Global Market Comments
September 16, 2016
Fiat Lux
SPECIAL RAILROAD ISSUE
Featured Trade:
(THE BIG COMEBACK IN RAILROADS),
(UNP), (CSX), (NSC), (CP), (KSU)
Union Pacific Corporation (UNP)
CSX Corp. (CSX)
Norfolk Southern Corporation (NSC)
Canadian Pacific Railway Limited (CP)
Kansas City Southern (KSU)
Want to know the best way to play the coming recovery in oil, commodities, precious metals, and emerging markets?
Buy the railroads. At least if you are early, you still have a functioning, cash flow positive business, unlike the rest of the above.
Since they peaked in early 2015, railroad stocks have been beaten like the proverbial red-headed stepchild, trading with the collapse in oil and coal tick for tick. Lead stock Union Pacific (UNP) has seen its share price crater by 36% since then before recently recovering half of that.
What follows a global synchronized slowdown, led by China and emerging markets? A global synchronized recovery, led by China and emerging markets.
I love railroads because they used to belch smoke and steam and have these incredibly loud, romantic, wailing whistles.
In fact, my first career goal in life (when I was 5) was to become a train engineer. By the time I was old enough to know better, American railroads almost no longer existed.
It turns out that the railroads today are a great proxy for the health of the entire global economy. They are, in effect, our canary in the coalmine.
If oil prices stay low enough for long enough, it will boost demand for everything else that Union Pacific ships, including houses, furniture, cars, and every other sweet spot for their franchise.
Union Pacific (UNP), in effect, has a great internal hedge for its many businesses. When one product line weakens, another strengthens. This has been going on since the 19th century.
The industry is carefully watching the construction of a second Panama Canal across Nicaragua (click here for ?Who the Grand Nicaragua Canal Has Worried?).
If completed by its Chinese promoters within the next decade, it could bring an incremental shift of traffic from the US West Coast to the Gulf Ports.
Even this is a mixed bag, as this will move some business away from strike-plagued ports that are currently causing so much trouble.
When I rode Amtrak?s California Zephyr from Chicago to San Francisco in 2014, I passed countless trains heading west hauling hoppers full of coal for shipment to China.
Last year? I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.
Take a look at the charts below, and you will see that the shares of virtually the entire railroad industry are breaking out to the upside.
In two short years, the big railroads have completely changed their spots, magically morphing from fading coal plays to emerging oil ones.
You?ve heard of ?fast fashion?? This is ?fast railroading?.
Today the big business is coming from the fracking boom, shipping oil from North Dakota?s Bakken field to destinations south. In fact, the first trainload of Texas tea arrived here in the San Francisco Bay area only a couple of years ago, displacing crude that formerly came from Alaska.
There are a wealth of interesting companies in the railroad sector now. You could almost pick any one.
These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), Kansas City Southern (KSU) and Canadian Pacific (CP).
Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service.
A friend of mine, taking a passenger train from New Mexico to Los Angeles, found his car abandoned on a siding for 24 hours where he froze and starved until he was discovered.
New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy.
The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government-owned Amtrak passenger service was created out of the ashes.
I know all of this because my late uncle was the treasurer of Penn Central.
Fast forward nearly half a century, and what you find is not your father?s railroad.
While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and lines were reorganized and consolidated.
The government provided a major assist with sweeping deregulation. It became tremendously concentrated, with just four companies dominating the country, down from hundreds a century ago, giving you a great oligopoly play.
The quality of management improved dramatically.
Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from West Coast Ports.
A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.
All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment.
The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.
Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa.
Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double stacked sea containers.
Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic.
Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.
I have some firsthand knowledge of this expansion. Every October 1st, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in.
There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.
During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad.
I can guide my guests through that tunnel today with flashlights because Union Pacific (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.
While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing and another energy renaissance) and Canada (natural resources) promise to boost rail traffic with the US.
The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, providing all great cargo for railroads.
And who knew?
Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four time
s more energy efficient than competing trucks.
In fact, many companies are now looking to railroads to reduce their overall carbon footprint. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad six years ago has probably doubled in value since then.
You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities.
My past letters have chronicled adventures riding the Orient Express from London to Venice and Amtrak from New York to San Francisco.
I even once considered buying my own steam railroad, the fabled ?Skunk? train in Mendocino, California, until I figured out it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.
It gets worse.
Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.
The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition, and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.
When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, click here and hit the ?PLAY? arrow in the lower left hand corner.
Please excuse the shaky picture. I shot this with one hand, while using my other hand to keep my over- excited kids from running onto the tracks to touch the laboring beast.
Railroads all look like ripe, ?buy on dips? low-hanging fruit to me.
Global Market Comments
September 15, 2016
Fiat Lux
Featured Trade:
(OCTOBER 7TH INCLINE VILLAGE, NV GLOBAL STRATEGY LUNCHEON),
(DON?T TOUCH THE COAL BUBBLE),
(KOL), (BHP), (TCK),
(TEN TIPS FOR SURVIVING A DAY OFF WITH ME)
VanEck Vectors Coal ETF (KOL)
BHP Billiton Limited (BHP)
Teck Resources Limited (TCK)
What has been the top performing asset class so far in 2016?
Is it gold (GLD), oil (USO), or collectable French postage stamps?
If you said ?coal,? you win the kewpie doll. In fact, the 19th century energy source is the best performing commodity of the year by a large margin.
Indeed, the Van Eck Coal ETF (KOL) has picked up an eye popping 130% since it printed its $5 low in the first week of? January.
As a result, I have recently been deluged by readers asking if it is time to buy this prehistoric energy source.
My answer is no, not ever, and not even with Donald Trump?s money.
However, my answer relies more on basic market dynamics, rather than any environmental sympathies I might have.
It all has to do with China.
The Beijing government is manipulating its domestic coal industry to prevent it from defaulting on hundreds of billions of dollars worth of loans to local banks.
So it has cut back the number of days the industry can operate from 330 to 276 days a year.
Then the Chinese economy started to improve.
What happens when you restrict supply and increase demand? Prices go through the roof, as they have done smartly.
It gets better.
In August, the Middle Kingdom was hit with rainstorms of biblical proportions, flooding many mines and forcing them to close. The sushi hit the fan.
That forced major consumers, the big steel producers and electric power plants, to resort to the international spot market, or the ?seaborne market? to cover shortages to avoid shutting down themselves.
Who is the world?s largest supplier to the seaborne market?
That would be BHP Billiton (BHP), the largest capitalized company in Australia, which has seen its shares appreciate by 65% since January.
I have been following coal for 45 years, ever since I was the coal correspondent for the Australian Financial Review (AFR) during the 1970s.
I had to write a mind-numbing five pieces a week on coal (the AFR was a daily). So it?s safe to say that I know which end of a lump of coal to hold upward.
For a start, you never want to invest in an asset that is dependent on government fiat for rising prices. They can change their minds at any time. The loans in question could get paid off.
And you can count on the world market to suddenly find new supplies whenever of commodity price doubles.
Remember the Rare Earths' bubble, where we were active players? After a hyperbolic bubble, prices fell by 90%. Rare earths turned out to be not so rare. Only the cheap labor to extract them was exempt from environmental regulation.
So you can count on the current coal bubble to deflate fairly quickly. The perfect storm is about to run in reverse.
That leaves us with the long term fundamentals of coal which are bleak, to say the least.
China is far and away the world?s largest coal consumer at 49%, followed by the US at 11%.
China is making every effort to reduce reliance on this cheapest form of energy, thanks to the blinding, choking smog alerts besetting its largest cities.
It is only still using coal because with an economy growing at 6% a year plus, it has to rely on every energy form just to keep the lights only. Power brownouts can lead to political instability.
Coal consumption in the US has been in a death spiral for years, falling from 50% to 33% of electric power generation over the past decade. That led to the bankruptcy of several of its largest players such as Arch Coal (ACI) and Peabody Energy (BTU).
The collapse of natural gas prices to $2/btu made a cleaner burning alternative cost competitive. And gas lacks the nitrous and sulfur oxides and particulate pollution prevalent in coal.
Read the prospectus of any electric power company and you will find them besieged by lawsuits from consumers claiming that the coal they burned caused their cancers. Utility companies would love to be rid of it.
Any reluctance by US companies to dispense with coal were blown away last year when the Environmental Protection Agency classified carbon dioxide as toxic waste. That put a big fat bulls eye on the remaining coal companies.
If Hillary Clinton wins the presidency, you can expect restrictions to worsen. She hates coal and makes no bones about it. She has told me so personally.
And then there?s solar energy. This week, California Governor Jerry Brown signed the nation?s toughest climate legislation mandating a cut in the state's greenhouse gas emissions to 40% below 1990 levels by 2030.
While ambitious, the target is viewed as doable. Solar energy, which now accounts for 5% of the state?s power output, will do the heavy lifting.
Many other states are expected to follow suit. No coal here.
The United Kingdom has already taken this path. It says a lot that a country that ran a coal-based economy for 300 years announced the closing of its last mine which it did a few months ago. It will replace the power output with alternatives.
Having lived in England during the violent miner?s strikes during the early 1980?s, it was quite a revelation.
So the writing is on the wall. Another major producer, Anglo American (NGLB.BE), is now in contract to sell two major mines in Australia.
Coal is an energy source whose time has clearly come and gone. So will the price of coal.
Global Market Comments
September 14, 2016
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE SEPTEMBER 16TH PORTLAND, OR GLOBAL STRATEGY LUNCHEON),
(10 REASONS WHY JANET YELLEN WON?T RAISE RATES),
(UUP),
(LAUNCHING ?TRADING OPTIONS FOR BEGINNERS?)
PowerShares DB US Dollar Bullish ETF (UUP)
Come join me for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Portland, OR at 12:00 PM on Friday, September 16, 2016.
A three-course lunch will be followed by an extended question and answer period.
I?ll be giving you my up to date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing 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 are available for $208.
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. I expect a small group, so there will be plenty of opportunities to exchange ideas.
The lunch will be held at five star downtown Portland hotel, the exact location of which will be emailed to you with your confirmation.?
I look forward to meeting you, and thank you for supporting my research.
To purchase tickets for the luncheon, please click here.
No way, Jose.
That is my read on the likelihood of the Federal Reserve raising interest rates at next week?s Open Market Committee meeting.
The evidence against it is overwhelming. Here are ten reasons why:
1) Chairwoman Janet Yellen has told me on many occasions that she will not raise interest rates until she sees ?the whites of inflation?s eyes? to paraphrase a Battle of Bunker Hill metaphor (we lost that one).
There is no inflation of any kind anywhere in the world. Deflation is still rampant. A US CPI of 0.8% YOY is not what rate hikes are made of.
2) The US economic data has recently slowed. Central banks are supposed to raise rates to prevent economies from getting overheated.
Overheated?
August Nonfarm Payroll came in at a lowly 151,000. The August ISM Manufacturing Index plunged from 52.6 to 49.9, a six year low. To a data dependent Fed, these numbers are shouting ?STOP?.
Need I say more?
3) Remember that election? The Fed is loathe to take any action before November 8. If the economy were in free fall, as in 2008, or going to the moon, like we saw in 1999 that would be a different story. But it?s not.
4) Even the hint, the rumor, or even a scintilla of a rate rise is keeping the US dollar at its high for the year. That is wreaking havoc with US multinationals which are seeing their products priced out of the international markets. This alone is a significant drag on the economy.
5) Watch the Fed fund futures. It is showing a 20% probability of a rate rise on September 20, or a one in five chance. Always follow the people who are putting their money where their mouths are, not the talking heads or dime newsletters that flood the Internet.
6) By the way, the same Fed funds futures are showing only a 48% chance of a December rate rise, which means there is a better than even chance that there will be NO rate rise in 2016. Did I mention that has been my view all year?
?
7) After watching the Fed for 45 years I can tell you that when in doubt, the fed always does nothing (remember the magisterial Arthur F. Burns?). It NEVER makes 50/50 calls.
8) Remember that black long chain carbon molecule, oil. Its price is in free fall again. That is delivering another deathblow to the oil patch, which accounts for 6% of US GDP (formerly 10%). I?m sure the new Dallas Fed governor has views on this situation.
9) Thanks to a gale force deflationary headwind, the Fed will be limited to only eight quarter point rate rises in this business cycle, and it has already used one. Why waste a rate hike now, when dry powder in the future is more valuable.
10) While the longest economic recovery in history is slow, but steady, it has also been uneven at best.
Growth has primarily been focused on the coasts, while those left behind by globalization in the Midwest and South are still suffering.
For many of these unfortunate people, the 2008 recession never ended. A rate rise just might push them over the edge.
To sum it all up, inertia is always a huge influence at the Fed.
Yes, we are already in a rate raising cycle in the wake of the December, 2015 25 basis point snugging. The Fed will raise again, it?s just a question of when.
And while there has been an abundance of Fed speakers over the past week, in the end, only one view counts.
That would be the one of my former UC Berkeley economics professor, Janet Yellen, possibly the most dovish Fed chairperson in history.
I rest my case.
Global Market Comments
September 13, 2016
Fiat Lux
Featured Trade:
(STOCKS TO BUY FOR A TRUMP WIN IN NOVEMBER),
(CVX), (XOM), (COP), (BP), (RIG), (DO), (BTUUUQ),
(CCJ), (CHK), (DVN), (NOC), (GD), (ZMH), (UNH),
(HUM), (PFE), (AAPL), (UNP), (BAC),
(SEPTEMBER 14TH GLOBAL STRATEGY WEBINAR),
(ARE YOU IN THE 1%?),
(SNE), (HMC)
Chevron Corporation (CVX)
Exxon Mobil Corporation (XOM)
ConocoPhillips (COP)
BP p.l.c. (BP)
Transocean Ltd. (RIG)
Diamond Offshore Drilling, Inc. (DO)
Peabody Energy Corporation (BTU)
Cameco Corporation (CCJ)
Chesapeake Energy Corporation (CHK)
Devon Energy Corporation (DVN)
Northrop Grumman Corporation (NOC)
General Dynamics Corporation (GD)
Zimmer Biomet Holdings, Inc. (ZMH)
UnitedHealth Group Incorporated (UNH)
Humana Inc. (HUM)
Pfizer Inc. (PFE)
Apple Inc. (AAPL)
Union Pacific Corporation (UNP)
Bank of America Corporation (BAC)
Sony Corporation (SNE)
Honda Motor Co., Ltd. (HMC)
Given Hillary's stumble last weekend, both literally and figuratively, we have to consider the unimaginable, a Trump win in November.
For a start, let's discount the obvious. Volatility will absolutely go through the roof and live there for the next four years. The old 90 handle high hit in the fall of 2008 will be a chip shot and may even print the day after the election.
Vol traders will think they've died and gone to heaven.
What would a Trump win in November mean for your portfolio?
I had a lot of fun with this one.
I spoke to more than a dozen investors, all Republicans, and the responses I received were as varied as they were interesting.
Of course, the knee jerk reaction was to recommend concrete stocks, as Trump has promised to build a 2,000 mile, 20 foot high wall along the Mexican border.
That won?t work because Trump is going to get the Mexicans to pay for the wall. So that means the business will go to Mexican cement companies, if there is such a thing.
How about airlines to transport 11 million deportees back to their home countries? Nope. These would all be one-way trips, and the planes would have to return empty. What kind of business model is that?
A Trump win in November is not impossible. He could motivate tens of millions of angry, underemployed, gun toting blue-collar workers, while preventing traditional loyal moderate Republicans from staying home. Add that to a low Democratic turn out, and he just might pull it off.
This is an easy call to make. Expect a dramatic roll back of the leftward policies the country has adopted over the last seven years, and a sudden, drastic lurch to the right. The lists of winners and losers are huge.
In fact, if you look at the charts below, many of the stocks I am suggesting have already started to discount a conservative win.
It is hard to imagine big oil companies not being the biggest winners from a Trump win. American oil imports from the Middle East will accelerate, where the industry earns 80% of its profits.
You want a war to get oil prices up? No problem! Donald will give you more wars than you imagine possible.
That will take oil over $100/barrel quickly, and eventually to $150 or $200. Restrictions on both onshore and offshore drilling will get rolled back to their Bush era laissez faire levels, cutting costs and boosting profitability.
You want to own Chevron (CVX), ExxonMobil (XOM), Conoco Phillips (COP), and of course, BP (BP). The drilling and service companies, like Transocean (RIG) and Diamond Offshore (DO), should come roaring back from the graveyard.
Coal will benefit immensely from relaxed environmental regulation, paving the way for more exports to China. You want to own the few companies that have yet to go bankrupt, like Peabody Energy (BTU). The railroads will love this too because 70% of their profits are earned hauling coal, especially Union Pacific (UNP) with its East-West routes.
Nuclear Energy is a big beneficiary here, which should drive you into Shaw Group (SHAW) and top uranium producer Cameco (CCJ).
Forget about natural gas companies, like Chesapeake Energy (CHK) and Devon Energy (DVN). Relaxed environmental controls will give the green flag to the new fracking technology that is unleashing huge supplies on the market, driving prices for CH4 into the basement.
After all, it?s about free enterprise now!
The Trump portfolio should also have a heavy weighting in defense companies, as an expanded war against terrorism means we will be fighting more wars in more places for longer.
Any shopping list should include Northrop Grumman (NOC) and General Dynamics (GD). Also prospering mightily will be the makers of prosthetic limbs for the military, like Zimmer Holdings (ZMH).
Health care is easy. A Republican win in the House would wipe out Obamacare so fast it would make your head spin.
Health care companies like United Health (UNH), Humana (HUM), and Pfizer (PFE) will rocket, no longer facing the imminent prospect of price controls. The Hillary Tweet will be sent to the dustbin of history.
Major tax cuts for the top 1% of income earners costing $700 billion over ten years and more loopholes for corporations pared with increased defense spending promise to send government deficits through the roof.
Short positions? You want short positions? The Donald promises to deliver fabulous short side trading opportunities up the wazoo. Jim Chanos! Trump is your man!
The mere possibility that Trump will reverse 50 years of globalization is worth at least an immediate 20% market correction because of the enormous uncertainty it will bring. If he actually goes through with it, make that 50%.
This is why the Republican establishment is fighting Trump tooth and nail. They know the party will never survive causing two Great Recessions within a single decade.
You can start with the entire technology industry, which earns over 60% of its profits from abroad. Bring an end to international trade, which Trump is threatening to at least seriously impair, and you can kiss those earnings goodbye.
It also reduces to scrap metal value the hundreds of billions in overseas manufacturing facilities that corporate America has built in Europe and Asia over the last half century.
Apple (AAPL), the most widely owned company in America (and one of the cheapest), would be especially hard hit.? Trump has already singled it out for special abuse.
You can count on subsidies for alternative energy to get axed as unaffordable luxuries even though this industry has created 500,000 jobs in California alone in the past five years.
After all, global warming is nothing more than a leftist hoax, right?
The good news is that the higher oil prices (USO) Republican policies are guaranteed to bring means that green companies of every stripe will be forced to become profitable in their own right, making subsidies unnecessary. Many are already close to accomplishing that.
Remember, Bush policies took crude from $20 to $150/barrel, topping up the Strategic Petroleum Reserve at the absolute top. What better incentive is there to go green than that?
A recession would force Federal Reserve chairwoman Janet Yellen to take the one 25 basis point interest rate hike off the table post haste. That is when the Fed has to start entertaining the negative interest rates already endemic in Europe and Japan.
Needless to say, banks stocks get absolutely demolished in this scenario as their interest rate margins disappear up their own exhaust pipes. Bank of America (BAC) shares, $5 here we come, which was the 2009 crash low.
As the two parties are diametrically and violently opposed to each other on virtually every issue, the impact of a regime change on the economy and the markets promises to be huge. I could write on this subject for days, so these are just the high points.
If elected, Trump may take his file full of draconian proposals and lose it behind a radiator somewhere in
the White House. If he does that, he may find those radiators already stuffed with folders left there by previous presidents.
It wouldn?t be the first time that a president didn?t deliver what he promised on the campaign trail. When markets figure this out, they will rally hard.
You rarely get to choose between diametrically opposed worlds in an election.
This is one of those times.
Be careful what you wish for.
When asked about the urban legend that the vaults at Fort Knox are empty, and that the Fed has no gold, former Federal Reserve Chairman Ben Bernanke responded, ?I?ve been to the basement of the New York Fed. The gold is there. I?ve seen it.?
