Research Archives

Reaching Peak Technology Stocks

I drove into San Francisco for a client dinner last night and had to wait an hour at the Bay Bridge toll gate. When I finally got into town, the parking attendant demanded $50. Dinner for two at Morton’s steakhouse? How about $400.

Which all underlines the fact that we have reached “Peak” San Francisco. San Francisco just isn’t fun anymore.

The problem for you is that if the City by the Bay has peaked, have its much-loved big cap technology stocks, like Facebook (FB), Alphabet (GOOGL), and Netflix (NFLX) peaked as well?

To quote the late manager of the New York Yankees baseball team, Yogi Berra, “Nobody goes there anymore because it’s too crowded.”

What city was the number one creator of technology jobs in 2017?

If you picked San Francisco, you would have missed by a mile. Anyone would be nuts to start up a new business here as rents and labor are through the roof.

Competition against the tech giants for senior staff is fierce. What, no fussball table, free cafeteria, or on-call masseuses? You must be joking!

You would be much better off launching your new startup in Detroit, Michigan. Better yet, hyper-connected low-waged Estonia where the entire government has gone digital.

In fact, Toronto, Canada is the top job creator in tech now, creating an impressive 50,000 jobs last year. Miami, FL and Austin, TX followed. Silicon Valley was at the bottom of the heap.

It’s been a long time since peach orchards dominated the Valley.

Signs that the Bay Area economy is peaking are everywhere. Residential real estate is rolling over now that the harsh reality of no more local tax deductions on federal tax returns is sinking in.

To qualify for a home loan to buy the $1.2 million median home in San Francisco, you have to be a member of the 1%, earning $360,000 a year or better.

Two-bedroom one bath ramshackle turn of the century fixer uppers are going for $1 million in the rapidly gentrifying nearby city of Oakland, only one BART stop from Frisco.

Most school districts have frozen inter-district transfers because they are all chock-a-block with students. And good luck getting your kid into a private school like University or Branson. There are five applicants for every place at $40,000 a year each.

The freeways have become so crowded that no one goes out anymore. It’s rush hour from 6:00 AM to 8:00 PM every day.

When you do drive it’s dangerous. The packed roads have turned drivers into hyper-aggressive predators, constantly weaving in and out of traffic, attempting to cut seconds off their commutes. And there is no drivers ed in China.

I took my kids to the city the other day for a Halloween “Ghost Tour” of posh Pacific Heights. It was lovely spending the evening strolling the neighborhood’s imposing Victorian mansions.

The ornate gingerbread and stained-glass buildings are stacked right against each other to keep from falling down in earthquakes. It works. The former abodes of gold and silver barons are now occupied by hoody-wearing tech titans driving new Teslas.

We learned of the young girl forced into a loveless marriage with an older wealthy stock broker in 1888. She bolted at the wedding and was never seen again.

However, the ghost of a young woman wearing a white wedding address has been seen ever since around the corner of Bush Street and Octavia Avenue. Doors slam, windows shut themselves, and buildings make weird creaking noises.

Then I came to a realization walking around Fisherman’s Wharf as I was nearly poked in the eye by a selfie stick-wielding visitor. The tourist areas on weekdays are just as crowded as they were on summer weekends 30 years ago, except that now the number of languages spoken has risen tenfold, as has the cost.

It started out to be a great year for technology stocks. Amazon (AMZN) alone managed to double off its February mini crash bottom, while others like Apple (AAPL) rocketed by 56%. But traders may have visited the trough once too often

The truth is that technology stocks have not performed since June, right when the Mad Hedge Fund Trader dumped its entire portfolio. Only Microsoft (MSFT) and Amazon (AMZN) have managed to eke out new all-time highs since then, and only just.

The rest of tech has been moving either sideways in the most desultory way possible, or suffered cataclysmic declines like Facebook (FB) and Micron Technology (MU).

Of course, the trade wars haven’t helped. It’s amazing that big tech hasn’t already been hit harder given their intensely global business models.

Nor has rising interest rates. Big cap tech companies have such enormous cash balances that they are all net creditors to the financial system and actually benefit from higher interest rates. But dear money does slow the US economy and that DOES hurt their earnings prospects.

No, I’m not worried about tech for the long term. There is no analog company that can compete with a digital company anywhere in the world.

Accounting for 26% of the stock market capitalization and 50% of its profits, it’s only a question of when we get a major new up leg in share prices, not if.

The only unknown now is whether this next leg will take place before or after the next recession. Given the rate at which interest rates and oil prices are rising in the face of a slowing global economy, it’s looking like the recession may win the race.

As our tour ended, who did we see having dinner in the front window of one of the city’s leading restaurants? A young woman wearing a white wedding dress.

Yikes! Maybe the recession is sooner than I thought.

October 11, 2018/by MHFTF

The Bull Case for Tesla

Diary, Newsletter, Research

Talk about a bad news factory.

A short interest of 26% in Tesla (TSLA) stock has the tendency to manufacture bad news on a daily basis, whether it is true or not. It really has been a black swan a day.

This really is the most despised stock in the market. But you have to expect that when you are simultaneously disputing the auto, oil, dealer, and advertising industries, and doing it all union-free.

It also doesn’t help that Tesla is on the Department of Justice speed dial, undergoing no less than three investigations since the advent of the new administration. I can’t imagine why this is happening, given that the White House is now packed with oil industry executives.

That’s why I have been advising investors to buy the car and not the stock.

That is until now.

The truth is that all of this negativity is generating the best entry point for Tesla shares in two years.

In the meantime, the San Francisco Bay Area has become flooded with new Tesla 3’s. These are suddenly everywhere and soon will outnumber the ubiquitous Toyota Prius, until now the favorite of technology employees.

Q3 production of Tesla 3’s reached an eye-popping 55,840, up from 18,440 the previous quarter, taking Tesla’s total output to 80,000 including the model X.

That puts the company on target to reach 250,000 units in 2019. Tesla may be about to see something it has not witnessed in the company’s 15-year history: a real profit.

When I picked up my first Tesla 1 in 2010, chassis no. 125, I was all alone and treated like I was visiting royalty. The sales staff fawned all over me, offering me free hats, coffee mugs, and other tchotchke. Today, a staggering 200 people a day are gleefully driving their new wheels away from the Fremont factory, and another 200 getting them home-delivered by semis. Take a number and wait in line.

I have pinned down several of these drivers in parking lots, shopping malls, and trailheads to quiz them about their new ride and the answer is always the same. It’s a car from 20 years in the future, the best they have ever driven, and they will never buy another marque again.

Sounds pretty good, doesn’t it?

So I perked up the other day when I heard my old pal, legendary value investor Ron Baron, make the bull case for Tesla.

Ron has never done things by halves. He expects Tesla’s market capitalization to soar from $43 billion today to $1 trillion by 2030, a mere 12 years away. By then, Tesla should be generating $150 billion a year in profits. That implies that a 23-fold increase in the share price to $5,570 is ahead of us.

Half of this will be generated by the auto sales, while the other half will be produced by a burgeoning battery business. Tesla will easily become the largest auto manufacturer in the world within a few years.

Tesla will sell 10-15 million cars a year by 2030, compared to the current 300,000 annual rate.

It already is the one American auto maker with the highest US parts content, nearly 100%. It has also been one of the largest creators of new jobs over the past decade, right behind Amazon (AMZN), at some 46,000.

It’s really all about the math. Today, Tesla is building its Tesla 3’s at a cost of $28,000 apiece and selling them for $62,000. That’s the high price they have been realizing with extra options like four-wheel drive, 300-mile extended range batteries, painted wheels, and all the other bells and whistles. That gives you a $34,000 profit per vehicle.

Tesla’s “cheap” cars, the stripped-down rear wheel drive Tesla 3’s that will sell for a modest but world-beating $35,000 won’t be available until early 2019.

At this rate, the entire company will become profitable when it hits a production rate of 10,000 units a week compared to the current 6,000 units. They should achieve that sometime in early 2019.

Much has been made of drone video footage showing vast parking lots in Fremont, CA chock-a-block with shiny new Tesla 3’s. This creates a false sense of poor sales.

The actual fact is that Tesla has no dealer network. All of those parked cars have been sold and are awaiting owners to pick them up. The months it takes from payment to actual delivery gives Tesla a free float on billions of dollars. That’s worth a lot in a world of steadily rising interest rates.

Oh, and those notorious tents? They could withstand a category 5 hurricane. However, like everything else the company does, they’re revolutionary. They enable bypassed permitting procedures and can be built very quickly and cheaply.

How are things going with the competition? Not so good. The traditional internal combustion car industry has hundreds of billions of dollars tied up in engine factories that will eventually become worthless. They really are the 21^st century equivalent of buggy whip makers.

General Motors (GM), Ford (F), and Chrysler are executing slow motion roll out of electric cars in order to squeeze a few more years of use out of these legacy plants. Electric cars don’t use engines. That is putting them ever further behind.

This is what the poor share performance of auto shares has been screaming at you all year despite one of the strongest economies and stock markets in history. Yes, “peak Auto” is at hand.

The high-end brands like Mercedes, BMW, Audi, and Porsche that just entered the all-electric market are a decade behind Tesla in autonomous software and manufacturing processes. They all have huge, expensive dealer networks.

Let’s see how sales go after they suffer their first fatal crash. In the meantime, Tesla has run up 200 million miles worth of driving data.

Factory insiders say a speed-up of new Tesla orders is in the works. Orders placed before December 31, 2018 are entitled to a $7,500 federal tax credit. That drops to $3,750 in the first half of 2019, only $1,750 in the second half, and zero in 2020.

In the meantime, the oil industry is still collecting $55 billion a year of federal oil depletion allowances. Go figure.

At the same time, many states like California, far and away Tesla’s largest market (Texas is no. 2), are either maintaining or expanding their own electric car subsidies or gas guzzler penalties. It is $2,500 per car in California.

Ron Baron is not alone in his admiration of Tesla. Macquarie Research has just initiated coverage with a strong “BUY” and a target of $430 a share, up 70% from today’s close.

Next in the works will be a Tesla Model Y, a small four-wheel drive based on the Tesla 3 chassis. A Roadster relaunch comes next in 2022, a $250,000 super car that will be doubtless aimed at Arab sheiks and billionaire car collectors.

By then the entire product line will spell SEXY. See! Elon Musk does have a sense of humor after all!

My First S-1

RIP

My New Wheels

October 10, 2018/by MHFTF

The Market Outlook for the Week Ahead, or Get Me Off This Roller Coaster!

Diary, Newsletter, Research

After two years of somnolent complacency, the bond market finally broke out of a two-year range, putting the cat among the pigeons with investors everywhere.

In a mere six weeks, the yield on the ten-year US Treasury bond (TLT) soared by 45 basis points from 2.80% to 3.25%, and 25 basis points during last week alone. It is the kind of move one normally associates with major financial crisis, the bankruptcy of a leading bank, or a major geopolitical event.

Once the 3.11% top was taken out, there was a virtual melt up to 3.25%. Rumors of Chinese dumping of its massive bond holdings were rife. Apparently, trade wars DO have consequences.

The 30-year fixed rate mortgage hit 5%, shutting millions out of the housing market. If you haven’t sold your home by now you’re in for the duration.

Personally, I believe that it was Amazon’s wage hike for 250,000 workers from $12 to $15 an hour that had the bigger impact. The inflation train is obviously leaving the station.

The free ride we have enjoyed in equities since February ended abruptly. The long, long overdue correction is here. This has ignited a rush by managers to lock in gains by selling off their biggest winners, and that would be the large cap tech stocks we have all come to know and love.

It started to be a great week with the settlement of NAFTA 2.0. Suddenly, Canada was no longer deemed a national security threat, and our supply of maple syrup was safe once again. My “trade peace” stocks soared.

The shocker came the next day when Amazon announced that it was raising wages by 25% for its 250,0000 minimum wage US workers. Suddenly, this inflation thing was real. It was the stick that broke the camel’s back.

General Electric (GE) dumped its CEO, after only a year and the stock rocketed 17%. It looks like the hedge fund that makes light bulbs still hasn’t found the “ON” switch.

Tesla cut its deal with the SEC for a token amount, and the stock soared 20%. Then Elon tweeted once again, and it fell 20%. With the Defense Department now dependent on Musk to get their spy satellites into orbit there was no way the case against him was ever going anywhere.

General Motors Q3 sales collapsed by 11.1% YOY as new Tesla 3 sales wiped out the electric Chevy Bolt, down 44%. The two hurricanes didn’t help here either.

Oil prices soared, driven by our new sanctions against Iran, knocking the wind out of transportation stocks like airlines Delta (DAL) and Southwest (LUV). The short squeeze is on, as Europeans scramble to make up lost Iran supplies. The last time this happened we went into a recession.

Tying up the week with a nice bow was the September Nonfarm Payroll Report, which took the headline unemployment rate down to 3.7%, the lowest since 1969.

I remember that year well. I was earning a dollar an hour at the May Company snack bar. Kids who dropped out of my high school were sent off to Vietnam and were killed within weeks. Neither the snack bar nor the May Company nor South Vietnam still exists, but I do. I guess I’m too mean to kill.

Average hourly earnings improved by eight cents to $27.24, and are up 2.8% YOY. Although the print was a weak 134,000, the back month upward revisions for July and August were huge.

Leisure and Hospitality lost 17,000 jobs due to the hurricanes, as did Retail, which shed 20,000 jobs.

Professional and Business Services were up 54,000, Health Care was up 26,000, and Manufacturing gained 18,000.

The performance of the Mad Hedge Fund Trader Alert Service is down -1.42% so far in October. Now, it’s all about keeping positions small. I managed to get a nice bond short off before the big collapse. But the real money was made being long the Volatility Index (VIX) which I missed.

Those who took my advice in the Wednesday Strategy Webinar to buy the iPath S&P 500 VIX Short Term Futures ETN (VXX) March 2019 calls for 50 cents make a quickie 500%.

My 2018 year-to-date performance has retreated to 26.97%, and my trailing one-year return stands at 32.11%.

My nine-year return appreciated to 303.44%. The average annualized return stands at 34.30%. I hope you all feel like you’re getting your money’s worth. The goal here is to minimize losses so we can bounce back quickly to a new all-time high once the dust settles.

Yes, I am looking at BUYING the bond market with a bet that ten-year yields won’t rise above 3.35% in the next month.

This coming holiday shorted week will be pretty non-eventful after last week’s fireworks.

Monday, October 8, is Columbus Day. Stocks will be opened but bonds will be mercifully closed.

On Tuesday, October 9 at 6:00 AM, the September NFIB Small Business Optimism Index is announced.

On Wednesday October 10 at 8:30 AM, the September Producer Price Index is published.

Thursday, October 11 at 8:30 we get Weekly Jobless Claims. At the same time, we get the September Consumer Price Index, the most important inflation indicator.

On Friday, October 12, at 10:00 AM, we learn September Consumer Sentiment. The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, it’s fleet week so I’ll be watching the Parade of Ships come in under the Golden Gate Bridge. After that, the Navy’s Blue Angels will be flying overhead using my mountain top home as a key navigation point. I’ll be wishing I was in the air at the stick with them.

Good luck and good trading.

October 8, 2018/by MHFTF

The Market Outlook for the Week Ahead, or Don’t Nominate Me!

Diary, Newsletter, Research

I have a request for all of you readers. Please do not nominate me for justice of the Supreme Court.

I have no doubt that I could handle the legal load. A $17 copy of Litigation for Dummies from Amazon would take care of that.

I just don’t think I could get through the approval process. There isn’t a room on Capitol Hill big enough to house all the people who have issues with my high school background.

In 1968, I ran away from home, hitchhiked across the Sahara Desert, was captured by the Russian Army when they invaded Czechoslovakia, and had my front teeth knocked out by a flying cobblestone during a riot in Paris. I pray what went on in Sweden never sees the light of day.

So, I’m afraid you’ll have to look elsewhere to fill a seat in the highest court in the land. Good luck with that.

The most conspicuous market action of the week took place when several broker upgrades of major technology stocks. Amazon (AMZN) was targeted for $2,525, NVIDIA (NVDA) was valued at $400, and JP Morgan, always late to the game (it’s the second mouse that gets the cheese), predicted Apple (AAPL) would hit a lofty $270.

That would make Steve Jobs’ creation worth an eye-popping $1.3 trillion.

The Mad Hedge Market Timing Index dove down to a two-month low at 46. That was enough to prompt me to jump back into the market with a few cautious longs in Amazon and Microsoft (MSFT). The fourth quarter is now upon us and the chase for performance is on. Big, safe tech stocks could well rally well into 2019.

Facebook (FB) announced a major security breach affecting 50 million accounts and the shares tanked by $5. That prompted some to recommend a name change to “Faceplant.”

The economic data is definitely moving from universally strong to mixed, with auto and home sales falling off a cliff. Those are big chunks of the economy that are missing in action. If you’re looking for another reason to lose sleep, oil prices hit a four-year high, topping $80 in Europe.

The trade wars are taking specific bites out of sections of the economy, helping some and damaging others. Expect to pay a lot more for Christmas, and farmers are going to end up with a handful of rotten soybeans in their stockings.

Barrick Gold (ABX) took over Randgold (GOLD) to create the world’s largest gold company. Such activity usually marks long-term bottoms, which has me looking at call spreads in the barbarous relic once again.

With inflation just over the horizon and commodities in general coming out of a six-year bear market, that may not be such a bad idea. Copper (FCX) saw its biggest up day in two years.

The midterms are mercifully only 29 trading days away, and their removal opens the way for a major rally in stocks. It makes no difference who wins. The mere elimination of the uncertainty is worth at least 10% in stock appreciation over the next year.

At this point, the most likely outcome is a gridlocked Congress, with the Republicans holding only two of California’s 52 House seats. And stock markets absolutely LOVE a gridlocked Congress.

Also helping is that company share buybacks are booming, hitting $189 billion in Q2, up 60% YOY, the most in history. At this rate the stock market will completely disappear in 20 years.

On Wednesday, we got our long-expected 25 basis-point interest rate rise from the Federal Reserve. Three more Fed rate hikes are promised in 2019, after a coming December hike, which will take overnight rates up to 3.00% to 3.25%. Wealth is about to transfer from borrowers to savers in a major way.

The performance of the Mad Hedge Fund Trader Alert Service eked out a 0.81% return in the final days of September. My 2018 year-to-date performance has retreated to 27.82%, and my trailing one-year return stands at 35.84%.

My nine-year return appreciated to 304.29%. The average annualized return stands at 34.40%. I hope you all feel like you’re getting your money’s worth.

This coming week will bring the jobspalooza on the data front.

On Monday, October 1, at 9:45 AM, we learn the August PMI Manufacturing Survey.

On Tuesday, October 2, nothing of note takes place.

On Wednesday October 3 at 8:15 AM, the first of the big three jobs numbers is out with the ADP Employment Report of private sector hiring. At 10:00 AM, the August PMI Services is published.

Thursday, October 4 leads with the Weekly Jobless Claims at 8:30 AM EST, which rose 13,000 last week to 214,000. At 10:00 AM, September Factory Orders is released.

On Friday, October 5, at 8:30 AM, we learn the September Nonfarm Payroll Report. The Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, it’s fire season now, and that can only mean one thing: 1,000 goats have appeared in my front yard.

The country hires them every year to eat the wild grass on the hillside leading up to my house. Five days later there is no grass left, but a mountain of goat poop and a much lesser chance that a wildfire will burn down my house.

Ah, the pleasures of owning a home in California!

Good luck and good trading.

We’re Taking Calls Now

October 1, 2018/by MHFTR

What Will Trigger the Next Bear Market?

Diary, Newsletter, Research

To paraphrase Leo Tolstoy in Anna Karenina, all bull markets are alike; each bear market takes place for its own particular reasons.

Now that the wreckage of the past financial crises is firmly in our rearview mirror, it is time for us to start pondering the causes of the next one. I’ll give you a hint: It will all boil down to excessive debt…again.

Global quantitative easing has been going on for a decade now, keeping interest rates far too low for too long. The unintended consequences will be legion, and the day of atonement may be a lot closer than you think.

The 1991 bear market was prompted by the Savings & Loan Crisis, where too many unsophisticated financial institutions in a newly unregulated world dreadfully mismatched asset and liabilities.

Every time I drive by a former Home Savings and Loan branch, with its unmistakable quilt decorations and accents, I remember those frightful days. Back then, when I looked at buying a home in San Francisco, the seller burst into tears when the price I offered would have generated a negative equity bill due for him.

The 2000 Dotcom crash can easily be explained by the monstrous amounts of debt provided to stock speculators. The 2008 crash was produced by massive, unregulated, and largely unknown lending to the housing sector through complex derivatives that virtually no one understood, especially the buyers.

So, here we are in 2018 nearly a decade out of the last crisis. Potential disasters are lurking everywhere under the surface while blinder constrained investors blithely power ahead. Once they metastasize, they rapidly feed into each other, creating a domino effect. They always do.

Emerging Market Debt

Lacking domestic capital markets with any real depth, companies in emerging economies prefer to borrow in U.S. dollars. When the dollar is weak that’s great because it means liabilities on the balance sheet shrink when brought back into the home currency. When the greenback is strong, the opposite happens. Dollar debt can grow so large that it can wipe out a company’s total equity.

This is already happening in a major way in Turkey, where the lira has plunged 50% in the past year, effectively doubling their debt. And once it starts, a global contagion kicks in as all emerging companies become suspect. This is not a small problem. Emerging market debt has rocketed from 55% to 105% of GDP since 2008.

The Rise of Junk Borrowers

In recent years there has been a massive expansion in borrowing by marginal credits. This is taking place because fixed income investors are willing to accept a large increase in the amount of risk for only a small marginal rise in interest rates.

There is now $1.4 trillion in low grade BBB bonds outstanding, with one-third of this one downgrade away from junk. There has also been a dramatic rise in “covenant lite” issuance, which minimizes the rights of bond holders in the event of default. When the next round of trouble arrives, you can expect this market to shut down completely, as it did in 2008.

Student Loans

These have been the sharpest rising form of borrowing over the past decade, doubling to $1.5 trillion. Some 10% are now in default. This acts as a major drag on the economy as heavily indebted students don’t borrow, buy homes or cars, or really participate in the economy in any way, banned by lowly FICO scores. This is why millennials in general have been slow to enter the housing market for the first time.

Shadow Banking

Would you like to know today’s equivalent of subprime the lending that took the financial system down in 2008? That would be shadow banking, or off the books, unreported lending by hedge funds, private equity funds, and mortgage companies. Again, this is all in pursuit of high interest rates in a low interest rate world.

Yes, liars’ loans are back, just not to the extent we saw 10 years ago…yet. I’m waiting for my cleaning lady to get offered a great refi package again, just as she was in the run-up to the last crisis. How many of these loans are out there? No one has any idea, especially the Fed. As a result, nearly 50% of all mortgage lending is now from unregulated nonbank sources.

The Outlier

Remember when Sony (SNE) was almost put out of business by a hack attack from North Korea? What if they had done this to JP Morgan (JPM)? That would have created a chain reaction of defaults throughout the financial system that would have been impossible to stop. When this happened in 2008, it took the Fed three months to reopen markets such as commercial paper. If big bankers need a reason to lie awake at night, this is it.

I’m not saying that markets can’t go higher before they go lower. In fact, I dove back into Amazon (AMZN) only this morning.

However, as an Australian farmer told me on my last trip down under, “Be careful when you cross the field, mate. Deadly snakes abound.” Add up all the above and it will turn into a giant headache for investors everywhere.

September 28, 2018/by MHFTR

Say Goodbye to That Gas Guzzler

Diary, Newsletter, Research

Do you want to get in on the ground floor of another major new trend?

Well, here’s another new trend. Get this one right and your retirement funds should multiple like rabbits.

There have been some pretty amazing announcements by governments lately.

The United Kingdom has banned the use of gasoline-powered engines by 2040.

China is considering doing the same by 2035.

And now the State of California is targeting 100% alternative energy use by 2040. That’s only 22 years away.

The only unknown is what such a planned obsolescence program will look like, and how soon it will be implemented.

With 20% of the U.S. car market, don’t take the Golden State’s ruminations lightly.

California was the first state to require safety glass, seat belts, and catalytic converters, and the other 49 eventually had to follow. Some 20% of the market is just too big to ignore.

The death of the car is now upon us, and it is still early, very early.

This is a very big deal.

Earlier in my lifetime, car production directly and indirectly accounted for about one-third of the U.S. economy.

Much of the growth during our earlier Golden Ages, in the 1920s and the 1950s, were driven by a never-ending cycle of upgrades of our favorite form of transportation, and the countless ancillary products and services needed to support them. Tail fins, radios, and tons of chrome assured you always had to have the next new model.

Today, 253 million automobiles and trucks prowl America’s roads, about half the world’s total, with an average age of 11.4 years.

The demise of this crucial industry started during the 2008 crash, when (GM) and Chrysler (owned by Fiat) went bankrupt. Only more conservatively run, family owned Ford (F) survived on its own.

The government stepped in with massive bailouts. That was the cheaper option for the Feds, as the cost of benefits for an entire unemployed industry was far greater than the cost of the companies absorbed.

If it hadn’t done so, the auto industry would have decamped for a new base near the technology hubs in California, and today would be a decade closer to their futures than they are now.

And remember, the government made billions of dollars of profits from its brief foray into the auto industry as an investor. It was one of the best returns on investment in history in major size.

I’ll breakout the major directions the industry is now taking. Hint: It doesn’t have much to do with traditional metal bashing.

The Car as a Peripheral

The important thing about a car today is not the car, but the various doodads, doohickeys, gizmos, and gadgets they stick in them.

In this category you can include 24/7 4G wireless, full Internet access, mapping software, artificial intelligence, and learning programs.

(GM) is now installing more than 100 microprocessors in its vehicles to control and monitor various functions.

Good luck doing your own tune-ups.

The Car as a Service

When you think about it, automobile ownership is a wildly inefficient use of capital. It is usually a family’s second largest expense, after their home, running $30,000 to $80,000.

It then sits unused in garages or public parking for 96% to 98% of the day. Insurance, maintenance, and liability costs can be off the charts.

What if your car was used 24/7, as is machinery in well-run industrial plants? Your cost drops by 96% to 98% to the point where it is almost free.

The sharing economy is the way to accomplish this.

We are already seeing several start-ups attempting to achieve this in major U.S. cities, such as Zipcar, Car2Go, Getaround, RelayRides, and City CarShare.

What happens to conventional car companies when consumers shift from ownership to sharing? Demand plunges by 96% to 98%.

Perhaps that is why auto shares (GM), (F) have performed so abysmally this year relative to technology and the main market.

Self-Driving Technology

This is the hottest development area in the industry, with Apple (AAPL), Alphabet (GOOG), and the big European carmakers committing thousands of engineers.

Let’s say your car is now comfortably driving you to work, allowing you to read the morning papers and catch up on your email. Or maybe you’re lazy and would rather watch the season finale of Game of Thrones.

What else is possible?

How about if, instead of parking, your car drops you off, saving that exorbitant fee.

Then it joins Uber, picking up local riders and paying for its own way. It then dutifully returns to pick you up at your office when it’s time to go home.

Since the crash rate for computers is vastly lower than for humans, car insurance rates will collapse, gutting that industry.

Ditto for life insurance, as 35,000 people a year will no longer die in car crashes.

Half of all emergency room visits are the result of car accidents, so that business disappears too, dramatically shrinking health care costs in the process.

I have been letting my new Tesla S-1 drive me since last year, and I can assure you that the car can drive better than I can, especially at night.

What better way to get home after I have downed a bottle of Caymus cabernet at a city restaurant?

Driverless electric cars are totally silent, increasing the value of land near freeways.

Nor do they require much maintenance, as they have so few moving parts. Exit the car repair industry.

I could go on and on, but you get the general idea.

For more on the topic, please read “Test Driving Tesla's Self Driving Technology” by clicking here.

Virtual Reality

After 30 years of inadequate infrastructure budgets, trying to get into any America city center is a complete nightmare.

Only last week, a cattle truck turned over on the Golden Gate Bridge, bringing traffic to a halt. Fortunately, a cowboy traveling to a nearby rodeo was able to unload his horse and lasso the errant critters (no, it wasn’t me!).

Even if you get into the city, you will be greeted by a $40 tab for a parking space. Hopefully, no one will smash your windows and steal your laptop (happened to me last year).

Why bother?

Thirty years ago, teleconferencing services pitched themselves as replacing the airplane.

Today, we are taking the next step, using Skype and GoToMeeting to conduct even local meetings, as we do at the Mad Hedge Fund Trader.

Virtual reality is clearly the next step, providing a 3D, 360 degree experience that makes you feel like you and your products are actually there.

Better to leave that car in the garage where it can get a top up on its charge. BART is cheaper anyway, when it runs.

New Materials

We are probably five years away from adopting the carbon fiber technology now used in the aircraft industry for mass-market cars. Carbon has one-tenth the weight of steel, with five times the strength.

The next great leap forward for electric cars won’t be through better batteries. It will come through a 70% reduction of the mass of a car, tripling ranges with existing technology.

San Francisco Becomes the Car Capital of the World

This will definitely NOT happen, as sky-high rents assure that the city by the bay will never attract large, labor-intensive industries.

Instead, the industry will develop much as the one for smartphones. The high value-added aspects, design and programming, will stay in California.

The assembly of the chassis, the body, and the rest of the vehicle will be best done in low-cost, tax-free states with a lot of land, such as Texas and Nevada.

What will happen to Detroit? It has already become a favored destination of new venture capital financial start-ups - the cost of offices and housing is virtually free.

Seems Alive to Me

September 26, 2018/by MHFTR

The Market Outlook for the Week Ahead

Diary, Newsletter, Research

Talking to hedge fund managers, financial advisors, and portfolio managers around the country de-risking seems to be the name of the game. It’s like they expect a category five hurricane to hit the markets tomorrow.

Even my friend, hedge fund legend David Tepper, says that the stock market is fairly valued and that he is cutting back his equity exposure. However, he is hanging onto his position in Micron Technology (MU), which he believes is deeply oversold. Will the last person to leave Dodge please turn out the lights?

You can expect a real hurricane, Florence, to impact the coming economic data. The usual pattern is for GDP growth to take an initial hit when the big storms hit, and then make back more as reconstruction and government spending kicks in. The scary thing is that there are three more hurricanes on the way.

The big event of the week was Apple’s (AAPL) roll out of its new product line, which will beat the daylights out of competitors. Think better and more expensive across the board, with the top iPhone now costing an eye-popping $1,499.

If you are Life Alert, the private company that sells safety devices to seniors, Apple just ate your lunch. Welcome to the cutthroat world of technology investing.

The drama at CBS (CBS) played out with the departure of CEO Les Moonves. He basically generated virtually all the profits for the company for the past two decades. But in this modern age not keeping your zipper zipped carries a heavy price.

A happier departure was seen by Alibaba’s (BABA) Jack Ma, China’s richest man to focus on philanthropic activity.

Emerging markets (EEM) continued their relentless meltdown, only given a brief respite by profit taking in the U.S. dollar (UUP) on Friday.

A coming strike by the United Steelworkers may mark the onset of new wage demands by labor nationwide. In the meantime, the JOLTS report hit a new all-time high with 650,000 job openings.

For the final “screw you” of the week, Trump indicated he was going forward with tariffs on another $200 billion in Chinese imports. Consumer goods will dominate the new black list in the lead up to the Christmas shopping season. Beat the Grinch and shop early!

With the Mad Hedge Market Timing Index ranging from 50 to 78 last week the market keeps trying and failing to reach new all-time highs on small volume. Volatility (VIX) hit a one-month low.

Thank goodness I took profits on my iPath S&P 500 VIX Short Term Futures ETN (VXX) long. The January $40 call options have cratered from $3.60 to only $1.96. Still, there was enough price action to allow us to take nice profits on our bond short (TLT) and Microsoft (MSFT) long. Microsoft was the top-performing Dow stock last and we got in early!

Last week, the performance of the Mad Hedge Fund Trader Alert Service forged a new all-time high. September has given us a middling return of 2.42%. My 2018 year-to-date performance has clawed its way back up to 29.43% and my trailing one-year return stands at 41.35%.

My nine-year return appreciated to 305.90%. The average annualized Return stands at 34.65%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 29.41%. I hope you all feel like you’re getting your money’s worth.

This coming week is pretty flaccid in terms of economic data releases.

On Monday, September 17, at 8:30 AM, we learn the August Empire State Manufacturing Survey.

On Tuesday, September 18, at 10:00 AM, the National Association of Homebuilders Home Price Index is released. August Home Sales is out at 10:00 AM EST.

On Wednesday September 19, at 8:30 AM, the August Housing Starts is published.

Thursday, September 20 leads with the Weekly Jobless Claims at 8:30 AM EST, which dropped 1,000 last week to 204,000.

On Friday, September 21, at 8:30 AM, we learn August Retail Sales. The Baker Hughes Rig Count is announced at 1:00 PM EST. Last week saw a gain of 7.

As for me, the harvest season in nearby Napa Valley is now in full swing, so I’ll be making the rounds picking up my various wine club memberships. Screaming Eagle check, Duckhorn check, Chalk Hill check.

Good luck and good trading.

September 17, 2018/by MHFTR

Some Good News from Tesla

Diary, Newsletter, Research

I’ll give you a chance to pick yourself off the floor first.

While the media focus seems to be overwhelmingly on problems with the Tesla 3 (TSLA) production these days, the fact is that some of the company’s other business lines are growing like gangbusters.

Orders for the groundbreaking Tesla Powerwall were up an eye-popping 450% during the first half of 2018. This device costs $5,800 ($4,060 after the federal alternative investment tax credit) and can store enough power to run your house for three days. When integrated with your solar rooftop array the combined system allows you to reap a greater return from your alternative energy investment.

Tesla could sell more Powerwalls but is constrained by lithium ion battery supplies from its Sparks, Nevada, Gigafactory. Doubling the world’s lithium ion battery supply in one shot, Tesla is already shopping for a location for a second Gigafactory.

As the company made ramping up Tesla 3 production to 100,000 units this year its top priority, the car has first call on battery supplies.

Tesla has also recently completed several utility-sized battery projects that have consumed lithium ion supplies, including those in Australia, Moss Landing, California, for PG&E, and for Green Mountain Energy in Vermont.

This means that Tesla has already carved out a dominant position in a market that is expected to grow by tenfold over the next five years. GTM Research estimated that sales of energy storage products in the U.S. will soar from $541 million in 2018 to $1 billion in 2019 and $4.6 billion by 2013.

It is developing into a global market. The U.S. only accounts for 30% of the global battery storage market, with energy poor Japan and South Korea holding major shares.

Tesla competitors include Florida-based NextEra Energy in America, E.on in Germany, and Fluence, a joint venture between Siemens and AES, also from Germany. Germany seems to be the place where green energy philosophies and top-rate engineering meet.

It’s impossible to see how much the battery business is contributing to Tesla’s overall bottom line as it does not break out earnings separately. They are subsumed within a Tesla division that once comprised Solar City, which Tesla took over in 2016. Running two businesses off a single lithium ion supply was a stroke of genius, permitting vertical integration and vast economies of scale.

However, Tesla’s solar business saw revenues rise by 56.7% to $784 million over the year-earlier period. Selling a product with exponential demand but limited supply is a good place to be in.

It is puzzling to see so much media attention paid to a company with a market capitalization of only $50 billion. Last week, the controversial firm soaked up perhaps a quarter of all financial reporting coverage.

But when you add up all of the industries that Tesla is radically disrupting, such as autos, the oil industry, the dealer local network, local power utilities, and advertising, it comes close to 25% of U.S. GDP.

If I had just taken the online payments system, auto, rocket, solar, and the battery industries a decade into the future and made $30 billion for myself along the way, I’d probably be smoking a joint, too.

And Elon is only 47. It makes you wonder what you’ve been doing with all your free time.

Send Me Another Half Dozen

September 14, 2018/by MHFTR

Expanding My “Trade Peace” Portfolio

Diary, Newsletter, Research

This morning, U.S. Treasury Secretary Steven Mnuchin mentioned that an effort was being made to get trade talks with China back on track. The Dow soared 160 points in a heartbeat.

Past murmurings by the Treasury Secretary demonstrate that his musings have zero credibility in the marketplace and the move vaporized in minutes. However, given the extreme moves made by the shares of trade war victims, I think it is time to review my “Trade Peace” portfolio and make some additions.

The shares have been so beaten up that I think you can start scaling in now with limited downside and a ton of potential upside.

It’s not a matter of if, but when Trump has to run up the white flag with his wildly unpopular trade wars. As they now stand the new tariffs are threatening to chop $10 off of S&P 500 earnings in 2018, from $168 down to $158, according to J.P. Morgan. Some two-thirds of all U.S. companies have been negatively impacted.

Tariffs have effectively wiped out the benefits of the corporate tax cuts for most companies enacted last December. Who has been the worst hit? Thousands of small manufacturers in Midwest red states that can’t function because they are missing crucial cheap parts they can only obtain from the Middle Kingdom.

At last count there are a staggering 37,000 applications for exemptions from tariffs filed with the U.S. Treasury and only a dozen people to process them. A mere 10% have been granted. It is a giant bureaucratic nightmare.

With the midterm elections now only 37 trading days away, the clock is ticking. If Trump doesn’t cut trade deals with all of our major counterparties around the world before then, the Republican Party stands to lose both the House of Representatives and the Senate on November 6. That will make Trump a “lame duck” president for two more years.

China Technology Stocks – Includes Alibaba (BABA), Baidu (BIDU), and Tencent (TCTZF). It’s not often that you get to buy a company with 61% sales growth, which has seen its shares plunge by 27% in three months, as is the case with (BABA). Just to get (BABA) back up to its June level it has to rise by 37%. This is a stock that will easily double or triple over the long term.

U.S. Semiconductor Stocks – With China buying 80% of its chips from the U.S., stocks such as Micron Technology (MU), Lam Research (LRCX), and KLA-Tencor (KLAC) have been taken out to the woodshed and beaten senseless. Micron is off a withering 41% since the trade war began in earnest in May.

Emerging Markets – China is the largest trading partner for most of the world, and a recession there sparks a global contagion effect. Reverse that, and you stimulate not only emerging markets, but the U.S. economy, too. Look at the charts for the iShares MSCI Emerging Markets ETF (EEM), the iShares China Large-Cap ETF (FXI), and the iShares MSCI Brazil ETF (EWZ) and you will salivate.

Oil – Boost the global economy and oil demand (USO) also. China is the world’s largest incremental buyer of new oil, and it will absorb all of the Iranian crude freed up by the U.S. abrogation of the treaty there.

Agricultural – No sector has been punished more than agriculture, where profit margins are small, lead times stretch into years, and mother nature plays her heavy hand. In this area you can include soybeans (SOYB), corn (CORN), and wheat (WEAT), as well as equipment makers Caterpillar (CAT) and Deere (DE).

Some 20 years of development efforts in China by American farmers have gone down the toilet, and much of this business is never coming back. Trust and reliability are gone for good. Storage silos across the country are full. Did I mention that red states are taking far and away the biggest hit? There are not a lot of soybeans grown in California, New York, or New Jersey.

Even if Trump digs in and refuses to admit defeat, as is his way, there is still a light at the end of the tunnel. Sometime in 2019, the World Trade Organization will declare virtually all of the new American tariffs illegal and hit the U.S. with its own countervailing duties. This is the Chinese strategy. Waiting for them to fold could be a long wait, a very long wait.

Time to Look at the “Trade Peace” Portfolio?

September 13, 2018/by MHFTR

The Market Outlook for the Week Ahead, or The War with Canada Starts on Tuesday

Diary, Newsletter, Research

I have spent all weekend sitting by the phone, waiting for the call from Washington D.C. to re-activate my status as a Marine combat pilot.

Failure of the administration to reach a new NAFTA trade agreement by the Friday deadline makes such a conflict with Canada inevitable.

And while you may laugh at the prospect of an invasion from the North, the last time this happened Washington burned. You can still see the black scorch marks inside the White House today.

This is all a replay for me, when in 1991, I enjoyed an all-expenses paid vacation courtesy of Uncle Sam. That’s when I spent a year shuttling American fighter pilots from RAF Lakenheath to forward bases at Ramstein, Aviano, Cyprus, and Dharan, Saudi Arabia.

It may seem unlikely that our nation’s military would require the services of a decrepit 66-year-old. However, in my last conflict I ran into another draftee who was then 66. It seems that the Air Force then had a lot of F-111 fighter bombers left over from Vietnam that no one knew how to fly.

That’s the great thing about the military. It never throws anything away. Not even me. The life of our remaining B-52 Stratofortress bombers at their final retirement in 2050 will be 100 years.

Perhaps Canada will decide that discretion is the better part of valor, and simply wait for the World Trade Organization to declare the Trump tariffs illegal, which they obviously all are.

That would then force the administration to withdraw from the organization the U.S. created at the end of WWII to regulate fair trade and go rogue. But then what else is new?

And while there was immense media time devoted to the NAFTA talks, which only oversees trade with partners with around $2 trillion each, China, the 800-pound gorilla, is still lurking out there. It has a $12.2 trillion GDP and Trump is imposing tariffs on another $200 billion of their imports there today.

The corner that Trump has painted himself into is that he has made himself SO unpopular abroad, insulting virtually everyone but Russia, that no leader is willing to risk doing a deal with him lest they get kicked out of office.

I certainly felt this in Europe this summer where the discussion was all about Trump all of the time. When you insult a nation’s leader you insult everyone in that country. I haven’t received that kind of treatment since the Vietnam War was running hot and heavy in 1968.

I’ll tell you, I’d much rather be flying combat missions over enemy territory without a parachute than trading a market like we had last week. For months now, it has been utterly devoid of low risk/high return entry points for all asset classes.

It’s been a slow-motion melt-up virtually every day against the most horrific news backdrop imaginable. Such is the wonder of massive global excess liquidity. It Trumps everything.

NASDAQ topped 8,000, proving that if you aren’t loaded to the gills with technology stocks, as I have been pleading all year, you are out of your freaking mind. If you don’t own Apple, you are doubly screwed.

I doubt that such data is available, but I bet the illiterate and the uneducated have been beating more literate types in performance by a huge margin.

The unresponsiveness to news isn’t the only thing afflicting this market. As the summer coughs and sputters its way to a close, we enter September, notorious as the most horrific trading month of the year. And we are launching into it with the Mad Hedge Market Timing Index stuck in the 70s, overbought territory, for weeks now.

Blockbuster earnings, the principal impetus for rising share prices in 2018, are now firmly in the rearview mirror, and won’t make a reappearance for another month. Then they die completely in 2019.

Perhaps this is why my long volatility position in the (VXX) is doing moderately well, even though the indexes have been hitting new all-time highs, with the S&P 500 briefing kissing $292. I rather practice my golf swing rather than try to outtrade this market, even though I don’t play golf.

Other than NAFTA, there was little to trade off of last week. Apple (AAPL) shares continue to break new records, hitting an incredible $228, in front of their big iPhone launch this month. Trump announced he was freezing wages on 1 million-plus federal employees next year. That will solve their tax problems for sure.

Coca-Cola (KO) bought British owned Costa for $5 billion, where I regularly breakfast while traveling abroad, in the hopes that perhaps its 501st new drink launch this year will be successful.

Amazon (AMZN) is within sofa change of becoming the next $1 trillion market cap company, making the parents of founder Jeff Bezos the most successful angel investors in history, worth $30 billion.

U.S. auto sales are in free fall. Car company shares (GM), (F) continued their slide as they are pummeled on every side by administration economic policies. One has to ask the question of how long the American economy can survive after losing a major leg like this one. Home sales, another vital component, are also suddenly awful.

Trump attacked big tech. The market yawned.

With the Mad Hedge Market Timing Index at 71 and bounces around in the 70s all week, I am not inclined to reach for trades here. All three of my current positions are making money, my longs in Microsoft (MSFT) and volatility (VXX) and my short in the U.S. Treasury bond market (TLT).

August finally brought in a performance burst in the final days, leaving us with a respectable return of 2.13%. My 2018 year-to-date performance has clawed its way back up to 25.30% and my nine-year return appreciated to 303.48%. The Averaged Annualized Return stands at 34.35%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 28.59%.

This coming week housing statistics will give the most important insights on the state of the economy.

On Monday, September 3, there was a national holiday, Labor Day.

On Tuesday, September 4, at 9:45 AM the PMI Manufacturers Index is out. August Construction Spending is out at 10:00 AM.

On Wednesday, September 5 at 7:00 AM, we learn MBA Mortgage Applications for the previous week.

Thursday, September 6 leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 3,000 last week to 213,000. Also announced at 9:45 AM are the August PMI Services Index.

On Friday, September 7 the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, the high point of my weekend was the funeral services for Senator John McCain. Boy, the Squids really know how to put on a ceremony. I suspect it may market a turning point for our broken American politics.

In the meantime, King Canute sits in his throne at the seashore ordering the tide not to rise.

Good luck and good trading.