Research Archives

The Game Changer for Solar

With great fanfare, congress passed a blockbuster $1.8 trillion spending bill in December. President Obama hastily signed the bill into law the next day.

Barley noticed was a measure included in the bill, which extends the 30% investment tax credit for alternative energy investments by five more years, until the end of 2021.

Barely, that is, unless you owned solar stocks.

Since the intention to include this pet democratic program started leaking out in November, shares of the entire industry doubled in value.

Solar City (SCTY) rocketed by 136%. First Solar (FSLR) soared by 81%. Even the normally quiescent Guggenheim Solar ETF (TAN) gained an impressive 28%.

Since then, these shares have given up a big chunk of their gains, thanks to the ongoing stock market correction. Better look hard at this group. They could become one of the top performers this year.

In exchange for the solar extension, the president agreed to permit oil exports for the first time in 40 years. The fact that the country has run out of storage and already has 50 filled takers sitting offshore in the Gulf of Mexico makes this an easy move.

House Minority leader, Nancy Pelosi, my local congressperson, told me the republicans were willing to ?Give away the store? to get the export measure through.

It seems that the Koch Brothers, the republican party?s largest donors and funders of global warming deniers, wanted to use the oil export measure as the means to offshore the entire US petrochemical industry.

It is headed for emerging nations, where labor is cheaper, taxes are lower, and regulation nil. That means the loss of tens of thousands of US jobs, many in California, over which Pelosi complained.

Pelosi complaining about the loss of petrochemical jobs? It?s proof that if you live long enough, you see everything.

Whatever jobs the Golden State loses here, it will make back with solar, big time. Industry analysts estimate that the five-year extension is worth a STAGGERING $125 BILLION IN ADDITIONAL SALES!

That is a multiple of the entire solar industry?s current total annual sales.

What?s more, this is five years during which the solar industry can dramatically improve panel output efficiencies, inverters, designs, and cut costs (remember that the cost of labor and regulation, about half the cost of a solar installation, is still rising).

Solar is already close to grid parity on costs now. It is even competitive in Texas. It will be substantially cheaper in five years.

During the same time, the cost of grid power will keep rising continuously, thanks to rising capital cost of replacing aging infrastructure.

I?m not saying you should rush out and buy solar today. But when the bull market resumes later this year, this group should be at the top of your list.

As for me, I am already getting estimates for a doubling of my existing solar roof system to accommodate the charging of my second Tesla, the Model X.

To learn all the ins and outs of buying and installing a solar roof system for you self, please read ?How to Buy a Solar System? by clicking here.

Better Bring Some More Panels

Volatility Here is Peaking

Diary, Newsletter, Research

It is often said that the stock market has discounted 12 out of the last four recessions.

While the market is discounting another recession now, I believe it is one of the many previously forecast that will never happen, a lot like to 18% swoon in the futures markets we saw last summer.

If anything, the reported hard data are showing that the economy is strengthening now, not weakening. The December nonfarm payroll hit a one-year high at 292,000. Christmas sales were off the charts for online merchants.

Auto production topped an 18 million rate. And this is an industry that was bankrupt only seven years ago.

But what else would you expect from a global economy that just has a $2 trillion annual tax cut dumped in its lap, thanks to lower energy prices.

I therefore think we are within days of the final capitulation of this move. That means the Volatility Index (VIX) will peak as well, probably around $30, the top that defined the top of every spike for all of 2015, except for the August 24 flash crash day. That apex is probably only days away.

I am one of those cheapskates who buys Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar, because my eleven month theoretical return on capital comes close to 1,000%.

I also like buying flood insurance in the middle of the summer when the forecast here in California is for endless days of sunshine.

That is what we are facing now with the volatility index (VIX) where premiums have just doubled, from $15 to near $30. Get this one right, and the profits you can realize are spectacular.

Watch carefully for other confirming trends to affirm this trade is unfolding. Those would include a strong dollar, collapsing stocks, and oil in free fall, and a weak Japanese yen, Euro.

I don?t know about you, but I am seeing seven out of seven cross asset confirming price action.

The CBOE Volatility Index (VIX) is a measure of the implied volatility of the S&P 500 stock index, which has been rallying hard since oil began its precipitous slide three weeks ago.

You may know of this from the many clueless talking heads, beginners, and newbies who call this the ?Fear Index?. Long-term followers of my Trade Alert Service profited handsomely after I urged them to sell short this index three years ago with the heady altitude of 47%.

For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expiration's.

The (VIX) is the square root of the par variance swap rate for a 30 day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever useful Black-Scholes equation. You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?

For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don?t know what an SAT test is, this is what you need to know. When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. End of story. Class dismissed.

The (VIX) is expressed in terms of the annualized movement in the S&P 500, which today is at 1,800. So a (VIX) of $14 means that the market expects the index to move 4.0%, or 72 S&P 500 points, over the next 30 days.

You get this by calculating $14/3.46 = 4.0%, where the square root of 12 months is 3.46. The volatility index doesn?t really care which way the stock index moves. If the S&P 500 moves more than the projected 4.0%, you make a profit on your long (VIX) positions.

Probability statistics suggest that there is a 68% chance (one standard deviation) that the next monthly market move will stay within the 4.0% range. I am going into this detail because I always get a million questions whenever I raise this subject with volatility-deprived investors.

It gets better. Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006. Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the ?hedge? in hedge fund.

But wait, there?s more. Now, erase the blackboard and start all over. Why should you care? If you sell short the (VIX) here at $24, you are picking up a derivative at a nice overbought level. Only prolonged, ?buy and hold? bull markets see volatility stay under $14 for any appreciable amount of time. That?s probably what we have now.

If you are a trader you can sell short the (VIX) futures somewhere over $20 and expect an easy profit sometime in the coming weeks. If we get another 5% rally somewhere along that way, that would do it.

If you don?t want to sell the (VIX) futures or options outright, then you can always sell short the iPath S&P 500 VIX Short Term Futures ETN (VXX). Better yet, you can buy a short (VIX) ETN outright, the Velocity Shares Daily Inverse VIX Short Term ETN (XIV).

If you make money on this trade, it will offset losses on other long positions.

No one who buys fire insurance ever complains when their house doesn?t burn down.

Volatility Can Be Your Friend

Here Comes the Final Bottom in Oil

Diary, Newsletter, Research

I had a fascinating dinner last week at Morton?s, San Francisco?s best steak restaurant, with one of John Hamm?s original investors.

You remember John, the legendary Texas oilman who saw fracking coming a mile off and made billions?

Since some of what my friend had to say came true in a matter of days, I thought I?d pass on the essence of our conversation.

The oil storage facility at Cushing, Oklahoma is full, at 480 million barrels. The US Strategic Petroleum Reserve has been full for a long time, with 713 million barrels (36 days of US consumption).

Contangos are exploding. It might as well be the end of the world for the oil industry.

The oil Armageddon is here, and the final flush is upon us.

There is a 50% chance we will bottom at $32/barrel, and another 50% chance that we go all the way down to $20. If we go down to $20, the last three ticks of the move will be $22?.$20?.$22. Then a saw tooth bottom will unfold between $24 and $32 which will last for several months.

There will be many chances to buy this bottom. There isn?t going to be a ?V? shaped bottom in oil this time, like we saw in past energy crashes.

The margin clerks and risk control managers are in control now, so we may see the final low sooner than you think. But it could be some time before we break $40 again to the upside and hold it.

The industry was really drinking the Kool-Aid with both hands to get it this wrong. Ultra low interest rates drove in billions in capital from first time oil investors looking to beat zero interest rates. They also saw China continuing an endless economic boom forever, and the energy demand that went with it.

In the end, they got both the supply and demand sides of the equation completely wrong on a global scale, always a recipe for disaster.

Many of the fields drilled in places like North Dakota would never have been touched during normal times. Then Saudi Arabia came out of left field with a grab for global market share that has yet to play out.

The seeds of this recovery are already evident. Chinese auto sales are up 19% YOY. China is buying all the cheap oil it can to fill up its own strategic oil reserve. Miles driven in the US are already up 4.6% YOY, which is a huge gain.

All of this will contribute to a higher US GDP in 2016.

Once we put in a final bottom in oil, don?t expect $100 a barrel any time soon. The ma and pa investor in the oil patch will not be back in this generation.

Marginal sources, like high cost Canadian tar sands, deep offshore, and some in North Dakota aren?t coming back either. These supplies needed $100/barrel just to break even.

Personally, my friend does not see oil topping $80/barrel this decade. He see?s a $62-$80 trading range persisting for a long time.

As the US has become more energy independent, the geopolitical factors have mattered less and less. That is why oil moved only $1 on an ISIS victory, the Paris attacks, or some other disaster.

To call the bottom in oil, watch the shares of ExxonMobil (XOM), Conoco Phillips (COP), and Occidental Petroleum (OXY). When they revisit their August lows, down 5%-10% down from here, that will be a great time to jump back into the oil space.

None of these companies are going under, and the dividend payouts are now enormous, (XOM) at (3.7%), (COP) at (5.8%), and (OXY) at (4.2%).

Distressed debt is where the smart money is focusing now, where double-digit returns have become common. If the issuer goes bankrupt the equity owners get wiped out while the bondholders get the company for pennies on the dollar.

Energy companies and master limited partnerships (MLP?s) have far and away been the biggest borrowers in the high yield market in recent years.

There is a junk maturity cliff looming, with $145 billion in bonds due for refinancing from 2017-2021. Expect the default ratio to rocket from this year?s 2.8% to 25%. A 12% default rate is a normal peak in a recession.

Individual company research now has a bigger payoff than in any time in history, even the 2008-09 crash.

Small leveraged companies with exposure to the price of oil are toast.

The play is for the toll takers, master limited partnerships that profit from the volume of oil pumped, and not the price of oil. Over time, volumes will increase, and so will the profits at these MLP?s.

In the meantime, everything is getting thrown out with the bathwater, regardless of fundamentals. People just don?t want to be near the space, especially going into yearend book closing.

Nobody wants to be seen as the idiot who owned oil in 2015.

Linn Energy (LINE) is a perfect example of this. It suspended its dividend so it could buy more assets on the cheap. It has plenty of cash, and will be backstopped by Blackrock with additional credit lines, if necessary.

While this raises volatility for the short term, it increases returns over the long term. It?s definitely your ?E? ticket ride.

I pointed out that President Obama did the oil industry the biggest favor in history by dragging his feet on the Keystone Pipeline, and then ultimately killing it. It prevented US consumers from loading the boat with $100/barrel tar sands crude at the top of the market.

My friend conceded that it is unlikely the pipeline would ever be built. The market has moved away.

I have accumulated a variety of odd tastes in my half-century of traveling around the world.

So when I heard we were eating at Morton?s, I brought my own jar of Coleman?s hot English mustard. It makes a medium rare cooked filet mignon taste perfect, but my action always puzzles the waiters. They never have it.

John Hamm gained public notoriety last year when he wrote a $974 million divorce settlement check to is ex wife and she refused to cash the check. I asked if the check ever got cashed?

?She cashed the check,? he said.

Needless to say, my friend picked up the check for the dinner as well. I let him drive my Tesla Model S-1 back to his hotel.

Saudi Arabia?s Secret Plan for Global Prosperity

Diary, Newsletter, Research

Friends of mine at my former employer, the Financial Times, have met with the senior Saudi leadership in recent weeks and confirmed what I already knew.

The implications for your trading account and retirements funds are nothing less than far reaching.

The Kingdom?s long-term strategic goal is to create a global economic boom.

If they are successful, the value of all assets sensitive to the business cycle will explode in value. Those include stocks, commodities real estate, precious metals, and commodities. Only bonds, and other fixed income investments will suffer.

Saudi financial planners are betting that such a comeback is only one to two years off.

They will accomplish this by creating a world wide economic recovery that will eventually take the price of oil back up to at least $70-$80 a barrel, close to the price they need to maintain the world?s most generous social service system and balance their budget.

But to get there, they have to keep the price lower for longer.

So far, so good.

Since Saudi Arabia began its war for market share 18 months ago, $40 West Texas Intermediate is 63% off its 2014 high, and 74% down from the 2011 all time high.

At today?s prices, the global tax cut amounts to $2.24 trillion a year ($67/barrel saved X 92 million barrels/day global consumption X 365 days).

Saudi Arabia can easily add 1%-2% to global growth simply by keeping oil prices at the present level.

They can do this because they have oil reserves far beyond the understanding of all but a few industry experts.

I have traveled in the Middle East for 48 years.

I covered the neighborhood wars for The Economist magazine during the 1970?s.

When representing Morgan Stanley in the firm?s dealings with the Saudi royal family in the 1980?s, I paused to stick my finger in the crack in the Riyadh city gate left by a spear thrown by King Abdul Aziz al Saud when he captured the city in the 1920?s, creating modern Saudi Arabia.

The only mistake I made in my Texas fracking investments is that I sold out too soon in 2005, when natural gas traded from $2 a BTU to $5, and missed the spike to $17.

So let me tell you about the price of oil.

I?ll make it easy, and distill everything down to one single fact.

Saudi Arabia?s entire production of 11.5 million barrels a day, 14% of the world?s total, comes from 11 major fields.

THEY HAVE 70 OTHER SUCH FIELDS, which have yet to be surveyed and drilled. We know they are there because the geology is identical and the ultrasound data pans out.

So if Saudi Arabia wants to increase production to the point where every other producer in the world goes broke, THEY HAVE THE RESOURCES TO DO SO FOR ANOTHER CENTURY!

Saudi Arabia is not undergoing their current aggressive strategy without any pain. They are currently running an unprecedented 20% budget deficit (compared to America?s 12% in red ink).

For the first time, they have also emerged as massive borrowers in the international debt markets to bridge the funding gap.

But don?t expect the Saudis to change their posture one iota at the upcoming December 4 OPEC meeting in Vienna. They clearly see the present low price strategy as in their own best interest.

In my many dealings with the Saudis I have learned one thing.

They are playing the long game, the very long game. They obviously believe that global oil consumption will be greater over the next decade by keeping prices lower for longer, now.

And if every producer in the Bakken shale, the Marcellus shale, the Eagleford shale, and the Monterrey shale goes bankrupt first, that?s fine too.

It?s all about maximizing long-term market share.

Saudis have grown weary of being the free de facto put option for the world?s high cost producers, like American shale, Canadian tar sands, the Arctic, and offshore anywhere.

There has long been a belief that if oil prices fell below $100 for any period of time, the Saudis would simply throttle back their production and bump it back up.

Those days are long gone.

I have another theory about what?s going on.

If alternative energy sources maintain their current rate of expansion, oil will be rendered worthless by 2035.

For example, California has mandated that 50% of its energy will come from alternatives within 15 years. Many other states and countries will follow.

Therefore, it?s in the Kingdom?s interest to shift as much of their inventory before prices collapse to their production cost of $5/barrel.

If they can accomplish this faster than their oil producing, hostile competitors in the Middle East and Russia, so much the better.

You may say this all sounds like pie in the sky stuff.

But I happen to know that the Saudis are massive investors throughout the entire alternative energy venture capital spectrum, including solar, wind, ocean waves, geothermal, and even biodiesel (which I don?t believe in for two seconds).

They are NOT doing this because they need new energy sources for themselves.

The irony here is that if the Saudi plan is successful, it will add another 2-3 years to the Great American bull market that is now entering its sixth year.

The Saudis are also one of the biggest foreign Investors in US shares. It?s in their own self-interest to keep prices rising.

You have more in common with the Saudi royal family than you think.

How Much Did You Say You Wanted?

Woe the Australian Dollar!

Diary, Newsletter, Research

If I warned them once, I warned them 1,000 times!

The Australian dollar (FXA) is going to fall.

That?s why I cautioned my Aussie friends to sell their homes, get the money the hell out of the country, and pay for their overseas vacations in advance.

As long as it is a de facto colony of China, the fortunes of the Land Down Under are completely tied to economic prospects there.

It is almost a waste of time looking at the Reserve Bank of Australia?s data releases. They have become a deep lagging, and really irrelevant indicators. You are better off going to the source, and that is in Beijing.

And therein lies the problem.

It is highly unlikely that the government in China has any idea what their economy is actually doing. Sure, they pump out the usual figures on a reliable basis like clockwork. These are educated guesses, at best.

Even in a perfect world, collecting numbers from 1.3 billion participants is a hopeless task. The US is unable to do these with any real accuracy, and we have one quarter of their population and vastly superior technology.

For what it is worth, Chinese President Xi Jinping has promised that his country?s GDP growth will not fall below a 6.5% annual rate for the next five years. At this pace, China is still creating more economic activity that any other country in the world.

Which leaves us nothing else to rely on but commodity prices to look at, far an away Australia?s largest earner. These are suggesting that the worst has yet to come.

Virtually the entire asset class hit new six year lows yesterday. I had to go to the weekly charts to see how ugly things really are.

Australia?s largest exports are iron ore (26%, or $68.2 billion worth), coal (KOL) (16%), gold (GLD) (8.1%), and petroleum (USO) (5.7%). When the world?s largest consumer of these slows down, so does demand for these commodities.

BHP Billiton Ltd. (BHP), the largest producer of iron ore, has seen its shares plunge 57% from last year?s high.

But wait! It gets worse.

I have written at length about the transition of China from an industrial to a services based economy. You would expect this, as the Middle Kingdom has virtually no commodity resources of its own, but lots of smart people.

In a nutshell, they wish they had America?s economy. Where services now account for a staggering 68% of all economic activity.

This is why China?s future lies with Alibaba (BABA), Baidu (BIDU), and JD.com (JD). It does NOT lie with its steel factories and coalmines, which by the way, recently announced layoffs of 100,000, the largest in history.

To learn more about the structural remaking of China, please click here for ?End of the Commodities Super Cycle?.

There is one bright spot to mention. Australia is making a transition to a services based economy of its own. Tourism is rocketing, as is the influx of flight capital from the Middle Kingdom.

Walk the streets of Brisbane these days, and you are overwhelmed by the abundance of Asians coming here to learn English, attain a high education, or start a new business. When I came here 40 years ago, they were virtually absent.

How low is low?

It doesn?t help that the governor of the Reserve Bank of Australia, Australia?s central bank, Glenn Stevens, despises his nation?s currency.

He has used every rally this year to talk down the Aussie, threatening interest rate cuts and quantitative easing.

The hope is that a deep discount currency will allow the exporters to maintain some pricing edge on the commodities front.

The market chatter is that the Aussie will take a run as low as $0.55, the 2008-09 Great Recession low.

Whether we actually get that far or not is a coin toss.

And will even $0.55 below enough for Glenn Stevens?

Noted Aussie Dollar Hater

Bank of America is Breaking Out All Over

Diary, Newsletter, Research

In view of the blockbuster October nonfarm payroll report, and the collapse of the bond market that followed, it is time to take a cold, steely eyed look, and the financials, especially Bank of America (BAC).

What did the stock do? It rocketed by 6.5%, along with the rest of the market, hitting four month high of $18.09. I hate it when that happens, being right on the fundamentals, and wrong on the market timing.

You are getting the reaction that the bang up Q3 earnings report should have delivered, just one week late. The shares appear to be taking a run at a new multi year high.

It was a stellar report, with earnings beating expectations handily on both the top and the bottom lines. Expenses are in free-fall, and the company?s cost of funds is plummeting, as lower cost deposit surge.

Analysts were blown away when they saw after tax profits come in at $4.5 billion, producing a diluted earnings per share of $0.37. The company returned a staggering $3 billion to shareholders in the form of dividends and an aggressive share buy back program.

Every major business segment showed big year on year improvements, including consumer and business banking. Global wealth and investment management knocked the cover off the ball.

The sudden burst of market volatility gave a nice push in income to the global banking division.

Deposits from mobile banking jumped. Average deposits are up 4%. Subterranean interest rates kept income there flat.

Given the bank?s tremendous upside leverage, many analysts are now pegging the stock with a $30 handle.

There is another play here. (BAC) is highly geared to raising interest rates, which will enable them to lend money out at higher interest rates, increasing their spread. Think of it as long dated put option on the iShares Barclays 20+ Treasury Bond ETF (TLT).

That is not a bad position to have on board, given that we probably put in a multigenerational spike in bond prices last week.

Because of the bank?s long and well-publicized problems with regulators dating back to before the 2008 financial crisis, (BAC) became toxic waste for many portfolio mangers.

The end result of that has been to make the best-run banks in the industry also the cheapest.

I have a feeling that I will be visiting the trough here often, and generously.

Time to Visit the ATM Again

Keep American Express on Your Short List

Diary, Newsletter, Research

I remember that the highlight of my 1968 trip to Europe was always my visit to the nearest American Express (AXP) office to pick up my mail.

In those pre Internet and email days, it was the only way that a fresh faced 16 year old could stay in touch with a hand wringing family while traveling around the world.

They just wrote ?John Thomas, c/o American Express, Paris, France,? and the letters never failed to get through to me.

It was also a great place to meet other vagabonding Americans my age--of the female persuasion. At least they spoke English. Almost.

That was a very long time ago.

So I got to know well the American Express locations off the Spanish Steps in Rome, Saint Mark?s Square in Venice, Berlin?s Kurfurstendamm, and the Champs-Elysees in Paris.

I have a feeling that American Express is about to give me a warm and fuzzy feeling once again.

After being taken out to the woodshed and getting beaten senseless in the wake of getting fired by Costco, one of the biggest customers, the shares appear poised for a comeback.

We have a rare occasion where the highest quality stock in a sector with the best business model is selling cheaper than its cohorts for a series of temporary reasons.

Take a look at the charts for (AXP) and Visa (V) below, and one of the greatest pairs trades of all time may be setting up, whereby you want to buy for the former and sell short the latter against it.

At the very least, you should be taking your monster profits on Visa and rolling the money into American Express.

Since its inception in 1958, that flashy green (or platinum) piece of plastic has long been a status symbol, and owned the premium end of the credit card market.

As a result, it earns more fees and extends fewer loans than its competitors. The loans it does have enjoy a far lower default rate. There are now 107 million Amex cards in circulation, compared to only 55 million in 2001. Thank you 1%!

American Express cardholders run balances three times larger than the average Master Card holder. That?s what happens when you buy a Ferrari on your Amex card, as I once did (to get the frequent flier points).

Merchants pay very high fees, usually 5% of the purchase. That?s why many shun the card. (AXP) is currently running a credit card balance of $940 billion, versus $3.1 trillion for Visa (V).

Fees accounted for an impressive 57% of the company?s revenues, a far higher ratio than other credit card companies. Better yet, (AXP)?s fees are rising, while those of others are falling. Interest on balances brings in 15% and cardholder fees 8%.

(AXP) is expected to earn $5.8 billion in net income on $33.9 billion in revenues this year, up 9.4%. With the US economy recovering, growing by 2.6% this year and 3.0% plus in 2015, the company is in the sweet spot for capturing more profits.

Morgan Stanley estimates that cardholder spending grows at 4.5 times the US GDP growth rate. That should cause (AXP)?s earnings to double, and the stock as well. An extra tailwind will be the company?s new strategy of moving down market to expand market share.

Despite all this good news, (AXP) shares are selling at a 13.4X multiple, a discount to its industry (21X), and the main market (18X). An ambitious share buy back program should put a floor under the stock.

Part of the discount can be explained by a Justice Department suit claiming that the company overcharges merchants. Amex correctly argues that, as the smallest of the major credit card companies, it has nowhere near monopoly pricing power.

It will be interesting to see how aggressively the government pursues its action, now that attorney general Eric Holder, has moved on to retirement.

You all know by now that I think financials are the place to be for years going forward because of imminently rising interest rates. But I?ll hold back on pulling the trigger on single name long side stocks plays until the carnage in the markets abate.

When I?m ready to shoot out a Trade Alert, you?ll be the first to know.

When I do, don't even think about putting it on your credit card.

Just Stopping By to Pick Up the Mail

Celgene Will Make a Comeback

Diary, Newsletter, Research

It was known as the ?Tweet that sank Wall Street.?

When presidential candidate Hillary Clinton attacked the drug industry last summer, the entire pharmaceutical and health care industries were taken out to the woodshed and beaten like the proverbial red headed stepchild (my apologies in advance to red heads).

One of the principal victims was cancer drug maker Celgene (CELG), which dropped some 24.6% from top to bottom.

Never mind that Clinton is unlikely to get what she wants, even if she wins the election.

For that, you need a congress in your pocket, a probability that is at least 5-9 years away.

That is, unless Donald Trump continues his campaign for the Republican nomination.

However, in this nervous, twitchy, gun shy trading environment, it is shoot first and ask questions latter. So Celgene shares sank, whether it was warranted or not.

Celgene is really all about one drug, Revlimid, a blood cancer treatment that accounts for 75% of its sales. Last year, the company sold $7.6 billion worth of this complex molecule.

To wean itself off of its overdependence on a single drug it has embarked on a number of aggressive initiatives.

Since the spring of 2012, it has increased the use of its Abrazane drug to treat late stage pancreatic cancer, the disease that killed Steve Jobs. It has won regulatory approval for the psoriasis drug Otezla.

It has also pursued the mergers and acquisitions road to growth, picking up some two-dozen small drug makers in recent years. The $7.2 billion purchase of Receptos was a big one, which manufactures Ozanimod, a drug used to treat ulcerative colitis and multiple sclerosis.

Celgene also picked up Juno Therapeutics for $1 billion a few months ago, a maker of innovative cellular immunotherapies.

If this ambitious strategy works, Celgene?s net earnings should continue to grow at a 25% annual rate for the next five years. That means the shares should triple by 2020.

This is why the company?s shares command a lofty multiple of 18 times 2016 earnings, the higher end of the range for this industry.

So the next time Hillary opens her mouth, use the dip in (CELG) shares to load the boat. It would also be helpful if stock investors shift their focus from value back to growth.

Looks Like a ?BUY? To Me

Loose Lips Sink Ships

Revisiting Cheniere Energy (LNG)

Diary, Newsletter, Research

I am constantly asked if there are any ways investors can take advantage of the current collapse in natural gas prices.

You don?t want to touch the gas producing companies, like Chesapeake (CHK) and Devon (DVN), because prices for natural gas are probably going to stay down for years.

Good firms that benefit from the increased volume of gas pumped are few and far between. Unless you are a large consumer of this despised molecule, such as an electric power company or a petrochemical plant, it is tough to find a profitable niche.

However, there is one company that delivers a narrow rifle shot that will do extremely well in coming years, and that is Cheniere Energy (LNG).

I first started following (LNG) two decades ago when I was still wildcatting for CH4 in the Texas Barnet Shale.

Back when natural gas was trading at a lofty $5/MBTU, Qatar invested $50 billion in developing its own massive gas resources.

The plan was to liquefy the gas at -256 degrees Fahrenheit in the Middle East, ship it to the US in a fleet of specialized LNG carriers, and have Cheniere convert it back into gas at its Sabine River plant for distribution to an energy hungry US market through the Creole Trail pipeline.

It all looked like a great plan, and (LNG) shares traded up to $45.

Then ?fracking? technology came along and blew up the entire model. The discovery of a new 100-year supply of gas under our feet caused gas prices to crash from a post Amaranth peak of $17/MMBTU down to $2/MMBTU.

Any plans to import LNG from the other side of the world were rendered utterly worthless. Qatar ended up selling its gas to Europe insteadto help offset that continent's over reliance on imports from Russia.

Chenier?s billion-dollar investment in a gasification plant was now worth only so much scrap metal. (LNG) shares plumbed to low single digits as the firm flirted with bankruptcy.

Enter China.

The Middle Kingdom?s voracious demand for energy in this recovery has caused the price of oil (USO) to soar from a 2008 low of $30 to $112.

Despite accounting for an overwhelming share of the world?s new energy purchases, Chinese cities are suffering from brown outs due to power shortages.

This is why China is resisting immense American pressure to quit buying Texas tea from Iran.

Enter the arbitrage. While oil has been plummeting, gas has been falling even more. Gas is now selling at 25% of the cost of oil on an adjusted BTU basis.

Another way of saying this is that you can buy oil for $12 a barrel instead of $48. It only takes a second with an abacus to understand the appeal of such a disparity.

Gas also has the additional benefits in that it is much cleaner burning than crude, lacks the sulfur and nitrogen dioxides, and produces half the carbon dioxide. That?s a big deal in Beijing where the air is so thick you can cut it with a knife on a bad day.

It is also important to know that many states, like California have decided to use natural gas as a bridge fuel until more economic and scalable alternatives are developed.

Enter the long-term contracts. During the 1960?s and 1970?s Japan entered into huge long term contracts to buy LNG from Australia and Indonesia to feed their own economic miracle of the day.

Because it is very expensive and hard to get, offshore supplies were tapped, the price was set at $16/MBTU. Those contracts are now expiring.

Do you think they?ll renew at the old price, or go to Cheniere for the $4 stuff? Gee, let me think about that one for a bit.

Enter Fukushima. The nuclear meltdown on March, 2011 prompted Japan to shut down 49 of 54 nuclear power plants that accounted for 25% of the country?s electric power generation. The brownouts that followed forced a sweltering summer on millions as the government urged consumers to shut off air conditioners to save juice.

Power companies there have been scrambling to obtain conventional energy supplies, and cheap gas supplies from the US would meet this demand nicely.

The trigger.

Cheniere obtained US government permission to export 2.2 billion cubic feet a day for 20 years. That would require it to convert the existing gasification plant to a liquefaction plant, something that can be done with some expensive re-engineering. A second plant is in the approval process.

It has already found several large international buyers to take delivery of the new end product. All that was missing was the money to finish the plant.

My hedge fund buddies have been accumulating this stock when it bottomed at $3, expecting an angel investor to appear. But it was one of those ?someday, it might happen? kind of stories better left to long-term players.

Then Blackstone jumped in with a beefy $2 billion investment in Cheniere. That will enable them to obtain an additional $3 billion in debt financing needed to finish the first of two export facilities. They are now expected to come online in 2016.

How does Cheniere stack up as an investment? Frankly, it is kind of scary. The market cap is only $11.3 billion, it has no earnings yet, and it pays no dividend. When the current spate of deals are done, it will have $5 billion in debt.

I first got followers into (LNG) at $5. We then had a great run all the way up to $85, and we took profits. In the current melt down, it has backed off all the way down to $45, a 47% hickey.

And these facilities are dangerous to operate. One blew up in Texas in 1937 and killed 300 schoolchildren.

As a result, local permits for these are very hard to come by. Anyone who thinks Texas is an unregulated paradise should try drilling for natural gas.

But as you can see a whole host of geopolitical, technology and economic strands reach a nexus in this one company, all of which are extremely positive for the share price.

If the story comes true, as Blackstone hopes, then there could be a double or triple in the shares for the patient. To learn more about Cheniere Energy, please go to their website: http://www.cheniere.com.

Did Somebody Light a Match?

Switching From Growth to Value

Diary, Newsletter, Research

All good things must come to an end.

For most of 2015, growth stocks far and away have been the outstanding performers in the US stock market.

Almost daily, I delighted in sending you trade alerts to buy winners, like Palo Alto Networks (PANW), Tesla (TSLA), and the Russell 2000 (IWM).

And so they delivered.

The reasons for their impressive gains were crystal clear.

The expectation all year was that the Federal Reserve would raise interest rates imminently. This gave us a perennially strong dollar (UUP).

Thus, one could only direct focus towards companies that were immune from plunging foreign currencies and falling international earnings.

It really was a year to ?Buy American?.

But a funny thing happened on the way to the bear market for bonds. It never showed up.

The final nail in the coffin was Fed governor Janet Yellen?s failure to move on September 17. She looked everywhere for inflation, but only found the chronically unemployed (the 10% U-6 discouraged worker jobless rate).

Not only did we NOT get the rate hike, the prospects are that WE MAY NOT SEE A SUBSTANTIAL INCREASE IN THE COST OF MONEY FOR YEARS!

At this point, the worst-case scenario is for the Fed to deliver only two 25-basis point rises over the next six months, AND THAT?S IT!

This reinforces my belief that the top of the coming interest rate cycle may only reach the bottom of past cycles, since deflation is so pernicious, and so structural.

All of a sudden, the bull case for the dollar, which has been driving our US stock selection all year, went wobbly at the knees.

Europe, Japan, and China are all now in between new quantitative easing and stimulus cycles, giving a decided bud to the Euro (FXE), the Yen (FXY), (YCS), the Yuan (CYB), the Aussie (FXA), and the Loonie (FXC).

New round of QE will come, but those could be months off.

Therefore, I am sensing a sea change in the market leadership. Rushing to the fore are the shares of companies that benefit from flat interest rates and a flagging greenback.

Those would be value stocks.

Value stocks are easy to find. Do any quantitative screen based on low price earnings multiples, low price to book value, and low price to cash flow, and you will find thousands of them. This is what the big boys do.

There is another reason to refocus on value stocks, but it is more psychological than analytical.

We are now into our sixth year in this bull market, one of the strongest in history. Portfolio managers are very wary of paying high multiples at market tops, as many did at the summit of the Dotcom bubble in 2000.

At least if they buy cheap share at market highs they have adequate job preserving explanations for their actions. There is also some inherent built in safety in increasing weightings in companies that haven?t appreciated very much.

I probably don?t know you personally (although I call about 1,000 of you a year), but I bet you don?t have 100 in-house analysts at hand to help you sift through the wheat and the chaff.

So let me do the heavy lifting for you. I?ll distill down the value play to a handful of high quality, high probability sectors.

1) Industrials ? Remember those, the decidedly unsexy, heavy metal bashing companies that you have been ignoring for years? With global businesses and hefty borrowing for capital spending, they do very well in a flat interest rate environment. What?s my favorite industrial? The former hedge fund that made light bulbs, General Electric (GE). They make really cool jet engines and diesel electric locomotives too.

2) Consumer Discretionary ? Finally, people are spending their gas savings, now that they realize it is more than a temporary windfall. A housing market that is on fire is creating enormous demand for all the things owners stuff in their homes, both in new purchases and upgrades. Low rates will keep the 30-year mortgage under 4% for longer. You already know my best names here, Home Depot (HD), and Disney (DIS).

3) Old Technology ? Tired of paying 100 plus multiples for the latest non yielding cloud highflyer? Mature old technology stocks offer some of the cheapest valuations in the market. As, yes, they pay dividends now! I?ll go with Microsoft here (MSFT) as the action in the options market has suddenly seen a big spike.

And what about the biggest old tech stock of all, Apple (AAPL)? I think this will be a 2016 story, and investors reposition themselves to take advantage of the run up to the iPhone 7 launch in a year. But as the recent price action shows, some portfolio managers may not want to wait.

4) Financials ? Are not the first sector to leap to mind when looking for a low interest rate play. Overnight interest rates will remain depressed as far as the eye can see. However, rates at the long end, maturities of five years or more, are rising.

This steepening yield curve is where it really matters for banks, as it allows them to expand their profit margins. On top of that, bank valuations are at the bargain basement end of the market, with many still trading at below book value. Go for Citibank (C), Bank of America (BAC), and Goldman Sachs (GS).

New leadership from low-priced sectors could give us the rocket fuel for a melt up in the indexes into the end of 2015. It could take us right to the low end of my forecast yearend range for the S&P 500 I made on January 6 of 2,200-2,300 (click here for ?My 2015 Annual Asset Class Review?).

After five months of derisking, both institutions and hedge funds are underweight stocks and shy of exposure. As a result this underperforming year has ?chase? written all over it.

Keep your fingers crossed, but stranger things have happened.

<img decoding="async" class="aligncenter size-full wp-image-37238" src="https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/Bank-of-America-ATM-e1411681030258.jpg" alt="Bank of America - ATM" width="400" height="228" />Time to Visit the ATM Again

Time to Visit the ATM Again