Research Archives - Mad Hedge Fund Trader

Get Ready to Load the Boat with Homebuilders

Diary, Newsletter, Research

I am writing this to you from Terminal 3 at San Francisco airport, awaiting my flight to Honolulu, Hawaii.

The pilot strides by quickly and purposefully, and I?m wondering if I should stop him for a brief pilot to pilot chat.

How are you feeling? Are you satisfied with your life?

Are you feeling depressed at all?

Hey, did you hear the one about the chicken that crossed the road...?

Two guys walk into a bar, and there?s a duck sitting on a barstool...?

Did you know that the three most often told lies are ?the check is in the mail?, ?I?ll get back to you? and ??

A Protestant, a Catholic and a Jew are sitting next to each other when the engine fails?

My kids quickly talk me out of the idea. They convince me that if I did make it to Hawaii, I probably would only get as far as the Federal Detention Facility in Honolulu. This must be the only family in the world where the kids have to ask the dad to exercise discretion.

But I digress.

No, this is not some kind of April Fool.

You would think that homebuilders would be the worst place in the world to invest right after the biggest bond bull market in history is ending, and interest rates are going to rise.

Not so.

In fact, homebuilders are the current number one pick of Bill Miller, the legendary stock picker at fund manager Legg Mason. He argues strongly that it will be the easiest place to make money in the market for the rest of the decade, with the stocks doubling or more from current levels.

I like the sound of this.

Bill argues that there is a 500,000-unit deficit in homebuilding industry capacity compared to market demand. It trades at a 25% discount to the S&P 500 earnings multiple of 17X. He expects profit growth to run at a 20% annual rate for the next 3-5 years.

And let?s face it. The data out of the real estate industry in February was nothing less that blockbuster. February new home sales were up a red hot 7.8% and January was revised up to a smoking 4%. February pending home sales clocked 6.1% and 12% year on year.

When you see an entire data range catch fire like this, it becomes highly convincing.

This rocketing demand is occurring in the face of shrinking supply. There are now only 1.8 million existing homes on the market in the United States, a 4.6 month supply, close to an historic low. Real estate agents are clamoring for new supply, but the builders are taking their own sweet time.

After a quiescent 2014, home prices in America have started to rise once again.

You would think that anyone going into the homebuilders just as interest rates are starting to increase has a hole in their head. But look at the correlation between rates and homebuilder share prices, and the opposite is true.

When prices began their meteoric rise last year, culminating in an eye popping 1.62% yield on ten year Treasury bonds (TLT) in January, homebuilder stocks looked liked they had Montezuma?s revenge.

Now that rates have backed off, and the Fed has been rattling its saber for more interest rate rises (goodbye ?patience?), the sector has been on fire.

The reason is that the Fed will raise rates only if they see inflation coming. This would be fantastic news for the entire real estate industry, the most reliable inflation hedge out there for the individual investor.

Having your inventory appreciate in value through no effort of your own is also about the best thing that can happen to any developer.

The key to understanding these stocks is that this is not you father?s real estate industry.

Absolutely no one competes for market share anymore. Companies are constructing only enough homes they are certain to sell at high margins. They?re also getting cagier on land acquisition costs.

Hence the shortage.

Look no further than Lennar (LEN). At the top of the last housing cycle in 2005, they built 53,000 houses. In 2015, they will construct only 25,000, but will earn a far greater profit margin on them.

Those firms that reached for market share with leverage were wiped out by the great cleansing of the 2008 crash, or were taken over for pennies on the dollar.

Mind you, the industry still has major challenges. The entry-level buyer is missing in action, as millions of students buckle under crushing debt loads. Some 10% of all homeowners representing 5.4 million units are still underwater on their mortgages, blocking trade ups.

These factors alone explained the market?s and the homebuilder shares lack of sizzle in 2014.

But longer term, the outlook is fantastic.

My ?Golden Age? scenario for the 2020?s makes the homebuilders an absolute sweet spot to be in. A demographic shortfall will make workers scarce, lead to rising wages, and at long last bring a return of inflation. It is a perfect storm for rising home prices.

Could the market already be starting to discount the great things to come in the next decade?

In addition to (LEN), the usual suspects in this sector include Pulte Homes (PHM), KB Homes (KBH), the old Kaufman & Broad (who sold out right at the top) and DR Horton (DHI). You can also contemplate the Real Estate iShares ETF (IYR).

Coming Soon to a Neighborhood Near You

Ten Reasons Why Stocks Are Still Going Up

Diary, Newsletter, Research

While driving back from Lake Tahoe last weekend, I received a call from a dear friend who was in a very foul mood. He had bailed on all his equity holdings at the end of last year, fully expecting a market crash in the New Year.

Despite market volatility doubling, multinationals getting crushed by the weak euro and the Federal Reserve now signaling its first interest rate rise in a decade, here we are with the major stock indexes sitting at all time highs.

Why the hell are stocks still going up?

I paused for a moment as a kid driving a souped up Honda weaved into my lane of Interstate 80, cutting me off. Then I gave him my response, which I summarize below:

1) There is nothing else to buy. Complain all you want, but US equities are now one of the world?s highest yielding securities, with a lofty 2% dividend. That compares to one third of European debt offering negative rates and US Treasuries at 1.90%.

2) Oil prices have yet to bottom and the windfall cost savings are only just being felt around the world.

3) While the weak euro is definitely eating into large multinational earnings, we are probably approaching the end of the move. The cure for a weak euro is a weak euro. The worst may be behind for US exporters.

4) What follows a collapse in European economic growth? A European recovery, powered by a weak currency. This is why China has been on fire, which exports more to Europe than anywhere else.

5) What follows a Japanese economic collapse? A recovery there too, as hyper accelerating QE feeds into the main economy. Japanese stocks are now among the worlds cheapest. This is why the Nikkei Average hit a new 15-year high over the weekend, giving me yet another winning Trade Alert.

6) While the next move in interest rates will certainly be up, it is not going to move the needle on corporate P&L?s for a long time. We might see a ?% hike and then done, and that probably won?t happen until 2016. In a deflationary world, there is no room for more. At least, that?s what Janet tells me.

This will make absolutely no difference to the large number of corporates, like Apple (AAPL), that don?t borrow at all.

7) Technology everywhere is accelerating at an immeasurable pace, causing profits to do likewise. You see this in biotech, where blockbuster new drugs are being announced almost weekly.

See the new Alzheimer?s cure announced last week? It involves extracting the cells from the brains of alert 95 year olds, cloning them and then injecting them into early stage Alzheimer?s patients. The success rate has been 70%. That one alone could be worth $5 billion.

8) US companies are still massive buyers of their own stock, over $170 billion worth in 2014. This has created a free put option for investors for the most aggressive companies, like Apple (AAPL), IBM (IBM), Exxon (XOM), Wells Fargo (WFC), and Intel (INTC), the top five repurchasers. They have nothing else to buy either.

They are jacking up dividend payouts at a frenetic pace as well and are expected to return more than $430 billion in payouts this year (see chart below).

9) Oil will bottom in the coming quarter, if it hasn?t done so already. This will make the entire energy sector the ?BUY? of the century, dragging the indexes up as well. Have you noticed that Conoco Phillips (COP), Warren Buffets favorite oil company, now sports a stunning 4.70% dividend?

10) Ditto for the banks, which were dragged down by falling interest for most of 2015. Reverse that trade this year, and you have another major impetus to drive stock indexes higher.

My friend was somewhat set back, dazzled, and non-plussed by my long-term overt bullishness. He asked me if I could think on anything that might trigger a new bear market, or at least a major correction.

I told him to forget anything international. There is no foreign development that could damage the US economy in any meaningful way. No one cares.

On he other hand, I could think of a lot of possible scenarios that could be hugely beneficial for US stocks, like a peace deal with Iran, which would chop oil prices by another half.

The traditional causes of recessions, oil price and interest rate spikes, are nowhere on the horizon. In fact, the prices for these two commodities, energy and money, are headed lower and not higher, another deflationary symptom.

Then something occurred to me. Share prices have been going up for too long and need some kind of rest, weeks or possibly months. At a 17 multiple American stocks are not the bargain they were 6 years ago when they sold for 10X earnings. Those were the only thing I could think of.

But then those are the arguments for shifting money out of the US and into Europe, Japan, and China, which is what the entire world seems to be doing right now.

I have joined them as well, which is why my Trade Alert followers are long the Wisdom Tree Japan Hedged Equity ETF (DXJ) (click here for ?The Bull Case for Japanese Stocks?).

With that, I told my friend I had to hang up, as another kid driving a souped up Shelby Cobra GT 500, obviously stolen, was weaving back an forth in front of me requiring my attention.

Whatever happened to driver?s ed?

The Bull Case for Japanese Stocks

Diary, Newsletter, Research

If you live long enough, you see everything.

After a 25-year hiatus, here I am finally back making money in the Japanese stock market once again.

Any sentient being couldn?t help but notice the specular results the Japanese stock market has produced so far in 2015.

The Nikkei Average is up a robust 11.7%, while the Wisdom Tree Japan Hedged Equity Fund (DXJ), which eliminates all of the underlying yen currency risk, has tacked on an impressive 13.2%. This compares to a US Dow average return for the same period of essentially zero.

So, is it too late to get in? Are we joining the tag ends of a party that is winding down? Or is the bull market just getting started?

To answer that question, you have to go to a 30 year chart for the Nikkei average which chronicles all of the violence, heartbreak and drama of the great Japanese stock market crash, and the budding recovery that has since ensued.

The bulls see a crucial triple bottom at ?7,500 that has spread out over ten years, from 2003 to 2013. The initial resistance for the bull market was at ?18,000. That level was decisively broken last week.

And as any long in the tooth technical analyst will tell you, the longer the base building, the longer the recovery.

It is no accident that this sea changing technical action is happening now. Last year rumors abounded that the Japanese government would mandate higher equity weighting by Japanese pension fund managers.

That is exactly what happened at the end of February. The government required pension fund managers to increase equity weightings from 8% to 25%, at the expense of their Japanese government bond holdings. I guess the 0.33% yield on the ten-year wasn?t exactly tickling their fancy.

To meet the new guidelines, managers have to buy $120 billion worth of stocks over the next two years.

That is a lot of stock.

Japanese pension fund managers are the world?s most conservative. Since they can no longer buy all the domestic bonds they want, they are investing in stocks that are essentially bond equivalents.

These include relatively high dividend yielding domestic defensive sectors, like pharmaceuticals, railroads, services, chemicals and foods. With the program only just starting, the Nikkei will be underpinned by local Japanese institutional buying, possibly for years. That eliminates your downside.

Enter the foreign investor. Gaijin mutual fund and hedge fund managers alike were net sellers of Japanese stock for all of 2014. They turned to net buyers only three weeks ago.

Guess what kind of stocks foreigners like to buy? The same kind they buy at home: technology stocks. Take a look at the charts below for Sony (SNE) and Canon (CAJ) and the breakouts there exactly match up with the timeline I described above.

Sony, in particular deserves special mention. Sony was the Apple of Japan during the 1980?s, and should have been the Apple of today. But the company lost its way after 1990, when the founder, my friend Akio Morita, passed away.

Succeeding management was dull, sluggish, and unimaginative. The world quit buying its top of the line stereo systems. As a result, its market capitalization plunged from $150 billion to only $10 billion.

The final indignity came when North Korean hackers almost wiped out the company last year when it released The Interview, a spoof on dictator Kim Jong-un.

These days, Sony is leading the resurgence of the Japanese stock market. Management modernized and westernized. It launched a range of new high tech products. It is selling at a dirt cheap 12X multiple. I also think it is safe to say that their hacking defenses are now state of the art.

It doesn?t hurt that when foreign investors think of buying Japan, picking up Sony is the first thing that comes to mind.

So the technicals and the supply/demand picture lines up, how about the fundamentals?

Go into Japan now, and you are betting that Prime Minister Shinzo Abe (I knew his dad), will succeed in his ?three arrows? plan for economic and financial reform. Insiders believe he can pull this off.

The December election gave him a continued mandate from the Japanese people. The Bank of Japan is also in his corner, implementing a monetary policy that is so aggressive that it was once thought unimaginable. Doubling the money supply in two years?

This is why the Japanese yen will continue to depreciate, which is also highly reflationary for the economy, and is the subject of my Trade Alert below to sell yen.

If all of this lines up, then the next target for the Nikkei is for it to add another ?10,000, up nearly 50% from here. Beyond that, the Japanese stock average is likely to take a run at its old 1989 high of ?39,000.

I remember the day it hit that level all too well.

The rock group Chicago was leading the charts with Look Away. The office at Morgan Stanley was packed with women wearing these big shoulder pads that made them look like football players. Huge sunglasses, neon colors and big hair were everywhere.

Like I said, if you live long enough, you see everything, even another Japanese bull market.

It?s All Over for the Japanese Yen

Diary, Newsletter, Research

The only reservation I have about doing this trade right now is that the Japanese fiscal year ends on March 31. As we all know, book closings can generate some pretty weird gyrations in the market place as both companies and government window dress in the extreme.

However, once we are in the new fiscal year, I expect the yen to resume its downtrend, and the Nikkei its uptrend.

I think that the action in the foreign currency markets is about to shift from the Euro, which is now oversold in the extreme, to the Japanese yen, which has recently been sleepy.

?Oh, how I despise the yen, let me count the ways.?

I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.

To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:

1) With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials between countries are the single greatest driver of foreign exchange rates. That means the yen is taking the downtown express.

2) This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets. So ?RISK ON? means more yen selling, a lot.

3) Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re just not making enough Japanese any more. Countries that are not minting new consumers in large numbers tend to have poor economies and weak currencies.

4) The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 260% of GDP, or 130% when you net out inter agency crossholdings, Japan is at the top of the list.

5) The Japanese ten-year bond market, with a yield of only 0.33%, is a disaster waiting to happen. It makes US Treasury bonds look generous by comparison at 1.93%. No yield support here whatsoever.

6) You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters and revive the economy.

When the big turn inevitably comes, we?re going to ?125, then ?130, then ?150. That works out to a price of $150 for the (YCS), which last traded at $90.50. But it might take a few years to get there.

If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360.

To me the ?120.78 I see on my screen today is unbelievably expensive.

?

It?s All Over for the Yen

Fed Not to Raise Interest Rates in 2015

Diary, Newsletter, Research

Yes, that is the shocking truth that Fed chairman Janet Yellen told us today with the release of the central bank?s minutes.

Of course, she didn?t exactly say that she would raise interest rates for the first time in a decade in so many words. To discern that, you had to be fluent in Janetspeak.

Very few people have the slightest idea what comprises Janetspeak. It just so happens that I am quite knowledgeable in this arcane argot. In fact I can even negotiate a menu written entirely in Janetspeak and receive a meal reasonably close to what I thought I ordered.

I learned this esoteric language through private tutoring from none other than Janet Yellen herself. These I obtained while having lunch with her at the San Francisco Fed every quarter for five years.

It was a courtesy Janet extended not just to me, but to all San Francisco Bay area financial journalists. But fewer than a half dozen of us ever showed up, as monetary policy is so inherently boring, and government supplied food is never all that great. Ask any Marine.

So let me parse the words for you, the uninitiated. The Fed removed the crucial word ?patient? from its discussion. In the same breath, it says it is unlikely that rates will rise at the April meeting.

She said that any future rate rise would be conditional on continued improvement in the labor market. As the US economy is now approaching full employment, there seems to be little room for improvement there.

Now comes the vital part. Janet also said that an increase in interest rates would also be conditional on inflation returning to the Fed?s 2% inflation target!

Here?s a news flash for sports fans. Inflation is not rising. It is falling. Look no further than the price of oil, which kissed the $42 a barrel handle only this morning.

Inflation is at negative numbers in Europe and in Japan. Even the Fed?s own inflation calculation has price rises limited to 1% in 2015. Their best-case scenario does not have inflation rising to 2% until 2017 at the earliest.

Furthermore, things on the deflation front are going to get worse before they get better. Some one third of all the debt is Europe now carries negative interest rates.

Tell me about inflation when oil hits $20, which it could do in coming months, and will have a massive deflationary impact on the entire US economy, especially in Texas.

That?s the key to understanding Janet. When she says that she won?t raise rates until she sees the whites of inflations eyes, she means it.

I love the way that Janet came to this indirect decision, worthy of King Salomon himself. By taking ?patient? out of the Fed statement, she is throwing a bone to the growing number of hawks among the Fed governors.

At the same time she shatters any impact this action might have. The end result is a monetary policy that is even more dovish than if ?patient? has stayed in.

That is so Janet. No wonder she did so well as a professor at UC Berkeley, the most political institution in the world. I feel like I?m back at college.

You all might think I?m smoking something up here in the High Sierra, or that maybe a rock fell down and hit me on the head. But look at the market action. I?ll go to the video tapes.

Every asset class delivered a kneejerk reaction as if the Fed had just CUT interest rates. Stocks (IWM), bonds (TLT), the euro (FXE), the yen (FXY), OIL (USO), and gold (GLD) all rocketed. The dollar and yields dove.

This is the exact opposite of what every market participant expected, which is why the moves were so big. It is also why I went into this with a 100% cash position in my model trading portfolio.

We lost the word ?patient? we got the ?patient? result.

I had a batch of Trade Alerts cued up and ready to go expecting a dovish outcome. But it was delivered in such a left-handed fashion that I held back on the news flash. It was only when I heard the words from Janet herself that I understood exactly what was happening.

Out went the Trade Alert to buy the Russell 2000 (IWM)! Out went the Trade Alert to pick up some Wisdom Tree Japan Hedged Equity ETF (DXJ)!

Why the (IWM)? Because small caps are the American stocks least affected by a weak Euro.

Why the (DXJ)? Because the Fed action is an overwhelmingly ?RISK ON?, pro stock action. Unlike the rest if the world, the Japanese stock market has to double before it reaches new all time highs. It is just getting started.

Won?t today?s strong yen hurt the (DXJ)? Only momentarily. The Nikkei has yet to discount the breakdown from Y100 to Y120 that has already occurred, let alone the depreciation from Y120 to Y125 that is about to unfold.

Banzai!

Taking Profits on the Euro

Diary, Newsletter, Research

Occasionally the consensus is right.

Since the start of the year, it seems that everyone and his brother, sister and cleaning lady has been selling short the euro.

As a result, the beleaguered continental currency has suffered one of the sharpest falls in the history of the foreign exchange markets.

I have to think back three decades to recall something similar, when the Plaza Accord ignited a dramatic collapse in the US dollar against the Japanese yen, then trading at Y270.

Or you can recall back to January, when my friends at the Swiss National Bank engineered an overnight depreciation of the euro against the Swiss franc of 20%.

Those who followed my advice to sell short the euro last July have profited mightily. The (FXE) has plunged by 26% since then. Those who picked up the ProShares Ultra Short Euro 2X bear ETF (EUO) that I pleaded with you to buy did even better, capturing an eye popping 75% profit.

To read my prescient predictions about the imminent demise of the European currency, please click here for my 2015 Annual Asset Class Review.

With spectacular results like this, one has to ask whether we are seeing too much of a good thing, if this trade is getting rather long in the tooth, and if it is time to get while the getting is good.

The technical analysts certainly think so. The greenback is currently overbought and the euro oversold in the extreme, with RSI?s and momentum indicators off the charts.

For the statisticians out there, the euro?s move is 3.5 standard deviations away from the mean, something that is only supposed to happen every 100 years. And as we all know, mean reversion can be a real bitch.

On top of that, long-term market veterans will tell you that markets of all kinds naturally gravitate towards large round numbers. With the euro trading yesterday at the $1.03 handle, spitting distance from parity at $1.00, this is about as large of a round number that you will find anywhere.

So trying to catch the last three cents of a move from $1.40 to $1.00 is an awful trading idea, as the risk/reward is so poor.

My guess is that we will take a brief, peripatetic run at the $1.01 handle, and then develop a sudden case of acrophobia, or fear of heights. There will just be too many traders out there with enormous unrealized gains, begging to be exited.

I have not suddenly fallen in love with the euro. The pit from which its economy must extricate itself is deep, foreboding, and structural. But it is time to face facts. The only reason to add new euro positions here is to believe that it is going to 88 cents to the US dollar, and fast.

It could well do that. But the probability is much lower than we saw with the moves from $1.60 to $1.40 or from $1.40 to $1.03.

However, get me a decent price to sell at, like $1.08 or $1.10, and I?ll be back there again on the short side in a heartbeat.

You also must understand that the cure for a cheap euro is a cheap euro. Big continental exporters, like Daimler Benz, BMW and Volkswagen, are licking their chops at the prospects of booming sales, thanks to a newly devalued currency. Sooner or later, this will turn into robust economic growth.

If nothing else, you need to look at the Wisdom Tree Germany Hedged Equity Fund (DXGE), which will profit from this new business activity, and has already tacked on an impressive 24% in 2015. The Wisdom Tree International Hedged Equity Fund (HEDG) also looks pretty good.

As for me, I have already started planning my discount summer vacation in Europe in earnest.

Cappuccino, please!

I Remember it like it was Yesterday

The Cheap Euro Works for Me

Why I Went to 100% Cash

Diary, Newsletter, Research

I am sitting here in the balcony seats at the Napa City Winery. Somehow, my peripatetic social life has dragged me down here to listen to a Hispanic rap group. That?s right, you heard it correctly. A Hispanic rap group.

It is midnight.

The sound is so loud that it is vibrating through my chest. So I have withdrawn into my own inner silence to contemplate what the hell happened in the financial markets on Friday.

Most modern hedge funds are constructed using a series of complex correlations between asset classes which are back tested years, if not decades.

When stocks go up (SPY), bonds (TLT) are supposed to go down, as corporate America profits from the lower cost of money. When stocks go down, gold (GLD) is supposed to rally, as traders flee from risk. When bonds collapse, the dollar is weak, as foreign investors repatriate the proceeds of their sales.

And so on, and so on.

Except on Friday, none of this worked. Everything went down in unison. Only the dollar rose. It was that simple. You could hear the models blowing up like fireworks on the Fourth of July (or Guy Fawkes Day, whatever your persuasion).

To see the market trade this badly on such great news as the blockbuster February nonfarm payroll of 395,000 was really quite amazing. It makes no sense, but it is there, and therefore, I am gone.

Whenever I don?t understand what is going on, I get out. You should too.

I was never one to argue with Mr. Market. So I have moved to a 100% cash position, a circumstance, which for me, is as rare as a dodo bird.

Did the world go mad when I wasn?t looking?

Which leaves us to contemplate what the markets are trying to tell us deaf traders.

When you see illogical, irrational, unpredictable market behavior like this, it is evidence that the market is changing. But in which way? Let us consider five possibilities.

1) The Fed is Raising Rates in June. It is amazing how much complacency there is out there about the coming hike in interest rates, the first in a decade. The talking heads will tell you that it is well telegraphed, fully discounted, and in the market. But when the momentous event actually occurs, just watch. Traders will run around like chicks with their heads cut off.

It is not in the market.

2) The market is topping out. This is the most frightening prospect for most investors, as the memories of the Great Crash are so recent. Unfortunately, it has also been predicted annually for the last seven years. If anything, the global economy is getting stronger, not weaker, now that Euro QE is finally kicking in.

This new virility will enable Europe, China, and Japan to rejoin the global economy after a prolonged period of absence. US economic growth should catapult from 2.5% to 3% this year. That?s what Friday?s 5.5% headline unemployment rate was shouting at us, the closest to full employment that we have been since 2005.

3) Money is Shifting Out of the US and into Europe. It is only natural that investors want to reallocate capital out of markets where QE is ending, like the US, and into markets where it is beginning, such as Europe. Those who have been mercilessly beaten for diversifying internationally for the last seven years, are now, at long last, getting rewarded. Suddenly, learning all those exotic foreign languages and strange customs is getting you more than a nice table at an ethnic restaurant.

The markets certainly believe this, with the Wisdom Tree International Hedged Equity ETF (HEDJ) up an impressive 20% in 2015, compared to a feeble 0% for the S&P 500 (SPY). Nothing persuades like performance.

4) The Seasonal Period of Equity Strength is Ending. Remember ?Sell in May, and go away?? That looming deadline is only two months off. Some four of the six months of seasonal equity strength is behind us.

5) The Strong Dollar is Finally Starting to Hurt. After a 34% depreciation of the Euro against the US dollar over the past seven years, the deflationary impacts are finally taking their toll. Global multinationals are feeling the heat the most, mid caps less so. At last, I can afford my extravagant European vacations!

If the dollar is the driver, can we expect any respite? Only if the Federal Reserve cancels all interest rate hikes for the foreseeable future. In other words, fat chance.

Parity against the Euro, here we come!

All of this inspires me to exercise greater than usual amounts of self-discipline and risk control. With any luck, I?ll be all cash going into the next meltdown. That is worth paying a premium for in terms of opportunity cost.

Hey, even a broken clock is right twice a day, occasionally a blind squirrel finds an acorn and if you fire buckshot long enough, eventually you are going to hit a barn.

Well, the band has just completed its grand finale, wading into the middle of the crowd for a giant selfy. My ears will be ringing for days.

Now, for my next newsletter?

Why There is No Bubble in Stocks

Diary, Newsletter, Research

One couldn?t help but notice the outbreak of recollection, reminiscing and schadenfreude that took place yesterday when the NASDAQ briefly tipped over 5,000.

I remember it like it was yesterday. I am still amazed by the frenzy that took place, witnessing the kind of bubble one only sees twice a century. And I was right in the thick of it, living in nearby Silicon Valley.

Business school students were raising $50 million with a one-page business plan. An analyst predicted that Amazon (AMZN) shares would double to $400 in a year. It happened in only four weeks.

All of my attorneys quit, taking up prestige jobs as chief legal counsels at new start ups, taking stock in lieu of pay, dollar bills dancing in front of their eyes. They were replaced by the ?B? team. Other law firms started accepting stock as payment of legal fees.

I knew more than one office secretary who took pay cuts to $15,000 a year in exchange for stock, which they later sold for $2 million.

When I tried to expand my company, I couldn?t find a larger office to rent. San Francisco had run out of office space. So I bought a house for $7 million instead and worked from there. That was no problem, as everyone had $7 million then.

But what I remember most fondly were the parties. The beneficiaries of every IPO sought to celebrate with the biggest party in Bay Area history, each one eclipsing the last. An entire industry of creative party organizers sprung up, seeking to outdo every competitor.

I remember most fondly the Vodka luge carved out of a giant block of ice, where a pretty hostage poured 100 proof super cooled rocket fuel straight down your throat. By midnight, the passed out bodies started piling up on the periphery.

Those were the days!

Which brings us to today, when handwringing is breaking out all over. Investors are afraid that we are just now putting in the double top of the century in NASDAQ, with a very neat 15 years taking place between peaks.
Is it time to sell?

I think not.

Today, we see a completely different world from the one we knew in 2000. Global GDP then was a mere $32 trillion. Today it is 2.5 times higher at $78 trillion. Using this simplistic measure, the GDP adjusted value of NASDAQ should be 12,187.

The high tech index peaked at a price earnings multiple of 100 times earnings. Today it is 30 times. That means the multiple adjusted high for NASDAQ today would be 16,650.

Technology stocks then didn?t pay dividends. Today, look at Apple (AAPL), which pays a 1.50% dividend worth $11.25 billion in annual payouts. This revenue stream provides enormous support under the market, and almost makes Apple shares perform more like bonds than stocks.

Which brings me to a new investment thesis.

What if the stocks that peaked in 2000 are only now just breaking out and starting long bull runs? I am thinking of quality technology names that have completed long, sideways, basing moves. Ebay (EBAY), Broadcom (BRCM), and Cisco (CSCO) leap to the fore.

The possibilities boggle the mind.

I think that in order to get NASDAQ to really get the bit between its teeth, one thing has to happen. Apple has to stop going up.

You really only had to make one stock call in 2014. You had to be overweight Apple. If you did, you were a star. If you didn?t, then you are still probably looking for a new job on Craig?s List.

Managers are behaving as if the past were a prologue, loading the boat with Apple with their eyes firmly fixed on the rear view mirror. That explains the blowout 13% jump in Steve Jobs? creation so far in 2015, some $90 billion in market capitalization.

All you need is for investors to stop buying Apple for 15 minutes and rotate into other big tech names. That was my logic behind my Trade Alert to buy Cisco two weeks ago. If that occurs, it will be off to the races for NASDAQ once again.

Remember that old saw in technical analysis land, ?the longer the base, the bigger the air above it.?

A vodka martini, anyone?

How High is High?

Diary, Newsletter, Research

Those who read my New Year predictions already know that my target for the S&P 500 at the end of 2015 is a range of 2,288-2,392, or up 10%-15%.

When I made that forecast, I was heaped with abuse, derision and scorn, as usual. Perma bears and market haters never miss an opportunity to loose their slings and arrows against those who have been bullish (read accurate), impatiently awaiting their ever-receding vindication.

I love this bunch because it is they who are creating the ?wall of worry? that keeps investors on the sidelines, perennially in fear of an instant playback of the 2008-09 stock market crash.

It is all a perfect prescription for higher share prices.

For a while in January, it looked like the bears might at last be having their day in the sun. Volatility (VIX) spiked to 23%, ten-year bond yields (TLT) crashed to 1.62%, and crude oil (USO) plumbed the depths of $43 a barrel.

February has brought us a horse of a different color. The S&P 500 has sprinted up from a January 2 print of 2,080 to 2,123, a gain of 43 points, or 2%. That is right on schedule as far as I am concerned.

Maybe my outlook is not so ?Mad? after all.

And the best is yet to come.

For those who missed my all asset class calls for 2015, it?s not too late to take advantage of my insights. Please click here for my ?2015 Annual Asset Class Review?.

My friends at Stockcharts.com produced some cogent analysis yesterday that lent more credibility to my high side targets. It outlines the entire technical argument in favor of a continuation of the bull market. I guess great minds think alike.

Check out the chart below and you?ll see they are expecting a 2,240 target for the first half of this year, up another 5.5% from today?s level.

They see an unfolding repetition of the huge 10% leg up that began last October, and was followed by a two month period of digestion. They expect that the technology driven NASDAQ will do even better.

The reason, quite simply, is that it?s different this time. The last time NASDAQ was poking around the 5,000 level the world was unrecognizable from today. In fact, it might as well have been the Pleistocene Age.

There were only 361 million people connected to the Internet in 2000. Today the figure is 3 billion, an 8-fold increase.

Some 2 billion consumers now use smart phones, compared to a few hundred thousand 15 years ago.

There has also been a 1,635% increase in e-commerce during the same period. No small part of that has come from sales of the Diary of a Mad Hedge Fund Trader.

Internet companies are now hugely profitable. Look no further than the blowout numbers announced by Salesforce.com today. At the new millennium, Internet purveyors only had ?eyeballs? to boast of.

Speaking to my own followers on a daily basis, I can tell that the greatest misconception about the stock market is that prices are rising because of quantitative easing. That aggressive policy of monetary easing started here in the US first, and then spread to Japan and Europe like an Ebola Virus.

Nothing could be further from the truth.

Stock prices are rising for the old fashioned reasons. They are making more money. Rising earnings are driving asset prices, not QE. While the stock indexes have tripled in six years, earnings multiples have risen only 70% off the bottom, from 10 to 17.

This yawning disparity can only be explained by the massive profits that American companies are making, both here and abroad. This has happened in the face of the most rapid improvement in corporate balance sheets in history.

And while QE in the US has been dead for six months, the earnings explosion is only just getting started.

What happens after European and Japanese economic collapses? European and Japanese economic recoveries, now that they have adopted our monetary policy. This is what the stock market was screaming at us by going up almost every day this month.

This is the fundamental basis for my positive outlook for US equities, which could keep rising in value until well into the 2020?s. What?s driving those equity prices? Hyper accelerating technology and productivity improvements. Those are speeding up, not slowing down.

US companies are becoming so efficient that they don?t need us pesky humans anymore.

Perhaps I am so bullish because I see all this stuff playing out before my eyes on my front doorstep here in Silicon Valley. Not a day goes by when I don?t receive a pitch soliciting a new venture capital investment.

I was eating dinner at San Francisco?s posh Boulevard restaurant last week, feasting on my first foie gras since last summer (it was only decriminalized in California last month). Google founder Sergei Brin was sitting at the next table.

After polishing off a bottle of fabulous Screaming Eagle cabernet, I headed to the men?s room. I swear, while I was there standing at the urinal, some fresh faced kid made a pitch to me.

It was something about an app that was a takeoff on Match.com, where cell phones would mutually ping or vibrate when compatible partners came within range. I passed. They had clearly never heard of Heisenberg?s Uncertainty Principle. Besides, it?s already been done in Japan.

Someone approaching me in the men?s room! Now that is a sign of an overheated market!

An App That Does What?

Why Solar Stocks are Catching on Fire

Diary, Newsletter, Research

Long time solar observers were stunned by the news that First Solar (FSLR) and Sunpower (SPWR) were teaming up to create a joint venture.

The stock market certainly got the message. Sunpower rocketed by 18%, while First Solar soared by 17%.

Imagine Macy?s merging with Gimbels, Coke tying up with Pepsi or the Los Angeles Dodgers teaming up with the San Francisco Giants?

It?s a little more complicated than that.

The move further convinces me that solar is one of the few industries that could offer investors a ten-bagger over the coming decade. Revenues are soaring, costs are plunging.

Throwing the fat on the fire are generous government subsidies that create a massive incentive for consumers to go solar by the end of next year.

The entity that (FSLR) and (SPWR) are forming is known as a ?yieldco.?

A yieldco is a publicly traded company that is formed to own operating assets that produce a predictable cash flow. Separating volatile activities (like research and development and construction) from stable and less volatile cash flows of operating assets can lower the cost of capital.

Yieldcos are expected to pay a major portion of their earnings in dividends, which may be a valuable source of funding for parent companies which own a sizeable stake. They are commonly used in the energy industry, particularly in renewable energy to protect investors against regulatory changes.

Yieldcos are in effect first cousins to other high yielding securities like Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs). Yieldcos give investors a chance to participate in renewable energy without many of the associated risks.

The announcement came on the heels of blowout earnings announced by the two companies. SunPower said it expects to install another 215 megawatts of generation in 2015 and that its project pipeline now totals more than 4,000 megawatts.

First Solar became the first solar photovoltaic (PV) maker to install 10,000 megawatts of capacity last month. Its project pipeline exceeds a monstrous 2,600 megawatts.

A 30% tax credit on any alternative energy investment is set to expire at the end of 2016. I think this will trigger the mother of all stampedes by consumers to buy solar systems while they can still get the government to pick up one third of the tab.

The entire solar industry looks attractive here. Collapsing oil prices has had a leveraged effect on solar shares, dropping them a heart stopping 40% in only three months.

Heaven knows investors are starved for cheap stocks these days.

There is one cautionary note to add here. The government subsidies that help float the company expire in 2017, making the entire proposition financially less attractive. That is, unless they get renewed.

Think President Hillary.

The only things that would save them are dramatically higher conventional energy costs. However, right now energy costs are heading the opposite direction, thanks to fracking and a well-publicized war for market share at OPEC.