I wanted to get the low down on clean coal (KOL) to see how clean it really is, so I visited some friends at Lawrence Livermore National Laboratory in California.
The modern-day descendent of the Atomic Energy Commission, where I had a student job in the early seventies, the leading researcher on laser-induced nuclear fission, and the administrator of our atomic weapons stockpile, I figured they’d know.
Dirty coal currently supplies us with 35% of our electricity, and total electricity demand is expected to go up 30% by 2030. The industry is spewing out 32 billion tons of carbon dioxide (CO2) a year and the great majority of independent scientists out there believe that the global warming it is causing will lead us to an environmental disaster within decades.
Carbon Capture and Storage technology (CCS) locks up these emissions deep underground forever. The problem is that there is only one of these plants in operation in North Dakota, a legacy of the Carter administration, and new ones would cost $4 billion each.
The low estimate to replace the 250 existing coal plants in the US is $1 trillion, and this will produce electricity that costs 50% more than we now pay. In a gridlocked constrained congress, this is a big ticket that is highly unlikely to get picked up.
While we can build a wall to keep out illegal immigrants from Latin America, it won’t keep out CO2. This is a big problem as China is currently completing one new coal-fired plant a week.
In fact, the Middle Kingdom is rushing to perfect cheaper CCS technologies, not only for their own use but also to sell to us. The bottom line is coal can be cleaned but at a frightful price.
Coal once had a huge price advantage over other energy sources that disappeared when the price of natural gas (UNG) collapsed for $17 BTU to $2/MM BTU. Yesterday, gas closed at a feeble $2.70.
Cost savings aside, virtually every utility in the country would love to get out of the coal business because of the litigation it invites. Read the prospectus for new securities issued by any of them, and you will find a litany of lawsuits over diseases caused by Sulfur Dioxide (SO2), Nitrous Oxides (NO2), and a host of other asthma and cancer-causing pollutants.
Burning natural gas only emits carbon dioxide (CO2) (only half the amount that crude oil derived bunker fuel does) and water (H2O). Sorry, but my inner chemist is speaking.
California closed its last coal-fueled power plant a 20 years ago, switching to natural gas, accidentally creating a windfall for consumers. Much of the money saved was used to modernize the grid buy installing statewide smart meters which allow customers to both buy and sell electricity back to utilities generated from home solar installations and charged up 1,000-pound 100 kWh lithium-ion Tesla batteries.
These moved are expected to save our local Pacific Gas and Electric (PGE) the capital cost of building two new major generating plants. This is not your father’s utility.
Although it is unlikely that another coal fired power plant will ever be built in the US again, don’t expect coal giants like Peabody Energy (BTU) to disappear anytime soon. There is still a massive export business to China, as the Burlington Northern freight trains that rumble near my home testify (love that midnight whistle).
But don’t ever confuse a stock price that has gone down a lot with “cheap.” The shares of these companies could remain in the dumps for a long time, and possibly forever, creating a classic value trap. That is, until the Chinese buy them out for pennies on the dollar.
These are jobs I don’t mind exporting to China. They can have them.
When I checked the price of the old coal ETF (KOL) I discovered that it had ceased trading in 2020 after its asset under management fell from $908 million to just $35 million. At that level Van Eck was losing money running the fund. Most pension funds had banned investing in coal companies.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/06/Smoke-Stacks.jpg300455Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-09-15 09:02:492023-09-15 17:13:33The Price Tag for Clean Coal
So how does someone with 55 years of investment experience like me learn something new? Listen to someone with 80 years of experience.
It is with great anticipation that I read Warren Buffett’s annual letter to shareholders. Having banged the table for decades that his Berkshire Hathaway (BRK/B) is a “must own” stock, keeping up with the 92-year-old Oracle of Omaha” is essential.
Besides, Warren was one of the founding subscribers to The Diary of a Mad Hedge Fund Trader 15 years ago.
I’ll give you the high points.
Berkshire companies took in a record $30.8 billion in operating profits in 2022, producing a net 3% gain in the share price.
Sounds like a deal to me!
Buffett describes himself as a business picker, not a stock picker. Over time, the great businesses prosper and compound, while the poor ones fail. The flowers bloom and the weeds wither away.
One need look no further than the Dow Average, where NO stocks were able to stay in the index over the last 100 years because of business failures. (Corn Products Refining Company? Woolworth’s? Union Carbide?). This is known as “creative destruction,” which moves capital out of the past and into the future.
“Efficient” markets exist only in textbooks, their day-to-day behavior “baffling” and only understood in retrospect.
In the ultimate act of humility, Buffet confesses to only making a dozen good decisions in his life. Coca Cola (KO) was one of those. His initial investment of $1.3 billion in 1994 is now worth $25 billion and now spins off an annual dividend of $700 million.
American Express (AXP) is the same, the initial 1995 investment of $1.3 billion is now worth $22 billion, paying $302 billion a year in dividends. Over the same time frame, an investment in 30-years bonds yielded nothing.
Warren makes the case for share buybacks, which he regularly executes whenever (BRK/B) trades at a discount. When the share count goes down, the shareholders’ ownership of the businesses goes up. This is how Berkshire created many $100 millionaires over the years.
Buffet also makes his annual case for the “Great American Tailwind.” In Buffet’s 80 years of investing, he has only seen it becalmed occasionally and briefly. Never bet against America.
Buffet started his investing career in April of 1942. Unknown to him, the US was about to win the Battle of Midway. Stocks bottomed and launched a torrid 20-year run, even though the public was unaware of the victory for three more months. It’s proof that markets see things before we mere mortals do.
As for me, I suppose I have to be even more humble than Warren Buffet, for I have only made four good investment decisions in 50 years. I agreed to accept a job offer from The Economist magazine in London, kicking off a half-century of intensive research. I took a big pay cut to go to work for Morgan Stanley (MS), which rewarded me with pre-IPO stock at book value of 25 cents a share. I bought Apple (AAPL) at $2 when Steve Jobs returned to run the company on the edge of bankruptcy. I bought Tesla (TSLA) at a split-adjusted $2.35 a share in 2010, completely buying into Elon Musk’s 30-year vision.
I only have to live another 17 years to see if he was right.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/10/New-Tesla.png455647Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-03-02 08:02:142023-03-02 07:53:47Touching Base With Warren Buffet
The Mad Hedge Traders & Investors Summit is onfor June 14-16. A collection of the 27 best traders and managers in the world, or eight a day, each giving an educational webinar. Back-to-back one-hour presentations are followed by an interactive Q&A. It’s a smorgasbord of trading strategies, so pick the one that is right for you. Covering all stocks, bonds, commodities, foreign exchange, precious metals, energy, bitcoin, and real estate. It’s the best look at the rest of 2022’s money-making opportunities you will get anywhere. Oh, and you will have a chance to win $100,000 in prizes. To view the schedule and speakers and to register NOW, click here.
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Landing my 1932 de Havilland Tiger Moth biplane can be dicey.
For a start, it has no brakes. That means I can only land on grass fields and hope my tail skid catches before I run out of landing strip. If it doesn’t, the plane will hit the end, nose over, and dump a fractured gas tank on top of me. Bathing in 30 gallons of 100 octane gasoline with sparks flying is definitely NOT a good long term health plan.
The stock market is starting to remind me of landing that Tiger Moth. On Friday, all four main stock indexes closed at all-time highs for the first time since pre-pandemic January. A record $115 billion poured into equity mutual funds in November. This has all been the result of multiple expansion, not newfound earnings.
Yet, stocks seem hell-bent on closing out 2020 at the highs.
And there is a major factor that the market is completely ignoring. What if the Democrats win the Senate in Georgia?
If so, Biden will have the weaponry to go bold. The economy goes from zero stimulus to maybe $6 trillion raining down upon it over the next six months. That will go crazy, possibly picking up another 10%, or 3,000 Dow points on top of the post-election 4,000 points we have seen so far.
That is definitely NOT in the market.
The other big decade-long trend that is only just starting is the weak US dollar. Lower interest rates for longer were reaffirmed by the appointment of my former economics professor Janet Yellen as Treasury Secretary.
A feeble dollar brings us a fading bond market, as half the buyers are foreigners. A sickened greenback also provides the launching pad for all non-dollar assets to take off like a rocket, including commodities (FCX), precious metals (GLD), (SLV), Bitcoin, and the currencies (UUP), (FXE), (FXA), (FXB), (FXY), and emerging stock markets like China (FXI), Brazil (EWZ), Thailand (THD), and Peru (EPU).
All of this is happening in the face of a US economy that is clearly falling apart. Weekly jobless claims for November came in at 245,000, compared to a robust 638,000 in October, taking the headline unemployment rate down to 6.9%. The real U6 unemployment rate stands at an eye-popping 12.0%, or 20 million.
Some 10.7 million remain jobless, 900,000 higher than in February. Transportation and Warehousing were up 140,000, Professional & Business Services by 60,000, and Health Care 46,000. Retail was down 35,000 as stores shut down at a record pace.
OPEC cuts a deal, adding 500,000 barrels a day to the global supply. The hopes are that a synchronized global recovery can take additional supply. Texas tea finally busts through a month's long $44 cap, the highest since March. Avoid energy. I’d rather buy more Tesla, the anti-energy.
Black Friday was a disaster, with in-store shopping down 52%. Long lines and 25% capacity restrictions kept the crowds at bay. If you don’t have an online presence, you’re dead. In the meantime, online spending surged by 26%.
Amazon (AMZN) hires 437,000 in 2020, probably the greatest hiring binge since WWII, and is continuing at the incredible rate of 3,000 a week. That takes its global workforce to 1.2 million. Most are $12 an hour warehouse and delivery positions. The company has been far and away the biggest beneficiary of the pandemic as the world rushed to online commerce.
Tesla’s (TSLA) full self-driving software may be out in two weeks, instead of the earlier indicated two years. The current version only works on freeways. The full street to street version could be worth $8,000 a car in upgrades. Another reason to go gaga over Tesla stock.
Goldman Sachs raised Tesla target to $780, the Musk increased market share to a growing market. No threat from General Motors yet, just talk. Volkswagen is on the distant horizon. In the meantime, Tesla super bear Jim Chanos announced he is finally cutting back his position. He finally came to the stunning conclusion that Tesla is not being valued as a car company. Go figure. Short interest in Tesla has plunged from a peak of 35% in March to 6% today. It’s learning the hard way.
The U.S. manufacturing sector pauses, activity in the U.S. manufacturing sector barely ticked up in November as production and new orders cratered, data from a survey compiled by the Institute for Supply Management showed on Tuesday. The ISM Manufacturing Report on Business PMI for November stood at 57.5, slipping from 59.3 in October.
Salesforce (CRM) overpays for workplace app Slack, knocking its stock down 9%. This is worth a buy the dip trade in the short-term and this is still a great tech company which is why the Mad Hedge Tech Letter sent out a tech alert on Salesforce on the dip.
Weekly Jobless Claims dive, with Americans applying for unemployment benefits falling last week to 712,000 down from 787,000 the week before. The weakness is unsurprising as we head into seasonal Christmas hiring.
The end of the tunnel for Boeing (BA) as they bring to an end an awful 2020. Irish-based airline Ryanair Holdings placed a large order for a set of brand new Boeing 737 MAX aircraft, giving the plane maker a shot in the arm as the single-aisle jet comes off an unprecedented 20-month grounding.
Ryanair, Europe’s low-cost carrier, has 135 Boeing 737 MAX jets on order and options to bring the total to 200 or more. Hopefully, they won’t crash this time around. My fingers are crossed.
Dollar Hits 2-1/2 Year Low. With global economies recovering, the next big-money move will be out of the greenback and into the Euro (FXE), the Aussie (FXA), the Looney (FXC), the Japanese yen (FXY), the British pound (FXB), and Bitcoin. Keeping interest rates lower for longer will accelerate the downtrend.
When we come out the other side of this pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Global Trading Dispatch catapulted to another new all-time high. December is up 5.34%, taking my 2020 year-to-date up to a new high of 61.78%.
That brings my eleven-year total return to 417.69% or double the S&P 500 over the same period. My 11-year average annualized return now stands at a nosebleed new high of 38.00%. My trailing one-year return exploded to 64.56%. I’m running out of superlatives, so there!
I managed to catch the 50%, two-week Tesla melt-up with a 5X long position, which is always nice for performance.
The coming week will be a slow one on the data front. We also need to keep an eye on the number of US Coronavirus cases at 14.5 million and deaths at 285,000, which you can find here.
When the market starts to focus on this, we may have a problem.
On Monday, December 7 at 4:00 PM EST, US Consumer Credit is out.
On Tuesday, December 8 at 11:00 AM, the NFIB Business Optimism Index is published.
On Wednesday, December 9 at 8:00 AM, MBA Mortgage Applications for the previous week are released.
On Thursday, December 10 at 8:30 AM, the Weekly Jobless Claims are published. At 9:30 AM, US Core Inflation is printed.
On Friday, November 11, at 9:30 AM EST, the US Producer Price Index is announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, at least there is one positive outcome from the pandemic. Boy Scout Christmas tree sales are absolutely through the roof! We took delivery of 1,300 trees from Oregon for our annual fundraiser expected to sell them in two weeks. We cleared out our entire inventory in a mere six days!
We sold trees as fast as we could load them. With the scouts tying the knots, only one fell onto the freeway on the way home. An “all hands on deck” call has gone out to shift the inventory.
It turns out that tree sales are booming nationally. The $2 billion a year market places 21 million trees annually at an average price of $8 and are important fundraisers for many non-profit organizations. It seems that people just want something to feel good about this year.
Governor Gavin Newsome’s order to go into a one-month lockdown Sunday night inspired the greatest sales effort I have ever seen, and I worked on a Morgan Stanley sales desk! We shifted the last tree hours before the deadline, which was full of mud with broken branches and had clearly been run over by a truck at a well-deserved 50% discount.
I can’t wait until next year!
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2020/12/john-thomas-chainsaw-e1607348125295.png500328Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-12-07 09:02:522020-12-07 09:18:03The Market Outlook for the Week Ahead, or a Dicey Landing
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own a deep in-the-money options positions that expire on Friday, June 19, and I just want to explain to the newbies how to best maximize their profits.
This involves the:
the iShares Barclays 20+ Year Treasury Bond Fund (TLT) June 2020 $175-$180 in-the-money vertical Bear Put spread
the S&P 500 (SPY) June 2020 $235-$245 in-the-money vertical BULL CALL spread
Provided that we don’t have another 3,000-point move down in the market by next week, these positions should expire at their maximum profit points.
So far, so good.
I’ll do the math for you on our oldest iShares Barclays 20+ Year Treasury Bond Fund (TLT) position. Your profit can be calculated as follows:
Profit: $5.00 expiration value - $4.10 cost = $0.90 net profit
(24 contracts X 100 contracts per option X $0.90 profit per options)
= $2,160 or 21.95% in 34 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning June 22 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next quarter-end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/09/john-and-girls.png322345Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-06-10 08:02:082020-09-28 12:12:21How to Handle the Friday June 19 Options Expiration
Jay Powell really showed his hand today with the press conference following his 25-basis point interest rate cut.
The Fed’s medium-term target rate is now zero. Take a 1.75% inflation rate, subtract a 1.75% overnight rate and you end up with a real interest rate of zero. The fact that we have real economic growth also at zero (1.75% GDP – 1.75% inflation) makes this easier to understand.
That means there will be no more interest rate cuts by the Fed for at least six more months. All interest rate risks are to the downside. There is no chance whatsoever of the Fed raising rates in the foreseeable future with a growth rate of 1.75%. It will also take a substantial fall in the inflation rate to get rates any lower than here.
That may happen if the economy keeps sliding slowly into recession. Net net, this is a positive for all risk assets, but not by much.
I regard every Fed day as a free economics lesson from a renown professor. Over the decades, I have learned to read through the code words, hints, and winks of the eye. It appears that the thickness of the briefcase no longer matters as it did during Greenspan. No one carries around paper anymore during the digital age.
I then have to weed through the hours of commentary that follows by former Fed governors, analysts, and talking heads and figure out who is right or wrong.
In the meantime, the “Curse of the Fed” is not dead yet. The ferocious selloffs that followed the last two Fed rate cuts didn’t start until the day or two after. That’s what the bond market certainly thinks, which rallied hard, a full two points, after the announcement.
All of this provides a road map for traders for the coming months.
The Santa Claus rally will start after the next dip sometime in November. Buy the dip and ride it until yearend. The Mad Hedge Market Timing Index at 75, the bond market (TLT), the Volatility Index (VIX) and the prices of gold (GLD), silver (SLV), and the Japanese yen (FXY) are all shouting this should happen sometime soon.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/10/jay-powell.png352672Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-10-31 08:04:572019-12-09 13:11:58Welcome to the Land of Zeros
I have a pretty good view from my home on a mountaintop in San Francisco.
To the west, I can see through the Golden Gate Bridge all the way out to the Farallon Islands 20 miles off the coast. To the south, there is Stanford’s Hoover Tower and all of Silicon Valley. In the winter I can look east and see the snow-covered High Sierras 200 miles away.
However, during last year’s wildfires, I couldn’t see a thing. Visibility ended at 100 yards, the cars parked outside were covered in ash, and I could barely breathe. We were all confined indoors.
I kind of feel that’s the way the stock market is right now. You can’t see a thing, so it’s better to stay indoors.
Not only are market gyrations subject to unpredictable and random, out-of-the-blue influences. The old playbook about cross market correlations and how asset classes respond at different points of the economic cycle doesn’t work either.
The good news is that August is over, the second worth trading month of the year. The bad news? September is the WORST trading month of the year!
So, what does a trader do on the first day of the worst investment month of the year?
Research.
That's what I’ll be doing, waiting for the next cataclysmic collapse to buy or the next euphoric bubble to sell short. Until then, I’ll be sitting tight. Just running my existing long/short trading book, I’ll be up 3.4% by the September 20 option expiration date in 15 trading days.
There is one BIG positive for the economy that no one is talking about. The home ATM is open for business, and open like it’s never been open before.
The thirty-year fixed rate mortgage rate is now at 3.56%, 10 basis points over a decade low and 20 basis points above an all-time low (see the chart below). There are currently $9.4 trillion of outstanding home mortgages in the US. Some $5 trillion is in Fannie Mae and Freddie Mac conforming loans, some 90% of which have interest rates higher than the current market.
If just ten million of these mortgages refinance obtaining an average of $4,560 in annual savings each, that will amount to a de facto tax cut of $456 billion per year, not an inconsequential amount. And Goldman Sachs thinks we could be in for as much as 37 million refis. It could be enough to offset the negative impact of the trade war.
As for the past week, it seemed like a disaster a day.
Trump ordered all US companies out of China. Like you can reverse 40 years’ worth of trillions of dollars of investment with a Tweet. If they did, an iPhone would cost $10,000 and your low-end laptop $15,000. An escalation of the trade war is the last thing your 401k wanted to hear. Kiss that early retirement goodbye.
Oilcrashed (USO) on trade war escalation, with the industry now seeing a recession as a sure thing. Russian cheating on quotas is pouring the fat on the fire creating a massive supply glut in the face of shrinking demand. Take a long nap before considering any energy investment (XLE). The long-term charts show they are all going to zero.
Prime Minister Boris Johnson suspended Parliament, prompting a free fall in the pound. It’s to keep Parliament from blocking his hard Brexit, where it would certainly loose by a landslide. It’s all up to the Queen now, the monarch, not the rock group.
The yield inversion is deepening, with the US Treasury selling two-year notes today at a 1.56% yield, with ten-year yield closing at 1.45%. And that’s with the Treasury selling a total of a gob smacking $113 billion worth of bonds last week, which should have driven rates UP! US ten-year TIPS now showing negative interest rates.
Company stock buybacks are fading. That's a big deal as corporations retiring their own shares have been the biggest buyers in the market for the past two years. As if you needed another reason for downside risk.
US 15% tariffs hit on Sunday, and the Chinese paused in retaliation. Christmas is about to get more expensive. Many large retailers won’t make it until the new year. Keep selling short Macy’s (M) on rallies.
Bond yields hit new lows, at 1.44% for ten-year US Treasury bonds. The next stop is zero. Fixed income markets are saying that a recession is imminent. “Inversion” will be the world of the year for 2019. Go refi that home if you can get a banker on the phone!
There is no way out of the next recession, says hedge fund titan Ray Dalio. With global rates below zero, you can’t cut to stimulate business. You can’t do any more quantitative easing either, as the world is already glutted with paper. This is the trap Japan has been caught in for the last 30 years. It is all sobering food for thought.
US growth slowed with the second reading of the Q2 GDP marked down from 2.1% to 2.0%. The downturn has continued since the economy peaked 18 months ago. Q3 will be much worse when the trade war and earnings downgrades hit big time. And then there’s the soaring deficit. Sow the wind, reap the whirlwind.
US Consumer Sentiment took a dive from 98.4 to 89.8 in August. Has the spending boom just peaked? If so, we’re all toast. The "tariff cliff" is already taking its toll.
The Mad Hedge Trader Alert Service has posted its best month in two years. Some 22 or the last 23 round trips, or 95.6%, have been profitable, generating one of the biggest performance jumps in our 12-year history.
My Global Trading Dispatch has hit a new all-time high of 334.48% and my year-to-date shot up to +34.35%. My ten-year average annualized profit bobbed up to +34.30%.
I raked in an envious 16.01% in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.
As long as the Volatility Index (VIX) stays above $20, deep in-the-money options spreads are offering free money. I am now 60% invested, 40% long big tech and 20% short Walmart (WMT) and the Russell 2000, with 20% in cash. It rarely gets this easy.
The coming week will be all about jobs, jobs, jobs.
Monday, September 2, markets were closed for the US Labor Day.
Today, Tuesday, September 3 at 10:00 AM, the August ISM Purchasing Manager’s Index is out.
On Wednesday, September 4, at 2:00 PM, the Fed Beige Book for July is published.
On Thursday, September 5 at 8:30 AM EST, the Weekly Jobless Claims are printed. At 10:30, we learn the ADP Report for private hiring.
On Friday, September 6 at 8:30 AM, the August Nonfarm Payroll Report is printed.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be filling out the paperwork for my own home refi. JP Morgan Chase Bank (JPM) is offering the best deals, in my case a 30-year fixed rate no-cash-out jumbo loan for only 3.4%. Now where did I put that tax return?
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2019/06/john-thomas-camping.png431322Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-09-03 02:02:172019-10-14 09:45:45The Market Outlook for the Week Ahead, or Visibility is Poor
I often am asked at lunches and speaking engagements whether people should be investing in bitcoin. My answer was always that it was a scam and to be avoided at all costs.
I was vindicated when the value of the online cryptocurrency collapsed 74% from its peak, from $1,230 to $320 to the US dollar.
After all, why should an arbitrarily valued currency, like bitcoin, be worth more than any other, like the US dollar?
I really hope the pizza parlor in New York City that sold a pizza for 8 bitcoins years ago unloaded their proceeds before the crash.
After some major security upgrades, the cryptocurrency has since rallied back up to $670.
Then Marc Andreessen, of leading venture capital firm, Andreessen Horowitz, made some comments the other day that piqued my interest.
He said that he was a major investor in several parts of the bitcoin ecosystem. He thought it had a great long-term future and he was especially interested in bitcoin infrastructure plays.
Smelling a rare opportunity to smash my own preconceived notions, biases, and prejudices, I started making a few phone calls around Silicon Valley.
It wasn?t long before someone put me in touch with Mr. Celso Pitta, the CEO of BTCJam. BTCJam is the world?s first peer-to-peer bitcoin lending company and they are paving the way for alternative crypto-currency investing.
What I learned from him was fascinating.
Long considered a ?gold for nerds? and ?online gold?, the financial community is in fact taking bitcoins seriously. Recently, the US Treasury and the Department of Homeland Security held a conference in Florida to bring the industry into its anti-money laundering payments standards.
Where do bitcoins come from? Bitcoins are ?mined? by computers. Every couple of minutes the bitcoin network releases an algorithm and the computer that solves the algorithm first, receives the bitcoin.
They are created from scratch by bitcoin ?miners? who exchange them for local currencies to cover their own costs and compensation for the bitcoin infrastructure.
Bitcoins are a completely decentralized, transparent, and digitally traded currency. Some predict that cryptocurrencies like bitcoin may replace traditional fiat paper currencies in the near future.
In the end, bitcoins are just a giant global payment ledger balanced out by debtors and creditors. As it is electronic, it can be sent and administered for free.
BTCJam has created from scratch a global online marketplace of borrowers and lenders in over 180 countries. Go to their site (https://btcjam.com) and you will find a parade of borrowers from around the planet looking to take out loans and bitcoin lenders looking to invest. Look at the individual players and it is clear that they are young and tech savvy.
Each potential borrower lists the details for their loan, along with a host of personal information. The purposes cited I found included a new transmission for a broken down car in England, a vacation to Japan and the start up of many small business. It also seems a lot of young Americans are seeking to consolidate student loans.
Once a user signs up, BTCJam subjects every application to its credit evaluation software, which examines more than 300 different parameters.
BTCJam uses traditional data that banks use such as personal identification, banking confirmation, and income verification, but they also use a host of other resources such as: LinkedIn, Facebook, PayPal, and eBay accounts.
Believe it or not, a person with 1000 Facebook friends has a much better credit standing and a lower default rate than someone with only 1 friend.
Customers are then given an ?A? to ?E? rating based on their loan algorithm. This software was developed by CEO Pitta, a native of Brazil, who boasts a heavy background in artificial intelligence and facial recognition software.
The company is taking advantage of the void of lending resources in emerging nations; frequently, these people can only turn to loan sharks and other risky loan sources.
Large international banks are reluctant to invest in these places because of the local currency risk. When a loan on BTCJam is fully funded, the borrowers convert their bitcoin into local currencies to spend in the local economy.
Remember how the poorest countries leapfrogged telephone landlines and went straight to cell phones 20 years ago? Well, the same thing is now happening in consumer credit through peer-to-peer lending.
Many developing countries suffer from the complete lack of credit rating agencies. There, every client is considered high risk, and lending is priced according to the standards of the worst borrowers.
Credit card interest rates run as high as 200% in Brazil, 90% in Mexico, and are well into double digits in Indonesia and the Philippines. Overall, they average 175% in the BRICS. As a result, the rates charged by BTCJam seem like a bargain by comparison.
When borrowers sign up at BTCJam and input all their information, they are given a suggested interest rate. They then have the choice to set their monthly interest rate as high or low as they want.
Loans that follow the suggested interest rate are more likely to be funded quickly by investors. Over time, the loan is gradually paid back in full by the borrower as they convert their money back into bitcoin.
Now for the lender side of the equation. BTCJam has investors from all over the world: they attract people that already have bitcoins and are looking for returns on their bitcoins. They also bring in lenders who are new to bitcoin and buy a few for the purpose of investing in BTCJam.
Lenders are completely free to choose which loans they want to invest in and how much they want to invest. Interest rates vary based on the risk profile of the borrower. They range all the way from 14% for the highest quality ?A+? borrowers to 100% for the low-end ?E-? hopefuls.
BTCJam is a bitcoin-only platform: lenders invest bitcoin and borrowers receive bitcoin. Borrowers have the option to link their loan to USD, which helps them avoid the risk of volatility long term. This enables them to lock in the bitcoin price at the time they receive the loan.
BTCJam lists every outstanding loan, and the investors connected to that individual. There is an online discussion on the potential advantages and disadvantages of each borrower. Some of the comments are quite funny. Others are downright rude.
It gets better: BTCJam will soon introduce automatic investments. Lenders will then have the opportunity to set specific criteria such as: the amount they want to invest, which asset class they want to invest in, and for how long. This will significantly enhance the use of the website and lenders will never have to miss out on good loans.
Pitta told me that globally, the total loan portfolio has a 10% default rate. But if you focus on only their ?A? rated customers, that rate plunges to a mere 1.8%. This is in the same ballpark as the largest US consumer lenders.
Do the math with high yields and a non-payment rate this low, and you can easily see that risk sophisticated and tolerant depositors will do these loans all day long.
The peer-to-peer lending model is one of the fastest growing corners of the financial industry. The giant Credit Ease in China is the largest, with a $9 billion loan portfolio. They are followed by the $3-$4 billion Lending Club. The UK has Zopa, with a $1 billion loan book.
This all compares to total credit card debt for the US alone of $1 trillion. Clearly, there is an enormous, high cost, low return, entrenched market to be explored here.
The entire bitcoin story did get tarnished by the bankruptcy of Mt. Gox operation in Japan, which went under with $60 million in liabilities. They claimed they were the victims of the hackers.
Industry insiders say that incompetent management, inferior software, and lax controls are much more likely culprits. These
are common transgressions in every start up industry.
Which brings me to BTCJam?s own business model, which recently obtained several million in seed capital from venture capitalists, like Ribbit Capital and the Founders Club.
They are poised to eat the lunches of emerging nation banks, which have always ignored, overcharged, or abused their local customers. It all seems to me ripe ground for disruption.
I think it is safe to say that in 20 years, the global financial system will be unrecognizable from what it is today. Ultimately, Bitcoin and BTCJam may have a large influence in the transition from traditional currencies to an all out system of online money.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/11/Bitcoin-e1415109751157.jpg222400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-12-20 01:07:292016-12-20 01:07:29Is There a Bitcoin in Your Future?
If you think that an energy shortage was bad, it will pale in comparison to the next water crisis. So investment in fresh water infrastructure is going to be a great recurring long-term investment theme.
One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.
Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles.
In places like China, with a quarter of the world?s population, up to 90% of the fresh water is already polluted, some irretrievably so.
Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.
Aquifers in the US, which took nature millennia to create, are approaching exhaustion, especially in California?s Central Valley.
While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don't have any, and will easily double the end cost of water to consumers.?
While it may take 16 pounds of grain to produce a pound of beef,?it takes a staggering 2,416 gallons of water?to do the same. Beef exports are really a way of shipping water abroad in highly concentrated form.
The UN says that $11 billion a year is needed for water infrastructure investment and $15 billion of the 2008 US stimulus package was similarly spent.
It says a lot that when I went to the University of California at Berkeley's School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds!
At the top of the shopping list to participate here would be the Guggenheim S&P Global Water Index ETF (CGW).
You can also check out the PowerShares Water Resources Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VEOEY), Tetra-Tech (TTEK) and Pentair (PNR).
Bonus Question:? Which country has the world?s greatest water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/03/Waterfall.jpg283432Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-11-04 01:06:312016-11-04 01:06:31Why Water Will Soon Become More Valuable Than Oil
I ran into Minxin Pei, a scholar at the Carnegie Endowment for International Peace, who imparted to me some iconoclastic, out-of-consensus views on China?s position in the world today.
He thinks that power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP at $5,800, compared to $48,000 in the US.
We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars.
China can?t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede.
China?s military is entirely devoted to controlling its own people which make US concerns about their recent build up laughable.
All of Asia?s progress, to date, has been built on selling to the US market. Take us out, and they?re nowhere.
With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon.
There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more, because there is no social safety net.
Try filing a Chinese individual tax return, where a maximum rate of 40% kicks in at an income of $35,000 a year, with no deductions, and there is no social security or Medicare in return.
Ever heard of a Chinese unemployment office or jobs program?
Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries.
The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia has just one world-class school, the University of Tokyo.
As much as we Americans despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world.
After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for four decades, and you feel this vibrating from everything around you.
I?ll consider what Minxin Pei said next time I contemplate going back into the China (FXI) and emerging markets (EEM).
https://www.madhedgefundtrader.com/wp-content/uploads/2013/04/China-Parade.jpg266401Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-10-14 01:06:432016-10-14 01:06:43China?s View of China
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