Research Archives - Mad Hedge Fund Trader

Why the ?Underground? Economy is Growing

There is no doubt that the ?underground? economy is growing.

No, I?m not talking about violent crime, drug dealing, or prostitution. Those are largely driven by demographics, which right now, are at a low ebb.

I?m referring to the portion of the economy that the government can?t see, and therefore is not counted in its daily data releases.

This is a big problem.

Most investors rely on economic data to dictate their trading strategies. When the data is strong, they aggressively buy stocks, assuming that a healthy economy will boost corporate profits.

When data is weak, we get the flip side, and investors bail on equities. They also sell commodities, precious metals, oil, and plow their spare cash into the bond market.

We are now more than half way through a decade that has delivered unrelentingly low annual GDP growth, around the 2%-2.5% level.

We all know the reasons. Retiring baby boomers, some 85 million of them, are a huge drag on the system, as they save, and don?t spend.

Generation X-ers do spend, but there are only 65 million of them. And many Millennials are still living in their parents? basements - broke and unable to land paying jobs in this ultra cost conscious world.

But what if these numbers were wrong? What if the Feds were missing a big part of the picture?

I believe this is in fact what is happening.

I think the economy is now evolving so fast, thanks to the simultaneous hyper acceleration of multiple new technologies, that the government is unable to keep up.

Further complicating matters is the fact that many new internet services are FREE, and therefore are invisible to government statisticians.

They are, in effect, reading from a playbook that is a decade or more old.

What if the economy was really growing at a 3-4% pace, but we just didn?t know it.

I?ll give you a good example.

The government?s Consumer Price Index is a basket of hundreds of different prices for the things we buy. But the Index rarely changes, while we do.

The figure the Index uses for Internet connections hasn?t changed in ten years.

Gee, do you think that the price of broadband has risen in a decade, with the 1,000-fold increase in speeds?

In the early 2,000?s you could barely watch a snippet of video on YouTube without your computer freezing up. Now, I can download a two-hour movie in High Definition in just two minutes on my Comcast 250 megabyte per second business line.

And many people now watch movies on their iPhones. I see them in the rush hour traffic.

I?ll give you another example of the burgeoning black economy: Me.

My business shows up nowhere in the government economic data because it is entirely online. No bricks and mortar here!

Yet, I employ a dozen people, provide services to thousands of individuals, institutions, and governments in 140 countries, and take in millions of dollars in revenues in the process.

I pay a lot of American taxes too.

How many more me's are out there? I would bet millions.

If the government were understating the strength of the economy, what would the stock market look like?

It would keep going up every year like clockwork, as ever-rising profits feed into stronger share prices.

But multiples would never get very high (now at 19 times earnings) because no one believed in the rally, since the economic data was so weak.

That would leave them constantly underweight equities in a bull market.

Stocks would miraculously and eternally climb a wall of worry. Did I mention that the S$P 500 is 2% short of an all time high?
?
On the other hand, bonds would remain strong as well, and interest rates low, because so many individuals and corporations were plowing excess, unexpected profits into fixed income securities. Structural deflation would also give them a big tailwind.

If any of this sounds familiar, please raise your hand.

I have been analyzing economic data for a half century, so I am used to government statistics being incorrect.

It was a particular problem in emerging economies, like Japan and China, which were just getting a handle on what comprised their economies for the first time.

But to make this claim about the United States government, that has been counting things for 225 years, is a bit like saying the emperor has no clothes.

Sure, there has always been a lag between the government numbers and reality. In the old days they used horses to collect data, and during the Great Depression numbers were kept on 3? X 5? index cards filled out with fountain pens.

But today, the disconnect is greater than it ever has been, by a large margin, thanks to technology.

Is this unbelievable? Yes, but you better get used to it.

As for that bull market in stocks, it just might keep on going.

There May Be More Here Than Meets the Eye

How to Buy a Solar System

Diary, Newsletter, Research

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 2% of the country?s electrical power supply today, we are only six 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 twenty pitches, almost all of the information you get from fly-by-night solar installation salesmen is inaccurate. Most don?t know the difference between 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 solar systems for the past 50 years.

During the early 1960?s, 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 beansprout 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 2014 when solar price/performance hit the breakeven sweet spot acceptable for me, about six years. Then I really launched into overdrive, attempting to get the best value for my money, and game the many financing alternatives.

The numbers are now so compelling, that even a number crunching, blue state hating Texas oil man 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.

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 US population, costs about 10 cents a kilowatt hour.

This is a function of the high level of public power utility regulation in the US, 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 upfront 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 $450 to $50 a month.

This system cost me $32,000, or $22,400 net after the 30% alternative energy investment tax credit, giving me a breakeven point of four years and eight months.

Don?t focus too much on the panels themselves, as they are only 25% of a system?s costs. The big installers, like Solar City (SCTY) 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 invertor 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, like my refrigerator, cells phones, laptop, and of course, 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 80kW battery recharge every two 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 ten 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.

Buzz kill warning! PG&E has to pay me only their lowest marginal cost of power, or 4 cents/kWh. That is why it 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 sized house with no Teslas), or you want to preserve your capital for your trading account, you may want to lease from a company like Solar City.

They 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 raising your cost of electricity annually.

In my case, my monthly power bill would 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 is why Solar City is a great stock to buy, but not such a good solar alterative. They are making money hand over fist.

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: https://www.dividendsolar.com/) 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 US 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 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.

They 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 manufacture made possible by the new Gigafactory now under construction near Reno, Nevada.

The Gigafactory will double world lithium ion battery capacity in one shot, and is expected to come online within two years. Plans for a second Gigafactory are already in the works (which is why presidential candidate Rick Perry has been visiting California).

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

Short Selling School 101

Diary, Newsletter, Research

With the stock market falling for the next few weeks, or even months, it?s time to rehash how to profit from falling markets one more time.

There is nothing worse than closing the barn door after the horses have bolted.

No doubt, you will receive a wealth of short selling and hedging ideas from your other research sources and the media at the next market bottom. That is always how it seems to play out.

So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now, while stock markets are still only 3% short of an all time high, and unchanged on the year.

Market?s could be down 10% by the time this is all over.

THAT IS MY LINE IN THE SAND!

There is nothing worse than fumbling around in the dark looking for the matches after a storm has knocked the power out.

I?m not saying that you should sell short the market right here. But there will come a time when you will need to do so. Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:

Bear ETFs

Of course the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain the in the (SH).

In actual practice, it doesn?t work out like that. The ETF has to pay management operating fees and expenses, which can be substantial. After all, nobody works for free.

There is also the ?cost of carry,? whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.

Still individuals can protect themselves from downside exposure in their core portfolios through buying the (SH) against it (click here for the prospectus: http://www.proshares.com/funds/sh.html). Short selling is not cheap. But it?s better than watching your gains of the last seven years go up in smoke.

Virtually all equity indexes now have bear ETF?s. Some of the favorites include the (PSQ), a short Play on the NASDAQ (click here for the prospectus: http://www.proshares.com/funds/psq.html), and the (DOG), which profits from a plunging Dow Average (click here for the prospectus: http://www.proshares.com/funds/dog_index.html).

My favorite is the (RWM) a short play on the Russell 2000, which falls 1.5X faster than the big cap indexes in bear markets (click here for the prospectus: http://www.proshares.com/funds/rwm.html).

Leveraged Bear ETFs

My favorite is the ProShares Ultra Short S&P 500 (SDS), a 2X leveraged ETF (click here for the? prospectus: http://www.proshares.com/funds/sds.html). A 10% decline in the (SPY) generates a 20% profit, maybe.

Keep in mind that by shorting double the market, you are liable for double the cost of shorting, which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry, this ETF or you might be disappointed.

3X Leveraged Bear ETFs

The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus: http://www.proshares.com/funds/spxu.html).

First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.

Eventually, they all go to zero, and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further added to costs.

Yes, I know the charts can be tempting. Leave these for the professional hedge fund intra day traders they are meant for.

Buying Put Options

For a small amount of capital, you can buy a ton of downside protection. For example, the April (SPY) $182 puts I bought for $4,872 allowed me to sell short $145,600 worth of large cap stocks at $182 (8 X 100 X $6.09).

Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better be good with these, because when the market goes against you, put options can go poof, and disappear pretty quickly.

That?s why you read this newsletter.

Selling Call Options

One of the lowest risk ways to coin it in a market heading south is to engage in ?buy writes?. This involves selling short call options against stock you already own, but may not want to sell for tax or other reasons.

If the market goes sideways, or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially they get called away, but at a higher price, so you make more money. Then you just buy them back on the next dip. It is a win-win-win.

I?ll give you a concrete example. Let?s say you own 100 shares of Apple (AAPL), which closed on Friday at $95.13, worth $9,513. If you sell short 1 July, 2016 $100 call at $1.30 against them, you take in $130 in premium income ($1.30 X 100 because one call option contract is exercisable into 100 shares).

If Apple close2 below $100 on the July 15, 2016 expiration date, the options expire worthless and you keep your stock and the premium. You are then free to repeat the strategy for the following month. If (AAPL) closes anywhere above $100 and your shares get called away, you still make money on the trade.

Selling Futures

This is what the pros do, as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risk for an entire portfolio of shares by simply selling short futures contracts for a stock index.

For example, let?s say you have a portfolio of predominantly large cap stocks worth $100,000. If you sell short 1 June, 2016 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.

The margin requirement for one contract is only $5,000. However if you are short the futures and the market rises, then you have a big problem, and the losses can prove ruinous.

But most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom and pop investing for their retirement fund.

Most 401ks and IRAs don?t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.

That said, get the futures markets right, and it is the quickest way to make a fortune, if your market direc
tion is correct.

Buying Volatility

Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it through buying the iPath S&P 500 VIX Short Term Futures ETN (VXX), or buying call and put options on the (VIX) itself.

If markets fall, volatility rises, and if markets rise, then volatility falls. You can therefore protect a stock portfolio from losses through buying the (VIX).

I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read ?Buy Flood Insurance With the (VXX)? by clicking here.

Selling Short IPO?s

Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That?s because many are held by hot hands, known as ?flippers,? and don?t have a broad institutional shareholder base.

Many of the recent ones don?t make money and are based on an, as yet, unproven business model. These are the ones that take the biggest hits.

Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus: http://www.renaissancecapital.com/ipoinvesting/ipoetf/ipoetf.aspx).

Buying Momentum

This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum, while falling markets produce falling momentum.

So selling short momentum produces additional protection during the early stages of a bear market. Blackrock has issued a tailor made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here: https://www.ishares.com/us/products/251614/MTUM.

Buying Beta

Beta, or the magnitude of share price movements, also declines in down markets. So selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.

The Index is compiled, maintained and calculated by Standard & Poor's and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.

The Fund and the Index are?rebalanced and reconstituted quarterly in?February, May, August and November. To learn more, read the prospectus by clicking here:? https://www.invesco.com/portal/site/us/financial-professional/etfs/product-detail?productId=SPHB.

Buying Bearish Hedge Funds

Another subsector that does well in plunging markets are publicly listed bearish hedge funds. There are a couple of these that are publicly listed and have already started to move.

One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus: http://www.advisorshares.com/fund/hdge). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.

Oops, Forgot to Hedge

Watch Out for the Head and Shoulders

Diary, Newsletter, Research

The market has been chattering quite a lot about the massive downside bets on the S&P 500 being placed by some of the industry?s best known players.

That is something I would expect from my long time client and mentor George Soros.

But Warren Buffett as well? He is one of the greatest long term, pro America bulls out there.

It is the sort of news that gives investors that queasy, seasick feeling in the pit of their stomachs. You know, like when a new Tesla owner shows off his warp speed ?ludicrous mode??

That is unless you are running heavy short positions in stocks, as I am.

Every technical analyst in the world is pouring over their charts and coming to the same conclusion. A ?Head and Shoulders? pattern is setting up for the major indexes, especially for the S&P 500 (SPY).

And if you think the (SPY) chart is bad, those for the NASDAQ (QQQ), and the Russell 2000 (IWM), look much worse.

This is terrible news for stock investors, as well as owners of other risk assets like commodities, oil and real estate. It is wonderful news for those long of Treasury bonds (TLT), the Euro (FXE), gold (GLD), and silver (SLV).

A head and shoulders pattern is one of the most negative textbook indicators out there for financial markets. It means that there is only enough cash coming in to take prices up to the left shoulder, but no higher.

There is not even enough to challenge the old high, taking a double top decidedly off the table.

The bottom line: the market has run out of buyers. Be very careful of markets where everyone is bullish long term, but no one is doing any buying.

When the hot, fast money players see momentum rapidly fading, they pick up their marbles and go home. Some of the most aggressive, like me, even flip to the short side and make money in the falling market.

If we make it down to the ?neckline? and it doesn?t hold, then the sushi really hits the fan. Right now, that neckline is at $204.60 in the S&P 500 (SPY). Break that, and it?s hasta la vista baby. See you later.

Stop losses get triggered, the machines takeover, and shares move to the downside with a turbocharger. Distress margin calls on the most levered players (usually the youngest ones) add further fuel to the fire. We might even get a flash crash

This is when the really big money is made on the short side.

There is a new wrinkle this year that could make this sell off particularly vicious. To see a formation like this setting up during May is particularly ominous. It means that ?Sell in May? is going to work one more time

?It?s not like we have any shortage of bearish headlines to prompt a stampede by the bears.

The turmoil in Europe, one of the largest buyers of American exports, could cause the US to catch a cold. This is what the latest round of earnings disappointments has been hinting at.

Margin debt to own stocks has recently exploded to an all time high.

It could well be that the market action is just the dress rehearsal for a deeper correction in the summer, when markets are supposed to go down.

If markets do breakdown, it won?t be bombs away. The (SPY) might make it down to $181, $177, or in an extreme case $174. But to get sustainably below that, we really need to see an actual recession, not just a growth scare.

Remember that earnings are still growing year on year, once you take out the oil industry. That is not a formula for any kind of recession.

It is a formula for a 10% sell off in an aged bull market. That?s where you load the boat with the best quality stocks (MSFT), (FB), (GOOG), (CELG), etc., which should be down 25-35%, and then clock your +25% year in your equity trading portfolio.

If you are NOT a trader, but a long-term investor monitoring you retirement funds, just go take a round-the-world cruise and wake me up on December 31. You should be up 5% or more, with dividends, and skip the volatility.

Ignore It at Your Peril

Volatility? What Volatility?

The Cost of an Aging World

Diary, Newsletter, Research

Regular readers of this letter are well aware of my fascination with demographics as a market driver.

They go a long way towards explaining if asset prices are facing a long-term structural headwind or tailwind.

The great thing about the data is that you can get precise, high quality numbers 20, or even 50 years in advance. No matter how hard governments may try, you can?t change the number of people born 20 years ago.

Ignore them at your peril. Those who failed to anticipate the coming retirement of the baby boomer generation in 2006 all found themselves horribly long and wrong in the market crash that followed shortly.

The Moody?s rating agency (MCO) has published a report predicting that the number of ?super aged? countries, those with more than 7% of their population over the age of 65, will increase from three to 13 by 2020, and 34 in 2030.

Currently, only Japan (26.4%) (EWJ), Italy (21.7%) (EWI), and Germany (EWG) are so burdened with that number of old age pensioners. France (EWQ) (18.7%), Switzerland (EWL) (18.2%), and the UK (EWU) (18.1%) are about to join the club.

The implication is that the global demographic dividend the world has enjoyed over the last 40 years is about to turn into a tax, a big one. The consequence will be lower long-term growth, possibly by 0.5%-1.0% less than we are seeing today.

This is what the bond market may already be telling us with its unimaginably subterranean rates for its long term bonds (Japan at -0.13%! Germany at 0.14%! The US at 1.75%!).

Traveling around Europe last summer, I was struck by the number of retirees I ran into. It certainly has taken the bloom off those topless beaches (I once saw one great grandmother with a walker on the beach in Barcelona).

For the list of new entrants to the super aged club, see the table below.

This is all a big deal for long-term investors.

Countries with inverted population pyramids have lots of seniors saving money, spending very little, and drawing hugely on social services.

For example, in China, the number of working age adults per senior plunges from 6 in 2020, to 4.2 in 2030, to only 2.6 by 2050!

Financial assets do very poorly in such a hostile environment. Your money doesn?t want to be anywhere near a country where diaper sales to seniors exceed those to newborns.

You want to bet your money on countries with positive demographic pyramids. They have lots of young people who are eager to work and to spend on growing families, drawing on social services little, if at all.

Fewer seniors to support keeps tax and savings rates low. This is all great for business, and therefore, risk assets.

Be careful not to rely solely on demographics when making your investment decisions. If you did that, you would have sold all your American stocks in 2006, had two great years, but then missed the tripling in markets that followed.

According to my friend, noted demographer Harry S. Dent, Jr., the US will not see a demographic tailwind until 2022.

When building a secure retirement home for yourself, you need to use all the tools in your toolbox, and not rely just on one.

A demographic headwind does not permanently doom a country to investment perdition.

The US is a prime example, where a large number of women joining the labor force, high levels of immigration, later retirement ages, and lower social service payouts all help mitigate a demographic drag.

A hyper accelerating rate of technological innovation also provides a huge cushion.

You Want to Invest in This Pyramid?

...Not This One

Death of the Mall

Diary, Newsletter, Research

We?ve all heard this story before.

Malls are dying. Commerce is moving online at breakneck pace. Investing in retail is a death wish.

No less a figure than Bill Gates, Senior told me that in a decade malls would only be inhabited by climbing walls and paintball courses, and that was a decade ago.

Except it didn?t quite work out that way. Some malls are playing out Mr. Gates? dire forecast. But others are booming. It turns out that there are malls, and then there are malls.

There is one big kicker here that no one is noticing except me. If my prediction that this is not a low interest rate decade, but a low interest rate century turns out to be correct, then mall REIT?s with their high yields are the ?BUY? of the century.

Let me expand a bit on my thesis.

Technology is moving forward at an exponential rate. As a result, product performances are improving dramatically, while costs are falling. While commodity and energy prices are rising, they are but a tiny fraction of the cost of production.

In other words, DEFLATION IS HERE TO STAY!

The nearest hint of real inflation won?t arrive until the 2020?s when Millennials become big spenders, driving up the cost of everything.

We also have the most dovish Federal Reserve in history. Until my former economics professor Janet Yellen sees ?the whites of inflation?s eyes? she?ll limit interest rate hikes to a quarter point a year, if that. That?s until we go into the next recession, when US rates will go negative.

So with that issue decided, let's go back to the REIT thing. Real Estate Investment Trust?s are a creation of the Internal Revenue Code, which gives preferential tax treatment for investment in malls and other income generating properties.

There are 1,100 malls in the United States. Some 464 of these are rated as B+ or better and are concentrated in the biggest spending parts of the country (San Francisco, Beverly Hills, Greenwich, CT, etc).

Trading and investing for a half century, I have noticed that most mangers are backward looking, betting that existing trends will continue forever. As a result, their returns are mediocre at best and terrible at worst.

Truly brilliant managers make big bets on what is going to happen next. They are constantly on the lookout for trend reversals, new technologies, and epochal structural changes to our rapidly evolving modern economy.

I am one of those kinds of managers.

These are not your father?s malls. It turns out the best quality malls are booming, while second and third tier ones are dying the slow painful death that Mr. Gates outlined.

It is all a reflection of the ongoing American concentration of wealth at the top. If you are selling to the top 1% of wealth owners in the country, business is great. If fact, if you cater to the top 20%, things are pretty damn fine.

You can see this in the top income producing tenants in the ?class A? malls. In 2000, they comprised J.C. Penney, Sears, and Victoria?s Secret. Now Apple, L Brands, and Foot Locker are sought after renters. Put an Apple store in a mall, and it is golden.

And what about that online thing?

After 20 years of online commerce, the business has become so competitive that profit margins have been beaten to death. You can bleed yourself white watching Google Adwords empty out your bank account. I know, because I?ve tried it.

Many online only businesses are now losing money, desperately searching for that perfect algorithm that will bail them out, going head to head against the geniuses at Amazon.

I open my email account every morning and find hundreds of solicitations for everything from discount deals on 7 For All Mankind jeans, to the new hot day trading newsletter, to the latest male enhancement drug (although why they think I need the latter is beyond me).

Needless to say, it is tough to get noticed in such an environment.

It turns out that the most successful consumer products these days have a very attractive tactile and physical element to them. Look no further than Apple products, which are sleek, smooth, and have an almost sexual attraction to them.

I know Steve Jobs drove his team relentlessly to achieve exactly this effect. No surprise then that Apple is the most successful company in history, and can pay astronomical rents for the most prime of prime retail spaces.

It turns out that ?Clicks to Bricks? is becoming a dominant business strategy. A combination of the two is presently generating the highest returns on investment in retail today.

People start out by finding a product online, and then going to the local mall to try it on, touch it , and feel it.

Research shows that two thirds of Millennials prefer buying their clothes and shoes at malls. Once there, the probability of a serendipitous purchase is far great than online, anywhere from 20% to 60% of the time.

This explains why pure online businesses by the hundreds are rushing to get a foothold in the highest end malls.

Immediate contact with a physical customer give retailers a big advantage, gaining them the market intelligence they need to stay ahead of the pack. In ?fast fashion? retailers like H&M and Uniqlo, which turn over their inventories every two weeks, this is a really big deal.

There?s more to the story. Malls are not just shopping centers, they have become entertainment destinations. With an ever increasing share of the population chained to their computers all day, the demand for a full out-of-the-house shopping, dining, and entertainment family experience is rising.

Notice how Merry Go Rounds have started popping up at the best properties. Imax Theaters are spreading like wildfire. And yes, they have climbing walls too. I have not seen any paintball courses yet, but the guns and accessories are for sale.

This is why all of the highest rated malls in the country are effectively full. If you want space there you have to wait in line. REIT managers pray for tenant bankruptcies so they can jack up rents on the next incoming client, or pivot their strategy towards a new retail niche.

Malls are also in the sweet spot in the alternative energy game. Lots of floor space means plenty of roof space. That means they can cash in on the 30% federal investment tax credit for solar roof installations. Some malls in sunny states are net power generators, effectively turning them into mini local power utilities.

Fortunately for we investors, we are spoiled for choice in the number of securities we can consider. Many have a return on investment of 9-11%, a portion of which is passed on to the end investor.

There are now 25 REIT?s in the S&P 500. The sector has become so important that the ratings firm is about to create a separate REIT subsector within the index.

According to NAREIT.com (click here for the link at https://www.reit.com/nareit ), these are some of the largest mall related investment vehicles in the country:

Simon Growth Property (SPG) is the largest REIT in the country, with 241 million square feet in the US and Asia. It is a fully integrated real estate company which operates from five retail real estate platforms: regional malls, Premium Outlet Centers, The Mills, community/lifestyle centers and international properties. It pays a 3.17% dividend.

Macerich Co. (MAC) is a California based company that is the third largest REIT operator in the country. It has been growing though acquisitions for the past decade. It pays a 3.53% dividend.

Taubman Centers, Inc. (TCO) runs a national network of malls in some of the priciest zip code in the country. Properties include th
e Beverly Center in Los Angeles, Stamford Town Center in Stamford, CT, and the Fair Oaks mall in Fairfax, VA. It was established by the late Alfred Taubman of Sotheby?s fame. It pays a 3.41% dividend.

Mind you, REIT?s are not exactly risk free investments. To get the high returns you take on more risk. We remember how disastrously the sector did when the credit crunch hit during the 2009 financial crisis. Many went under, while others escaped by the skin of their teeth.

There are a few things that can go wrong with malls. Local economies can die, as exemplified by Detroit. Populations age, shifting them out of a big spending age group.

These are all highly leveraged companies, so any prolonged rise in interest rates could be damaging. But as I pointed out before, there is little chance of that in the near future.

The bottom line here is that we are seeing anything but the death of the mall. It just depends on the mall.

All in all, if you are looking for income and yield, which everyone on the planet is currently pursuing, then picking up some REIT?s could be one of your best calls of the year.

See You At the Mall

The Second American Industrial Revolution

Diary, Newsletter, Research

Circulating among Europe's top global strategists this spring, visiting their corner offices, camping out in their vacation villas, or cruising on their yachts, I am increasingly hearing about a new investment theme that will lead markets for the next 20 years: The Second American Industrial Revolution.

It goes something like this.

You remember the first Industrial Revolution, don't you? I remember it like it was yesterday.

It started in 1775 when a Scottish instrument maker named James Watt invented the modern steam engine.? Originally employed for pumping water out of a deep Shropshire coalmine, within 32 years it was powering Robert Fulton's first commercially successful steamship, the Clermont, up the Hudson River.

The first Industrial Revolution enabled a massive increase in standards of living, kept inflation near zero for a century, and allowed the planet's population to soar from 1 billion to 7 billion. We are still reaping its immeasurable benefits.

The Second Industrial Revolution is centering on my own neighborhood of San Francisco. It seems like almost every garage in the city is now devoted to a start up.

The cars have been flushed out onto the streets, making urban parking here a total nightmare. These are turbo charging the rate of technological advancement.

Successes go public rapidly and rake in billions of dollars for the founders overnight.? Thirty-year-old billionaires are becoming commonplace.

However, unlike with past winners, these newly minted titans of industry don?t lock their wealth up in mega mansions, private jets, or the Treasury bond market.

They buy a Tesla Model S-1 (TSLA), and then reinvest the rest of their windfall in a dozen other startups, seeking to repeat a winning formula.

Many do it.

Thus, the amount of capital available for new ideas is growing by leaps and bounds. As a result, the economy will benefit from the creation of more new technology in the next ten years than it has seen in the past 200.

Computing power is doubling every year. That means your iPhone will have a billion times more computing power in a decade. 3-D printing is jumping from the hobby world into large-scale manufacturing. In fact, Elon Musk's Space X is already making rocket engine parts on such machines.

Drones came out of nowhere, and are now popping up everywhere.

And don?t get me started on virtual reality. Ever wanted to date Cybil Shepherd or Nicole Kidman? How about both, at the same time? The possibilities boggle the mind.

It is not just new things that are being invented. Fantastic new ways to analyze and store data, known as ?big data? are being created.

Unheard of new means of social organization are appearing at breakneck speed, leading to a sharing economy. Much of the new economy is not about invention, but organization.

The Uber taxi service has created $65 billion in market capitalization in only five years, and is poised to replace UPS, FedEx, and the US Postal Service with ?same hour? intracity deliveries.?Now they are offering ?Uber Eats? in my neighborhood, which will deliver you anything you want to eat, hot, in ten minutes!?

Airbnb is arranging accommodation for 1 million guests a month, including 120,000 in Brazil for last year?s World Cup. They even had 189 German guests staying with Brazilians. I bet those were interesting living rooms on the final day! (Germany won).

As for me, I am planning my own all Airbnb trip to Europe next summer. It should be interesting.

And you are going to spend a lot of Saturday nights at home alone if you haven?t heard of Match.com, eHarmony.com, or Badoo.com.

Biotechnology (IBB), an also-ran for the past half-century, is sprinting to make up for lost time. The field has grown from a dozen scientists in my day 40 years ago, to several hundred thousand today.

The payoff will be the cure of every major disease, like cancer, Parkinson?s, heart disease, AIDS, and diabetes, within ten years. Some of the harder cases, such as arthritis, may take a little longer. Soon, we will be able to manipulate our own DNA at will.

The upshot will be the creation of a massive global market for these cures, generating immense profits. American firms will dominate this area, as well.

Energy is the third leg of the innovation powerhouse. Into this basket you can throw in solar, wind, batteries, biodiesel, and even ?new? nuclear.? The new Tesla home battery will be a game changer. Visionary, Elon Musk, is ramping up to to make tens of millions of these things.

The message to big oil is that Elon sold 400,000 of his new Tesla 3?s in just two weeks, and that is for a car that won?t be delivered for two more years.

Use of existing carbon based fuel sources, such as oil and natural gas, will become vastly more efficient. Fracking is unleashing unlimited new domestic supplies at costs that are falling at an incredible rate.

Welcome to ?Saudi America.?

The government has ordered Detroit to boost vehicle mileages to an average 55 miles per gallon by 2025. The big firms have all told me they plan to beat that deadline, not litigate it, a complete reversal of philosophy.

Coal will be burned in impoverished emerging markets only, before it disappears completely. Energy costs will drop to a fraction of today?s levels, further boosting corporate profits.

If you thought the Internet was big, free energy will have a far greater impact on the global economy.

Coal will die, not because of some environmental panacea, but because it is too expensive to rip out of the ground and transport around the world when all of the costs are factored in.

Seven years ago, I used to get two pitches for venture capital investments a quarter, if any. Now, I am getting two a day. I can understand only half of them (those that deal with energy and biotech, and some tech, where I have a background).

My friends at Google Venture Capital are getting inundated with 20 a day each! How they keep all of these stories straight is beyond me. I guess that?s why they work for Google (GOOGL).

The rate of change for technology, our economy, and for the financial markets will accelerate to more than exponential.

It took 32 years to make the leap from steam engine powered pumps to ships, and was a result of a chance transatlantic trip by Robert Fulton to England, where he stumbled across a huffing and puffing steam engine.

Such a generational change is likely to occur in 32 minutes in today?s hyper connected world, and much shorter if you work on antivirus software (or write the viruses themselves!).

The demographic outlook is about to dramatically improve, flipping from a headwind to a tailwind in 2022. That?s when the population starts producing more big spending Gen Xer?s and fewer oversaving and underproducing baby boomers. This alone should add at least 1-2% a year to GDP growth.

China is disappearing as a drag on the US economy. During the nineties and the naughts, they probably sucked 25 million jobs out of the US.

With an ?onshoring? trend now in full swing, the jobs ledger has swung into America?s favor. This is one reason that unemployment is steadily falling. Joblessness is becoming China?s problem, not ours.

The consequences for the financial markets will be nothing less than mind boggling. The short answer is higher for everything. Skyrocketing earnings take equity markets to the moon.? Multiples blast off through the top end of historic ranges. The US returns to a steady 4% a year GDP growth in the 2020's.

What am I bid for the Dow Average (INDU), (SPY), (QQQ) in 2030? Did I hear 300,000, a 17-fold pop from today?s level? Or more?

Don?t think I have been smoking the local agricultural products in arriving at these numbers. That is exactly the gain that I saw during 1982 to 2000, when the stock average also appreciated 17 fold, from 600 to 10,000.

Th
ey?re playing the same movie all over again. Except this time, it?s on triple fast forward.

There will also be commodities (DBA) and real estate booms. Even gold (GLD) gets bid up by emerging central banks bent on increasing their holdings to western levels.

I tell my kids to save their money, not to fritter it away day trading now, because anything they buy in 2020 will increase in value tenfold by 2030. They?ll all look like geniuses, like I did during the eighties.

After that, I will be 78, and it will be up to them to figure out what is going to happen next.

What are my strategists friends doing about this forecast? They are throwing money into US stocks with both bands, especially in technology (XLK), biotech (IBB), and energy (XLE).

That?s why the market bounced back so hard from the 10% correct in Q1.

This could go on for decades.

Just thought you?d like to know.

It?s Amazing What You Pick Up on These Things!

The Solar Missing Link is Here!

Diary, Newsletter, Research

I have seen the future, and it works.

In my never-ending search for my readers for ?ten-baggers,? or investments that will rise in value tenfold over the foreseeable future, I keep circling back to the solar industry.

Tesla founder Elon Musk never does anything small.

Last year he announced the first ever, economical home battery electrical storage system, which he calls the Powerwall.

The device will enable your roof-mounted solar panels to supply power to your home 24 hours a day, not just when the sun is shining.

It is an innovation on the scale of Thomas Edison?s invention of the light bulb in 1879, or the launch of the Internet in 1969, in terms of the long-term impact on our economy.

Shifting the source of a third of our power supply is a big deal.

You may recall that the early investors in these earlier transitions made fortunes, General Electric (GE) in Edison?s case, and Netscape that spun out of the early Internet days.

Today, General Electric is the only company that has remained in the Dow Average for the past 100 years. So, investors take note.

During the day, the panels will charge up the battery mounted on your garage wall, which is about the size of a big screen TV. At night, you can then run your home off battery power.

Alternatively, you can engage in what is known in the industry as ?load shifting.? Charge your battery at night when you can buy electricity for as little as 4 cents a kilowatt hour, and sell it back to your local utility during a power demand surge the next afternoon for as much as 50 cents a kWh.

Buy low, sell high, it works for me!

And what is the cost of the miracle technology?

Only $3,000 for a 7 kWh battery or $3,500 for the 10 kWh version for energy hogs, like me, who has to charge a Tesla Model S-1 every day, soon to be two.

You can also include as immediate customers for this new product sports addicts, who watch multiple games on ESPN 24/7, paranoids who keep the lights on all night and indoor pot farmers, whose energy needs are said to be prodigious. Of course, the military will be another big consumer.

I ran some numbers on the possibilities for the Powerwall and they are mind-boggling.

The average home in the US has 2,500 square feet, which uses 7,000 kWh per year, or 19 kWh per day. The current cost for this power will be around $2,000 a year, depending where you live, more in California, and less in Texas, Oklahoma, and North Carolina.

A solar/ battery combination for such a home should cost about $14,000, including installation, the panels, the inverter, and all the gizmos. Net out the alternative energy investment tax credit of 30% (IRS Form 5695 http://www.irs.gov/pub/irs-pdf/f5695.pdf ), and your cost falls to only $10,500.

That means your power savings will cover the cost of your solar investment in a mere 5 years, compared to the present 7 or 8 years. After that, your home will have free electricity for another 20 years, as the life of these systems is usually 25 years.

Make the investment, and the value of your home rises, by $2 for every dollar spent, or so local real estate agents tell me.

You also will be guaranteed against any future power rate increases, an absolute certainty. America?s power grid is currently in a woeful state of disrepair, with much of the hardware 50 years old, or more.

The demands on the power industry are also about to take a quantum leap forward, as millions of consumers buy electric cars. Tesla plans to ramp up production of vehicles from 40,000 units last year to 500,000 by 2020, when the $35,000, 300 mile range Tesla 3 achieves mass production.

Some of my over-the-horizon-thinking hedge fund friends believe that figure could hit 15 million by 2030.

Add to that new, competing electric models produced by every other major carmaker, and that?s a lot of juice that will be needed. As a result, electric power utilities will probably have to endure more structural changes to their business model than any other industry.

Trillions of dollars are needed to modernize it, and all of that is going to come out of your pocket, but only if you remain an existing power customer.

Indeed, I have already been notified by my own utility, Pacific Gas and Electric Company (PGE), that I am due for two consecutive 7% price increases over the next two years.

The battery will also provide a backup power supply for home for when the grid crashes. Twice in the last two decades I have lost a freezer full of venison, pheasants, quail, trout, and salmon that I hunted and fished when storms knocked out power, for a week each time.

The Powerwall prices are so low that they beat the cost of a conventional backup diesel or gasoline generator.

They will also wipe out most of the existing back up battery industry, as Tesla?s advantages gained through massive economies of scale are enormous. Musk is talking about producing billions of batteries.

The Powerwall is a game changer for the solar industry, which has long been hobbled by the limitation that it could only supply power for 12 hours a day, and less in the winter, depending on your latitude.

It certainly gives a shot in the arm for the solar industry, which I have been banging the table about for years. My favorite is Solar City (SCTY). Other names to look at are First Solar (FSLR) and SunPower (SPWR), which manufactures my own solar panels.

It also casts Musk?s own Tesla (TSLA) in a new light. It is no longer just a car company, but a comprehensive energy solution. Musk has already made one of the largest capital investments in history to build a $5 billion ?Giga? factory near Reno, Nevada.

Much of that plant?s production has already been pre sold, and I understand that the decision has already been made to build a second one. Wow!

Consumers are able to purchase the new batteries from the Texas based retailer, TreeHouse, (their link https://treehouse.co/treehouse-is-first-retailer-to-sell-tesla-home-battery/ ).

Musk explains that the world consumes 20 trillion kWh per year of electricity.

In the US, 1/3 of our fossil fuel consumption goes to transportation, and another 1/3 generates electric power, which is the equivalent to consuming 225 billion gallons of gasoline per year (or 8 billion barrels of oil per year, or 22 million barrels a day).

His goal is nothing less than to largely substitute those fossil fuel uses with solar energy, cutting our fossil fuel consumption by 2/3.

I guess there is no point in setting the bar low.

Meet the Next Light Bulb

What To Do About Apple

Diary, Newsletter, Research

It is the world?s largest company.

It is the planet?s most widely owned stock.

Of the 200 million Americans who possess financial assets, probably all of them own Apple (AAPL), either directly through a trading account, or indirectly though an ETF (it is a massive 11.67% of the PowerShares QQQ), public or private pension fund.

So to say that traders are on pins and needles ahead of the upcoming quarterly earnings report would be an understatement.

A year ago, Apple issued one of the most perfect reports in the history of capitalism.

It blew away even the most optimistic forecasts, announcing earnings per share of $2.33, versus a consensus expectation of $2.16, and $1.75 last quarter.

The firm earned $13.6 billion in profits on $58 billion in gross profits, the largest quarterly profit in world history.

The company sold a staggering 61.2 million iPhones during the three-month period, 4 million more than expected. Insignificant iPad sales dropped from 13.9 to 12.6 million units. MacBooks were in line at 4.6 million units.

No mention was made whatsoever of problems with a strong dollar.? The company now sits on an unbelievable $194 billion in cash, the equivalent of the GDP of a medium sized country.

Most importantly, Apple expanded its share buy back program to $200 billion. The big question now is, will Apple buy another company, or a whole country?

Wow!

Since then the stock has been grinding sideways in the most tedious manner imaginable. It was a classic ?Buy the rumor, sell the news? set up.

Which leads many shareholders to ask if, now that the stock is owned by every taxi driver, elevator operator , and shoe shine boy in the country (now I?m showing my age!), are we headed for another 45% selloff, much like the last time the stock peaked out in 2012?

Certainly, the grounds for concern are out there.

There are now no new blockbuster products coming out until we see the iPhone 7 in September 2016.

There are supply chain worries, as the global manufacturing network is now absolutely mammoth.

Some analysts are nervous about quality control, especially regarding new products like the Apple watch, which should sell an eye popping 30 million units this year.

However, I think this time it?s different.

While you weren?t looking, Apple has turned into a China play. No, they aren?t suddenly eating dim sum with chopsticks at corporate headquarters in Cupertino.

The Middle Kingdom, in short order, has become the firm?s largest grower of its earnings. This is a good thing. Last year saw an 80% growth of sales there. China is expected to become the largest market for Apple products this year.

What?s more, the ballistic growth there is expected to continue. Walk down the street in Shanghai these days, and you are amazed by how many people are speaking or texting into their iPhones, real and fake ones alike.

In fact, they have become the primary means through which people access the Internet there.

No doubt, this is due to Apple?s special relationship there with China Mobile (CHL), which now offers iPhone owners a great deal for their cell phone service. Did I mention that (CHL) has a staggering 750 million customers?

The iWatch is now viewed as the gateway for the sales of as many as 1.2 million future third party developed apps, the number iTunes offers now.

Apple Pay looks to replace Visa and Master Card at some point in the future. Apple TV is still lurking out there in the background.

We?ll learn more about all of this at the next developers conference in San Francisco in June.

All of this leads me to believe that there is far more fundamental support in terms of new products and business lines for the company than we saw during the last cycle.

There is also more distance in the rear view mirror since the passing of Steve Jobs. Successor Tim Cook has since proved himself as a world-class leader.

It turned out the timing for the company to transition from a founder-tyrant to a cutting edge administrator-manager was perfect. You don?t need to hold your breath anymore.

At least the stock market thinks so.

Therefore, I expect to see a $1 trillion market capitalization for Apple sometime in 2018, well up from today?s $602 billion. I think that means you need to use the current dip to load up on the stock.

Cyber Security is Only Just Getting Started

Diary, Newsletter, Research

It looks like the cyber security sector is about to take off like a rocket once again. There could be another 25%-50% in it this year.

The near destruction of Sony (SNE) by North Korean hackers last November has certainly put the fear of God into corporate America. Apparently, they have no sense of humor whatsoever north of the 38th parallel.

As a result, there is a generational upgrade in cyber security underway, with many potential targets boosting spending by multiples.

It's not often that I get a stock recommendation from an army general. However that's exactly what happened the other day when I was speaking to a three star about the long-term implications of the Iran peace deal.

He argued persuasively that the world will probably never again see large-scale armies fielded by major industrial nations. Wars of the future will be fought online, as they have been, silently and invisibly, over the past 15 years.

All of those trillions of dollars spent on big ticket, heavy metal weapons systems are pure pork designed by politicians to buy voters in marginal swing states.

The money would be far better spent where it is most needed, on the cyber warfare front. Needless to say, my friend shall remain anonymous.

The problem is that when wars become cheaper, you fight more of them, as is the case with online combat.

A little known fact is that during the Bush administration, the Chinese military downloaded the entire contents of the Pentagon's mainframe computers at least seven times.

This was a neat trick because these computers were in stand alone, siloed, electromagnetically shielded facilities not connected to the Internet in any way.

In the process, they obtained the designs of all of out most advanced weapons systems, including our best nukes. And what have they done with this top-secret information?

Absolutely nothing.

Like many in senior levels of the US military, the Chinese have concluded that these weapons are a useless waste of valuable resources. Far better value for money are more hackers, coders and servers, which the Chinese have pursued with a vengeance.

You have seen this in the substantial tightening up of the Chinese Internet through the deployment of the Great Firewall, which blocks local access to most foreign websites.

Try sending an email to someone in the middle Kingdom with a gmail address. It is almost impossible. This is why Google (GOOG) closed their offices there years ago.

My awareness of this comes from several Chinese readers complaining to me that they are unable to open my Trade Alerts or access their foreign online brokerage accounts.

As a member of the Joint Chiefs of Staff recently told me, "The greatest threat to national defense is wasting money on national defense."

If wars are now being fought online, then investing in national defense has actually come to mean investing in cyber security.

And although my brass-hatted friend didn't mention the company by name, the implication was that I need to go out and buy Palo Alto Networks (PANW) right now.

Palo Alto Networks, Inc. is an American network security company based in Santa Clara, California just across the water from my Bay Area office. The company's core products are advanced firewalls designed to provide network security, visibility and granular control of network activity based on application, user, and content identification.

Palo Alto Networks competes in the unified threat management and network security industry against Cisco (CSCO), FireEye (FEYE), Fortinet (FTNT), Check Point (CHKP), Juniper Networks (JNPR), and Cyberoam, among others.

The really interesting thing about this industry is that there are no real losers. That's because companies are taking a layered approach to cyber security, parceling out contracts to many of the leading firms at once, looking to hedge their bets.

To say that top management has no idea what these products really do would be a huge understatement. Therefore, they buy all of them.

This makes a basket approach to the industry more feasible than usual. You can do this through buying the $435 million capitalized PureFunds ISE Cyber Security ETF (HACK), which boasts Cyberark Software (CYBR), Infoblox (BLOX) and FireEye (FEYE) as its three largest positions. (HACK) has been a hedge fund favorite since the Sony attack.

For more information about (HACK), please click here: http://www.pureetfs.com/etfs/hack.html.

And don't forget to change your password.