John, you make me laugh. Following you has been awesome. If it weren?t for you, I'd have been a mega bear for the last three years.
Cheers
Justin
Western Australia
Global Market Comments
April 20, 2016
Fiat Lux
Featured Trade:
(BUY FLOOD INSURANCE WITH THE VIX),
?(VIX), (VXX), (UVXY),
(THE SOLAR MISSING LINK IS HERE!),
(SCTY), (FSLR), (SPWR), (TSLA)
VOLATILITY S&P 500 (^VIX)
iPath S&P 500 VIX ST Futures ETN (VXX)
ProShares Ultra VIX Short-Term Futures (UVXY)
SolarCity Corporation (SCTY)
First Solar, Inc. (FSLR)
SunPower Corporation (SPWR)
Tesla Motors, Inc. (TSLA)
I am one of those cheapskates who buys Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar because my eleven month return on capital comes close to 1,000%.
I also like buying flood insurance in the middle of the summer when the forecast here in California is for endless days of sunshine.
That is what we are facing now with the volatility index (VIX) where premiums have been hugging the 12%-14%% range recently. Get this one right, and the profits you can realize are spectacular.
The CBOE Volatility Index (VIX) is a measure of the implied volatility of the S&P 500 stock index, which has been melting since the ?RISK OFF? died a horrible death.
You may know of this from the talking heads, beginners, and newbies who call this the ?Fear Index?. Long-term followers of my Trade Alert Service profited handsomely after I urged them to sell short this index at the heady altitude of 47.
For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations.
The (VIX) is the square root of the par variance swap rate for a 30 day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever useful Black-Scholes equation. You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?
For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don?t know what an SAT test is, this is what you need to know. When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. End of story. Class dismissed.
The (VIX) is expressed in terms of the annualized movement in the S&P 500, which today is at 1,800. So a (VIX) of $14 means that the market expects the index to move 4.0%, or 72 S&P 500 points, over the next 30 days. You get this by calculating $14/3.46 = 4.0%, where the square root of 12 months is 3.46.
The volatility index doesn?t really care which way the stock index moves. If the S&P 500 moves more than the projected 4.0%, you make a profit on your long (VIX) positions.
Probability statistics suggest that there is a 68% chance (one standard deviation) that the next monthly market move will stay within the 4.0% range. I am going into this detail because I always get a million questions whenever I raise this subject with volatility-deprived investors.
It gets better. Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006. Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the ?hedge? in hedge fund.
But wait, there?s more. Now, erase the blackboard and start all over. Why should you care? If you buy the (VIX) here at $14, you are picking up a derivative at a nice oversold level. Only prolonged, ?buy and hold? bull markets see volatility stay under $14 for any appreciable amount of time.
If you are a trader you can buy the (VIX) somewhere under $14 and expect an easy double sometime in the coming months. If we get another 10% correction somewhere along that way, that would do it.
If you are a long-term investor, pick up some (VIX) for downside protection of your long-term core holdings. A bet that euphoria doesn?t go on forever and that someday something bad will happen somewhere in the world seems like a good idea here.
If you don?t want to buy the (VIX) futures or options outright, then you can always buy the iPath S&P 500 VIX Short Term Futures ETN (VXX). Easier still is the (UVXY), which is particularly useful for trading narrow ranges like the one we have had.
If you lose money on this trade, it will only be because you have made a fortune on everything else you made. No one who buys fire insurance ever complains when their house doesn?t burn down.
I have seen the future, and it works.
In my never-ending search for my readers for ?ten-baggers,? or investments that will rise in value tenfold over the foreseeable future, I keep circling back to the solar industry.
Tesla founder Elon Musk never does anything small.
Last year he announced the first ever, economical home battery electrical storage system, which he calls the Powerwall.
The device will enable your roof-mounted solar panels to supply power to your home 24 hours a day, not just when the sun is shining.
It is an innovation on the scale of Thomas Edison?s invention of the light bulb in 1879, or the launch of the Internet in 1969, in terms of the long-term impact on our economy.
Shifting the source of a third of our power supply is a big deal.
You may recall that the early investors in these earlier transitions made fortunes, General Electric (GE) in Edison?s case, and Netscape that spun out of the early Internet days.
Today, General Electric is the only company that has remained in the Dow Average for the past 100 years. So, investors take note.
During the day, the panels will charge up the battery mounted on your garage wall, which is about the size of a big screen TV. At night, you can then run your home off battery power.
Alternatively, you can engage in what is known in the industry as ?load shifting.? Charge your battery at night when you can buy electricity for as little as 4 cents a kilowatt hour, and sell it back to your local utility during a power demand surge the next afternoon for as much as 50 cents a kWh.
Buy low, sell high, it works for me!
And what is the cost of the miracle technology?
Only $3,000 for a 7 kWh battery or $3,500 for the 10 kWh version for energy hogs, like me, who has to charge a Tesla Model S-1 every day, soon to be two.
You can also include as immediate customers for this new product sports addicts, who watch multiple games on ESPN 24/7, paranoids who keep the lights on all night and indoor pot farmers, whose energy needs are said to be prodigious. Of course, the military will be another big consumer.
I ran some numbers on the possibilities for the Powerwall and they are mind-boggling.
The average home in the US has 2,500 square feet, which uses 7,000 kWh per year, or 19 kWh per day. The current cost for this power will be around $2,000 a year, depending where you live, more in California, and less in Texas, Oklahoma, and North Carolina.
A solar/ battery combination for such a home should cost about $14,000, including installation, the panels, the inverter, and all the gizmos. Net out the alternative energy investment tax credit of 30% (IRS Form 5695 http://www.irs.gov/pub/irs-pdf/f5695.pdf ), and your cost falls to only $10,500.
That means your power savings will cover the cost of your solar investment in a mere 5 years, compared to the present 7 or 8 years. After that, your home will have free electricity for another 20 years, as the life of these systems is usually 25 years.
Make the investment, and the value of your home rises, by $2 for every dollar spent, or so local real estate agents tell me.
You also will be guaranteed against any future power rate increases, an absolute certainty. America?s power grid is currently in a woeful state of disrepair, with much of the hardware 50 years old, or more.
The demands on the power industry are also about to take a quantum leap forward, as millions of consumers buy electric cars. Tesla plans to ramp up production of vehicles from 40,000 units last year to 500,000 by 2020, when the $35,000, 300 mile range Tesla 3 achieves mass production.
Some of my over-the-horizon-thinking hedge fund friends believe that figure could hit 15 million by 2030.
Add to that new, competing electric models produced by every other major carmaker, and that?s a lot of juice that will be needed. As a result, electric power utilities will probably have to endure more structural changes to their business model than any other industry.
Trillions of dollars are needed to modernize it, and all of that is going to come out of your pocket, but only if you remain an existing power customer.
Indeed, I have already been notified by my own utility, Pacific Gas and Electric Company (PGE), that I am due for two consecutive 7% price increases over the next two years.
The battery will also provide a backup power supply for home for when the grid crashes. Twice in the last two decades I have lost a freezer full of venison, pheasants, quail, trout, and salmon that I hunted and fished when storms knocked out power, for a week each time.
The Powerwall prices are so low that they beat the cost of a conventional backup diesel or gasoline generator.
They will also wipe out most of the existing back up battery industry, as Tesla?s advantages gained through massive economies of scale are enormous. Musk is talking about producing billions of batteries.
The Powerwall is a game changer for the solar industry, which has long been hobbled by the limitation that it could only supply power for 12 hours a day, and less in the winter, depending on your latitude.
It certainly gives a shot in the arm for the solar industry, which I have been banging the table about for years. My favorite is Solar City (SCTY). Other names to look at are First Solar (FSLR) and SunPower (SPWR), which manufactures my own solar panels.
It also casts Musk?s own Tesla (TSLA) in a new light. It is no longer just a car company, but a comprehensive energy solution. Musk has already made one of the largest capital investments in history to build a $5 billion ?Giga? factory near Reno, Nevada.
Much of that plant?s production has already been pre sold, and I understand that the decision has already been made to build a second one. Wow!
Consumers are able to purchase the new batteries from the Texas based retailer, TreeHouse, (their link https://treehouse.co/treehouse-is-first-retailer-to-sell-tesla-home-battery/ ).
Musk explains that the world consumes 20 trillion kWh per year of electricity.
In the US, 1/3 of our fossil fuel consumption goes to transportation, and another 1/3 generates electric power, which is the equivalent to consuming 225 billion gallons of gasoline per year (or 8 billion barrels of oil per year, or 22 million barrels a day).
His goal is nothing less than to largely substitute those fossil fuel uses with solar energy, cutting our fossil fuel consumption by 2/3.
I guess there is no point in setting the bar low.
Meet the Next Light Bulb
Global Market Comments
April 19, 2016
Fiat Lux
SPECIAL BERKSHIRE HATHAWAY ISSUE
Featured Trade:
(A CHAT WITH BERKSHIRE HATHAWAY?S WARREN BUFFETT),
(BRKA), (AXP), (WFC), (IBM), (KO), (GS), (AAPL), (UNP), (BAC)
Berkshire Hathaway Inc. (BRK-A)
American Express Company (AXP)
Wells Fargo & Company (WFC)
International Business Machines Corporation (IBM)
The Coca-Cola Company (KO)
The Goldman Sachs Group, Inc. (GS)
Apple Inc. (AAPL)
Union Pacific Corporation (UNP)
Bank of America Corporation (BAC)
Sometime in the early 1970?s, a friend of mine said I should take a look at a stock named Berkshire Hathaway (BRKA) run by a young stud named Warren Buffett.
I thought, ?Why the hell should I invest in a company that makes sheets??
After all, the American textile industry was in the middle of a long trek toward extinction that began in the 1920?s, and was only briefly interrupted by the hyper prosperity of WWII. The industry?s travails were simply an outcome of ever rising US standards of living, which pushed wages, and therefore costs, up.
It turns out that Warren Buffett made a lot more than sheets. However, he is not a young stud anymore, just an old one, like me.
Since then, Warren?s annual letter to investors has been an absolute ?must read? for me when it is published every spring.
It has been edited for the past half century by my friend, Carol Loomis, who just retired after a 60-year career with Fortune magazine. (I never wrote for them because their freelance rates were lousy).
Witty, insightful, and downright funny, I view it as a cross between a Harvard Business School seminar and a Berkeley anti establishment demonstration. You will find me lifting from it my ?Quotes of the Day? for the daily newsletter over the next several issues. There are some real zingers.
And what a year it has been!
Berkshire?s gain in net worth was $18.3 billion, which increased the share value by 8.3%, and today, the market capitalization stands at an impressive $343.4 billion. (Sorry Warren, but I clocked 30% last year, eat your heart out).
The shares are not for small timers, as one now costs $214,801, and no, they don?t sell half shares. This compares to a 1965 per share market value of $23.80, and is why the media are always going gaga over Warren Buffett.
If you?re lazy and don?t want to do the math, that works out to a compound annualized return of an eye popping 21.6%. This is why guessing what Warren is going to do next has become a major cottage industry (Progressive Insurance anyone?).
Warren brought in these numbers despite the fact that its largest non-insurance subsidiary, the old Burlington Northern Santa Fe Railroad (BNSF) suffered an awful year.
Extensive upgrades under construction and terrible winter weather disrupted service, causing the railroad to lose market share to rival Union Pacific (UNP).
I was kind of pissed when Warren bought BNSF in 2009 for a blockbuster $44 billion, as it was long my favorite trading vehicles for the sector. Since then, its book value has doubled. Typical Warren.
Buffett plans to fix the railroad?s current problems with $6 billion in new capital investment this year, one of the largest single capital investments in American history. Warren isn?t doing anything small these days.
Buffett also got a hickey from his investment in UK supermarket chain Tesco, which ran up a $444 million loss for Berkshire in 2014. Warren admits he was too slow in getting out of the shares, a rare move for the Oracle of Omaha, who rarely sells anything (which avoids capital gains taxes).
Warren increased his investment in all of his ?Big Four? holdings, American Express (AXP), Coca-Cola (KO), IBM (IBM), and Wells Fargo (WFC).
In addition, Berkshire owns options on Bank of America (BAC) stock, which have a current exercise value of $12.5 billion (purchased the day after the Mad Hedge Fund Trader issued a Trade Alert on said stock for an instant 300% gain on the options).
The secret to understanding Buffett picks over the years is that cash flow is king.
This means that he has never participated in the many technology booms over the decades, or fads of any other description, for that matter.
He says this is because he will never buy a business he doesn?t intrinsically understand, and they didn?t offer computer programming as an elective in high school during the Great Depression.
No doubt this has lowered his potential returns, but with the benefit of much lower volatility.
That makes his position in (IBM) a bit of a mystery, the worst performing Dow stock of the past two years. I would much rather own Apple (AAPL) myself, which also boasts great cash flow, and even a dividend these days (with a 1.50% yield).
Warren will be the first to admit that even he makes mistakes, sometimes, disastrous ones. He cites his worst one ever as a perfect example, his purchase of Dexter Shoes for $433 million in 1993. This was right before China entered the shoe business as a major competitor.
Not only did the company quickly go under, he exponentially compounded the error through buying the firm with an exchange of Berkshire Hathaway stock, which is now worth a staggering $5.7 billion.
Ouch, and ouch again!
Warren has also been mostly missing in action on the international front, believing that the mother load of investment opportunities runs through the US, and that its best days lie ahead. I believe the same.
Still, he has dipped his toe in foreign waters from time to time, and I was sometimes quick to jump on his coattails. A favorite of mine was his purchase of 10% of Chinese electric car factory BYD (BYDDF) in 2009, where I have captured a few doubles over the years.
Buffett expounds at great length the attractions of the insurance industry, which today remains the core of his business. For payment of a premium up front, the buyers of insurance policies receive a mere promise to perform in the future, sometimes as much as a half century off.
In the meantime, Warren can invest the money any way he wants. The model has been a real printing press for Buffett since he took over his first insurer in 1951, GEICO.
Much of the letter promotes the upcoming shareholders annual meeting, known as the ?Woodstock of Capitalism?.
There, the conglomerate?s many products will be for sale, including, Justin Boots (I have a pair), the gecko from GEICO (which insures my Tesla S-1), and See?s Candies (a Christmas addiction, love the peanut brittle!).
There, visitors can try their hand at Ping-Pong against Ariel Hsing, a 2012 American Olympic Team member, after Bill Gates and Buffett wear her down first.
They can try their hand against a national bridge champion (don?t play for money). And then there is the newspaper-throwing contest (Buffett?s first gainful employment).
Some 40,000 descend on remote Omaha for the firm?s annual event. All flights to the city are booked well in advance, with fares up to triple normal rates.
Hotels sell out too, and many now charge three-day minimums (after Warren, what is there to do in Omaha for two more days other than to visit PayPal?s technical support?). Buffett recommends Airbnb as a low budget option (for the single shareholders?).
I was amazed to learn that Berkshire files a wrist breaking 24,100-page Federal tax return (and I thought mine was bad!). Add to this a mind numbing 3,400 separate state tax returns.
Overall, Berkshire holdings account for more than 3% of the total US gross domestic product, but a far lesser share of the government?s total tax revenues, thanks to careful planning.
Buffett ends his letter by advertising for new acquisitions and listing his criteria. They include:
(1) ?Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) ?Demonstrated consistent earning power (future projections are of no interest to us, nor are ?turnaround? situations),
(3) ?Businesses earning good returns on equity while employing little or no debt,
(4) Managemen
t in place (we can?t supply it),
(5) Simple businesses (if there?s lots of technology, we won?t understand it),
(6) An offering price (we don?t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
Let me know if you have any offers.
To read the entire history of Warren Buffett?s prescient letters, please click here: http://www.berkshirehathaway.com/letters/letters.htm.
?A bet on ever-rising US prosperity is very close to a sure thing,? said Oracle of Omaha Warren Buffett.
Global Market Comments
April 18, 2016
Fiat Lux
Featured Trade:
(LAST CHANCE TO JOIN THE SPRING 2016 US STRATEGY LUNCHEON TOUR),
(PLEASE USE MY FREE DATA BASE SEARCH),
(WHO WAS BEN BERNANKE?)
Come join John Thomas for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting around the US on the dates below.
A three course lunch will be followed by a wide ranging discussion and an extended question and answer period.
I?ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be tossing a few surprises out there too.
Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets range from $200 to $250.
I?ll be arriving early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at exclusive five star hotels in every city center that will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research.
To purchase tickets for the luncheons, please go to www.madhedgefundtrader.com and click on the ?STRATEGY LUNCH? tab in the second row, then the ?USA? tab, and finally the city of your choice.
Friday, April 15 - Houston, TX
Monday, April 18 ? Miami, FL
Tuesday, April 19 ? Atlanta, GA
Wednesday, April 20 ? Washington DC
Thursday, April 21 ? Boston, MA
Friday, April 22 ? New York, NY
Monday, April 25 ? Chicago, IL
Since nothing less than the fate of the free world depended on the judgment of Ben Bernanke, I thought I?d touch base with David Wessel, the Wall Street Journal economics editor, who published In Fed We Trust: Ben Bernanke?s War on the Great Panic.
I doubted David could tell me anything more about the former Princeton professor I didn?t already know. I couldn?t have been more wrong, as David gave me some fascinating insights into the inner soul of our much-vaunted Chairman of the Federal Reserve.
Bernanke was the smartest kid in rural Dillon, South Carolina, who, through a series of improbable accidents, and intervention by a local black civil rights leader, ended up at Harvard.
He built his career on studying the Great Depression, then the closest thing to paleontology economics had to offer, a field focused so distantly on the past that it was irrelevant.
Bernanke took over the Fed when Greenspan was considered a rock star, inhaling his libertarian, free-market, Ayn Rand inspired philosophy in great giant gulps.
Within a year the economy had suddenly transported itself back to the Jurassic Age, and the landscape was suddenly overrun with T-Rex?s and Brontosauri. He tried to stop the panic 150 different ways, 125 of which were terrible ideas, the remaining 25 saving us from the Great Depression II. This is why unemployment is now only 5%? instead of 25%.
The Fed governor is naturally a very shy and withdrawing person and would have been quite happy limiting his political career to the Princeton, NJ school board.
To rebuild confidence, he took his campaign to the masses, attending town hall meetings and pressing the flesh like a campaigning first term congressman.
The price tag for Ben?s success has been large, with the Fed balance sheet exploding from $800 million to $4 trillion, solely on his signature. The true cost of the financial crisis won?t be known for a decade or more.
The biggest risk is that we grow complacent, having pulled back from the brink and let desperately needed reforms of the financial system and the rebuilding of Fannie Mae and Freddie Mac slide.
Ben Bernanke?s legacy will be defined by how well his successor, my friend, Janet Yellen, does her job. Unwind the bubble too soon and we go back into a real depression. Too late and hyperinflation hits.
That?s when we find out who Ben Bernanke really was.
