A Tribute to a True Veteran

Today is Veterans Day in the United States, a national holiday originally established for those who served in WWI.

I’ll be putting on my faded Marine Corp fatigues, with gold railroad track bars on my shoulders, and lead the hometown’s parade.

So, I thought it would be a good day to tell you the story of my Uncle Mitch, the REAL veteran.

Since job prospects for high school graduates in rural Pennsylvania were poor in 1936, Mitch walked 200 miles to the nearest Marine Corp recruiting station in Baltimore.

After basic training, he spent five years rotating between duty in China and the Philippines, manning the fabled gunboats up the Yangtze River.

When WWII broke out, he was a seasoned sergeant in charge of a machine gun platoon. That put him with the seventh regiment of the First Marine division at Guadalcanal in October 1942.

When the Japanese counterattacked, Mitch was put in charge of four Browning .30 caliber water-cooled machine guns and 33 men, dug in at trenches on a ridge above Henderson Field.

The Japanese launched massive waves of suicide attackers in a pouring tropical rainstorm all night long, frequently breaking through the lines and engaging in fierce hand-to-hand combat.

If the position fell, the flank would have been broken, leading to a loss of the airfield, and possibly the entire battle. WWII in the Pacific would have lasted two more years.

After the first hour, all of Mitch’s men were either dead or severely wounded, shot or slashed with samurai swords. So Mitch fired one gun until it was empty, then scurried over to the next, and then the next. In between human waves, he ran back and reloaded all the guns.

To more easily pitch hand grenades, he cut the arms off his herringbone fatigues. When the Japanese launched their final assault, and then retreated, he picked up a 40-pound Browning, cradled it in his arms, and ran down the hill after them, firing all the way, and burning all the skin off his left forearm.

Mitch’s commanding officer, Col. Herman H. Hanneken, heard the guns firing all night from the field below. He was shocked when he visited the position the next morning, finding Mitch alone in front of a twisted sea of 2,000 Japanese bodies, not a scratch on him.

Mitch was awarded the Congressional Medal of Honor by General “Chesty” Puller in Australia a few months later.

After the war, Mitch, now a colonel, was handed the plum of all Marine Corp jobs, acting as the liaison officer with Hollywood. He provided the planes, ships, and beaches needed to make the great classic war films.

He got to know stars like John Wayne, Lee Marvin, and yes, even Elvis Presley. The iconic fictional hero in the 1949 film, Sands of Iwo Jima, the quiet, but strong Sergeant John M. Striker, was modeled after him.

Tradition dictated that all military officers saluted Mitch, even five-star generals, and he was given a seat to attend every presidential inauguration from FDR on. Pacific countries issued stamps with his image, and Mattel sold a special GI Joe in his likeness.

When Mitch got older and infirm, I used my captain’s rank to escort him on diplomatic missions overseas to attend important events, like the D-Day 40th anniversary in Normandy.

Whenever Mitch was in town, he would join me for lunch with some of my hedge fund clients with a history bent, and a more humble and self-effacing guy you never met. He occasionally scratched the massive scars on his forearm, which still bothered him after a half-century.

I used to confess to my fellow traders present, “It makes what we do for a living look pretty feeble, doesn’t it?”

Mitch passed away in 2003 while he was working as a technical consultant to the pre-production of the HBO series, The Pacific, an absolute must-see for all armchair historians.

The principal character in the series is an amalgam of Mitch and John Basilone, another Medal of Honor winner at Guadalcanal. Basilone later died leading a charge on Iwo Jima, so his name was used in the film for dramatic effect.

The funeral in Riverside, California was marked by a lone eagle, which continuously circled overhead. According to the Indian shaman present, this only occurs at the services for great warriors.

A dozen living Medal of Honor winners accompanied the casket. Boy, the Marines can sure put on a great funeral, perhaps because they have had so much practice.

Last spring, I had an opportunity to visit the World War II Museum in New Orleans on the morning of my Strategy Luncheon there. Tucked away in a corner was a plaque paying tribute to Mitch. As I stood there in silence, a group of two dozen gathered around me. When someone asked, I told his whole story to a rapt audience. It was his final tribute.

When I get back from my parade, I’ll take out the samurai sword Mitch captured on that fateful day, a 1692 Muneshige carried by the Japanese division commander, the hilt still scarred with 30 caliber slugs, and give it a ritual polishing in sesame oil and powdered deer horn, as samurai have done for a millennium.To bring the story full circle, in January 2020 I’ll be visiting Guadalcanal myself as a representative of the US Marine Corps to begin the 78th year memorial services for the epic battle. I have already hired a native guide and metal detector to find the actual ridge from which Mitch fought hand to hand. I’ll be forwarding you the videos and the pictures.

To read more about the First Marine Division’s campaign during the war, please read the excellent paperback, The Island: A History of the First Marine Division on Guadalcanal by Herbert Laing Merillat, which you can buy by clicking here.

To Buy the DVD, The Pacific, click here.

 

 

 

Henderson’s Ridge in 1942

 

 

Last Chance to Attend the Mad Hedge Lake Tahoe, Nevada Conference, October 25-26, 2019

Tickets for the Mad Hedge Lake Tahoe Conference are selling briskly. If you want to obtain a ticket that includes a dinner with John Thomas and Arthur Henry, you better get your order in soon.

The conference date has been set for Friday and Saturday, October 25-26.

Come learn from the greatest trading minds in the markets for a day of discussion about making money in the current challenging conditions.

How much longer can the Fed keep boosting the market?

Will the recession start in 2020, or will we have to wait until 2021, and how soon will the stock market start discounting it?

How will you guarantee your retirement in these tumultuous times?

Will the next bear market be as bad as 2008-2009, or worse? And is it worth selling out everything now?

What will destroy the economy first, rising interest rates, collapsing earnings, a trade war, or all three?
 
Who will tell you what to buy at the next market bottom?

John Thomas is a 50-year market veteran and is the founder,  CEO and publisher of the Diary of a Mad Hedge Fund Trader. John will give you a laser-like focus on the best-performing asset classes, sectors, and individual companies of the coming months, years, and decades. John covers stocks, options, and ETFs. He delivers your one-stop global view.

Arthur Henry is the author of the Mad Hedge Technology Letter. He is a seasoned technology analyst and speaks four Asian languages fluently. He will provide insights into the most important investment sector of our generation.

The event will be held at a five-star resort and casino on the pristine shores of Lake Tahoe in Incline Village, NV, the precise location of which will be emailed to you with your ticket purchase confirmation.

It will include a full breakfast on arrival, a sit-down lunch, coffee break. The wine served will be from the best Napa Valley vineyards.

Come rub shoulders with some of the savviest individual investors in the business, trade investment ideas, and learn the secrets of the trading masters.

 

Ticket Prices

Copper Ticket – $699: Saturday conference all day on October 26, with buffet breakfast, lunch, and coffee break, with no accommodations provided

Silver Ticket – $1,399: Two nights of double occupancy accommodation for October 25 & 26, Saturday conference all day with buffet breakfast, lunch and coffee break

Gold Ticket – $1,598: Two nights of double occupancy accommodation for October 25 & 26, Saturday conference all day with buffet breakfast, lunch, and coffee break, and an October 26, 7:00 PM Friday night VIP Dinner with John Thomas

Platinum Ticket – $1,599: Two nights of double occupancy accommodation for October 25 & 26, Saturday conference all day with buffet breakfast, lunch, and coffee break, and an October 27, 7:00 PM Saturday night VIP Dinner with John Thomas

Diamond Ticket – $1,999: Two nights of double occupancy accommodation for October 25 & 26, Saturday conference all day with buffet breakfast, lunch, and coffee break, an October 25, 7:00 PM Friday night VIP Dinner with John Thomas, AND an October 26, 7:00 PM Saturday night VIP Dinner with John Thomas

Schedule of Events

Friday, October 25, 7:00 PM

7:00 PM – Exclusive dinner with John Thomas and Arthur Henry for 12 in a private room at a five-star hotel for gold and diamond ticket holders only

Saturday, October 26, 8:00 AM

8:00 AM – Breakfast for all guests at the Lakeshore Ballroom

9:00 AM – Speaker 1: Arthur Henry –The Mad Hedge Technology Letter –The Next Big Trends in Technology and How to Play Them

10:15 AM – 15-minute coffee break

10:30 AM – Speaker 2: John Thomas – Global Trading Dispatch – The Markets in 2020 – Risks and Rewards

12:00 PM – Lunch

1:30 PM – Speaker 3: Arthur Henry – The Mad Hedge Technology Letter – Pain and Pleasure in the Technology IPO Market

2:45 PM – Coffee Break

3:00 PM – Speaker 4: John Thomas – Global Trading Dispatch – The 2020 Election and the Markets

4:15 PM – Adjourn to Lone Eagle Bar

7:00 PM – Exclusive dinner with John Thomas for Platinum and Diamond ticket holders only in the lakeshore Ballroom

To purchase tickets, click here.

 

 

Will Antitrust Destroy Your Tech Portfolio?

In recent days, two antitrust suits have arisen from both the Federal government and 49 states seeking to fine, or break up the big four tech companies, Facebook (FB), Apple (AAPL), Amazon (AMZN), and Google (GOOG). Let’s call them the “FAAGs.”

And here is the problem. These four companies make up the largest share of your retirement funds, whether you are invested with active managers, mutual funds, or simple index funds. The FAAGs dominate the landscape in every sense, accounting 13% of the S&P 500 and 33% of NASDAQ.

They are also the world’s most profitable large publicly listed companies with the best big company earnings growth.

I’ll list the antitrust concern individually for each company.

Facebook

Facebook has been able to maintain its dominance in social media through buying up any potential competitors it thought might rise up to challenge it through a strategy of serial defense acquisitions

In 2012, it bought the photo-sharing application Instagram for a bargain $1 billion and built it into a wildly successful business. It then overpaid a staggering $19 billion for WhatsApp, the free internet phone and texting service that Mad Hedge Fund Trader uses while I travel. It bought Onovo, a mobile data analytics company, for pennies ($120 million) in 2013.

Facebook has bought over 70 companies in 15 years, and the smaller ones we never heard about. These were done largely to absorb large numbers of talented engineers, their nascent business shut down months after acquisition.

Facebook was fined $5 billion by the Fair Trade Commission (FTC) for data misuse and privacy abuses that were used to help elect Donald Trump in 2016.

Apple

Apple only has a 6% market share in the global smart phone business. Samsung sells nearly 50% more at 9%. So, no antitrust problem here.

The bone of contention with Apple is the App Store, which Steve Jobs created in 2008. The company insists that it has to maintain quality standards. No surprise then that Apple finds the products of many of its fiercest competitors inferior or fraudulent. Apple says nothing could be further from the truth and that it has to compete aggressively with third party apps in its own store. Spotify (SPOT) has already filed complaints in the US and Europe over this issue.

However, Apple is on solid ground here because it has nowhere near a dominant market share in the app business and gives away many of its own apps for free. But good luck trying to use these services with anything but Apple’s own browser, Safari.

It’s still a nonissue because services represent less than 15% of total Apple revenues and the App Store is a far smaller share than that.

Amazon

The big issue is whether Amazon unfairly directs its product searches towards its own products first and competitors second. Do a search for bulk baby diapers and you will reliably get “Mama Bears”, the output of a company that Amazon bought at a fire sale price in 2004. In fact, Amazon now has 170 in-house brands and is currently making a big push into designer apparel.

Here is the weakness in that argument. Keeping customers in-house is currently the business strategy of every large business in America. Go into any Costco and you’ll see an ever-larger portion of products from its own “Kirkland” branch (Kirkland, WA is where the company is headquartered).

Amazon has a market share of no more than 4% in any single product. It has the lowest price, and often the lowest quality offering. But it does deliver for free to its 100 million Prime members. In 2018, some 58% of sales were made from third-party sellers.

In the end, I believe that Amazon will be broken up, not through any government action, but because it has become too large to manage. I think that will happen when the company value doubles again to $2 trillion, or in about 3-5 years, especially if the company can obtain a rich premium by doing so.

Google

Directed search is also the big deal here. And it really is a monopoly too, with some 92% of the global search. Its big breadwinner is advertising, where it has a still hefty 37% market share. Google also controls 75% of the world’s smart phones with its own Android operating software, another monopoly.

However, any antitrust argument falls apart because its search service is given away to the public for free, as is Android. Unless you are an advertiser, it is highly unlikely that you have ever paid Google a penny for a service that is worth thousands of dollars a year. I myself use Google ten hours a day for nothing but would pay at least that much.

The company has already survived one FTC investigation without penalty, while the European Union tagged it for $2.7 billion in 2017 and another $1.7 billion in 2019, a pittance of total revenues.

The Bottom Line

The stock market tells the whole story here, with FAAG share prices dropping a desultory 1%-2% for a single day on any antitrust development, and then bouncing back the next day.

Clearly, Google is at greatest risk here as it actually does have a monopoly. Perhaps this is why the stock has lagged the others this year. But you can count on whatever the outcome, the company will just design around it as have others in the past.

For start, there is no current law that makes what the FAAGs do illegal. The Sherman Antitrust Act, first written in 1898 and originally envisioned as a union-busting tool, never anticipated anticompetitive monopolies of free services. To apply this to free online services would be a wild stretch.
 
The current gridlocked congress is unlikely to pass any law of any kind. The earliest they can do so will be in 18 months. But the problems persist in that most congressmen fundamentally don’t understand what these companies do for a living. And even the companies themselves are uncertain about the future.

Even if they passed a law, it would be to regulate yesterday’s business model, not the next one. The FAAGs are evolving so fast that they are really beyond regulation. Artificial intelligence is hyper-accelerating that trend.

It all reminds me of the IBM antitrust case, which started in 1975, which my own mother worked on. It didn’t end until the early 1990s. The government’s beef then was Big Blue’s near-monopoly in mainframe computers. By the time the case ended, IBM had taken over the personal computer market. Legal experts refer to this case as the Justice Department’s Vietnam.

The same thing happened to Microsoft (MSFT) in the 1990s. After ten years, there was a settlement with no net benefit to the consumer. So, the track record of the government attempting to direct the course of technological development through litigation is not great, especially when the lawyers haven’t a clue about what the technology does.

There is also a big “not invented here” effect going on in these cases. It’s easy to sue companies based in other states. Of the 49 states taking action against big tech, California was absent. But California was in the forefront of litigation again for big tobacco (North Carolina), and the Big Three (Detroit).

And the European Community has been far ahead of the US in pursuing tech with assorted actions. Their sum total contribution to the development of technology was the mouse (Sweden) and the World Wide Web (Tim Berners Lee working for CERN in Geneva).

So, I think your investments in FAAGs are safe. No need to start eyeing the nearest McDonald’s for your retirement job yet. Personally, I think the value of the FAAGs will double in five years, as they have over the last five years, recession or not.

 

 

 

 

Has the Value of Your Home Just Peaked?

Lately, my inbox has been flooded with emails from subscribers asking how to hedge the value of their homes. This can only mean one thing: the residential real estate market has peaked.

They have a lot to protect. Since prices hit rock bottom in 2011 and foreclosures crested, the national real estate market has risen by 50%.

I could almost tell you the day the market bounced. That’s when a couple of homes in my neighborhood that had been for sale for years suddenly went into escrow.

The hottest markets, like those in Seattle, San Francisco, and Reno, are up by more than 125%, and certain neighborhoods of Oakland, CA have shot up by 400%.

The concerns are confirmed by data that started to roll over in the spring and have been dismal ever since. It is not just one data series that has rolled over, they have all gone bad. One bad data point can be a blip. An onslaught is a new trend. Let me give you a dismal sampling.

*Home Affordability hit a decade low, thanks to rising prices and interest rates and trade war-induced soaring construction costs

*July Housing Starts have been in a tailspin as tariff-induced rocketing costs wipe out the profitability of new homes

*New Home Sales collapsed YOY.

*14% of all June Real Estate Listings saw price cuts, a two-year high

 *Chinese Buying of West Coast homes has vaporized over trade war fears

Fortunately, investors have a lot of options for either hedging the value of their own homes or making a bet that the market will fall.

In 2006, the Chicago Mercantile Exchange (CME) started trading futures contracts for the Corelogic  S&P/Case-Schiller Home Price Index, which covered both U.S. residential and commercial properties.

The Case-Shiller index, originated in the 1980s by Karl Case and Robert Shiller, is widely considered to be the most reliable gauge to measure housing price movements. The data comes out monthly with a three-month lag.

This index is a widely-used and respected barometer of the U.S. housing market and the broader economy and is regularly covered in the Mad Hedge Fund Trader biweekly global strategy webinars.

The composite weight of the CSI index is as follows:

  • Boston 7.4%
  • Chicago 8.9%
  • Denver 3.6%
  • Las Vegas 1.5%
  • Los Angeles 21.2%
  • Miami 5%
  • New York 27.2%
  • San Diego 5.5%
  • San Francisco 11.8%
  • Washington DC 7.9%

However, these contracts suffer from the limitations suffered by all futures contracts. They can be illiquid, expensive to deal in, and you probably couldn’t get permission from your brokers to trade them anyway.

If you want to be more conservative, you could take out bearish positions on the iShares US Home Construction Index (ITB), a basket of the largest homebuilders (click here for their prospectus). Baskets usually present half the volatility and therefore half the risk of any individual stock.

If real estate is headed for the ashcan of history, there are far bigger problems for your investment portfolio than the value of your home. Real estate represents a major part of the US economy and if it is going into the toilet, you could too.

It is joined by the sickly auto industry. Thanks to the trade wars, farm incomes are now at a decade low. As we lose each major segment of the economy, the risk is looming that the whole thing could go kaput. That, ladies and gentlemen, is called a recession and a bear market.

On the other hand, you could take no action at all in protecting the value of your home.

Those who bought homes a decade ago, took a ten-year cruise and looked at the value of their residence today will wonder what all the fuss is about. By the way, I met just such a person on the Queen Mary 2 last summer. Yes, ten years at sea!

And the next recession is likely to be nowhere near as bad as the last one, which was a twice-a-century event. So it’s probably not worth selling your home and buying it back later, as I did during the Great Recession.

See you onboard!

 

 

In Your Future?

 

How the Mad Hedge Market Timing Algorithm Works

Since we have just taken in a large number of new subscribers from around the world, I will go through the basics of my Mad Hedge Market Timing Index one more time.

I have tried to make this as easy to use as possible, even devoid of the thought process.

When the index is reading 20 or below, you only consider “BUY” ideas. When it reads over 80, it’s time to “SELL.” Everything in between is a varying shade of grey. Most of the time, the index fluctuates between 20-80, which means that there is absolutely nothing to do.

To identify a coming market reversal, it’s good to see the index chop around for at least a few weeks at an extreme reading. Look at the three-year chart of the Mad Hedge Market Timing Index.

After three years of battle-testing, the algorithm has earned its stripes. I started posting it at the top of every newsletter and Trade Alert two years ago and will continue to do so in the future.

Once I implemented my proprietary Mad Hedge Market Timing Index in October 2016, the average annualized performance of my Trade Alert service has soared to an eye-popping 34.61%.

As a result, new subscribers have been beating down the doors trying to get in.

Let me list the highpoints of having a friendly algorithm looking over your shoulder on every trade.

*Algorithms have become so dominant in the market, accounting for up to 90% of total trading volume, that you should never trade without one

*It does the work of a seasoned 100-man research department in seconds

*It runs real-time and optimizes returns with the addition of every new data point far faster than any human can. Imagine a trading strategy that upgrades itself 30 times a day!

*It is artificial intelligence-driven and self-learning.

*Don’t go to a gunfight with a knife. If you are trading against algos alone,
you WILL lose!

*Algorithms provide you with a defined systematic trading discipline that will enhance your profits.

And here’s the amazing thing. My Mad Hedge Market Timing Index correctly predicted the outcome of the presidential election, while I got it dead wrong.

You saw this in stocks like US Steel, which took off like a scalded chimp the week before the election.

When my and the Market Timing Index’s views sharply diverge, I go into cash rather than bet against it.

Since then, my Trade Alert performance has been on an absolute tear. In 2017, we earned an eye-popping 57.39%. In 2018, I clocked 23.67% while the Dow Average was down 8%, a beat of 31%. So far in 2019, we are up 18.10%.

Here are just a handful of some of the elements which the Mad Hedge Market Timing Index analyzes real-time, 24/7.

50 and 200-day moving averages across all markets and industries

The Volatility Index (VIX)

The junk bond (JNK)/US Treasury bond spread (TLT)

Stocks hitting 52-day highs versus 52-day lows

McClellan Volume Summation Index

20-day stock bond performance spread

5-day put/call ratio

Stocks with rising versus falling volume

Relative Strength Indicator

12-month US GDP Trend

Case Shiller S&P 500 National Home Price Index

Of course, the Trade Alert service is not entirely algorithm-drive. It is just one tool to use among many others.

Yes, 50 years of experience trading the markets is still worth quite a lot.

I plan to constantly revise and upgrade the algorithm that drives the Mad Hedge Market Timing Index continuously as new data sets become available.

 

 

 

 

It Seems I’m Not the Only One Using Algorithms

How to Buy a Solar System

It’s just a question of how long it takes Moore’s law type efficiencies to reach exponential growth in the solar industry.

Accounting for 4% of the country’s electrical power supply today, we are only five doublings away from 100% when energy essentially becomes free.

The next question beyond the immediate trading implications is, “What’s in it for you?”

I should caution you that after listening to more than 20 pitches, almost all of the information you get from fly-by-night solar installation salesmen is inaccurate. Most don’t know the difference when it comes to a watt, an ohm, or a volt.

I think they were mostly psychology or philosophy majors, if they went to college at all.

The promised 25-year guarantees are only as good as long as the firms stay in business, which for many will not be long.

Talking to these guys reminded me of the aluminum siding salesmen of yore. It was all high pressure, exaggerated benefits, and relentless emailing.

I come to this issue with some qualifications of my own, as I have been designing and building my own solar systems for the past 50 years.

During the early 1960s when solar cells first became available to the public through Radio Shack (RIP), I used to create from scratch my own simple sun-powered devices. But when I measured the output, I would cry, finding barely enough power to illuminate a flashlight bulb.

We have come a long way since then. For years, I watched my organic bean-sprout eating, Birkenstock wearing neighbors install expensive, inefficient arrays because it was good for the environment, politically correct, and saved the whales.

However, when I worked out the breakeven point compared to conventional power sources, it stretched out into decades. So, I held off.

It wasn’t until 2015 when solar price/performance hit the breakeven sweet spot acceptable for me, about six years. Four years in, and it’s looking like I’ll probably get my money back in five. Thanks to global warming, my solar system is becoming more efficient, not less. Why, I can’t imagine.

Then I really launched into overdrive, attempting to get the best value for money and game the many financing alternatives.

The numbers are now so compelling that even a number-crunching, blue state hating Texas oilman should be installing silicon on his roof.

A lot are.

My effort was the father of the many solar research pieces and profitable Trade Alerts you have received since.

Here are my conclusions up front: Learn about “tier shaving” from your local utility, and buy, don’t lease. All electrical utility plans are local.

First, about the former.

Every utility has a tiered system of charging customers on a prorated basis. A minimal amount of power for a low-income family of four living in a home with less than 1,500 square feet, about 20% of the U.S. population, costs about 10 cents a kilowatt hour.

This is a function of the high level of public power utility regulation in the U.S. where companies are granted local monopolies. There are a lot of trade-offs, local politics, and quid pro quos that are involved in setting electric power rates.

My local supplier, PG&E (PGE) has five graduated billing tiers, with the top rate at 55 cents a kWh for mansion dwelling energy hogs like me (one Tesla in the garage and another on the way).

In order to minimize your up-front capital cost, you want to buy all the power you can at the poor person rate, and then eliminate the top four tiers entirely. Do this and you can cut the cost of your new solar system by half.

Your solar provider will ask for your recent power bills and will help you design a system of the right size.

Warning! They will try to sell you more than you need. After all, they are in the solar panel selling business, not the customer-value-for-money delivery business.

On the other hand, if you are a scientist or engineer, you can simply calculate these figures yourself. In my case, I use 18,000 kWh a year, but by installing only a 9,000 kWh/year system, my monthly power bill dropped from $500 to $50 a month.

This system cost me $32,000, or $22,400 net of the 30% alternative energy investment tax credit, giving me a breakeven point of four years and eight months. Hurry up because this tax credit expires in 2020.

Don’t focus too much on the panels themselves, as they are only 25% of a system’s costs. The big installers constantly play a myriad of panel manufacturers off against each other to get the cheapest bulk supplies.

The majority of the expense is for labor, the inverter needed to convert DC solar power to AC wall plug power, and permitting.

As for me, Mr. First Class All the Way, I specified only 19 of the best American-made, most efficient 335 kWh SunPower (SPWR) panels.

If I had settled for lower cost 250 kWh imported panels and just bought more of them, I would have saved a few thousand bucks. That’s fine if you have the roof space.

One other frill I ordered was a top-of-the-line SunPower SPR-6000m inverter, which includes two 110-volt AC outlets. Many solar systems won’t work without access to the grid to run the inverter and software.

This will enable me to operate independent of the grid in case it is knocked out by an earthquake or storm, and power a few select appliances, such as my refrigerator, cells phones, laptop, and, of course, my car.

Once you get your connection notice from your utility, you enter electricity Nirvana, selling power at a premium during the day and buying it back at a discount at night.

You are, in effect, using the grid as a giant storage device or battery.

You can then log into your account online and measure how much your solar panels are generating in San Francisco even from places as remote as Africa as I did last summer.

My statement is posted below showing my roof is happily generating about 38 kW a day or one full Tesla 100kW battery recharge every 2 1/2 days.

Since my system is in California, it also expresses the solar energy produced in terms of gallons of gasoline equivalent, tree seedlings grown over 10 years, an average home’s power consumption for one year, or number of tons of waste sent to a landfill.

Call this “feel good” with a turbocharger.

At the end of every 12 months, the utility will then perform a “gross up” calculation. If you produced more power than you used, the utility owes you a check.

Buzzkill warning!

PG&E has to pay me only its lowest marginal cost of power, or 4 cents/kWh. That is why is pays to under build your system, which for me cost $2.49/kWh to install, net of the tax credit.

This was the quid pro quo that enabled PG&E to agree to the whole plan in the first place. So, you won’t get rich off your solar system.

I am now protected against any price increase for electricity for the next 25 years!

PG&E has already notified me of back-to-back 7.5% annual rate increases for the next two years to pay for replacement of their aging, dilapidated infrastructure, a problem that is occurring nationally.

Oh, and my $32,000 investment has increased the value of my home by $64,000, according to my real estate friend.

Now for the lease or buy question. If you don’t have $32,000 for a solar installation, (or $16,000 for a normal size house with no Teslas), or you want to preserve your capital for your trading account, you may want to lease from a company such as Solar City.

The company will design and install an entire system for you for no money down and lease it to you for 20 years. But after your monthly lease payment, Solar City will end up keeping half the benefit, and raise your cost of electricity annually.

In my case, my monthly power bill will have dropped from $450 to $250. And you don’t get any 30% investment tax credit. However, this is still cheaper than continuing to buy conventional power.

So if you can possibly afford it, buy, don’t rent.

This being Silicon Valley, niche custom financing firms have emerged to let you have your cake and eat it, too.

Dividend Solar (click here for their site) will lend you the money to buy your entire system yourself, thus qualifying you for the investment tax credit.

As long as you use the tax credit to repay 30% of your loan principal within 15 months, the interest rate stays at 6.49% for the 20-year life of the loan. Otherwise, the interest rate then rises to a credit card like 9.99%. A FICO score of only 690 gets you in the door.

There are a few provisos to add.

You can’t install solar panels on clay or mission tile roofs popular in the U.S. Southwest (where the sun is), or tar and gravel roofs, as the breakage or fire risk is too great. The racks that hold the panels down in hurricane force winds simply won’t fit.

If you want to maintain your aesthetics, you can take the mission tiles off, install a simple composite shingle roof, bolt your solar panels on top, then put back the clay tiles back around the edges. That way it still looks like you have a mission tile roof.

Also, it is best to install your system in the run-up to the summer solstice when the days are longest and the sunshine brightest. Solar systems produce 400% more power on the longest day of the year compared to the shortest because of the lower angle of the sun’s rays hitting the Northern Hemisphere.

Tesla (TSLA) has added a whole new chapter to the solar story.

It announced the launch of the Power Wall, a 7 or 10 kW home storage battery that will cost up to $5,000 (click here for “The Solar Missing Link is Here!”)

The development is made possible by the enormous economies of scale for battery manufacturing made possible by the new Gigafactory now coming on line near Reno, Nevada.

The Gigafactory will double world’s lithium ion battery capacity in one shot. Plans for a second Gigafactory are already in the works.

This will permit homeowners to use their solar panels to charge batteries during the day, and then run off them at night making them fully energy-independent.

Yes, a total American solar energy supply in 24 years sounds outrageous, insane, and even ludicrous (to use some of Elon Musk’s favorite words).

But, so did the idea of a 3-gigahertz laptop microprocessor for a mere $1,000 24 years ago where Moore’s law first applied.

Sounds like the investment opportunity of the century to me. And you don’t have to rush. In a rare compromise with Congress, the 30% alternative energy tax subsidy has been extended to 2021.

The graphics for my own solar power supply are below:

 

 

 

 

 

SunPower SPR-6000m

 

The Tale of Two Economies

I’m looking at my screens this morning and virtually every stock sold short by the Dairy of a Mad Hedge Fund Trader cratered to new six-month lows.

Call it lucky, call it fortuitous. All I know is that the harder I work the luckier I get.

If you are in the right economy, that of the future, you are having another spectacular year. If you aren’t, you are probably posting horrific losses for 2019. Call it the “Tale of two Economies.”

I suspected that this was setting up over the last couple of weeks. No matter how much bad news and uncertainty dumped on these companies, the shares absolutely refused to go down. Instead, they flat lined just below their 2019 highs. It was a market begging for a selloff.

When the Facebook (FB) hacking scandal hit, investors were ringing their hands about the potential demise of Mark Zuckerberg’s vaunted business model and the shares plunged to $123.

However, while analysts were making these dire productions, I knew that Facebook itself was signing a long-term lease for a brand new 46-story skyscraper in downtown San Francisco just to house its Instagram operations.

Months later, and the company that misused Facebook’s data, Steve Bannon’s Cambridge Analytica, is bankrupt, and (FB) is trading at $185, a new high. Facebook was right, and the Cassandras were wrong.

Amazon was given up for dead during the February melt down as the shares withered from a daily onslaught of presidential attacks threatening antitrust action. Today, the shares are up a mind-blowing 38% above those lows.

And when Apple announced its earnings, the shares tickled $222, putting it squarely back into the ranks of the $1 trillion club ($949 billion at today’s close).

It turns out that technology companies are immune from most of the negative developments that have caused the rest of the stock market to drag. I’ll go through these one at a time.

Falling Interest Rates

Tech companies are sitting gigantic cash mountains, some $245 billion in Apple’s case, which means that as net lenders to the credit markets, they are beneficiaries of the credit markets. This makes tech companies immune from the credit problems that will demolish old economy industries during the next rate spike.

Rising Oil Prices

While tech companies are prodigious consumers of electricity, many power these with massive solar arrays and they sell periodic excess power to local utilities. So as net energy producers, they profit from rising energy prices.

Rising Inflation

Since the output of technology companies is entirely digital, they can handily increase productivity faster than the inflation rate, whatever it is. Traditional old economy companies, like industrials and retailers can’t do this.

Remember that while analogue production grows linearly, digital production grows exponentially, enabling tech companies to handily beat the inflation demon, leaving others behind in the dust.

Share Buybacks

While technology companies account for only 26% of the S&P 500 stock market capitalization, they generate 50% of the profits. Thanks to the massive tax breaks and low tax repatriation of foreign profits enabled by the 2017 tax bill, share buybacks are expected to rocket from $500 billion to $1 trillion this year. Companies repurchasing their own shares have become the sole net buyers of equities in 2019.

And companies with the biggest profits buy back the most stock. This has created a virtuous cycle whereby higher share prices generate more buybacks to create yet higher share prices. Old economy companies with lesser profits are buying back little, if any, of their own shares.

Of course, tech companies are not without their own challenges. For a start, they have each other to worry about. FANGs will simultaneously cooperate with each other in a dozen areas, while fight tooth and nail and sue on a dozen others. It’s like watching Silicon Valley’s own version of HBO’s Game of Thrones.

Also, occasionally, the tech story becomes so obvious to the unwashed masses that it creates severe overbought conditions and temporary peaks, like we saw in January.

 

 

Have We Seen “Peak Auto Sales”?

There is no limit to my desire to get an early and accurate read on the US economy, which at the end of the day is what dictates the future returns on our investments.

I flew over one of my favorite leading economic indicators only last week.

Honda (HMC) and Nissan (NSANY) import millions of cars each year through their Benicia, California facilities where they are loaded on to hundreds of rail cars for shipment to points inland as far as Chicago.

In 2009, when the US car market shrank to an annualized 8.5 million units, I flew over the site and it was choked with thousands of cars parked bumper to bumper in their white plastic wrappings, rusting in the blazing sun and bereft of buyers.

Then, “cash for clunkers” hit (remember that?). The lots were emptied in a matter of weeks, with mile-long trains lumbering inland, only stopping to add extra engines to get over the High Sierras at Donner Pass. The stock market took off like a rocket, with the auto companies leading.

I flew over the site last weekend, and guess what? The lots are full again. Not only that, the trains lined up to take them away are gone. US Auto Sales peaked in October 2017 when they fell just short of a 19 million annualized rate. As of the end of June this year, they had fallen to a 15.1 million annualized rate. July is looking worse still.

And this is what I’m worried about. Auto Sales may not only be peaking for this economic cycle. They may be peaking for all time.

This is my logic.

As they slowly age, Millennials are about to become the principal buyers of automobiles. The problem is that Millennials are purchasing cars at a far slower rate than previous generations.

This is because they have a much higher concentration in urban areas where the cost of car ownership is the most expensive in history. $40 for parking for an evening? Give me a break. But good luck finding free on-street parking, and if you do, your windows will probably get smashed.

In cities like San Francisco, public transportation, bicycles, and electric scooters are the preferred mode of transportation.

It doesn’t help that this generation is shouldering the burden of the bulk of $1.5 trillion in student loan debt. When you owe $2,000 a month in interest, there is little room for a car payment, and you probably don’t have the credit rating to buy a car anyway.

When they do buy cars, all-electric is their first choice, if they can get access to overnight charging. A lot of companies are making this easy by offering free charging for electric commuters in corporate parking lots. This explains why Tesla (TSLA) has taken deposits from 400,000 for their low-end Tesla 3, which has a two-year waiting list for new buyers.

When Millennials do drive, such as on business, for weekend trips or summer vacations, they either rent or “share.” Driving around the city, you see cars parked everywhere with bizarre names like Upshift, Getaround, Zipcar, Turo, and Casual Carpool.

Indeed, Detroit takes the car-sharing threat so seriously that the Big Three have all bought into the technology, with General Motors taking a stake in Maven. (GM) plans to start its own peer-to-peer car-sharing service this summer.

This is all a mystery for my generation, which grew up tearing apart old cars and putting them back together. I spent a year trying to put the engine on my 1955 Volkswagen back together. When I gave up, I towed the car and a big box full of greasy parts to a local mechanic, a German Army veteran. When he finished, even he had four parts left over.

Do you know who believes my rash, possible MAD theory? Investors in auto stocks, one of the worst-performing sectors of the stock market this year. Shares like those of General Motors (GM) keep breaking new valuation lows.

What was (GM)’s price earnings multiple today? Try a miserable zero since the company loses money, one of the lowest of all S&P 500 stocks. Hapless portfolio managers keep getting sucked into the shares, which have become one of the ultimate value traps.

It is all further evidence that my cautious view on the US economy is correct, that multiple crises overseas are ahead of us, and that the stock market could drop 5%-10% at any time. The auto industry should lead the charge to the downside, especially General Motors (GM) and Ford (F).

As for Tesla (TSLA), better to buy the car than the stock.

Sorry, the photo is a little crooked, but it’s tough holding a camera in one hand and a plane’s stick with the other while flying through the turbulence of the San Francisco Bay’s Carquinez Straight.

Air traffic control at nearby Travis Air Force base usually has a heart attack when I conduct my research in this way, with a few joyriding C-130s having more than one near miss.

 

 

 

 

 

 

Welcome to the Deflationary Century

Ignore the lessons of history, and the cost to your portfolio will be great. Especially if you are a bond trader!

Meet deflation, upfront and ugly.

If you looked at a chart for data from the United States, consumer prices are showing a feeble 1.6% YOY price gain. This is below the Federal Reserve’s own 2.0% annual inflation target, with most of the recent gains coming from rising oil prices.

And here’s the rub. Wage growth, which accounts for 70% of the inflation calculation, has been practically nil. So, don’t expect inflation to rise much from here despite an unemployment rate at a 50-year low.

We are not just having a deflationary year or decade. We may be having a deflationary century.

If so, it will not be the first one.

The 19th century saw continuously falling prices as well. Read the financial history of the United States, and it is beset with continuous stock market crashes, economic crisis, and liquidity shortages.

The union movement sprung largely from the need to put a break on falling wages created by perennial labor oversupply and sub living wages.

Enjoy riding the New York subway? Workers paid 10 cents an hour built it 120 years ago. It couldn’t be constructed today, as other more modern cities have discovered. The cost would be wildly prohibitive.

The causes of 19th-century price collapse were easy to discern. A technology boom sparked an industrial revolution that reduced the labor content of end products by ten to a hundredfold.

Instead of employing 100 women for a day to make 100 spools of thread, a single man operating a machine could do the job in an hour.

The dramatic productivity gains swept through the developing economies like a hurricane. The jump from steam to electric power during the last quarter of the century took manufacturing gains a quantum leap forward.

If any of this sounds familiar, it is because we are now seeing a repeat of the exact same impact of accelerating technology. Machines and software are replacing human workers faster than their ability to retrain for new professions.

This is why there has been no net gain in middle class wages for the past 30 years. It is the cause of the structural high U-6 “discouraged workers” employment rate as well as the millions of millennials still living in parents’ basements.

To the above, add the huge advances now being made in healthcare, biotechnology, genetic engineering, DNA-based computing, and big data solutions to problems.

If all the major diseases in the world were wiped out, a probability within 10 years, how many healthcare jobs would that destroy?

Probably tens of millions.

So the deflation that we have been suffering in recent years isn’t likely to end any time soon. If fact, it is just getting started.

Why am I interested in this issue? Of course, I always enjoy analyzing and predicting the far future using the unfolding of the last half-century as my guide. Then I have to live long enough to see if I’m right.

I did nail the rise of eight-track tapes over six-track ones, the victory of VHS over Betamax, the ascendance of Microsoft (MSFT) operating systems over OS2, and then the conquest of Apple (AAPL) over Microsoft. So, I have a pretty good track record on this front.

For bond traders especially, there are far-reaching consequences of a deflationary century. It means that there will be no bond market crash, as many are predicting, just a slow grind up in long-term bond prices instead.

Amazingly, the top in rates in this cycle only reach the bottom of past cycles at 3.25% for ten-year Treasury bonds (TLT), (TBT).

The soonest that we could possibly see real wage rises will be when a generational demographic labor shortage kicks in during the 2020s. That could be a decade off.

I say this not as a casual observer but as a trader who is constantly active in an entire range of debt instruments.

 

 

 

Yup, This Will Be a Real Job Killer

The Secret Fed Plan to Buy Gold

The recent appointment of my old acquaintance, Judy Shelton, to the Fed places a monetary policy once considered impossible solidly on the table. For your see, Judy has long advocated that the US return to the gold standard.

If the American economy moves into the next recession with interest rates already near zero, the markets will take the rates for all interest-bearing securities well into negative numbers. This has already happened in Japan and Germany.

At that point, our central bank’s primary tool for stimulating US businesses will become utterly useless, ineffective, and impotent.

What else is in the tool bag?

How about large-scale purchases of Gold (GLD)?

You are probably as shocked as I am with this possibility. But there is a rock-solid logic to the plan. As solid as the vault at Fort Knox.

The idea is to create asset price inflation that will spread to the rest of the economy. It already did this with great success from 2009-2014 with quantitative easing, whereby almost every class of debt securities were Hoovered up by the government.

“QE on steroids”, to be implemented only after overnight rates go negative, would involve large scale purchases of not only gold, but stocks, government bonds, and exchange-traded funds as well.

If you think I’ve been smoking California’s largest cash export (it’s not the raisins), you would be in error. I should point out that the Japanese government is already pursuing QE to this extent, at least in terms of equity type investments and ETFs and already owns a substantial part of the Japanese stock market.

And, as the history buff that I am, I can tell you that it has been done in the US as well, with tremendous results.

If you thought that president Obama had it rough when he came into office in 2009 with the Great Recession on, it was nothing compared to what Franklin Delano Roosevelt inherited.

The country was in its fourth year of the Great Depression. US GDP had cratered by 43%, consumer prices crashed by 24%, the unemployment rate was 25%, and stock prices vaporized by 90%. Mass starvation loomed.

Drastic measures were called for.

FDR issued Executive Order 6102 banning private ownership of gold, ordering them to sell their holdings to the US Treasury at a lowly $20.67 an ounce.

He then urged congress to pass the Gold Reserve Act of 1934, which instantly revalued the government’s holdings at $35.00, an increase of 69.32%. These and other measures caused the value of America’s gold holdings to leap from $4 to $12 billion. That’s a lot of money in 1934 dollars, about $208 billion in today’s money.

Since the US was still on the gold standard back then, this triggered an instant dollar devaluation of more than 50%. The high gold price sucked in massive amounts of the yellow metal from abroad creating, you guessed it, inflation.

The government then borrowed massively against this artificially created wealth to fund the landscape altering infrastructure projects of the New Deal.

It worked.

During the following three years, the GDP skyrocketed by 48%, inflation eked out a 2% gain, the unemployment rate dropped to 18%, and stocks jumped by 80%. Happy days were here again.

Monetary conditions are remarkably similar today to the those that prevailed during the last government gold buying binge.

There has been a de facto currency war underway since 2009. The Fed started when it launched QE, and Japan, Europe, and China have followed. Blue-collar unemployment and underpayment is at a decades high. The need for a national infrastructure program is overwhelming.

However, in the 21st century version of such a gold policy, it is highly unlikely that we would see another gold ownership ban.

Instead, the Fed would most likely move into the physical gold market, sitting on the bid for years, much like it recently did in the Treasury bond market for five years. Gold prices would increase by a multiple of current levels.

It would then borrow against its new gold holdings, plus the 4,176 metric tonnes worth $200 billion at today’s market prices already sitting in Fort Knox, to fund a multi trillion-dollar infrastructure-spending program.

Heaven knows we need it. Millions of blue-collar jobs would be created and inflation would come back from the dead.

Yes, this all sounds like a fantasy. But negative interest rates were considered an impossibility only years ago.

The Fed’s move on gold would be only one aspect of a multi-faceted package of desperate last ditch measures to extend economic growth into the future which I outlined in a previous research piece (click here for “What Happens When QE Fails” .

That’s assuming that the gold is still there. Treasury Secretary Stephen Mnuchin says he saw the gold himself during an inspection that took place of the last solar eclipse over Fort Knox in 2018. The door to the vault at Fort Knox had not been opened since September 23, 1974. But then Steve Mnuchin says a lot of things. Persistent urban legends and Internet rumors claim that the vault is actually empty or filled with fake steel bars painted gold.

 

 

 

The Next QE?