Global Market Comments
September 23, 2016
Fiat Lux
Featured Trade:
(OCTOBER 7TH INCLINE VILLAGE, NV GLOBAL STRATEGY LUNCHEON),
(OLD TECH IS BACK!),
(GENERAL ELECTRIC?S IMAGINATION REALLY IS AT WORK),
(GE), (ELUXY), (SYF)
General Electric Company (GE)
AB Electrolux (ELUXY)
Synchrony Financial (SYF)
There is no doubt that old tech is back with a vengeance.
Look at the trifecta of blockbuster earnings reports from Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) recently, and you can reach no other conclusion.
The Microsoft turnaround in particular has been amazing.
PCs, and the software to run them were so 1990s.
After the Dotcom bust in 2000, Microsoft was dead money for years.
Founder Bill Gates retired in 2008. CEO Steve Ballmer finally got the message in 2013, and retired to pay through the nose, some $2 billion, for the basketball team, the LA Clippers.
Succeeding operating systems offered little that was new, and they fell woefully behind the technology curve.
Even I gave away my own machines years ago to switch to Apple devices. These virus immune machines are perfect for a small business like mine, as they seamlessly integrate and all talk to each other.
When the company brought out the Windows Phone in 2010, three years after Apple, people in Silicon Valley laughed.
Long given up for dead as a trading and investment vehicle, the shares have been on a tear in 2015.
The stock is hitting a new all time high FOR THE FIRST TIME IN 15 YEARS!
Satya Nadella, who took over management of the company in 2014, clearly had other ideas. The challenge for Nadella from day one was to move boldly into new technologies, while preserving its legacy Windows business lines.
So far, so good.
The key to the company?s new found success was it?s dumping of its old ?Wintel? strategy of yore that focused entirely on the growth of the PC market.
The problem was that the PC market stopped growing, as the world moved onto the Cloud and mobile.
The company is now rivaling Apple with $100 billion in cash, almost all held tax-free overseas.
EPS growth will reach 10% next year, beating other big competitors.
Windows and servers, the (MSFT)?s core products, still account for 80% of the firm?s business.
But its cloud presence is being ramped up at a frenetic pace, where the future for the company lies, nearly doubling YOY. Mobile technologies, where it has lagged until now, are also on fire.
Rave reviews from its latest operating system upgrade, Windows 10, also helped.
On top of all of this, Microsoft is paying a generous 3% dividend. It?s earnings multiple at 15X makes it a bargain compared to other big tech companies and the rest of the market.
As I explained in my recent research piece ?Switching From Growth to Value? (click here?), Microsoft makes a perfect investment for a mature bull market.
It is not only at a multiple discount to the rest of the market, now at 18X, it is cheap when compared to the rest of its own sector as well.
This is when investors and traders bail from their high priced stocks to safer, lower multiple companies.
Obviously, I don?t want to pile into Microsoft, or any other of the big tech stocks on top of a furious 10% spike. But it is now safely in the ?buy on the dip? camp, along with the rest of big tech.
The party has only just stated.
To read my interview with Bill Gates? father, click here for ?An Evening With Bill Gates, Sr.?.
Are you looking for an investment that does well during modest economic growth, a flat to slightly falling dollar, continued low interest rates, and a stock market that periodically hits the panic button?
Then General Electric (GE) is the stock for you.
I have just spent my day surfing the web for tidbits about GE and found quite a lot that I liked.
Want to get a great deal on a new diesel electric locomotive with teaser financing? That?s why customers flock to GE.
What I found was one of the largest corporate restructuring stories in history.
You can summarize it as ?Out with glitz, leverage, and volatility, and in with the plodding, the stable, and the reliable.? In stock market terms this means out with low price/earnings multiples and in with high ones.
For a start, GE is run by Jeffrey Immelt, considered by many to be one of the most superb large cap managers in the world. He has been cutting costs and ditching business lines not considered essential to its core heavy industrial origins.
Immelt has indicated that he expects that by 2018, General Electric will be earning 90% of its profits from "selling equipment for airplanes, railroads, oil extraction and electricity generation," all safe stuff.
By the way, these are great plays on a recovering Chinese economy as well. No coincidence there.
The most immediate trigger to pile into this stock was its planned sale of GE Finance, which is why wags used to call GE ?The hedge fund that sold light bulbs.?
GE was dragged into this business during the 1990s by predecessor, Jack Welsh, using the logic that ?Everyone else was doing it.? Welsh never inhaled a breath of humility in his life, and chronically suffered from confusing brilliance with a bull market.
In the end, his strategy almost took the company under, requiring a bailout from Warren Buffett during the dark days of 2009, in the form of a 10% convertible preferred stock issue.
If only I could get such terms!
In the most recent quarter, GE had to write off $4.33 billion for the sale of damaged securities left over from this ill conceived venture.
A $30 billion portfolio of such dross was recently sold to Wells Fargo (WFC). GE has also indicated that it will soon spin off consumer finance business Synchrony Financial (SYF).
This is yet another step in the company's plan to divest $200 billion of GE Capital assets as GE returns to its industrial roots.
And how can you not like that 3.10% dividend in this zero return world? This is with a price earnings multiple of 25 for current year earnings, and 19 times next year earnings.
GE?s aviation business is climbing to higher altitudes. Its backlog has ballooned some 36% over the past two years, to $150 billion.
It has been spurred on by a new engine that uses 15% less fuel, enabling their hyper competitive airline customers to cut one of their largest costs.
This will pave the way for GE to grow its installed base of engines from 36,000 to an impressive 46,000 by 2020. Did you know the Chinese have to buy 1,000 airliners over the next decade?
?
After an 18-month battle with the French government, GE managed to close its purchase of Alstom for $13.8 billion, a major European energy company. It had to promise to create 1,000 new jobs in France to do so.
The deal brings GE's capabilities that it had previously lacked in renewable energy and heat recovery steam generators. The latter are key components of combined cycle gas-plus-steam plants, which GE forecasts will account for 70% of all future gas-fired plant orders.
Acquiring this capability roughly doubles the General Electric share of the revenues it could capture from orders for such plants.
With it comes considerable expertise in plant design and construction, allowing GE to move from being a supplier to a lead contractor on such projects.
Alstom also delivers a significant presence in China and India, as well as sophisticated products in transmission technology.
(GE)?s sale of its appliance unit to Sweden?s Electrolux (ELUXY), which came with the Alstom deal, is pending antitrust review.
To top all this, activist investor Norman Peltz?s Trian Fund has taken a 1% stake in (GE) (or $2.5 billion worth) with the intention of shaking it up so a few more coins will fall out for shareholders.
That is quite an ambitious bet. Peltz wants the company to ramp up an already ambitious share repurchase program. And you get in at a great price today.
?
All in all, GE seems to be the right kind of stock to buy in the market we have at the moment. It also fits neatly into my scenario of new money moving into value, at the expense of growth (click here for ?Switching from Growth to Value?.
All we need to get in is a decent pullback from its recent parabolic move.
For more background on General Electric, click here for ?The American Onshoring Trend is Accelerating?.
Jeff?s Got Some New Tricks Up His Sleeve
?It is by the goodness of God that in our country we have those three unspeakably precious things: freedom of speech, freedom of conscience, and the prudence never to practice either of them.? said the 19th century American humorist, Mark Twain.
Global Market Comments
September 22, 2016
Fiat Lux
Featured Trade:
(CALIFORNIA UPS ITS GAME AGAINST GLOBAL WARNING),
(PCG), (AAPL),
(TEN REASONS WHY BONDS WON?T CRASH),
(TLT), (TBT), (ELD), (MUB)
Pacific Gas & Electric Co. (PCG)
Apple Inc. (AAPL)
iShares 20+ Year Treasury Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
WisdomTree Emerging Markets Lcl Dbt ETF (ELD)
iShares National Muni Bond (MUB)
California has raised the bar again in its relentless war on greenhouses gases.
Last week Governor Jerry Brown signed SB32 mandating that the Golden State reduce greenhouse gas emissions to 40% below 1990 levels by 2020. It is far and away the most ambitious such program anywhere in the world today.
I mention this because California is often the leader in groundbreaking legislation and technologies.
You know the national requirements for catalytic converters, safety glass, and seat belts for Detroit- manufactured cars? They all started here in CA. Your state, or country, won?t be far behind.
The bill is only the latest in a long line of attempts to halt global warming, which our Latin-speaking governor has made a hallmark of his administration.
Greenhouse gases have fallen by 9.5% since peaking in 2004 at 487.6 million metric tons. This has been largely due to the state?s three public utility companies closing the last of their coal burning power plants and shifting to cleaner burning natural gas. Improved car emissions and the rise of hybrid and electric vehicles have also helped.
This reduction has been effected with minimal economic cost. The State?s GDP has risen by 19% over the same time period, and that includes the Great Recession of 2008-2009. US real GDP rose by 18.5% over the same period.
California also hosts the planet's strictest ?Cap and Trade? system, which was implemented in 2012. A carbon tax by any other name, Sacramento sets an annual limit on the amount of carbon dioxide that can be released into the atmosphere each year, which is cut annually.
It then requires businesses, like refineries and electric power utilities, to buy a permit for every ton of greenhouse gases they spew into the atmosphere. The floor price has most recently been set at $12.73 a ton. The money raised, some $4 billion so far, is then used to finance other greenhouse reduction policies.
A big beneficiary has been California?s troubled and long-delayed High Speed Rail project, a plan to build an electric bullet train from San Francisco to Los Angeles, and ultimately to San Diego and Las Vegas.
Who is the biggest buyer of these permits? My own local utility, Pacific Gas and Electric (PCG/PC), who I sell power to, generated by my own personal solar panel array. They get whatever my Tesla Model S-1 doesn?t use.
Permit sales ran smoothly for four years. However, the program has recently run into difficulties. In the spring of 2016, only 10.5% of the needed permits sold. Fears that the entire system might get upended in the courts caused buyers to back away.
The oil industry has cobbled together a coalition of carbon-based energy producers with the California Chamber of Commerce to end the program when it comes up for renewal in 2020. Brown has threatened to fight them by sponsoring a statewide initiative that would almost certainly pass in a future election.
California is the founder of the global anti emissions movement for good reason. During the 1960s, the smog in Los Angeles was so severe that you couldn?t see 100 yards.
It rivaled the choking smog found in Beijing today. ?Smog Alerts? were declared by health officials to keep children indoors, including me.
California also boasts the world?s most ambitious alternative energy targets, which must reach 33% of total power production by 2020, and 50% by 2030. Ample state and federal subsidies have been made available to make this happen.
Still, before you ask, they pale in comparison to the $55 billion a year in federal subsidies the oil industry received in the form of the oil depletion allowance.
It is no surprise then that San Francisco has become the epicenter of a global alternative energy industry, be it in solar, geothermal, batteries, other storage or biodiesel. Not only does the industry receive enthusiastic local support, but it knows it has an ample base of local consumers who will beta test and buy their new products and services.
Want an app that will locate the nearest charging station? No Problem!
Hardly a day goes by without a young Berkeley or Stanford engineering student asking me where to focus his career. My answer is always the same: stay away from biodiesel. It?s not scalable, and smells like you know what. The future is in solar.
Ultimately, it is energy consumers who end of footing the bill for all of this. It is estimated that Cap and Trade alone has added 11 cents to the cost of a gallon of gasoline for California drivers. It is financing an industry that, if successful, will ultimately put it out of business.
There are, in fact, so many conflicting and competing alternative energy and anti global warming programs and subsidies that it can get downright confusing.
So far, the state's weary taxpayers have been tolerant. But, if you are already driving a Tesla, Leaf, Bolt, BMWi, the soon-to-be Apple McLaren electric race car, or any of the other myriad low-end electric cars to come, who cares?
To read more on this topic, please read my exhaustive research by clicking here for ?How to Buy a Solar System? and here for ?The Ten Baggers in Solar Energy? .
85 Years of Real US GDP Growth
I have never been one to run with the pack.
I'm the guy who eternally marches to a different drummer, not in the next town, but the other hemisphere.
I would never want to join a club that would lower its standards so far that it would invite me as a member.
On those rare times when I do join the lemmings, I am punished severely.
Like everyone and his brother, his fraternity mate, and his long lost cousin, I thought bonds would fall this year and interest rates would rise.
After all, this is normally what you get in the seventh year of an economic recovery. This is usually when corporate America starts to expand capacity and borrow money with both hands, driving rates up.
Although I was wrong on the market direction, Treasury bonds have been one of my top performing asset classes this year. I used every spike in prices to buy (TLT) vertical put spreads $3-$5 in the money, and raked in profits almost every month.
Of course, looking back with laser-sharp 20/20 hindsight, it is so clear why fixed income securities of every description have been on a tear all year.
I will give you ten reasons why bonds won't crash. In fact, they may not reach a 3% yield for at least another five years.
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1) The Federal Reserve is pushing on a string, attempting to force companies to increase hiring, keeping interest rates at artificially low levels.
My theory on why this isn?t working is that companies have become so efficient, thanks to hyper accelerating technology, that they don?t need humans anymore. They also don?t need to add capacity.
?2) The US Treasury wants low rates to finance America?s massive $19 trillion national debt. Move rates from 0% to 6% and you have an instant financial crisis.
3) With Japan and Europe in a currency price war and a race to the bottom, the world is sending its money to the US to chase higher interest rates. An appreciating greenback which is now at close to a five-year peak is also funneling more money into bonds.
The choices for ten-year government bonds are Japan at 0.4%, Germany at 0.0%,?Switzerland at a negative -0.48% and the US at 1.65%. It all makes our bonds look like a screaming bargain.
4) Since the 2009 peak, the US budget deficit has fallen the fastest in history, down 75% from $1.6 trillion to a mere $400 billion, and lower numbers beckon.
Obama?s tax hikes did a lot to shore up the nation?s balance sheet. A growing economy also throws off a ton more in tax revenues. As a result, the Treasury is issuing far fewer bonds, creating a shortage.
5) This recovery has been led by small ticket auto purchases, not big ticket home purchases. The last real estate crash is still too recent a memory for many traumatized buyers, at least for those few who can get a mortgage. This keeps loan demand weak, and interest rates at subterranean levels.
6) The Fed?s policy of using asset price inflation to spur the economy has been wildly successful. Bonds are included in these assets, and they have benefited the most.
7) New rules imposed by Dodd-Frank force institutional investors to hold much larger amounts of bonds than in the past.
8) The concentration of wealth with the top 1% also generates more bond purchases. It seems that once you become a billionaire, you become ultra conservative and only invest in safe fixed income products.
This is happening globally. For more on this, click here for ?The 1% and the Bond Market?.
9) Inflation? Come again? What?s that? Commodity, energy, precious metal, and food prices are disappearing up their own exhaust pipes. Industrial revolutions produce deflationary centuries, and we have just entered the third one in history (after no. 1, steam, and no. 2, electricity).
10) The psychological effects of the 2008-2009 crash were so frightening that many investors will never recover. That means more bond buying and less buying of all other assets. I can?t tell you how many investment advisors I know who have converted their practices to bond only ones.
Having said all of that, I am selling bonds short once again on the next substantial rally. Call me an ornery, stubborn, stupid old man.
But hey, even a blind squirrel finds an acorn sometimes.
Am I Stubborn or Just Plain Stupid?Global Market Comments
September 21, 2016
Fiat Lux
Featured Trade:
(THE LEAGUE OF EXTRAORDINARY TRADERS),
(WFM), (COST),
(AMERICA?S DEMOGRAPHIC COLLAPSE AND YOUR STOCK PORTFOLIO),
(TESTIMONIAL)
Whole Foods Market, Inc. (WFM)
Costco Wholesale Corporation (COST)
I never cease to be impressed with the readers of this newsletter.
I was reminded of this once again at my luncheon in Portland, Oregon last week, held at the exclusive Ringside Fish House, a purveyor of the outstanding Pacific Northwest seafood for which the City of Roses is rightly proud.
Luncheon attendees seem to fall into three categories.
1) Entrepreneurs whose businesses have become so successful that they are throwing off plenty of excess cash to invest. This leads them to an online search (they are also technically very savvy) that brought them to my newsletter.
One of my Portland guests runs a manufacturing business that builds drones. In five years his gross revenues have rocketed from $400,000 a year to $40 million, and he says the best has yet to come. Two years ago, the Federal Aviation Administration predicted that there would be 1,500 drones in the air by 2020. Today, there are 220,000.
Interestingly, he says he is now besieged by constant foreign takeover offers. These are from European and Asian firms that have gone ex growth and are desperately searching for new profit streams at any cost. So far, he has rebuffed all comers.
2) Financial advisors who have been following my long-term macro and trading advice and who have also become very successful. Winning financial advisors always have new clients and cash coming which they need to know how to invest.
3) Young men and women in their twenties and thirties who dropped out of the mainstream economy and taught themselves to become professional full time traders. Perhaps several hundred earn a full time living just off of my own Trade Alerts. This business has taken a quantum leap with my introduction of the Mad Options Trader service.
My firsthand observations of the economy indicate that it is in no way performing at a suboptimal 2% GDP growth rate.
Airplanes going anywhere are all full. The airports are packed. The cost of overnight parking in San Francisco has risen by 50%. The free electric charging stations, of which there are now 50, are always full.
Mt favorite Pendleton store in Portland no longer has sales. It?s full price for everything everywhere now. People have plenty of money to spend.
Stores are stocking more expensive, higher margin profits, and offering imaginative displays.
Placing your goods on worn out industrial heavy machines is a popular approach in Portland. I spent more time analyzing the machines than the goods for sale.
The irony is rich.
Restaurants are more expensive too, and always full, and also making the grab for higher margins. They now offer food that is gluten free, locally grown, and ?artisanal?.
When I ordered a steak, I was informed that it was hormone and? preservative free. I asked if I could have one WITH hormones and preservatives, as they put hair on my chest and preserve me.
No wonder everyone thinks I?m weird.
Of course, the ultimate expression of this strategy can be found in Portland?s burgeoning marijuana industry.
Huge billboards along the freeways offer ?organic? pot by the kilo. It seems they too are seeking that 30% mark up that Whole Foods (WFM) and Costco (COST) reap from organic groceries.
Yet there is evidence too of the failed America, the people who got left behind. At one stoplight I encountered a family of four holding a big sign in the pouring rain pleading ?We need money?.
They had recently been evicted from their home. All had serious health problems and were morbidly obese. They looked legit. Maybe it was a health-care-induced bankruptcy?
I asked no questions, made no judgments and gave them $20. They reacted like they had won the lottery.
The country clearly is not perfect.
As a long term observer of America?s demographic picture, I was shocked to hear of a recent report from the US Census Bureau (click here for the website).
The US population grew by a scant 0.72% in 2012, the lowest since 1942.
You can?t start or expand a family when an essential partner in the process is off fighting WWII, and there were 17 million of them.
This is far below the 2.09% replacement rate that the country was holding on to only a few years ago.
At the end of 2012, there were 316,128,839 Americans. This accounts for 4.4% of the global population of 7,137,577,750, which was up 1.1%. If the growth rate remained the same, there are more than 317 million of us by now.
This places American population growth at the bottom of the international sweepstakes, down with Italy (0.32%), Germany (0.11%), and Poland (0.02%).
According to the World Bank, 22 countries suffered population declines, like Portugal (-0.29%) and Japan (-0.20%) (click here for the website).
The tiny Sultanate of Oman, one of my old stomping grounds as a military pilot, enjoys the planet?s highest growth rate at 9.13%.
The obvious cause here was the weakness of the US economy. There is a high correlation between economic health and fertility a year later.
So we can only hope that the modest improvement in the economy this year will send more to the maternity ward.
If it doesn?t, it could be great news for your investment portfolio. Fewer births today translate into a shortage of workers in 20 years. That brings rising wages, flying inflation, rapid price hikes, and a housing boom.
Corporate profits go through the roof, as does the stock market. It also produces fewer relying on government services in 40 years, which makes it easier for the government to balance the budget.
This Goldilocks scenario is already scheduled for the coming decade of the 2020s, when a 15-year demographic headwind flips to a tailwind, thanks to the coming demise of the ?baby boomer? generation, now a big cost to the economy.
The new data suggests that the next ?roaring twenties? could extend into the 2030?s and beyond.
California was the most populous state, with over 38 million, followed by Texas and New York. Two states saw population declines, Maine and West Virginia, where the collapse of the coal industry is sucking the life out of local businesses.
Parsing through the report, it is clear that prediction of population trends is becoming vastly more complicated, thanks to the increasingly minestrone-like makeup of the US people.
By 2040 no single group will be a majority. That is already the case in San Francisco, and will be true for the entire State of California by 2020.
America will come to resemble other, much smaller multiethnic societies, like Singapore, South Africa, England, Israel, and Switzerland. This explains much about the current state of politics in the US.
Texas saw the greatest increase in population, with a jump of 387,397, to 26,020,000, as people flock in to take advantage of the big increase in local government hiring there.
Some 80% of new Texans were Hispanic and Black, confirming my belief that the Lone Star State will become the next battleground in presidential elections.
This is why gerrymandering (redistricting) is such a big deal there, with the white establishment battling to hang on to power at any cost.
Further complicating any serious analysis is the rapid decline of the traditional American nuclear family where married parents live with their children.
With a vast concentration of wealth at the top, and a long-term decline of middle class standards of living, this is increasingly becoming a luxury reserved for a prosperous elite.
As a result, the country?s birthrate has declined by half since 1960.
Those who do procreate are having fewer kids, the average family size dropping from three to two. In 1964, the final year of the baby boom, 36% of Americans were under the age of 18.
Today, that figure is just 23.5%, and is expected to fall to 21% by 2050. Only 80% of women have children now, compared to 90% in the 1970s.
One possible explanation is that the cost of child rearing has soared to $241,080 per child now. Rocketing college costs are another barrier, with 70% of high school grads at least starting some higher education.
I was a bargain as a kid, costing my parents only a tenth of that. I went to Boy Scouts and Little League baseball, each of which cost $1 a month. A full scholarship covered by college expenses.
When I look at the checks I have written for my own children for ski lessons, soccer, youth sailing, braces, international travel and assorted masters degrees, I recoil in horror.
Fewer women are following that old adage of ?marriage before carriage.? Some 41% of children are born out of wedlock, up 400% in 40 years.
It is definitely an education and class driven divide. Only 10% of college-educated mothers are still single, compared to 57% for those with a high school education or less.
It is a truism in the science of demographics that educated women have fewer children. It makes possible careers that enable them to bring home paychecks instead of babies.
Blame Roe versus Wade, the Equal Rights Act, and Title Nine, but every social reform benefiting women of the past half century has helped send the birthrate plummeting.
More women wearing the pants in the family hurts the fertility rate as well, as they are unable, or unwilling, to bear the large families of yore. The share of families where women are the primary breadwinners has leapt from 11% to 40% since 1960.
When couples do marry, they are sometimes of the same sex, now that gay marriage is legal in 16 states, further muddying traditional data sources. Some 2 million children are now being raised by gay parents. In fact, there is a gay baby boom underway, which those in the community call the ?gayby? boom.?
All female couples have produced one million children over the last 30 years, 95% of whom select blond haired, blue eyed, Aryan sperm donors who are over six feet tall ($40 a shot for donors if you guys are interested and live walking distance from UC Berkeley. I?m told that water polo players are particularly favored).
The numbers are so large that it is impacting the makeup of the US population.
There was a time when I could usually identify the people standing next to me on San Francisco BART trains. That time has long passed. Now I don?t have a clue.
Whenever we go to war, we become our enemy to a modest degree, both as a people and a culture.
After WWII, 50,000 German and 50,000 Japanese wives were brought home as war brides. Sushi, hot tubs and Volkswagens quickly followed.
The problem is that the US has invaded another 20 countries since 1945, and is now maintaining a military presence in 140. That generates a hell of a lot of green cards.
This has spawned sizable Korean, and later, Iranian communities in Los Angeles, a Vietnamese one in Louisiana, a Somali enclave in Minneapolis, and a large minority of Afghans in San Jose.
The fall of the Soviet Union in 1992 unleashed another dozen Eastern European ethnic groups and languages on the US. Have you noticed the proliferation of Arab fast food restaurants in your neighborhood since we sent 20 divisions to the Middle East?
What all this means is that the grand experiment called the United States is entering a new phase.
Different ethnic, racial, religious, and even political groups are blending with each other to create a population unseen in the history of the world, with untold economic consequences. It is also setting up an example for other countries to follow.
Get
your investment portfolio out in front of it, and you could prosper mightily.
Ignore Demographics at Your Portfolio?s Peril