Having been in this market for yonks, ages, and even a coon?s age, I have seen trading strategies come and go.
First, there was the nifty fifty during the 1960?s. Junk bonds had their day in the sun. Then portfolio insurance was all the rage.
Oops!
While the dollar was weak, international diversification was the flavor of the day. After foreign stocks turned bitter, the IPO mania and the Dotcom bubble of the nineties followed.
Macro trading dominated the new Millennium until the high frequency traders took over.
What is the cutting edge management strategy today?
According to my friend, Anthony Scaramucci, of Skybridge Capital, activist shareholder trading now has the unfair advantage.
Anthony, known as the ?Mooch? to his friends, is so convinced of the merit of this bold, in-your-face approach that he has devoted nearly 40% of his assets to this aggressive posture.
That is no accident.
Have you ever heard the term ?unintended consequences?? Scaramucci argues that The Financial Stability Act of 2010, otherwise known as Dodd-Frank produced that effect with a turbocharger.
The Act brought in a raft of new shareholder rights intended to help Mom & Pop. But activist investors have, so far, been the prime beneficiaries of the reform, using the new regulations to shake down companies for quick profits.
Historic low interest rates are allowing them to leverage up at minimal cost, increasing their firepower.
These include known sharks (once spurned as ?green mailers?) like my former neighbor, Carl Icahn, and his younger, more agile competitor, Bill Ackman.
They can simply buy a small number of shares in a target company and demand a management change, share buy backs, the spinning off of assets, several seats on the board, and even making allegations of criminal activity, which are often unfounded.
A message from Icahn on the voicemail is not something management is eager to hear.
He even shook down Apple (AAPL) last year, with great success, harvesting a near double on the trade.
This is why names like Herbalife (HLF), Netflix (NFLX), and JC Penny?s (JCP) are constantly bombarding the airwaves.
The net result of this is that savvy activist shareholders have effectively replaced the traditional ?buy and hold? strategy as a way to add alpha, or outperformance.
This has enabled activist oriented hedge funds to beat the pants off of traditional macro hedge funds because many historical cross asset relationships they follow have broken down.
Tell me about it!
Suddenly, the world no longer makes sense to them and has apparently gone mad, at the investors? expense. Long/short equity managers, which comprise 43% of the funds out there, are also underperforming for the sixth consecutive year.
The activist managers themselves justify their often harsh actions by arguing that individual shareholders can ride to riches on their coattails. Shaking up management can result in better-run companies, even if it is at the point of a gun.
Activism accelerates evolution, breaks up clubby boards of insiders, and enhances the bottom line. Corporations can be forced to retool and restructure.
How does the individual investor get involved in the new wave of activist investors? The short answer is that they don?t. There are few, if any, such exchange traded funds (ETFs) in existence.
Doing the quantitative screens to generate short lists of potential activist targets, and then listening to the jungle telegraph regarding who is coming into play, are well beyond the resources of your average Joe.
You can try to give your money to the best activist managers. But they are either closed to new investors, or have very high minimum initial investments, often in the $1-$10 million range.
If you are lucky enough to get your dosh in, you will find the talent very expensive. Activist funds are one of the last redoubts of the old 2%/20% management fee and performance bonus structure. And ?hockey stick? bonus schedules are not unheard of.
When I ran my old hedge fund, we made 40% a year like clockwork. I took the first 10%, the limited partners the remaining 30% and they were thrilled to get it.
And you wonder why the small guys feel the market is rigged.
The activist trend won?t last forever. Interest rates will inevitably rise, making the strategy expensive to finance. If the stock market keeps rising, as I expect, then cheap targets will become as scarce as hen?s teeth.
Eventually, gobs of money will pour into the strategy, compressing returns as the Johnny-come-latelys pile in. In the end, trading around activist shareholders will get tossed into the dustbin of history, along with all the other investment fads.
Checking in With the ?Mooch?
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/John-Thomas-with-Anthony-Scaramucci.jpg294382Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-07-19 01:07:552016-07-19 01:07:55Why Activist Investors Have the Upper Hand
One of the great anomalies of the American credit markets has always been the existence of the 30-year fixed rate home mortgage.
Long the favorite of homeowners, it has financed the majority of US residential property purchases since a Depression era housing stimulus program created them in 1938.
That is until now.
A perfect storm of institutional, political and economic factors is conspiring to bring an end to this type of loan.
Is it truly going the way of the dodo bird?
Look at the global credit landscape, and the 30 year fixed rate loan exists nowhere else.
Banks in all other countries only offer floating rate loans, where interest rates are adjusted monthly, quarterly, or annually to reflect the ebb and flow of the bond market. Thus, the homeowner assumes all of the interest rate risk.
So if you borrow money to buy a house and interest rates remain unchanged or fall, then so does your monthly payment. If rates rise, then so does your monthly nut. If they rise a lot, then you are toast.
The 30-year fixed only exists thanks to a massive government subsidy. That comes in the form of two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.
They buy home mortgages from banks, securitize them, and sell them on to end investors with a government guarantee. Thus the government took all the credit risk off of the banks and on to their own books. At the peak, the pair owned or guaranteed more than $5 trillion in debt.
And therein lies the problem.
When the 2008-2009 financial crisis came storming in, it didn?t take long for many of GSE?s home loans to default.
Thanks to the credit excesses of the 2000s, liars loans, and excess leverage, it turns out that many of the loans sold to them as prime credits were in fact junk. The default rates of some mortgage-backed securities exceeded 50%.
It didn?t take long for the GSEs' capital to get completely wiped out. They effectively declared bankruptcy (the polite term used was conservatorship), and were only kept alive with a $360 billion government bailout.
Private shareholders in the two were wiped out, and the stocks delisted from the NYSE.
At present, the two GSE?s are stuck in a holding pattern, waiting for congress to decide their fates. Fat chance of congress deciding on anything in its current gridlocked state.
At the very least, they require $150 billion in new capital to operate independently once again. However, congress is in no mood to spend money either.
Many analysts expect that it is just a matter of time before the two GSEs disappear. The daggers are certainly out in Washington, where many see them as just another subsidy or entitlement program, which they are.
Wipe out the GSEs, and you kill off the 30 year fixed rate mortgage, and by implication, the residential housing market as well.
This is happening two years after the Federal Reserve is ending its quantitative easing program, which, at it's highs, bought 50% of all the mortgage backed securities issued, or about $40 billion a month.
A privatized 30-year market would probably boost rates by 200 basis points, up from the present 3.40% to 5.40%, or about what your average subprime borrower might have to cough up.
That means monthly mortgage payments that are 50% higher than now. That is unless you have a near perfect FICO score of 750 or higher, and are willing to move all of your current financial transactions to the new lender.
However, the banks are likely to step in with other products like a 5/1 year adjustable rate mortgage, or just outright floaters to fill the gap.
As long as the world remains in a deflationary funk, the prospects of a serious rate spike are extraordinarily? low. The end result will be more risk for consumers, and less for the banks?.and the government.
In any case, with some 40% of today?s buyers paying all cash, the debt markets are less relevant than they used to be.
The 30-year is a bit of a dinosaur. The average holding period for a home is four years, and I never understood why borrowers paid the extra premium for the 26 years worth of debt they didn?t need. I guess it's because that?s what everyone else does.
It is most efficient to match your loan maturity with the time you expect to stay in your house. Five year loans should cover most of us, and certainly ten years. Shorter-term loans carry interest rates 100-150 basis points cheaper than the 30-year fixed.
This is all another facet of an economy that is evolving at an accelerating rate. It is finding the true value of everything and re-pricing them accordingly at hyper speed.
Think Amazon and books, iTunes and music, Netflix and movies and Ebay and clothes. Suddenly things have gone from expensive to cheap, while others make the trip from artificially cheap to expensive.
The 30-year fixed rate loan is about to make that second trip.
Fannie Mae is Not Long for This World
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/Home-Mansion.jpg312366Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-07-11 01:07:402016-07-11 01:07:40Is the 30-Year Mortgage an Endangered Species?
What we are seeing now is nothing less than the complete remaking of the American energy supply.
It is a metamorphosis, just as, if not more, dramatic than the initial electrification of the United States launched by Thomas Edison in 1876.
Think of it as a disruptive technology with a turbocharger.
Eventually, the cost of energy will drop to near zero in today?s terms, possibly as soon as 2035. The consequences for your trading and investment portfolio will be tectonic.
This is what people don?t get about solar.
Traditional forms of energy production and consumption, such as for oil, coal, natural gas, and hydroelectric, are subject to only linear improvements. Solar ones benefit from exponential growth.
There is, in effect, a solar Moore?s Law that sees efficiencies per dollar spent doubling every four years, such as we have already seen with the faster growth of microprocessor efficiencies since the 1960?s. Exponential growth of efficiencies will bring exponential growth of profits.
I am old enough to have lived through several solar booms in the past, only to see them crash and burn.
In 1979, President Jimmy Carter installed panels on the White House roof to provide leadership during the Iran oil crisis, only to see them torn down by President Ronald Reagan three years later.
Solar is now growing far faster than any other power source in the US, some 50% a year for the past six years.
Annual installations of photovoltaic panels have soared from a token 0.3 gigawatts in 2000 to an impressive 7.286 gigawatts in 2015, more than enough to fuel 8.5 million American homes.
California alone now has 500,000 homes running on solar, about 4% of the total. Installation trucks from a myriad of different local companies are seen everywhere.
This is all happening because of the simultaneous maturing and cross-pollination of technology, regulation, financing, and venture capital.
A key development was Chinese entry into mass production of solar panels, which led to a near immediate 80% collapse in prices. They now control 70% of the global market.
But this also led to the bankruptcy of a large number of US producers, including the ill-fated Solyndra, which I drive by every time I visit Tesla.
Chinese exports of panels to the US are now subject to anti dumping duties. This was all a windfall for the installation business.
Also helping has been the 90% collapse in the price of polysilicon, a key manufacturing component. Silicone (Si) is, in fact, one of the most common elements on the planet.
Still, the soft costs of sales, design, permitting, and labor, account for two thirds of a new installation today. By the way, solar has also proven a prolific new job creator. I can assure you, the cost of labor is never going to zero.
Some 15 years ago, I tried to install solar on my home and sell peak power to the grid. PG&E told me this was ?illegal? because I would crash the grid, something I knew was patently false.
This time around, my city permits sailed through effortlessly, and I received a polite email from PG&E instructing me how to read my new ?net metering bill?. I wish renewing my driver?s license was so easy (that damn vision test).
For the first time in history, solar power is now cheaper than grid power on a non-subsidized basis. Costs are set to still fall dramatically from here. Fossil fuels are about to become, well, fossils.
The Paris based International Energy Agency, no slouch when it comes to analyzing power data, predicts that solar will account for 27% of the global power supply by 2050, and will become the biggest single source.
But futurologist friends of mine, like Tesla?s (TSLA) Elon Musk, Google?s head of engineering, Ray Kurzweil, and cosmologist Dr. Stephen Hawking, believe there is no reason why it shouldn?t be at 100% by 2030-35. To quote Kurzweil, ?we are only six more doublings away.?
Google (GOOG), by the way, is already one of the world?s largest generators and distributors of solar power, while Musk is the preeminent installer through his participation in Solar City (SCTY).
Governments have been pouring fuel on the solar fire. Germany took an early lead, installing a massive 35 gigawatts over the past decade. It has since decided to shutter its entire nuclear industry, and offset its production with alternatives. But many of its subsidy programs were deep sixed by the crash.
President Obama made a 30% investment tax credit a central plank of his 2009 supplementary budget, which led to the current American solar renaissance.
That incentive expires in 2021, after getting a five year extension in a rare bipartisan deal in congress.
President Obama also upped the ante by using the Environmental Protection Agency to force power utilities to cut carbon emissions by 32% from 2005 levels. That involves setting a target of 28% alternative energy power generation by 2030.
The whole idea of using natural gas as a low carbon stepping stone has been abandoned.
Hillary Clinton has recently weighed in with her own plans to shift the country from a carbon to a solar energy based economy, if elected president.
She wants nothing less than to eliminate all oil and gas subsidies worth $100?s of billions, and shift the money to alternatives.
That is a radical move. Her goal is to increase the solar share of American power generation to 33% by 2027.
Individual states have weighed in with their own measures. California has mandated that its residents obtain 30% of their power from alternatives by 2020.
More than two dozen other states have followed with similar measures, including several red ones. Solar is starting to transcend the political spectrum; the numbers are so compelling.
This isn?t just a US phenomenon, but a global one. Saudi Arabia has two of the world?s largest solar plants on the drawing board, to produce some 2 megawatts.
After all, why burn $5 oil when you can sell it to foreigners (mostly the Chinese) at an extravagant $50 a barrel. They are also major investors in the San Francisco alternative energy scene.
China is building far and away the biggest solar infrastructure, and wants to build 70 gigawatts over the next two years.
Japan has a 20% solar target, thanks to the Fukushima nuclear disaster. India plans to provide cheap electricity via solar to 100,000 villages for the first time.
Improving solar cell efficiencies promises to take us further and faster into this brave new world.
My own SunPower (SPWR) X-335 panels, with their patented Maxeon solar cells, convert 20.3% of the sunlight they receive into electricity, the highest in the industry. Cheap imported Chinese panels offer efficiencies as low as 16% and don't last nearly as long.
University labs have perfected cells with 45% efficiencies using advanced silicon compounds. I happen to know that the military has a 65% efficient cell. All that remains are the economies of mass production to bring them to the public market.
This is crucial for the solarization of the global economy. Every 1% improvement in efficiencies cuts that total cost of a new installed system by 5%.
With the trends already in place, it is safe to assume that solar energy costs will fall by at least 10% a year for the foreseeable future. First Solar (FSLR), which specializes in large scale, thin film, industrial facilities, expects solar costs to plunge from 63 cents per kilowatt in 2014 to only 40 cents by 2017.
Storage is another key part of the equation, as panels alone can only produce electricity during daylight. The cost of home storage batteries, which are charged by day and can run a home at night, have dropped by 70% over the
past five years.
They could drop another 70%, once Solar City completes its Nevada Gigafactory in 2017. That will double the planet?s lithium ion battery capacity in one shot. A second plant is planned.
For a more detailed explanation of that technology and the investment opportunities therein, please click here for Solar Energy?s Missing Link.
What are the investment implications of all this? Clearly all of the companies mentioned in this piece are about to see their market size increase 30 fold.
But, what about everyone else?
The elimination of energy as a cost has enormous consequences for all companies. You can start with the energy intensive ones in transportation, steel, and aluminum, and work your way down the list.
The profitability and efficiency of the entire economy will take a great leap forward, much like we saw with the mass industrialization that was first made possible by electricity during the 1920?s. Share prices of all kinds will go ballistic.
Dow 200,000 anyone?
Since energy costs will eventually fall effectively to zero, that wipes out the present business model of the entire electric power industry. It will be the same as trying to sell something that is free, like air.
That will force them to morph from energy producers to power distributors. Watch this space for a future piece on this issue.
So when readers ask me for the names of shares of companies that have the potential to rise tenfold in ten years, this is one industry I always steer them towards.
To save yourself months of research on how to install your own solar system, please click here for How to Buy a Solar System.
Joining the Brave, New World
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But I think the choppy, volatile, trendless, trading conditions we are all suffering right now will continue for a few more weeks.
The risk/reward ratio for initiating new positions here is terrible. If you are long and right, you might eke out another two or three points on the S&P 500 (SPY) on the upside.
If you are long and wrong, you could lose 20 points in a heartbeat. Not for me, not for me, not even with your money.
Man! I wish I were still back in the Sahara Desert. There, I only had to worry about scorpions, poisonous snakes, heat stroke, kidnapping by ISIS, and raiding Berber tribesmen.
This is why you?re hearing a steady drumbeat from long time pros, like George Soros and Carl Icahn, turning negative on stocks and buying gold.
This is why I am going into the June 15 Federal Reserve Open Market Committee meeting with 100% cash.
In fact, the Fed meeting could signal the top of the entire recent move in stocks, even if they don?t raise interest rates, which my money is on.
The Dow is up 3,000 points in four months, taking company price earnings multiples close to a 20X multiple, a generational high. Breadth is terrible and volume is falling.
The calendar has flipped from friendly to hostile, as we enter the half year period which sees the greatest amount of stock selling (at least it has for the past 60 years).
It all screams ?Stay away!? to me.
Adding to the multiple weirdnesses of this year is the fact that presidential candidate Donald Trump scared many plungers out of the market at the February lows, predicting an imminent crash of epic proportions. Was that before he offered to give the residents of Berlin and Hiroshima nuclear weapons, or after?
I know it was definitely before he launched the withering personal attacks on the federal judge in his current fraud case.
That left everyone underweight in a rising market, which is why the current move has gotten so extended.
From here, I see stocks selling off 5-10% over the summer. Use the swoon to buy stocks with both hands.
I think there will be a huge autumn rally that will take us to new all time highs, as the presidential election fades into the history books.
It really makes no difference who wins. The mere fact that ?the election is gone will be a major market positive. Once again, it will be safe to turn our TV sets back on.
And if Hillary wins, which she almost certainly will, that is another big plus. Remember, her husband Bill presided over a 400% rise in stocks. History could repeat itself.
Sectors? You want to know about sectors? Jeeze, you?re a tough crowd to please.
I think we can go back to our old reliables of technology (QQQ), health care (GILD), consumer discretionaries (DIS), cyber security (PANW), and biotech (IBB).
This coming cycle will see some new additions. They include interest sensitives, like banks (GS), regional banks (KBE), and? homebuilders (LEN).
The interest rate rise we don?t get next week will almost certainly occur in December, and the interest sensitive?s are already starting to reflect that.
Energy stocks (XOM), (OXY), (COP) have run too far too fast, and are already reflecting an oil recovery to $70 a barrel.
Solar (FSLR), (SPWR) will be another winning sector if oil doesn?t go to zero again. Remember, the federal solar subsidy was expended for five more years last December.
As for Apple, expect the slumber to continue until the next new product cycle for the iPhone 7 launches in September. In between cycles is never a great time to buy Apple.
For those who have been prudently sitting on their hands all year waiting for a chance to put more long term, non-trading money to work, that time is coming. Your entry point will open up over the summer.
Let me tell you that I have an unfair advantage in making market calls like this that are bold, confident, and possibly bordering on hubris.
I have the good fortune to live in the San Francisco Bay area. It is like living 10-20 years in the future.
The GDP here is definitely not growing at a feeble 2% annual rate, as it may be for much of the rest of the country (like North Dakota, Oklahoma, and Texas).
It is really growing at a 5% rate, and possibly much more.
The technology boom in the City by the Bay is reaching a 1990?s fever pitch. You can?t get restaurant reservations or lease office space. Companies have launched serial poaching of staff with only the most limited experience at eye-popping salaries.
Contractors everywhere have turned into prima donnas.
Housing is a joke. A friend of mine managed to score a tiny, rent controlled pre-war studio apartment for $2,000 a month after winning a lottery against 50 other entrants. He had to pay a $100 ?application fee? just to enter the lottery.
Oh, and since this is one of the few dog friendly buildings in the city, the whole place smells like crap and dog hair, as every resident owns a pet. Open the door, and you get a slap in the face.
Yes, I know that the United States is not San Francisco.
However, the tools and services that are created here, at a breakneck pace, can be used by the rest of the world to dramatically improve productivity and profitability.
That boosts growth and share valuations everywhere.
By the way, if any of you has a twenty something kid looking for a job and a purpose in life, send them to San Francisco immediately. With any luck, they will be able to gain a foothold and pick up some coding skills before the next crash occurs.
As for me, I am going to try and maintain discipline and not chase every little gyration of the market.
You can?t take advantage of the coming best buying opportunity in a year if you blew all your money trying to catch the small fry.
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
https://www.madhedgefundtrader.com/wp-content/uploads/2015/08/Emperor-No-Clothes-e1439492614564.jpg277400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-06-06 01:06:322016-06-06 01:06:32Why the ?Underground? Economy is Growing
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 increasefor 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
https://www.madhedgefundtrader.com/wp-content/uploads/2015/07/Solar-Panel-Installation-2-e1437414885857.jpg346400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-05-25 01:06:182016-05-25 01:06:18How to Buy a Solar System
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.
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.
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.
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
https://www.madhedgefundtrader.com/wp-content/uploads/2014/04/Wile-E.-Coyote-TNT.jpg365496Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-05-23 01:06:362016-05-23 01:06:36Short Selling School 101
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?
https://www.madhedgefundtrader.com/wp-content/uploads/2014/04/Head-Shoulders-Shampoo.jpg363189Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-05-18 01:08:012016-05-18 01:08:01Watch Out for the Head and Shoulders
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
https://www.madhedgefundtrader.com/wp-content/uploads/2015/06/Lady-Raspberries-e1434408537142.jpg291400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-05-11 01:06:022016-05-11 01:06:02The Cost of an Aging World
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
https://www.madhedgefundtrader.com/wp-content/uploads/2016/04/Mall-e1461879279977.jpg303400DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2016-04-29 01:06:372016-04-29 01:06:37Death of the Mall
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3X Leveraged Bear ETFs
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