An Evening with General James Mattis

Marines are familiar with the concept of the ‘Old Breed.”

In WWI, it was a reference to those who fought the dreaded Huks in hand to hand combat in the Spanish American War in the Philippines. In WWII, it was those who fought in WWI and the banana republic wars that followed. During Vietnam, if was a reference to WWII veterans.

Today General James Mattis has “Old Breed” status in the new Marine Corps. The corps knows him as the “Warrior Monk,” a reference to his personal library of 7,000 books, almost entirely in military subjects. His code name was “CHAOS.”

Troops call him “Mad Dog,” an ironic reference to his modest, controlled approach to everything. In fact, every rank gets a new reading list of military history when promoted so Mattis knows how to precisely address them with future orders.

So, when I had the opportunity to meet him with some senior officers at the Marines Memorial Club in San Francisco, I jumped at the chance.

My family has long considered Mattis our in-house general. As a commander of the First Marine Division, he was my boss in the Gulf War and my nephew’s in Iraq. Both my father and my uncle served in the Marine First Division on Guadalcanal, which I will be visiting in a memorial ceremony in January.

General Mattis was the Secretary of Defense fired by Donald Trump at the end of 2018. Mattis gave two months’ notice to ease the transition to the next Secretary of Defense. In one of the pettiest moves I have ever seen, Trump refused to accept the notice and ordered him out of his office immediately.

The big difference Mattis had with Trump was over the value of our foreign allies. Mattis considers them essential, having managed large multinational forces in the Persian Gulf War, the Afghanistan War, and the War in Iraq.

Trump considers allies useless and expensive. Trump won and Mattis walked, preceded by General H.R. McMaster, another intellectual leader of our modern military.

Today, Mattis absolutely refuses to speak on the matter, unwilling to comment adversely on a former commander while still in office. Once Trump is out, it may be another matter. I can’t wait.

It was great listening to Mattis with a group of insiders, several of whom who had served with him in past campaigns. Occasionally, he’d say, “Thanks for laying out that minefield in Iraq right when I needed it,” or “We really appreciated those helicopters you gave us in Afghanistan.”

Mattis is highly critical of Chinese expansion in the South China Sea, the so-called “War of the Dots.” He sees Russia’s primary goal as the breaking up of NATO, crucial for Western Europe’s defense. He believes that climate change is a major threat to national defense.

Mattis is also in favor of the mutual defense with Japan. Mattis liked to inspect the front lines firsthand and more than once a Marine found that the general had dove on top of them to avoid incoming fire.

Mattis, a native of rural Washington state, came into the Marine Corps as a member of the naval ROTC in 1972. His reading of history is so extensive that he believes every contemporary battle has already been fought sometime in the past. All he has to do is identify which battle in history is being repeated and he will know the outcome.

One has to be an avid historian just to be following what he is saying. In the course of an hour and a half, I strained to recall references to Xenophon, Von Clausewitz, Bismarck, Napoleon, Patton, and the Battle of Fallen Timbers. The Persians clearly blew it at the Battle of Thermopylae in 480 BC.

Mattis supports the “two-state solution” for Israel, arguing that west bank settlement are a threat to peace. He didn’t believe that the Iran Nuclear deal was a perfect agreement, but thought it was a mistake for Trump to tear it up. Mattis has never been married, devoting his entire life to the Marine Corps.

As our meeting came to an end, there were even a few comments about him making a future run for the presidency, which he laughed off. As I walked out, I thought, “Wow, they certainly don’t make them like that anymore.”

Jim Mattis is two years older than me.

 

The Market Outlook for the Week Ahead, or Gridlocked

Market’s are gridlocked.

Traders don’t want to chase the market at an all-time high on top of a 2,000-point rally. They don’t want to sell short either since a Tweet could come out at any time triggering a squeeze.

Will the trade war continue for another week or a year?

On top of all that, we have a president who attempts to manipulate the market more than any in history.

And here is the problem. While the major indexes remain dead unchanged over the past 18 months, earnings have been falling. That has made them more expensive than at any time over the past several years.

And this is in the face of an onslaught of negative economic data that continues to deteriorate by the day, all caused by the trade war.

So, as a result, there is nothing to do here. The market is too high to buy and too low to sell. Clients call me with trade ideas, and I tell them they are reaching. There is nothing worse than reaching for the marginal trade when there is really nothing to do.

At least I’ll have something to do in the coming week. I’ll be launching the Mad Hedge Biotech and Health Care Letter, the newest addition to our family of research services. In addition to technology, I expect Biotech and Health Care to be one of the top-performing sectors in the coming decade.

I have taken out a full-time researcher in the field who has been grinding out reports for me since January 1. The invitation to the webinar should reach you in a few days where I will explain why keeping up with this sector is so important.

There is no law that says you have to have a trade on every day of the year. Cash is beautiful. Better than that, cash has option value. It’s worth a fortune to have dry powder when markets meltdown or melt-up. You get to catch other investors’ trades when they are puking. That is the best time ever to make money.

When my four technology positions expired at their maximum profit point on Friday, I celebrated. I went down to a bankruptcy sale for an antique store in Berkeley and bought a vintage Champaign magnum bottle for $10.

The week was kicked off by mass drone strikes that took out Saudi oil production, axing 6 million barrels a day off the global market. Half of that will be back in a day. Oil prices spike $10, the largest one-day move in history. This is clearly the end result of the US unilaterally pulling out of the US Iran Nuclear Agreement and the economic sanctions that followed, thus inviting retaliation.

General Motors (GM) workers struck, with 48,000 hourly workers hitting the picket lines. The last strike in 1998, also at a market top, lasted for 54 days. Could be this the long-awaited inflationary run-up in wages? Expect many more strikes to come.

China’s economy slowed, with Industrial output up 4.4%, the slowest since 2002. Trade war impacts will keep hitting the economy for months to come. The bad news? Business is not responding to recent stimulus and, with 70% of the country’s oil originating in Saudi Arabia, they now have a bigger headache.

Recreational Vehicle sales are falling off a cliff, down 22% YOY, as consumer cut back discretionary spending. It’s another reliable pre-recession indicator.

Recession fears are the highest in a decade, according to the Bank of America Merrill Lynch fund manager survey. Some 38% of managers are making the bear call versus 34% in August. Only 7% of managers expect value to outperform growth over the next 12 months.

Some 53% of CFOs think we’ll be in a recession in a year, and 67% by end 2020. These are the highest pessimism numbers in a decade. Germany already in recession is the largest concern, followed by a slowing China. It’s all linked. We are all one global economy, like it or not.

Philly Fed plunged, from 16.8 to 12.0, indicating fading business confidence. The trade war universally gets the blame. Notice how nervous everyone is getting.

Apple got tagged with a $14 billion fine in another “not invented here” penalty issued by the Irish government. It’s another attack on American big tech. Apple says they followed Irish tax law to the letter.

The Fed cut a quarter but talks down future rate hikes. Buy the rumor, sell the news. Probably no rate cut for October, so December is the next time we get a swing at the piñata. This will have zero effect on the economy, but further punishes savers.

Microsoft (MSFT) announced a $40 billion share buyback and raises its dividend by 11%. It’s a huge positive for the company and the market in general. I’ll try to buy the Thursday opening if it doesn’t open up at a stupid price. Buy Seattle real estate….and more Microsoft. Bill Gates’ creation has bought back 25% of its shares over the past decade.

The Mad Hedge Trader Alert Service still doing well in this indecisive market. My Global Trading Dispatch reached a new all-time high of 336.07% and my year-to-date ground up to +35.83%. My ten-year average annualized profit bobbed up to +34.57%. 

I took profits in my long bond position (TLT) earlier in the week, capturing a four-point rally there. I am left with my short position in oil (US), which needs a $9 a barrel move against it to lose money. That should be fine as long as there is not another attack on the Saudi oil fields.

It is interesting to note that this ramped up the implied volatilities on oil options going into the Friday close over fears of just such an event. We will get all that back at the Monday morning opening….as long as the weekend proves peaceful.

On Monday, September 23 at 8:30 AM, the Chicago Fed National Activity Index for August is out.

On Tuesday, September 24 at 9:00 AM, the S&P Case-Shiller National Home Price Index is updated, for July.

On Wednesday, September 25, at 8:30 AM, we learn August New Home Sales.

On Thursday, September 26 at 8:30 AM, the Weekly Jobless Claims are printed. We also obtain the final read for Q2 GDP.

On Friday, September 27 at 8:30 AM, the August Durable Goods is printed. The Baker Hughes Rig Count is released at 2:00 PM.

As for me, I’ll be doing a ten-mile backpack through Point Reyes National Seashore with a 60-pound pack and feasting on freeze-dried food in front of a campfire. Got to remain bootcamp-ready. You never know when Uncle Sam is going to come calling again.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

 

September 18 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 18 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What would happen to the United States Treasury Bond Fund (TLT) if the Fed does not lower rates?

A: My bet is that it would immediately have a selloff—probably several points—but after that, recession worries will take bond prices up again and yields down. I don’t think we have seen the final lows in interest rates by a long shot. That’s why I bought the (TLT) last week.

Q: Is it good to buy FedEx (FDX) considering the 13% fall today?

A: I use the 3-day rule on these situations. That’s how long it takes for the dust to settle from an earnings shock like this and find the real price. The problem with FedEx is that it’s a great early recession predictor. When the number of delivered packages decreases, it’s always an indicator that the economy as a whole is slowing down, which we know has been happening. It’s one of the most cyclical stocks out there, therefore one of the most dangerous. I wouldn’t bother with FedEx right now. Go take a long nap instead.

Q: Would you be a buyer of Facebook (FB) here, given they seem to have weathered all the recent attacks from Washington?

A: Not here in particular, but I would buy it 20% down when it gets to the bottom edge of its upward channel—it still looks like it’s going crazy. They’re literally renting or buying buildings to hire an additional 50,000 people in San Francisco anticipating huge growth of their business, so that’s a better indicator of the future of Facebook than anything.

Q: Will junk bonds be more in demand now that rates are cratering?

A: Junk bonds (HYG), (JNK) are driven more by the stock market than the bond market, as you can see in the huge rally we just had. Junk bonds are great because their default ratios are usually far below that which the interest rate implies, but you really have to trade them like stocks. Think of them as preferred stocks with really high dividends. When the stock market tops, so will junk bonds. Remember in 2008, junk yields got all the way up to 15% compared to today’s 5.6%.

Q: What will happen to emerging markets (EEM) as rates lower?

A: If lower interest rates bring a weaker US dollar, that would be very positive for emerging markets over the long term and they would be a great buy. However, emerging markets will take the hardest hit if we actually do go into a recession. So, I would pass for now.

Q: What are your thoughts on Alibaba (BABA) and JD.com (JD)?

A: They are great for the long term. However, expect a lot of volatility in the short term. As long as the trade war is going on, these are going to be hard to trade until we get a settlement. (JD) is already up 50% this year but is still down 40% from pre trade war levels. These things will all be up 20-30% when that happens. If you can take the heat until then, they would probably be okay for a long-term portfolio globally diversified.

Q: What do you have to say about the ProShares Ultra Short 20+ Year Treasury ETF (TBT)—the short bond ETF?

A: If you have a position, I’d be selling now. We just had a massive 20%, 4-point rally from $22 to $27 and now would be a good time to take a profit, or at least get out closer to your cost. The zero interest rates story is not over yet.

Q: Would you short the US dollar?

A: I would most likely short it against the euro (FXE), which now has a massive economic stimulus and quantitative easing program coming into play which should be positive for it and negative for the US dollar (UUP). That’s most likely why the euro has stabilized over the last couple of weeks. That said, the dollar has been unexpected high all year despite falling interest rates so I have been avoiding the entire foreign exchange space. I try to stay away from things I don’t understand.

Q: If all our big tech September vertical bull call spreads are in the money, what should we do?

A: You do nothing. They all expire at the Friday close in two trading days. Your broker should automatically use your long call position to cover your short call position and credit your account with the total profit on the following Monday, as well as release the margin for holding that position. After that, we’ll probably wait for another good entry point on all the same names, (AMZN), (FB), (DIS), (MSFT).

Q: If the US fires a cruise missile at Iran, how would the market react?

A: It would selloff pretty big—markets hate wars. And the US wouldn’t send one missile at Iran; it would be more like 100, probably aimed at what little nuclear facilities they have. I doubt that is going to happen. The world has figured out that Trump is a wimp. He talks big but there is never any action or follow through. Inviting the Taliban to Camp David while they were still blowing up our people? Really?

Q: Will the housing market turn on the turbochargers after this dip in rates?

A: It wouldn’t turn on the turbochargers, but it might stabilize the market because money is available now at unprecedentedly low interest rates. However, we still have the loss of the SALT deductions—the state and local taxes and real estate taxes that came in with the Trump tax bill. Since then, real estate has been either unchanged or has fallen on both the East and West coast where the highest priced houses are. It’s the most expensive houses that take the loss of the SALT deduction the hardest. Don’t expect any movement in these markets until the SALT deduction comes back, probably in 16 months.

Q: What catalyst do you think would cause a 10% correction in the next 2-3 months?

A: Trump basically saying “screw you” to the Chinese—a tweet saying he’s going to bring another round of tariff increases. That’s worth a minimum of 2,000 points in the Dow Average (INDU), or about 7% percent. Either that or no move in Fed interest rates—that would also create a big selloff. My guess is that and adverse development in the trade war will be what does it. That’s why my positions are so small now.

Q: We have a big short position in the United States Oil Fund (USO) now. Are you going to run this into expiration until October $18?

A: Even though oil has already collapsed by 10% since we put this position on last Friday, premiums in oil options are still close to record levels. So, it pays us to hang on for the time decay. The world is still massively oversupplied in oil and the Saudis were able to bring half of the lost production back on in a day. Oil will keep falling unless there is another attack and it is unlikely we will see one again on this scale. And, we only have 20 more days to go to capture the full 14.8% profit.

Good luck and good trading.
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader

 

 

 

 

You Can’t Do Enough Research

The Great Trading Guru Speaks

You never know how far this research is going to go. After all, the Internet is a pretty big thing. Still, I was amused to see that my opinion on crude oil prices was picked up by none other than the Hong Kong-based Asia Times, which I wrote for 50 years ago. Please click here and enjoy.

How to Reliably Pick a Winning Options Trade

You’ve spent vast amounts of time, money, and effort to become options trading experts. You know the difference between bids and offers, puts and calls, exercise prices and expiration days.

And you still can’t make any money.

Now What?

Where do you apply your new found expertise? How do you maximize your reward versus your risk?

It is all very simple. Stick to five simple disciplines that I am about to teach you and you will suddenly find that the number of your new trades that are winners takes a quantum leap, and the money will start pouring into your trading account.

It’s really not all that hard to do. So here we go!

1) Know the Macro Picture

If you have a handle on whether the economy is growing or shrinking, you have a major advantage in the options market.

In a growing economy, you only want to employ bullish strategies, like calls, call spreads, and short volatility plays.

In a shrinking economy you want to executive bearish plays, like puts, put spreads, and long volatility plays.

Remember, the only thing that is useful is a view on what the economy is going to NEXT. The government only publishes historical economic data, which is for the most part useless in predicting what is going to happen in the future.

Remember, the options market is all about discounting what is going to happen next.

And how do you find that out? Well, you could hire your own in-house staff economist. Or, you could rely on economic research from the largest brokerage houses that all have their own economist.

Even the Federal Reserve puts out its own forecasts for economic growth prospects. However, all of these sources have notoriously poor track records. Listening to them and placing bets on their advice CAN get you into a world of trouble.

For the best possible read on the future of the US and the global economy, there is no better place to go than Global Trading Dispatch, published by me, John Thomas, the Mad Hedge Fund Trader.

This is where the largest hedge funds, brokers, and yes, even the US government goes to find out what really is going to happen to the economy.

2) Looking for great industry fundamentals

Do you want to give yourself another edge?

There are over 100 different industries listed on US stock markets. However, only about 5 or 10 are really growing decisively at any particular time. The rest are either going nowhere, or are shrinking.

In fact, you can find a handful of sectors that are booming while others are in outright recession.

If you are a major hedge fund, institution, or government, you may want to cover all 100 of those industries. Good luck with that.

If you are a small hedge fund, or an individual working from home, you will want to conserve your time and resources, skip most of US industry, and only focus on a handful.

Some traders take this a step further and only concentrate on a single high growing, volatile industry, like technology or biotech, or a single name, like Netflix (NFLX), Tesla (TSLA), or Amazon (AMZN).

How do you decide which industry to trade?

Brokerage houses pump out more free research than you could ever read in a lifetime. Government reports tend to be stodgy, boring, and out of date. Big hedge funds keep their in-house research confidential (although some of it leaks out to me).

The Mad Hedge Fund Trader solves this problem for you by limiting its scope to a small number of benchmark, pathfinder industries, like technology, banks, energy, consumer cyclicals, biotech, and cyber security.

In this way, we gain a handle on what is happening in the economy as a whole, while lining up rifle shots on the best options trades out there.

We want to direct you where the action is, and where we have a good handle on future earnings prospects.

It doesn’t hurt that we live in the edge if Silicon Valley and get invited to test out many technologies before they are made public.

3) The Micro Picture is Ideal

Once you have a handle on the economy and the best industries, it’s time to zero in on the best company to trade in, or the “MICRO” selection.

It’s always great to find a good target to trade in because positions in single companies deliver double or triple the returns compared to stock indexes.

That’s because the market will pay a far higher implied volatility for a single company than a large basket of companies.

Remember also that you are taking greater risk in trading individual companies. One single stock is subject to far greater risk than a basket.

If the earnings come through as expected, everything is hunky dory. If they don’t, the shares can drop by half in a heartbeat. Large indexes buffer this effect.

Of course there are gobs of market research out there from brokers about individual companies. Some of it is right, some of it is wrong, but all of it is conflicted. Recommendations are either “BUY” or “HOLD”.

Brokers are loath to issue a “SELL” recommendation for a stock because it will eliminate any chance of that firm obtaining new issue business. Who wants to hire a broker to sell new stock with a “SELL” recommendation on their stock?

And brokerage firms don’t make their bread and butter on those piddling little discount commissions you have been paying them. They make it on new issues business. In fact, brokerage can earn as much as $100 million from a new issue for one firm.

I have been following about 100 companies in the leading market sectors for nearly half a century. Some of the managements of these firms have become close friends over the decades. So, I get some really first class information.

When markets rotate to sectors and companies that I already know, I have a huge advantage. Needless to say, this gives me a massive head start when selecting individual names for options Trade Alerts.

4) The Technicals Line Up

I have never been a huge fan of technical analysis.

Most technical advice boils down to “if it’s gone up, it will go up more” or “If it’s gone down, it will go down more.”

Over time, the recommendations are accurate 50% of the time, or is about equal with a coin toss.

However, the shorter the time frame, the more useful technical analysis becomes. If you analyze intraday trading, almost all very short-term movements can be explained in technical terms. This is entirely how day traders make their livings.

It’s a classic case of if enough people believe something, it becomes true, no matter how dubious the underling facts may be.

So it does behoove us to pay some attention to the charts when executing you trades.

Talk to old-time investors and you will find that they use fundamentals for long term stock selection and technicals for short term order execution.

Talk to them some more and you find the best fundamentalists sound like technicians, while savvy technicians refer to underlying fundamentals.

Get the technicals right, and you can provide one additional reason for your trade to work.

5) The calendar is favorable

There is one more means of assuring your trades turn into winners.

According to the data in the Stock Trader’s Almanac, $10,000 invested at the beginning of May and sold at the end of October every year since 1950 would be showing a loss today.

Amazingly, $10,000 invested on every November 1 and sold at the end of April would today be worth $702,000, giving you a compound annual return of 7.10%.

Of the 62 years under study, the market was down in 25 May-October periods, but negative in only 13 of the November-April periods, and down only three times in the last 20 years!

There have been just three times when the “good 6 months” have lost more than 10% (1969, 1973 and 2008), but with the “bad 6 months” time period, there have been 11 losing efforts of 10% or more.

Yes, it may be disturbing to learn that we ardent stock market practitioners might in fact be the high priests of a strange set of beliefs. But hey, some people will do anything to outperform the market.

It is important to remember that this cyclicality is not 100% accurate, and you know the one time you bet the ranch, it won’t work.

So there we have it.

Adopt these five simple disciplines and you will find your success rate on trades jumps from a coin toss to 70%, 80%, or even 90%.

In other words, you convert your trading from an endless series of frustrations to a reliable source of income.

If a potential trade meets only four of these five criteria, please do it with your money and not mine. Your chances of making money have just declined.

And I bet a lot of you poor souls execute trades all the time that meet NONE of these criteria.

Get the tailwinds of the economy, your industrial call, your company pick, the technicals, and the calendar working for you, and all of a sudden you’re a trading genius.

It only took me a half a century to pull all this together. Hopefully you can learn a little bit faster than that.

I hope it all works for you.

This is John Thomas signing off saying good luck and good trading.

 

Your Guide to Winning Trades

Industries You Will Never Hear About from Me

The focus of this letter is to show people how to make money through investing in fast-growing, highly profitable companies which have stiff, long-term macroeconomic winds at their backs.

That means I ignore a large part of the US economy, possibly as much as 80%, whose time has passed and are headed for the dustbin of history.

According to the Department of Labor’s Bureau of Labor Statistics, the seven industries listed below are least likely to generate positive job growth in the next decade.

As most of these stocks are already bombed out, it is way too late to short them. As an investor, you should consider this a “no go” list no matter how low they go. I have added my comments, not all of which should be taken seriously.

1) Realtors – The number of realtors is only down 10% from its 1.3 million peak in 2006. I have always been amazed at how realtors who add so little in value take home so much in fees, still around 6% of the gross sales price. Someone is going to figure out how to break this monopoly.

2) Newspapers – these probably won’t exist in five years, as five decades of hurtling technological advances have already shrunk the labor force by 90%. Go online, or go away.

3) Airline employees – This is your worst nightmare of an industry, as management has no idea what interest rates, fuel costs, or the economy will do, which are the largest inputs into their business. Pilots will eventually work for minimum wage just to keep their flight hours up.

4) Big telecom – Can you hear me now? Nobody uses landlines anymore, leaving these companies with giant rusting networks that are costly to maintain. Since cell phone market penetration is 90%, survivors are slugging it out through price competition, cost-cutting, and all that annoying advertising.

5) State and Local Government – With employment still at levels private industry hasn’t seen since the seventies, firing state and municipal workers will be the principal method of balancing ailing budgets. Expect class sizes to soar to 80 or go entirely online, to put out your own damn fires, and keep the 9 mm loaded and the back door booby-trapped for home protection.

6) Installation, Maintenance, and Repair – I have explained to my mechanic that the motor in my new electric car has only eleven moving parts, compared to 1,500 in my old clunker, and this won’t be good for business. But he just doesn’t get it.

The winding down of our wars in the Middle East is about to dump a million more applicants into this sector. The last refuge of the trained blue-collar worker is about to get cleaned out.

7) Bank Tellers – Since the ATM made its debut in 1968, this profession has been on a long downhill slide. Banks have lost so much money in the financial crisis, they can’t afford to hire humans anymore.

It hasn’t helped that hundreds of banks have closed during the recession, with many survivors merging to cut costs. Your next bank teller may be a Terminator.

 

Out With the Old

 

And in With the New

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