysayers announce. Things don?t happen that fast.
But they do, my friends, they do, especially in energy.
Until 1849, my ancestors were the largest producers of whale oil on Nantucket Island. (Our family name,? Coffin, was mentioned in ?Moby Dick? seven times, and was a focus of the just released film, ?In the Heart of the Sea.?)
Then this stuff called petroleum came along, wrested from the ground with new technology by men like Drake and Rockefeller. The whale oil market crashed, dropping in price by 90%, and virtually disappeared in two years.
My relatives were wiped out and moved to San Francisco, which they already knew from their whaling days, and where gold had just been found.
A half-century later, this thing called an ?automobile? came along meant to replace the ubiquitous horse and buggy. People laughed. It was loud, noisy, smelly, inefficient, and expensive. Only the rich could afford them.
You had to go to a drug store to buy high priced fuel in one-gallon tins. And it scared the horses. England passed a national automobile speed limit of 5 miles per hour, as cars were considered dangerous.
Then huge oil discoveries were made in Texas and California (watch ?There Will Be Blood?), the Hughes drill bit came along, and gasoline prices fell sharply. Suddenly cars were everywhere. The horse population declined from 100 million to only 1 million today.
All of this is a long-winded, history packed way of saving ?This time it may be different?.
I have on my desktop a Trade Alert already written up to buy the (USO) May, 2016 $9 calls. Today, they traded at $1.00. I?m just waiting for another melt down in oil to take a low risk punt on the long side.
If we rocket back up to $100, as many are predicting, these calls will be worth a fortune. But you know what, oil may only peak out at $44 this time. The trade will still make money, but not as much as in past cycles.
So, you better think hard about loading up on too many oil stocks at these distressed levels. Look what has already happened to the coal industry (KOL), which has essentially gone bankrupt.
You could well be buying into the buggy whip industry circa 1900.
There?s Got to Be a Better Way to Make a Living
Corporate earnings are up big! Great!
Buy!
No wait!
The economy is going down the toilet!
Sell! Buy! Sell! Buy! Sell!
Help!
Anyone would be forgiven for thinking that the stock market has become bipolar.
According to the Commerce Department?s Bureau of Economic Analysis, the answer is that corporate profits accounts for only a small part of the economy.
Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly, or are too small to have much of an impact.
Wages and salaries are in a three decade long decline. Interest and investment income is falling, because of the ultra low level of interest rates. Farm incomes are up, but are a tiny proportion of the total. Income from non-farm unincorporated business, mostly small business, is unimpressive.
It gets more complicated than that.
A disproportionate share of corporate profits is being earned overseas. So multinationals with a big foreign presence, like Apple (AAPL), Intel (INTC), Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes.
They really get to have their cake, and eat it too. Many of their business activities are contributing to foreign GDP?s, like China?s, more than they are here. Those with large domestic businesses, like retailers, earn less, but pay more in tax, as they lack the offshore entities in which to park them.
The message here is to not put all your faith in the headlines, but to look at the numbers behind the numbers. Those who bought in anticipation of good corporate profits last month, got those earnings, and then got slaughtered in the marketplace.
Caveat emptor. Buyer beware.
Has the Market Become Bipolar?
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
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more