Research Archives - Mad Hedge Fund Trader

Fed Not to Raise Interest Rates in 2015

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.

Dipping My Toes Back Into Gold

Diary, Newsletter, Research

One of my best calls of 2014 was to plead with readers to avoid gold like the plague, periodically dipping in on the short side only.

Gold certainly delivered disappointment in spades, falling 4%, while the US stocks, bonds and the dollar were on fire. The barbarous relic has been in a bear market since it peaked at $1,922 an ounce at the end of August, 2011.

Gold shares have fared much worse, with lead stock Barrick Gold (ABX) dropping a gob smacking 81% since then, and the gold miners ETF (GDX) suffering a heart rending 74% haircut.

However, the recent price action suggests that hard times may be over for this hardest of all assets. Despite repeated attempts, the yellow metal has failed to break down below the $1,100 support level that I have been broadcasting as the line in the sand.

It rallied $230 off the bottom, and then recently gave up half that move. (GDX) has performed even better, popping 44%. For a sideways to eventually rising gold market, this is a great place to get involved with a short dated call spread.

The Chinese are far and away the world?s largest gold buyers. So when the Chinese Lunar New Year rolls around, the biggest participants disappear. That explains where the latest triple digit dump came from. This will end soon.

Few people realize how small the gold market is. All of the gold mined in human history, from King Solomon's mines, to the bars still in Swiss bank vaults bearing Nazi eagles (I've seen them) would only fill 2.5 Olympic sized swimming pools.

That amounts to 5.3 billion ounces, about $8.6 trillion at today's prices. For you trivia freaks out there, that is a cube with 66 feet on an edge.

China is the world?s largest producer of gold (13.1%), followed by Australia (10%) and the US (8.8%).
The problem for gold bears is they?re not making it anymore. Production has been only rising incrementally in recent years, reaching 2,860 metric tonnes, or 100.9 million ounces in 2014. This is worth $116 billion at today?s prices (see chart below).

That would rank gold 5th as a single Fortune 500 company, just ahead of General Electric (GE). It is also only .38% of global public debt markets worth $40 trillion.
That is not much when you have the entire world bidding for it, governments and individuals alike. Talk about getting a camel through the eye of a needle!

The old inflation adjusted high of $2,300, nearly $400 higher than the record absolute price of $1,928. No wonder buying is spilling out into the other precious metals, silver (SLV), platinum (PPLT), and palladium (PALL).
Like an ugly sister, it is hard to love gold in a disinflationary world. However, I think we are getting ripe for a technical rally that could take up $100 or more from here for the nimble. The recent high at $1,228 seems like a chip shot. That works fine for a deep in-the-money call spread position.

When playing in the gold space, I always prefer to buy the futures, or the (GLD), the world?s second largest ETF by market cap, either outright, or through a longer dated call spread. The dealing costs are far too high for trading physical bars and coins, and can run as high as 30% for a round trip.

Having spent 40 years following mining companies, I can tell you that there are just way too many things that can go wrong with them for me to risk capital. They can get nationalized, suffer from incompetent management, hedge out their gold risk, get hit with strikes or floods, or get tarred by poor equity market sentiment.

I do believe that a true bull market in gold will return some day, just not now. Inflation will make a comeback in the 2020?s. Newly enriched emerging markets will also want their central banks to raise gold holding to western levels, which implies a long term purchase of several thousand metric tonnes.

For all the statistics about gold you?d ever want to read, please visit the World Gold Council at their site at http://www.gold.org/supply-and-demand.

The Spring in Cisco?s System?s Step

Diary, Newsletter, Research

I thought I noticed a spring in the step of Cisco Systems (CSCO) CEO John Chambers when he strutted out on TV to announce earnings last week.

Revenue came in just shy of $12 billion, a 7% improvement over fiscal 2014's Q2, and earnings per share really popped -- up 70% on a GAAP basis (including one-time items) to $2.4 billion from the prior year's "paltry" $1.4 billion.

Yikes!

Business in the US for the router and telecommunication company is going gangbusters. What is more important is the Chambers is seeing ?green shoots? is Europe, which has been a drag on the company?s earnings over the past several years.

This all presents important implications for the health of the global economy, which could be about to get dramatically better. Bring Europe, Japan, and China online, and we?re there.

It all fits in nicely with my own bullish forecasts for stocks in 2015. This has major implications for your own investment portfolio.

Cisco?s hardware is essential for connecting America?s 336 million cell phones. The Broadband spectrum needed for these devices to talk to each other is the new raw material of the 2000?s, replacing the oil, coal, and steel of an earlier century.

Cisco Systems (CSCO) believes that data delivered to mobile devices will skyrocket, from 4.2 billion gigabytes this year to a breathtaking 24.3 billion gigabytes by 2019 (or 24.2 Exabytes if you are interested). That is a fivefold increase in five years.

Blame all those kids watching full-length high definition motion pictures on their cell phones. My own tracking of share prices is no doubt making its contribution.

That means that at the current rate of capital investment, the US will completely run out of broadband capacity sometimes in 2018.

The answer? A lot more investment spending on all things broadband. This includes, the pipes, fiber optic cable everywhere, transmission towers, repeaters, and of course, lots of new routers.

This is all great news for Cisco.

Indeed, this is creating a gold rush for new spectrum as investors rush to buy the few free frequencies that are left.

In January, the Federal Communications Commission (FCC) auctioned off some government owned airwaves. It expected to receive $15 billion for the Licenses. What did it get? An eye popping $44.9 billion.

This is a game changer, and is enough to pay off 10% of this year?s total federal budget deficit. No doubt, they were popping the Champaign at the Treasury Department.

This has whetted appetites for a much larger auction due in 2016 or 2017, when the government sells off its last pieces of useable bandwidth. Like highly valued beachfront property, they?re not making it anymore.

Having covered the computer industry for nearly 50 years, I find all this fascinating. Processing advances have been driven by Moore?s law since 1965. That?s when Intel?s Gordon Moore predicted that computing speed would double every 2 years, while costs halved for the indefinite future. He later amended his theory to 18 months. Here we are in 2015, and he has proved dead on correct.

Telecommunications has its own version. Motorola engineer, Marty Cooper, invented the mobile phone in 1973. He has calculated that ?spectral efficiency? has doubled every 2 ? years since Guglielmo Marconi made his first broadcast in 1910.

Since then, efficiencies have improved by a trillion-fold. Analysts now refer to this forecast as ?Cooper?s Law.?

The logic in picking strikes for the Cisco Systems (CSCO) March, 2015 $27-$29 in-the-money vertical bull call spread is that we can trade against the gap created by the blowout earnings announcement.
With the market having the bit between its teeth, I doubt we will retrace that gap anytime soon.

To visit Cisco?s home page, please click here at http://www.cisco.com/c/en/us/index.html.

Way to Go Marty

The Best is yet to Come in Crude

Diary, Newsletter, Research

For the last few months, I have leapt off my biweekly global strategy webinars to check the weekly crude inventories announced minutes before. This week?s figures absolutely blew me away.

The American Petroleum Institute reported that crude stocks rose a staggering 14.3 million barrels over the past week. This is the biggest weekly build that I can remember after covering the industry for 45 years.

This comes on the heels of a breathtaking build of 6.1 million barrels the previous week.

Will someone please text me when the numbers come out during my next webinar? I hate being in the dark, even when it is just for 20 minutes.

Needless to say, crude prices (USO) fell like a stone, giving up 5.5% in hours. Prices are still plunging as I write this. It confirms my suspicion, voiced assiduously in the earlier webinar, that Texas tea has another run to the downside in store.

The 500,000 barrels a day of new production coming on line over the next four months make this a virtual certainty.

The implications for your investment portfolio are legion.

It means that a new leg down in the oil collapse is now unfolding. We may be in the process of taking another shot at the $43 low in January. Best case, this sets up the double bottom where you should buy the entire energy and commodity sectors. Worse case, we break to a new low in the $30?s.

Industry experts are keeping a laser like focus on the storage facilities at Cushing, Oklahoma. They are rapidly filling up, and will be full at 85 million barrels by June. Today?s numbers bring that day dramatically forward.

Once topped up, the industry could be facing a price Armageddon, and newly produced crude will have nowhere to go.

That will bring widespread capping of producing wells, which are never able to recover production when restored. This will be a terrible outcome for the producing companies and oil lease investors.

Consumers aren?t the only ones who are celebrating.

Oil traders are enjoying their best year since 2009, cashing in on the sky high volatility. Front month volatility is gyrating around the 55% levels. This compares to only 15.45% for the S&P 500.

Traders, eat your hearts out.

Big players like Glencore, Gunvor and Mercuria are cashing in with lower prices vastly offset by much greater turnover. Specialized energy hedge funds are also doing well.

The contango, whereby futures contracts for far month delivery are trading at huge premiums to front month ones, is also generating enormous trading opportunities.

The last time I checked, oil one-year out was trading at a 25% premium. This means you can buy a few hundred thousand barrels, charter a rusted out old tanker, and store it for future sale.

Ultra low interest rates to finance the position provide an additional kicker. Hedge funds with the right credit lines are pouring into the field.

OK, so you?re not set up to borrow billions, charter ships, and swing around huge amounts of crude. Nor am I, for that matter. However, the next best thing is also setting up.

When oil completes its next swan dive, there will be great opportunities in the options market.

One year dated calls on oil majors like Exxon (XOM), Conoco Phillips (COP) and Occidental Petroleum (OXY) and the oil ETF (USO) should rise tenfold in the next recovery if you are able to buy anywhere close to the bottom.

I?ll send out a Trade Alert when I see it.

I Think I See a Spot Over There

How Far Will Biotech Run?

Diary, Newsletter, Research

Long-term readers of this letter have prospered mightily from my addiction to biotech stocks in recent years, one of the most reliably top performing sectors in the stock market.

But have we visited the well one time too many times? Is biotech turning into a bubble that will eventually deliver the same grievous outcome of other past bubbles?

Not yet.

Still, one has to ask the question. No less a figure than Federal Reserve governor Janet Yellen has indicated that she thought valuations in the biotech sector were getting ?substantially stretched.? The Fed doesn?t single out stocks for commentary very often.

Biotech certainly has been a money-spinner for followers of my top performing Trade Alert service, which delivered a 30.5% profit in 2014.

Readers made three round trips in hepatitis C drug developer Gilead Sciences (GILD) in the past four months, adding 5.77% to the value of their portfolios. I believe the company?s blockbuster drug will become the most profitable in history. So do a lot of others.

Longer-term investors bought the Biotech iShares ETF (IBB) on my advice, which gained an impressive 45% last year, and is still rising.

However, biotech has long been a hedge fund favorite.

That means many shareholders are only dating these stocks and are not married to them. The hot money regularly flows in and out, giving the sector more than double the volatility of the main market. A 10% correction in any other stock is worth at least 25% in biotech.

This also makes biotech stocks great to buy on a dip. My last foray into (GILD) occurred after cautious guidance took the shares down a heart stopping 10% in a single day.

This is a great example of how unusually sensitive biotech stocks are to headline risk. I?ve ridden stocks to tremendous heights, watching them pour billions into a single treatment, only to see them crash and burn on failed stage three trials.

That is just the nature of their business. It?s all about all or nothing bets.

It?s just a matter of time before one of the major companies gets stuck with a hickey like this, flushing billions down the drain. That could herald a generalized sector selloff that could last months, or even years.

Biotech is a high-risk sector that should only be held within a well diversified portfolio. You may notice that in the Mad Hedge Fund Trader?s model trading portfolio I never have more than 10% in biotech at any given time. I figure I could handle a total blow up and lose the whole 10% and still stay in business.

When I speak at conferences, strategy luncheons and on TV, I tell listeners of my lazy man?s guide to long-term investment. Only follow three sectors, technology, biotech and energy, and ignore the other 97. You?ll save yourself a lot of time reading pointless research.

Biotech currently accounts for a mere 1% of US GDP. It is on its way to 20%, about where technology is today. That means that a disproportionately large share of earnings growth will spring from biotech over the coming decades.

One way to protect yourself is to stick with the big caps, which are undervalued relative to the sector, and are expected to haul in 20% earnings growth this year.

Many smaller companies prices are assuming a total certainty of the success of their drugs. The reality is that this only happens about half the time.

If you do go with small caps, I would take a venture capital approach. Buy a dozen with the expectation that many will go under, a couple do OK, and one goes through the roof. Never put all your eggs in one basket.

It also helps that you have someone with a scientific background making your picks, like me. Because drug companies promise such amazing results, like curing cancer, the sector has always been prone to hype and over promotion. I never met I biotech CEO who didn?t believe his company was about to deliver the next panacea, taking his shares up tenfold.

One plus for biotech is that it has unusually strong patent protection, which usually extends out 20 years for new products. There are not a lot of Chinese companies that can imitate their drugs.

That means earnings can be predicted far into the future, and are largely immune from the economic cycle. If you?re sick, you want to get cured regardless of whether the GDP is growing or shrinking, or whether interest rates are low or high.

Make sure that your investments have plenty of new developments in the pipeline. Expiring patents on past winners with no replacements can spell certain death for a stock price.

Publicly listed drug companies are now venturing into research fields that were only science fiction when I was in the lab 45 years go. ?Gene editing? whereby genes can be repaired, edited and then turned on and off at will, is now becoming a burgeoning new science.

It promises to cure the whole range of human maladies, including heart disease, cancer, obesity and a whole range of degenerative diseases (including some of mine).

Expect to hear a lot more about TALENs (transcription activator-like effector nucleases) and CRISPR (clustered regular interspaced short palindromic repeats). You heard it here first.

What is truly fascinating is that hybrid computer science/biochemical scientists are now taking algorithms developed y the National Security Agency hackers and using them to decode human DNA. (I hope I?m not speaking too much out of school here.)

Gene editing is the natural outcome of the discovery of recombinant DNA technology developed during the 1970?s by Paul Berg, Herbert Boyer, and Stanley Cohen, all early heroes of mine.

Since none were the equity participants of private companies, the initial rewards for the breakthrough were minimal. I remember that one received a new surfboard for his efforts.

Berg went on to found Genentech (GENE) in 1977 and got rich. If I hadn?t gone into the stock market, that is almost certainly where I would have ended up.

How things have changed.

The short answer here is that biotech does have further to run. A lot further.

The rate of innovation of biotechnology is accelerating so fast that it will continue to spew out fantastic investment opportunities for the rest of your lives. So expect to receive many more Trade Alerts in this area in the years to come.

But it is definitely an ?E? ticket ride. So fasten your seatbelt on your path to riches.

As for me, I?m thrilled that I got to live so long to see this stuff happen. At times, it was a close run race.