Global Market Comments
September 1, 2014
Fiat Lux
Featured Trade:
(SALUTING THE ?OLD BREED?)
(WHERE THE ECONOMIST ?BIG MAC? INDEX FINDS CURRENCY VALUE), (MCD), (FXE), (YCS), (FXF), (CYB)
(TESTIMONIAL)
McDonald's Corp. (MCD)
CurrencyShares Euro ETF (FXE)
It was with a mixture of nostalgia and awe that I attended the reunion luncheon celebrating the 72nd anniversary of America?s invasion of Guadalcanal. The event was hosted by my former division commander in Desert Storm, Major General Mike Myatt, at the Marines Memorial Association in San Francisco.
I was there to represent the family. My Uncle, Colonel Mitchell Paige, won the first Congressional Medal of Honor of WWII at Guadalcanal; single handedly wiping out 2,000 attacking Japanese in one night with his 30 caliber Brown machine gun (click here for ?Tribute to a True Veteran?).
My dad was there too, as a driver of a Steward light tank. My grandfather served in WWI, and historians tell me that I have a string of military heroes behind me that stretches all the way back to Valley Forge, where the first John Thomas served on George Washington?s staff.
I got plenty of dust under my fingernails myself, but lost a disc in my back from a plane crash, flying support missions for the First Marine Division in the Persian Gulf. Today I have three nephews serving in the Middle East in harm?s way, all in intelligence. So it is safe to say that my family has paid its dues in the defense of our country, and then some.
General Myatt delivered a lecture outlining the desperation and cruel arithmetic of the conflict. The Marines went in with virtually no intelligence and the few primitive maps they could scavenge from National Geographic Magazine against a Japanese army that until then had been undefeated. The US lost 7,000 men, 29 ships, and 600 aircraft. The Japanese lost 30,000 men, 37 ships, and many of their experienced pilots.
Japan never recovered from the blow, and played defense for the rest of the war. It was the single most important battle of the Pacific war. Afterwards, the Marines were sent to Melbourne, Australia for rest, wearing rags, often barefoot, but with weapons in perfect operating condition.
Whenever I give a strategy luncheon in that fair city, I never fail to thank my guests for the hospitality they once extended to my family. Today, a small case at the Melbourne Cricket Ground pays tribute to their sacrifice.
The youngest living Guadalcanal veteran today is 87, and eight of the elderly warriors made it to the reunion. Got to love that Marine health care plan! One 95 year old flew his own plane up from Los Angeles. Once a Marine, always a Marine.
I dined at a table with a van load of veterans from the California Veterans Hospital in Yountville, Napa Valley (click here if you want to, they need you).
One grizzled old sergeant told me that if a friend went missing at night, he was often found tied to a palm tree the next day, tortured to death.? Another time, a surrendering Japanese pulled a hand grenade out of his loincloth and threw it into a sympathetic, but gullible squad, with deadly results. Despite these atrocities, he respected the Japanese today as humble, respectful, and hard working. You don?t find these sentiments among the veterans of other nations at all.
Time has taken a toll on these aging vets more than the enemy ever could. Much of the conversation revolved around the daily aches and pains of living in your late eighties. Pulling out genuine anecdotes was difficult, often resulting in a canned memory dredged from a book or TV documentary produced decades after the event. Some may have been worried that if they did open the door to the past, they would dread what they found.
For a riveting account of the historic battle, please read ?The Pacific? by For a riveting account of the historic battle, please read ?The Pacific? by Hugh Ambrose.? You can purchase the book at Amazon by?clicking here. My uncle Mitch cooperated with Ambrose in the research for the book, which was the basis for the recently released and incredibly realistic HBO series of the same name.
Global Market Comments
August 29, 2014
Fiat Lux
Featured Trade:
(MAKING HAY WITH THE EAGLE FORD SHALE),
(USO), (UNG), (XOM), (CVX), (LNG), (CHK), (HAL)
(THE PASSING OF A GREAT MAN)
United States Oil (USO)
United States Natural Gas (UNG)
Exxon Mobil Corporation (XOM)
Chevron Corporation (CVX)
Cheniere Energy, Inc. (LNG)
Chesapeake Energy Corporation (CHK)
Halliburton Company (HAL)
Sell the shovels to the gold miners. That was the lesson of the 1849 California gold rush.
How many individual gold miners can you name today? How about none, unless you are an expert on the obscure street names of San Francisco.
And the companies that sold supplies and services to them? Try Wells Fargo (WFC), Bank of America (BAC), Union Pacific (UNP), and Levi Strauss. Some 165 years later, they not only survive, they thrive. This is the lesson that I remind readers of when they flock to me for advice on where to make money in the current natural gas fracking boom (UNG), (USO).
They do so because I was a pioneer in this revolutionary technology 15 years ago, driving down the endless washboard roads of the Barnet Shale in West Texas to lock up leases on depleted fields for pennies on the dollar. It turns out that there was still more gas and oil down there than had ever been extracted from the original wells. Kaching!
The problem, as it always is in radical new emerging technologies, is that it is tough for the outsider to participate. Fracking still only accounts for a tiny share of the profits of majors like Exxon Mobil (XOM) and Chevron (CVX).
The small plays have already risen tenfold, such as my recommendation for Cheniere Energy (LNG) (click here to read ?Revisiting Cheniere Energy (LNG)?). Much of the rest is privately held and closed to outside investors.
The last thing in the world you want to do is go out and buy natural gas itself. Why buy a commodity just when the supply is massively ramping up? So, how is the ordinary guy to get in on the ground floor of this modern day bonanza?
The other day I got a call from one of my old drilling buddies, who has since moved on to the Eagle Ford Shale in East Texas. You know, the one with the oil permanently stuck under his fingernails and a deeply tanned face that looks like an old saddle?
He said that the industry is facing a major problem in that the new fields are often in the middle of nowhere, lacking even the most basic infrastructure. Housing is non-existent and workers in scarce supply. Civilization in Texas, like the towns, is found around the geology of traditional oil, usually under giant underground salt domes. Oil shale is a different story.
Their choice now is to tell workers to bring their own recreational vehicles to live in the boondocks, or endure four-hour daily commutes. When you are paying your blue-collar workers $200,000 a year, you don?t want them spending half of their day on a bus listening to an iPod, watching videos, or staring blankly out at the desolate landscape. Obviously, families don?t fit anywhere in this picture.
My friend told me about a company called InVision Housing Solutions Management LLC that had come up with a great means for solving this vexing problem, carving out a highly lucrative niche for themselves. It is in the business of building and leasing out temporary housing for oil workers.
These are not the dreaded, ticky tacky mobile home parks of old, but high-end affairs, complete with pleasant grounds, high-end finishes, and generous common amenities. When workers are earning well into triple digits, they expect better accommodations.
Their primary customers are leading companies you all know and love, like Chesapeake (CHK) and Halliburton (HAL), which are opening up new oil and gas fields as fast as they can get the permits. These firms are more than happy to pay lease rates of $100 a day or more, or what you might expect to pay for a mid level hotel in a major city.
Then my friend really got my attention. He said that InVision?s existing facility, the ?Double C Resort,? was getting occupancy rates of 75% or more, usually on long-term leases, something a major hotel chain would kill for. This was enabling it to earn net returns on its investment for outside investors up to an eye popping 20% a year, or better.
The story gets better. The project is scalable. The Double C Resort is just one of 20 locations in Texas where the supply/demand dynamics favor similar developments. Beyond that, it could expand nationally to service fields as far away as North Dakota and California.
InVision can build a town with 300 units for $15 million, including the roads, utilities, sewers, Wi-Fi, etc. Operational expenses are minimal, so after the initial build out you are left with a big cash flow machine on your hands. You do the math.
What happens when the new fields get fully developed? For a start, these new natural gas fields are much larger than people realize. Once the primary gas pocket at 5,000 feet is emptied, there are more at 7,000, 9,000, 11,000, 13,000, 15,000 feet and more.
The same fields will get drilled over and over again for years to come. When they say that a century?s worth of cheap energy has just been discovered, they?re not kidding.
There will also always be continuing demand for housing to service the new infrastructure, such as the pipelines. After that, the housing is so portable that it can simply be placed on a flatbed trailer and moved elsewhere.
InVision is not a public company, but is accepting outside investors with a minimum $50,000 stake. Besides the generous cash flow, if the company ever does go public at some point in the future, you would then get the earnings multiple bump up in the value of your asset.
To get more information about InVision Housing Solutions Management LLC please, visit their website at http://invisionhousing.com . You can also contact, Tom Tamrack, directly at info@invisionhousing.com, or call him at 888-516-2221.
Perhaps an Investment Opportunity?
Global Market Comments
August 28, 2014
Fiat Lux
Featured Trade:
(TAKING A LOOK AT SOLAR CITY),
(SCTY), (TSLA), (PCG)
(SAN FRANCISCO?S SUFFERING RENTERS TAKE ANOTHER HIT)
SolarCity Corporation (SCTY)
Tesla Motors, Inc. (TSLA)
PG&E Corporation (PCG)
In recent weeks, I couldn?t help but notice the green and white vans of Solar City (SCTY) visiting my neighbors. My trader?s radar went up, so I thought there might be an opportunity here.
With my second Tesla (TSLA) about to be delivered, the Model X SUV, it was time for me to review my electricity bill.
My first Tesla, an S-1, boosted my monthly power consumption from 600 kWh to 1,800 kWh per month, about what a small industrial facility might use. Yet, my bill from PG&E increased from only $350 to $450 a month. This is because they effectively give away power for free from 12:00 AM to 7:00 AM to qualified EV users, charging me only 4.7 cents per kWh.
On my suggestion, Tesla then upgraded their software so vehicles could be programmed to recharge only at these hours. That means it is costing me $4.00 for a full 80 kWh charge that can take me 255 miles, or 1.6 cents a mile. That doesn?t include the enormous savings on maintenance (there is none).
Well then! The IRS currently allows a mileage deduction of 56 cents per mile for business purposes, so that?s an opportunity to exploit right there.
Given that the average US car now gets 25 miles per gallon of gasoline (and that is being generous), that means my equivalent cost for running my S-1 works out to paying a scant 40 cents a gallon.
This compares to the $3.60 at the local service station ($3.45 at Costco), which is at a one year low, or a savings of 89%. That is a little more than I paid for gas when I first started driving a beat up VW Bug at the Santa Anita Race Track parking lot back in 1967.
That sounds like a deal to me.
However, the second Tesla is likely to boost my monthly power consumption from 1,800 kWh to 3,000. When PG&E sees bills that big, they assume someone is operating an illegal marijuana grow house and send the DEA to kick your door down at 5:00 AM on a Monday morning.
So I was on the phone to Solar City the next morning. What I heard was nothing less than amazing.
For a start, they called up a Google Earth mapping program that focused on a picture of my roof from a low earth orbit satellite (Google has invested $280 million in Solar City). Then a second program autofit their existing solar panels to my roof and spit out a mass of numbers.
This complete stranger told me things about my roof that I never knew, like it was 4,000 square feet of flat concrete tiles on 14 planes. Welcome to the 21st century.
I nervously looked down and made sure my fly was fully zipped up.
He went on to tell me that he could fit a 15 kW DC system on my roof that would generate 106% of my power needs, generating 19,365 kWh a year. That would make me completely self sufficient in electricity, even though I will be charging two hulking Tesla 1,000 pound lithium ion batteries every day.
They will install a ?net? two-way electric meter on my house. When the sun shines, it will run backwards as I can sell power to PG&E (PCG) at high prices.
At night, when I recharge my cars, I would then buy cheap power from Solar City. No storage devices are required. The PG&E grid is effectively the storage system. That would turn me into a day trader of electricity, selling high by day and buying low by night. I love it!
How did their satellite know I was a hedge fund trader? What else does it know?
Now comes the best part. The cost of the installation and panels was $66,000. Solar City would do it for free. Yes, free, as in gratis, with no money down. They would lease me the panels for 20 years, with an annual price increase of 6.2%. That would cut my monthly electricity bill from $450 to $200. It does this by eliminating the tier 3, 4 and 5 prices I am currently paying PG&E.
If I sell my house, I can either buy out my contract at the discounted, fully depreciated value, or pass it on to the new owners. It is well known that solar panels significantly increase the value of existing homes.
Installation can be done in a day. But it can only take place on unbreakable concrete tile roofs. Those made of clay tiles, metal, tar and gravel, wood shakes, or slate don?t work for various reasons. You need a FICO score of 680 or better to qualify. There is a 60-day waiting list to get this done.
It didn?t take me long to figure out the game here. By purchasing the panels and leasing them to me, they keep the 30% government subsidy for capital investments in alternative energy, which works out to $19,890 for my house alone. Solar city also gets to depreciate these panels on an accelerated schedule, mostly in the first five years.
This explains why Solar City has grown larger than the next 15 competitors combined. Solar City?s largest customer is the US Army, which has already installed panels on 1 million structures.
There is one cautionary note to add here. The government subsidies that help float the company expire in 2018, making the entire proposition financially less attractive. That is, unless they get renewed. Think President Hillary.
The only things that would save them are dramatically higher conventional energy costs. However, right now energy costs are heading the opposite direction, thanks to fracking.
As with everything else Elon Musk touches, an investment in Solar City has been wildly successful. Since the company went public at the end of 2012, the shares have risen by an awesome 670%. Needless to say, with no earnings, and no dividend, the $6.5 billion market cap company may appear hopelessly expensive.
Like with Elon?s other company, Tesla, your aren?t betting on the value of the business today, but where it will be in five years, when it has a far larger share of the market.
Given Musk?s track record so far, that is a bet that I am willing to take.
My Home from Outer Space
It?s Been a Long and Winding Road Driving from This?
To ThisGlobal Market Comments
August 27, 2014
Fiat Lux
Featured Trade:
(WHAT TO DO ABOUT APPLE?), (AAPL),
(THE PARTY IS JUST GETTING STARTED WITH THE JAPANESE YEN),
(FXY), (YCS), (DXJ)
Apple Inc. (AAPL)
CurrencyShares Japanese Yen ETF (FXY)
ProShares UltraShort Yen (YCS)
WisdomTree Japan Hedged Equity ETF (DXJ)
Those who followed my advice to buy Apple a year ago are now drowning in riches (click here for ?Buy Apple on the Dip?). Since the July, 2013 bottom, the shares have risen by a meteoric 92%. It is the largest company in the world once again.
As a result, I have heard of my readers shopping for second homes on Lake Tahoe, sponsoring NASCAR teams, or buying new Rolex watches for significant others.
I recommended China Mobile (CHL) then as well, the big beneficiary of a new deal with Apple, whose shares have also gone ballistic.
The question of the day is: ?Now what do we do?
You are right to ask the question. The company?s stock is notorious for running up massively into every major product launch, and then giving back a big chunk afterwards.
So while the expected announcement of the iPhone 6 on September 9 is welcomed as producing a major new source of revenue, it could also signal the end of the current run.
Take a look at the long-term charts, and the hair on the back of your neck should stand up. The fanfare for the iPhone 6 will almost exactly come at a potential double top in the stock price. Could we be setting up for the greatest ?buy the rumor, sell the news? of all time?
The last time we visited this territory, which we visited on the launch of the iPhone 5, Apple?s shares plunged a gut churning 45%, prompting some shareholders to dump their iPhones in the trash.
Certainly the problems that caused the rally to fail last time are kicking in once again. The law of large numbers applies once more. Apple?s market capitalization is at $607 billion today. There may not be enough equity investors in the world to push the shares up appreciably from here.
Oh, and because of the recent rapid appreciation, most institutions are now overweight Apple, as they were in September, 2012. The only difference is that Apple accounts for only 3% of the S&P 500, compared to a hefty 5% two years ago.
The shares are now at a 15.5 earnings multiple, up from under 10 at the recent bottom, and 7 if you took out all of the cash. That is still a discount to the main market, as well as most other technology stocks.
The truth is that this is not your father?s Apple.
CEO Tim Cook has shown a much greater respect for investors compared to founder, Steve Jobs, who despised Wall Street with a passion. I know, because I escorted Steve to meet with institutional investors looking at a secondary share issue during the early 1980?s. It was not a happy time for me.
There is a $50 billion stock buyback program in place, which soaked up a ton of shares at the bottom.
We also now have a 2% dividend yield, a mere 37 basis points through ten year Treasury bond today, another idea Jobs poo pooed.
The company is also strategically in a much stronger position than it was in 2012. Apple has a far broader, more attractive, and more advanced product range than it did only 24 months ago. The China Mobile deal has kicked in big time.
There is immense demand for the new larger screen, faster iPhone 6, which will offer consumer untold bells and whistles. Some 50% of the iPhones in existence are 4s?s or older, so upgrades from the installed base will the largest in history.
This will enable it to retake market share from hated rival, Samsung, which moved to a big screen in 2013. This will open the way for an expansion of Apple?s profit margins, possibly by 25% or more.
Samsung?s smart phone strategy all along has been to copy Apple?s patents and milk them for whatever they are worth, before they inevitably lose the next infringement case in court. As I never tire of telling listeners at my speaking engagements and luncheons, you can?t steal your way to the top in technology.
I would expect, at the very least, that the market has to put the double top theory to the test at least once. That alone will prompt a 10% correction, back down to $92.
Then, if we really are still in a bull trend, it will bounce off that number and head to new highs. If it doesn?t, then it?s game over until the run up to the next big product launch. The iPhone 7?
So the clever thing to do here has to be to do a buy write and sell short Apple September, 2014 $105 calls against you existing stock position.
At this moment, you can get 96 cents for them, with September 19 expiration. If you are braver still, you can go out another month and take in $2.01 for the October 17, 2014 calls. Don?t go farther out than that, or you might miss the yearend rally.
That way, if the stock keeps rising, you will sell your shares out at the higher price of $105. If it falls, your average cost declines by 96 cents, or $2.01. Either way, it is a win-win.
Isn?t that what you pay me for?
Meet Your New iPhone
?Oh, how I despise the yen, let me count the ways.? I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.
To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:
* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 240% of GDP, or 120% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of only 1%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.
When the big turn inevitably comes, we?re going to ?110, then ?120, then ?150. That works out to a price of $200 for the (YCS), which last traded at $62. But it might take a few years to get there.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?83 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.
It?s All Over For the YenGlobal Market Comments
August 26, 2014
Fiat Lux
Featured Trade:
(AUGUST 27 GLOBAL STRATEGY WEBINAR),
(WHY I?M COVERING SOME EURO SHORTS),
(FXE), (EUO),
(THAT WAS SOME SHAKER!)
CurrencyShares Euro ETF (FXE)
ProShares UltraShort Euro (EUO)