Global Market Comments
May 2, 2016
Fiat Lux
Featured Trade:
(HOW THE REST OF 2016 WILL PLAY OUT IN THE MARKETS),
(SPY), (QQQ), (IWM), (GLD), (UUP),
(KISS THAT UNION JOB GOODBYE),
(TESTIMONIAL)
SPDR S&P 500 ETF (SPY)
PowerShares QQQ ETF (QQQ)
iShares Russell 2000 (IWM)
SPDR Gold Shares (GLD)
PowerShares DB US Dollar Bullish ETF (UUP)
Down, then up, then up some more. That?s all you need to know.
The stock market will mirror the economy with a three-month lag, as it always does.
That calls for a 10% correction in stocks from the recent $2100 peak going into the summer, then a monster rally to new highs going into the end of the year.
Certainly the 200-day moving average in the (SPY) at $199.75 is crying out for attention. Below that you can target the previous breakout level of $192.50, and that nearly gets you to your 10% hickey.
That means you should be buying gold right about now to hedge your existing long positions in equities.
Remember ?Sell in May and Go Away?? I have bad news for you. It?s May 2.
Why should stocks sell off right now? There are a plethora of reasons.
We are just entering the worst six months of the year to own equities. Buy stocks every May and sell them every October and your return on equities for the past 60 years has been zero, despite the indexes going up several thousand percent.
Stocks at a 19X price earnings multiple are at the top end of its historic 9-24X range. Buy high and sell higher? I?ll leave that one to you.
As traders entertain a June rate hike by the Fed, the dollar (UUP) is about to strengthen. This is always terrible news for large US multinationals.
Several large hedge funds are going bust, dumping large amounts of stock on the market. That?s why the Japanese yen has been so strong this week. They?re covering their shorts.
A Q1 mini recession has become a regular feature of the US economy, the aftermath of maxed out credit cards during the holiday shopping season and delayed starts to New Year corporate capital spending programs.
The economy then bounces back hard for the remaining three quarters, but the data won?t show this definitively for 3-6 more months. That?s sets up the annual cycle for the movement of all asset classes which we have learned to both love and hate.
And while QE is gone and dead in the US, it continues full speed ahead in Europe, Japan, and China, which account for 35% of the planet?s GDP.
Therefore, the American stocks that look expensive now at a 19X price earnings multiple become fairly priced in three months, and a bargain in six.
How far in advance do you want to front run the attractive valuations?
In addition, you have to consider the harsh reality that there is absolutely nothing else to buy. US 30 year Treasury bonds with a 2.69% yield? German 10 year bunds at 0.27%? Japanese government bonds at -0.11%. Not a lot to choose from.
How about collectable French postage stamps? Beanie babies anyone?
The fact is that EQUITIES HAVE BECOME THE HIGH YIELD INSTRUMENTS OF OUR DAY.
You can get 2.10% for the S&P 500, and much more for damaged names like AT&T (T)(5.04%), Altria Group (MO)(3.68%), Chevron (CVX)(4.18%), and Verizon Communications (VZ)(4.52%).
The world is still on a giant paper chase, as it has been for the last seven years. The only difference now is that we are shifting from fixed income to equity script.
So when we get our 10% summer correction, you have to jump in with both hands and buy as much stock as you can.
This year is special in that we are likely to get a presidential election that is equity positive. We may even have a shot at an end of congressional deadlock, which would open the fiscal spending floodgates.
I?ll let you guess which result delivers that.
Stocks are almost certainly flying to new all times highs going into the end of 2016. I?m looking for at least a $220 print, a gain of 6.8% from here. If you cash out now, you?ll be kicking yourself around the Christmas tree.
Newbie traders working without the benefit of the Mad Hedge Fund Trader will end up selling every bottom, buying every top, and then wonder where all their money went.
If you are an elderly retiree, or just a plain wimp, and don?t want to trade these big moves, just take a long cruise. You will find share prices pleasantly higher at the end of 2016, and wonder what all the fuss was about.
I recommend the Cunard World Cruise (click here for the link at http://www.cunard.com/cruise-types/world-cruises/ ). You can use my regular owner?s suite.
Those of you counting on getting your old union assembly line job back in Detroit can forget it.
The eight year forecast published by the Bureau of Labor Statistics shows that 4.19 million jobs will be gained in the US in professional and business services, followed by 4 million health care and social assistance jobs, while 1.2 million will be lost in manufacturing.
This is great news for website designers, internet entrepreneurs, registered nurses, and masseuses in California, but grim tidings for traditional metal bashers in the rust belt manufacturing states like Michigan, Indiana and Ohio.
I?m so old now that I am no longer asked for a driver?s license to get into a nightclub. Instead, they ask for a carbon dating.
The real challenge for we aged career advisors is that probably half of these new service jobs haven?t even been invented yet, and if they can be described, it is only in a cheesy science fiction paperback with a half-dressed blond on the front cover.
After all, who heard of a webmaster, a cell phone contract sales person or a blogger 40 years ago?
Where are all these jobs going? You guessed it, China, which by my calculation, has imported 25 million jobs from the US over the past decade.
You can also blame other lower waged, upstream manufacturing countries like Vietnam, where the Middle Kingdom is increasingly subcontracting its own offshoring.
These forecasts may be optimistic, because they assume that Americans can continue to claw their way up the value chain in the global economy and not get stuck along the way, as the Japanese did in the nineties.
The US desperately needs no less than 27 million new jobs to soak up natural population and immigration growth and get us back to a traditional 5% unemployment rate. The only way that is going to happen is for America to invent something new and big, and fast.
Personal computers achieved this during the eighties, and the internet did the trick in the nineties. The fact that we?ve done squat since 2000 but create a giant paper chase of subprime loans and derivatives explains why job growth since then has been zero, real wage growth has been negative, and American standards of living are falling.
While the current crop of politicians extol the virtues of education, the reality is that we are dumbing down our public education system. How do we invent the next ?new? thing, while shrinking the University of California?s budget by 25% two years in a row?
If my local high school can?t afford new computers, how is it going to feed Silicon Valley with computer literate work force? The US has a ?Michael Jackson? economy. It?s still living like a rock star, but hasn?t had a hit in 20 years.
China can have all the $20 a day jobs it wants. But if it accelerates its move up the value chain, as it clearly aspires to do, then America is in for even harder times.
I?ll be hoping for the best, but preparing for the worst. How do you say ?unemployment check? in Mandarin?
Is This Your Future?
Going to renew my membership today because you provide great ideas. I think you have a lot of integrity in your messages.? We may not agree politically, but you have nailed many of the concepts you shepherd.? I have become a fan and look forward to your writing every day.
Don
Cleveland, Ohio
I?m Such a Saint!Global Market Comments
April 29, 2016
Fiat Lux
SPECIAL REIT ISSUE
Featured Trade:
(THE DEATH OF THE MALL),
? (SPG), (MAC), (TCO)
Simon Property Group Inc. (SPG)
The Macerich Company (MAC)
Taubman Centers, Inc. (TCO)
?
We?ve all heard this story before.
Malls are dying. Commerce is moving online at breakneck pace. Investing in retail is a death wish.
No less a figure than Bill Gates, Senior told me that in a decade malls would only be inhabited by climbing walls and paintball courses, and that was a decade ago.
Except it didn?t quite work out that way. Some malls are playing out Mr. Gates? dire forecast. But others are booming. It turns out that there are malls, and then there are malls.
There is one big kicker here that no one is noticing except me. If my prediction that this is not a low interest rate decade, but a low interest rate century turns out to be correct, then mall REIT?s with their high yields are the ?BUY? of the century.
Let me expand a bit on my thesis.
Technology is moving forward at an exponential rate. As a result, product performances are improving dramatically, while costs are falling. While commodity and energy prices are rising, they are but a tiny fraction of the cost of production.
In other words, DEFLATION IS HERE TO STAY!
The nearest hint of real inflation won?t arrive until the 2020?s when Millennials become big spenders, driving up the cost of everything.
We also have the most dovish Federal Reserve in history. Until my former economics professor Janet Yellen sees ?the whites of inflation?s eyes? she?ll limit interest rate hikes to a quarter point a year, if that. That?s until we go into the next recession, when US rates will go negative.
So with that issue decided, let's go back to the REIT thing. Real Estate Investment Trust?s are a creation of the Internal Revenue Code, which gives preferential tax treatment for investment in malls and other income generating properties.
There are 1,100 malls in the United States. Some 464 of these are rated as B+ or better and are concentrated in the biggest spending parts of the country (San Francisco, Beverly Hills, Greenwich, CT, etc).
Trading and investing for a half century, I have noticed that most mangers are backward looking, betting that existing trends will continue forever. As a result, their returns are mediocre at best and terrible at worst.
Truly brilliant managers make big bets on what is going to happen next. They are constantly on the lookout for trend reversals, new technologies, and epochal structural changes to our rapidly evolving modern economy.
I am one of those kinds of managers.
These are not your father?s malls. It turns out the best quality malls are booming, while second and third tier ones are dying the slow painful death that Mr. Gates outlined.
It is all a reflection of the ongoing American concentration of wealth at the top. If you are selling to the top 1% of wealth owners in the country, business is great. If fact, if you cater to the top 20%, things are pretty damn fine.
You can see this in the top income producing tenants in the ?class A? malls. In 2000, they comprised J.C. Penney, Sears, and Victoria?s Secret. Now Apple, L Brands, and Foot Locker are sought after renters. Put an Apple store in a mall, and it is golden.
And what about that online thing?
After 20 years of online commerce, the business has become so competitive that profit margins have been beaten to death. You can bleed yourself white watching Google Adwords empty out your bank account. I know, because I?ve tried it.
Many online only businesses are now losing money, desperately searching for that perfect algorithm that will bail them out, going head to head against the geniuses at Amazon.
I open my email account every morning and find hundreds of solicitations for everything from discount deals on 7 For All Mankind jeans, to the new hot day trading newsletter, to the latest male enhancement drug (although why they think I need the latter is beyond me).
Needless to say, it is tough to get noticed in such an environment.
It turns out that the most successful consumer products these days have a very attractive tactile and physical element to them. Look no further than Apple products, which are sleek, smooth, and have an almost sexual attraction to them.
I know Steve Jobs drove his team relentlessly to achieve exactly this effect. No surprise then that Apple is the most successful company in history, and can pay astronomical rents for the most prime of prime retail spaces.
It turns out that ?Clicks to Bricks? is becoming a dominant business strategy. A combination of the two is presently generating the highest returns on investment in retail today.
People start out by finding a product online, and then going to the local mall to try it on, touch it , and feel it.
Research shows that two thirds of Millennials prefer buying their clothes and shoes at malls. Once there, the probability of a serendipitous purchase is far great than online, anywhere from 20% to 60% of the time.
This explains why pure online businesses by the hundreds are rushing to get a foothold in the highest end malls.
Immediate contact with a physical customer give retailers a big advantage, gaining them the market intelligence they need to stay ahead of the pack. In ?fast fashion? retailers like H&M and Uniqlo, which turn over their inventories every two weeks, this is a really big deal.
There?s more to the story. Malls are not just shopping centers, they have become entertainment destinations. With an ever increasing share of the population chained to their computers all day, the demand for a full out-of-the-house shopping, dining, and entertainment family experience is rising.
Notice how Merry Go Rounds have started popping up at the best properties. Imax Theaters are spreading like wildfire. And yes, they have climbing walls too. I have not seen any paintball courses yet, but the guns and accessories are for sale.
This is why all of the highest rated malls in the country are effectively full. If you want space there you have to wait in line. REIT managers pray for tenant bankruptcies so they can jack up rents on the next incoming client, or pivot their strategy towards a new retail niche.
Malls are also in the sweet spot in the alternative energy game. Lots of floor space means plenty of roof space. That means they can cash in on the 30% federal investment tax credit for solar roof installations. Some malls in sunny states are net power generators, effectively turning them into mini local power utilities.
Fortunately for we investors, we are spoiled for choice in the number of securities we can consider. Many have a return on investment of 9-11%, a portion of which is passed on to the end investor.
There are now 25 REIT?s in the S&P 500. The sector has become so important that the ratings firm is about to create a separate REIT subsector within the index.
According to NAREIT.com (click here for the link at https://www.reit.com/nareit ), these are some of the largest mall related investment vehicles in the country:
Simon Growth Property (SPG) is the largest REIT in the country, with 241 million square feet in the US and Asia. It is a fully integrated real estate company which operates from five retail real estate platforms: regional malls, Premium Outlet Centers, The Mills, community/lifestyle centers and international properties. It pays a 3.17% dividend.
Macerich Co. (MAC) is a California based company that is the third largest REIT operator in the country. It has been growing though acquisitions for the past decade. It pays a 3.53% dividend.
Taubman Centers, Inc. (TCO) runs a national network of malls in some of the priciest zip code in the country. Properties include th
e Beverly Center in Los Angeles, Stamford Town Center in Stamford, CT, and the Fair Oaks mall in Fairfax, VA. It was established by the late Alfred Taubman of Sotheby?s fame. It pays a 3.41% dividend.
Mind you, REIT?s are not exactly risk free investments. To get the high returns you take on more risk. We remember how disastrously the sector did when the credit crunch hit during the 2009 financial crisis. Many went under, while others escaped by the skin of their teeth.
There are a few things that can go wrong with malls. Local economies can die, as exemplified by Detroit. Populations age, shifting them out of a big spending age group.
These are all highly leveraged companies, so any prolonged rise in interest rates could be damaging. But as I pointed out before, there is little chance of that in the near future.
The bottom line here is that we are seeing anything but the death of the mall. It just depends on the mall.
All in all, if you are looking for income and yield, which everyone on the planet is currently pursuing, then picking up some REIT?s could be one of your best calls of the year.
"There is tremendous amounts of money sitting on the sidelines. There is enormous M&A activity. The greatest thinkers in the corporate world are saying that it is cheaper to buy than to build. This says to me that the stock market still has value in it. We?re a long way from expensive,? said Milton Ezrati, senior economist and market strategist for money management giant, Lord Abbett.
Global Market Comments
April 28, 2016
Fiat Lux
Featured Trade:
(JUMPING BACK INTO APPLE),
(AAPL),
(THE SECOND AMERICAN INDUSTRIAL REVOLUTION),
(INDU), (SPY), (QQQ), (GLD), (DBA),
(TSLA), (GOOGL), (XLK), (IBB), (XLE)
Dow Jones Industrial Average (^DJI)
SPDR S&P 500 ETF (SPY)
PowerShares QQQ ETF (QQQ)
SPDR Gold Shares (GLD)
PowerShares DB Agriculture ETF (DBA)
Tesla Motors, Inc. (TSLA)
Alphabet Inc. (GOOGL)
Technology Select Sector SPDR ETF (XLK)
iShares Nasdaq Biotechnology (IBB)
Energy Select Sector SPDR ETF (XLE)
I have been holding back from buying Apple shares (AAPL) for the past 10 months, since back in June, 2015, the last time the shares peaked at $132.50.
That was when the stock fully discounted the launch of the iPhone 6s, it's last blockbuster product. I knew then that the company was about to enter a wide parched desert of falling sales, declining earnings, and sliding share prices.
We have just reached the end of that desert.
I have been saying for all of 2016 to buy (AAPL) after the disastrous Q1 earnings. So I am going to put my money where my mouth is and do exactly that.
From today?s $95.20 low the shares have to gain 28.15% to match their old high. I expect them to do exactly that by the end of the year.
The driver will be the launch of the iPhone 7 in September, which the entire world is obviously holding back to buy.
From this point on, Apple is a long play. Put your buying boots on, stop those buy rights, sell short some puts, salt away some shares in your 401k. I?m talking about a total risk reversal here.
Worst case, you lose $5; best case, you make $37.30. A risk/reward ratio like that is hard to find these days in this indifferent market.
With a PE multiple of 9X and $230 billion in cash on the books, every value player in the world is going to be forced to load up on these shares or get fired.
If you buy the stock, you will be competing with the company to do so, which announced a further $50 billion in buy backs yesterday.
It was definitely a pig of an earnings report that took the stock down 8% at the opening. Sales of its flagship product, iPhones, at 51.2 million units were actually better than the 50.3 million units that were expected.
But overall sales fell for the first time in 13 years. China revenues were down an eye popping 26%. The comps were terrible. But then, we knew all this was coming.
I thought there were more positives in the report than negatives. Service revenues leapt by 20% and are now the second biggest earner in the company, after iPhones. That?s where the future of the company lies, in things like Apple Pay and itunes.
The dividend will be increased by 10% to 2.20%. In a NIRP (negative interest rate) world that is positively high yield.
Record numbers of Android owners are switching to iPhones.
I have covered this company for 36 years and knew co-founder Steve Wozniak when he was a teenager. My first ?buy? of the stock was at a split-adjusted price of $1.
There is one thing that I have learned.
When things are good, they are never as good as people think they are. When they are bad, things are really not as bad as they appear either.
This is one of those latter times.
Circulating among Europe's top global strategists this spring, visiting their corner offices, camping out in their vacation villas, or cruising on their yachts, I am increasingly hearing about a new investment theme that will lead markets for the next 20 years: The Second American Industrial Revolution.
It goes something like this.
You remember the first Industrial Revolution, don't you? I remember it like it was yesterday.
It started in 1775 when a Scottish instrument maker named James Watt invented the modern steam engine.? Originally employed for pumping water out of a deep Shropshire coalmine, within 32 years it was powering Robert Fulton's first commercially successful steamship, the Clermont, up the Hudson River.
The first Industrial Revolution enabled a massive increase in standards of living, kept inflation near zero for a century, and allowed the planet's population to soar from 1 billion to 7 billion. We are still reaping its immeasurable benefits.
The Second Industrial Revolution is centering on my own neighborhood of San Francisco. It seems like almost every garage in the city is now devoted to a start up.
The cars have been flushed out onto the streets, making urban parking here a total nightmare. These are turbo charging the rate of technological advancement.
Successes go public rapidly and rake in billions of dollars for the founders overnight.? Thirty-year-old billionaires are becoming commonplace.
However, unlike with past winners, these newly minted titans of industry don?t lock their wealth up in mega mansions, private jets, or the Treasury bond market.
They buy a Tesla Model S-1 (TSLA), and then reinvest the rest of their windfall in a dozen other startups, seeking to repeat a winning formula.
Many do it.
Thus, the amount of capital available for new ideas is growing by leaps and bounds. As a result, the economy will benefit from the creation of more new technology in the next ten years than it has seen in the past 200.
Computing power is doubling every year. That means your iPhone will have a billion times more computing power in a decade. 3-D printing is jumping from the hobby world into large-scale manufacturing. In fact, Elon Musk's Space X is already making rocket engine parts on such machines.
Drones came out of nowhere, and are now popping up everywhere.
And don?t get me started on virtual reality. Ever wanted to date Cybil Shepherd or Nicole Kidman? How about both, at the same time? The possibilities boggle the mind.
It is not just new things that are being invented. Fantastic new ways to analyze and store data, known as ?big data? are being created.
Unheard of new means of social organization are appearing at breakneck speed, leading to a sharing economy. Much of the new economy is not about invention, but organization.
The Uber taxi service has created $65 billion in market capitalization in only five years, and is poised to replace UPS, FedEx, and the US Postal Service with ?same hour? intracity deliveries.?Now they are offering ?Uber Eats? in my neighborhood, which will deliver you anything you want to eat, hot, in ten minutes!?
Airbnb is arranging accommodation for 1 million guests a month, including 120,000 in Brazil for last year?s World Cup. They even had 189 German guests staying with Brazilians. I bet those were interesting living rooms on the final day! (Germany won).
As for me, I am planning my own all Airbnb trip to Europe next summer. It should be interesting.
And you are going to spend a lot of Saturday nights at home alone if you haven?t heard of Match.com, eHarmony.com, or Badoo.com.
Biotechnology (IBB), an also-ran for the past half-century, is sprinting to make up for lost time. The field has grown from a dozen scientists in my day 40 years ago, to several hundred thousand today.
The payoff will be the cure of every major disease, like cancer, Parkinson?s, heart disease, AIDS, and diabetes, within ten years. Some of the harder cases, such as arthritis, may take a little longer. Soon, we will be able to manipulate our own DNA at will.
The upshot will be the creation of a massive global market for these cures, generating immense profits. American firms will dominate this area, as well.
Energy is the third leg of the innovation powerhouse. Into this basket you can throw in solar, wind, batteries, biodiesel, and even ?new? nuclear.? The new Tesla home battery will be a game changer. Visionary, Elon Musk, is ramping up to to make tens of millions of these things.
The message to big oil is that Elon sold 400,000 of his new Tesla 3?s in just two weeks, and that is for a car that won?t be delivered for two more years.
Use of existing carbon based fuel sources, such as oil and natural gas, will become vastly more efficient. Fracking is unleashing unlimited new domestic supplies at costs that are falling at an incredible rate.
Welcome to ?Saudi America.?
The government has ordered Detroit to boost vehicle mileages to an average 55 miles per gallon by 2025. The big firms have all told me they plan to beat that deadline, not litigate it, a complete reversal of philosophy.
Coal will be burned in impoverished emerging markets only, before it disappears completely. Energy costs will drop to a fraction of today?s levels, further boosting corporate profits.
If you thought the Internet was big, free energy will have a far greater impact on the global economy.
Coal will die, not because of some environmental panacea, but because it is too expensive to rip out of the ground and transport around the world when all of the costs are factored in.
Seven years ago, I used to get two pitches for venture capital investments a quarter, if any. Now, I am getting two a day. I can understand only half of them (those that deal with energy and biotech, and some tech, where I have a background).
My friends at Google Venture Capital are getting inundated with 20 a day each! How they keep all of these stories straight is beyond me. I guess that?s why they work for Google (GOOGL).
The rate of change for technology, our economy, and for the financial markets will accelerate to more than exponential.
It took 32 years to make the leap from steam engine powered pumps to ships, and was a result of a chance transatlantic trip by Robert Fulton to England, where he stumbled across a huffing and puffing steam engine.
Such a generational change is likely to occur in 32 minutes in today?s hyper connected world, and much shorter if you work on antivirus software (or write the viruses themselves!).
The demographic outlook is about to dramatically improve, flipping from a headwind to a tailwind in 2022. That?s when the population starts producing more big spending Gen Xer?s and fewer oversaving and underproducing baby boomers. This alone should add at least 1-2% a year to GDP growth.
China is disappearing as a drag on the US economy. During the nineties and the naughts, they probably sucked 25 million jobs out of the US.
With an ?onshoring? trend now in full swing, the jobs ledger has swung into America?s favor. This is one reason that unemployment is steadily falling. Joblessness is becoming China?s problem, not ours.
The consequences for the financial markets will be nothing less than mind boggling. The short answer is higher for everything. Skyrocketing earnings take equity markets to the moon.? Multiples blast off through the top end of historic ranges. The US returns to a steady 4% a year GDP growth in the 2020's.
What am I bid for the Dow Average (INDU), (SPY), (QQQ) in 2030? Did I hear 300,000, a 17-fold pop from today?s level? Or more?
Don?t think I have been smoking the local agricultural products in arriving at these numbers. That is exactly the gain that I saw during 1982 to 2000, when the stock average also appreciated 17 fold, from 600 to 10,000.
Th
ey?re playing the same movie all over again. Except this time, it?s on triple fast forward.
There will also be commodities (DBA) and real estate booms. Even gold (GLD) gets bid up by emerging central banks bent on increasing their holdings to western levels.
I tell my kids to save their money, not to fritter it away day trading now, because anything they buy in 2020 will increase in value tenfold by 2030. They?ll all look like geniuses, like I did during the eighties.
After that, I will be 78, and it will be up to them to figure out what is going to happen next.
What are my strategists friends doing about this forecast? They are throwing money into US stocks with both bands, especially in technology (XLK), biotech (IBB), and energy (XLE).
That?s why the market bounced back so hard from the 10% correct in Q1.
This could go on for decades.
Just thought you?d like to know.