Research Archives - Mad Hedge Fund Trader

End of the Commodity Super Cycle

When the Trade Alerts quit working. I stop sending them out. That?s my trading strategy right now. It?s as simple as that.

So when I received a dozen emails this morning asking if it is time to double up on Linn Energy (LINE), I shot back ?Not yet!? There is no point until oil puts in a convincing bottom, and that may be 2015 business.

Traders have been watching in complete awe the rapid decent the price of Linn Energy, which is emerging as the most despised asset of 2014, after commodity producer Russia (RSX).

But it is becoming increasingly apparent that the collapse of prices for the many commodities is part of a much larger, longer-term macro trend.

(LINN) is doing the best impersonation of a company going chapter 11 I have ever seen, without actually going through with it. Only last Thursday, it paid out a dividend, which at today?s low, works out to a mind numbing 30% yield.

I tried calling the company, but they aren?t picking up, as they are inundated with inquires from investors. Search the Internet, and you find absolutely nothing. What you do find are the following reasons not to buy Linn Energy today:

1) Falling oil revenue is causing Venezuela to go bankrupt.
2) Large layoffs have started in the US oil industry.
3) The Houston real estate industry has gone zero bid.
4) Midwestern banks are either calling in oil patch loans, or not renewing them.
5) Hedge Funds have gone catatonic, their hands tied until new investor funds come in during the New Year.
6) Every oil storage facility in the world is now filled to the brim, including many of the largest tankers.

Let me tell you how insanely cheap (LINN) has gotten. In 2009, when the financial system was imploding and the global economy was thought to be entering a prolonged Great Depression, oil dropped to $30, and (LINN) to $7.50. Today, the US economy is booming, interest rates are scraping the bottom, employment is at an eight year high, and (LINE) hit $9.70, down $70 in six months.

Go figure.

My colleague, Mad Day Trader, Jim Parker, says this could all end on Thursday, when the front month oil futures contract expires. It could.

It isn?t just the oil that is hurting. So are the rest of the precious and semi precious metals (SLV), (PPLT), (PALL), base metals (CU), (BHP), oil (USO), and food (CORN), (WEAT), (SOYB), (DBA).

Many senior hedge fund managers are now implementing strategies assuming that the commodity super cycle, which ran like a horse with the bit between its teeth for ten years, is over, done, and kaput.

Former George Soros partner, hedge fund legend Paul Tudor Jones, has been leading the intellectual charge since last year for this concept. Many major funds have joined him.

Launching at the end of 2001, when gold, silver, copper, iron ore, and other base metals, hit bottom after a 21 year bear market, it is looking like the sector reached a multi decade peak in 2011.

Commodities have long been a leading source of profits for investors of every persuasion. During the 1970?s, when president Richard Nixon took the US off of the gold standard and inflation soared into double digits, commodities were everybody?s best friend. Then, Federal Reserve governor, Paul Volker, killed them off en masse by raising the federal funds rate up to a nosebleed 18.5%.

Commodities died a long slow and painful death. I joined Morgan Stanley about that time with the mandate to build an international equities business from scratch. In those days, the most commonly traded foreign securities were gold stocks. For years, I watched long-suffering clients buy every dip until they no longer ceased to exist.

The managing director responsible for covering the copper industry was steadily moved to ever smaller offices, first near the elevators, then the men?s room, and finally out of the building completely. He retired early when the industry consolidated into just two companies, and there was no one left to cover. It was heartbreaking to watch. Warning: we could be in for a repeat.

After two decades of downsizing, rationalization, and bankruptcies, the supply of most commodities shrank to a shadow of its former self by 2000. Then, China suddenly showed up as a voracious consumer of everything. It was off to the races, and hedge fund managers were sent scurrying to look up long forgotten ticker symbols and futures contracts.

By then commodities promoters, especially the gold bugs, had become a pretty scruffy lot. They would show up at conferences with dirt under their fingernails, wearing threadbare shirts and suits that looked like they came from the Salvation Army. As prices steadily rose, the Brioni suits started making appearances, followed by Turnbull & Asser shirts and Gucci loafers.

There was a crucial aspect of the bull case for commodities that made it particularly compelling. While you can simply create more stocks and bonds by running a printing press, or these days, creating digital entries on excel spreadsheets, that is definitely not the case with commodities. To discover deposits, raise the capital, get permits and licenses, pay the bribes, build the infrastructure, and dig the mines and pits for most commodities, takes 5-15 years.

So while demand may soar, supply comes on at a snail pace. Because these markets were so illiquid, a 1% rise in demand would easily crease price hikes of 50%, 100%, and more. That is exactly what happened. Gold soared from $250 to $1,922. This is what a hedge fund manager will tell us is the perfect asymmetric trade. Silver rocketed from $2 to $50. Copper leapt from 80 cents a pound to $4.50. Everyone instantly became commodities experts. An underweight position in the sector left most managers in the dust.

Some 14 years later and now what are we seeing? Many of the gigantic projects that started showing up on drawing boards in 2001 are coming on stream. In the meantime, slowing economic growth in China means their appetite has become less than endless.

Supply and demand fell out of balance. The infinitesimal change in demand that delivered red-hot price gains in the 2000?s is now producing equally impressive price declines. And therein lies the problem. Click here for my piece on the mothballing of brand new Australian iron ore projects, ?BHP Cuts Bode Ill for the Global Economy?.

But this time it may be different. In my discussions with the senior Chinese leadership over the years, there has been one recurring theme. They would love to have America?s service economy.

I always tell them that they have a real beef with their ancient ancestors. When they migrated out of Africa 50,000 years ago, they stopped moving the people exactly where the natural resources aren?t. If they had only continued a little farther across the Bering Straights to North America, they would be drowning in resources, as we are in the US.

By upgrading their economy from a manufacturing, to a services based economy, the Chinese will substantially change the makeup of their GDP growth. Added value will come in the form of intellectual capital, which creates patents, trademarks, copyrights, and brands. The raw material is brainpower, which China already has plenty of.

There will no longer be any need to import massive amounts of commodities from abroad. If I am right, this would explain why prices for many commodities have fallen further that a Middle Kingdom economy growing at a 7.5% annual rate would suggest. This is the heart of the argument that the commodities super cycle is over.

If so, the implications for global assets prices are huge. It is great news for equities, especially for big commod
ity importing countries like the US, Japan, and Europe. This may be why we are seeing such straight line, one way moves up in global equity markets this year.

It is very bad news for commodity exporting countries, like Australia, South America, and the Middle East. This is why a large short position in the Australian dollar is a core position in Tudor-Jones? portfolio. Take a look at the chart for Aussie against the US dollar (FXA) since 2013, and it looks like it has come down with a severe case of Montezuma?s revenge.

The Aussie could hit 80 cents, and eventually 75 cents to the greenback before the crying ends. Australians better pay for their foreign vacations fast before prices go through the roof. It also explains why the route has carried on across such a broad, seemingly unconnected range of commodities.

In the end, my friend at Morgan Stanley had the last laugh.

When the commodity super cycle began, there was almost no one around still working who knew the industry as he did. He was hired by a big hedge fund and earned a $25 million performance bonus in the first year out. And he ended up with the biggest damn office in the whole company, a corner one with a spectacular view of midtown Manhattan.

He is now retired for good, working on his short game at Pebble Beach.

Good for you, John.

Not as Shiny as it Once Was

Oil Grinch KO?s Christmas Rally

Diary, Newsletter, Research

The continuing collapse in oil prices has finally spilled over into the real world, at its worst knocking 290 points off of the Dow Average yesterday.

Traders who grew accustomed to a market that went up like clockwork every day were in for a rude awakening. Is the positive case for equities coming to an end?

Is the bull dead?

Not yet. All we are seeing is a normal 5%-7% correction in a long-term uptrend. It?s really all about the numbers, as it always is.

American companies are still on tract to increase earnings by 10% in 2015, and S&P 500 earnings are set to reach $130. Technology and innovation are hyper accelerating. Our energy costs have been cut in half, creating a giant tax cut. The world still wants to send its money here.

Goldilocks is still alive and well, just momentarily hiding under the bed.

Yes, it?s another buying opportunity.

This time, however, it?s different.

Oil has gone down so fast, some $46, or 43% in a scant six months that it has set the cat among the pigeons within the producing countries. The decline has been so precipitous that the budgets of oil producing countries from Saudi Arabia, to Russia, to Norway, have taken a real walloping. What else would you expect when your principal revenue source suddenly halves?

The plunge caught the producers totally by surprise. So to meet budget shortfalls, they are having to raise cash from their sovereign wealth funds. Some 15 of the world?s 20 largest sovereign wealth funds are run by oil producing countries.

To raise money, they are having to sell off investments, primarily stocks, and especially energy stocks. That is one of the few industries they actually understand.

This all means that the selling should dry up going into yearend, once budgetary requirements are met. If the price of oil stabilizes here at $61, or heaven forbid, starts to rise, then their selling of stocks completely ceases.

The bull market returns.

After suffering through a Trade Alert drought that has lasted more than a month, there are finally some nice trades setting up. I?m thinking specifically about the S&P 500 (SPY), energy (OXY), (XOM) and Solar stocks (SCTY), (FSLR), (VSLR), and even a chance to get back into the front-runners, technology (XLK) and biotech (BBH). Europe is also finally starting to look enticing.

Watch this space.

Goldilocks is Still Alive and Well

Update on Linn Energy (LINE)

Diary, Newsletter, Research

After the catastrophic 25% fall in the units of Linn Energy (LINE) over the past three days, I thought I?d better take another look at the company. The company?s units have now crashed by an eye popping 55% since the May $31 high.

The units have been trading as if the company is imminently going bankrupt. The contradiction is that it clearly isn?t. This is basically a healthy company that is undergoing some volatility typical for the sector.

Is this logical or rational?

No, not at all. But when a real panic hits, you sell first, and ask questions later. That has clearly been happening in the oil patch for the past month.

At the $14 low on Monday, the units were yielding a spectacular 20.7% annualized. This is not some imaginary pie in the sky estimate. This is what the actual $0.24 monthly cash payout announced by the company as recently as December 1 works out to for holders of record as of Thursday, December 11.

Nor are these spectacular yields based on some wild leveraged bets in the financial markets. (LINE) is predominantly a natural gas company, a commodity which has seen its price go largely unchanged for the past two years, hovering above $3.50. And much of its production has already been hedged against any downside risk with offsetting positions in the futures market.

I always try to use every loss as a learning opportunity, or the lesson goes wasted, and is doomed to repetition.

The reasons above were why I shot out a quick Trade Alert last week to buy (LINN) at $16.67. It was an uncharacteristically cautious position for me. But calling bottoms in major trends is always a risky enterprise, so I went small, very small. I bought the underlying units, not the options, and then in unleveraged form.

Initially things went great, rocketing 13% right out the door. Short term, smart traders, like Mad Day Trader Jim Parker, then put in tight stop losses below. That way, he was playing with the house?s money in any further upside, and is assured against loss during any rapid reversal.

I, unfortunately was too slow to do so, and had to bear the cost of the sudden 25% drop. Remember, being right 80% of the time means that I am wrong 20% of the time. But with only a 10% position, my loss never exceeded 1.60% of my total portfolio, something I can live with, and ride out until any recovery.

My guess is that many (LINE) holders violated my ?Sleep at night rule,? lured by the hefty dividend payout into owning too many units.

Once burned, twice forewarned.

My advice to you now is ?Hang on.? You?ve already taken the hit. Don?t bail here and miss the recovery, which will probably begin in earnest next year.

The November Nonfarm Payroll Report is a Game Changer

Diary, Newsletter, Research

Finally, the economy is starting to deliver the blockbuster numbers that I have been predicting all year.

The 321,000 gain in the November nonfarm payroll on Friday wasn?t just good, they were fantastic, truly of boom time proportions. It was the best report in nearly three years. The headline unemployment rate stayed at 5.8%, a seven year low.

It vindicates my ultra bullish view for the US economy of a robust 4% GDP growth rate in 2015. It also makes my own out-of-consensus $2,100 yearend target for the S&P 500 a chip shot (everybody and his brother?s target now, but certainly out-of-consensus last January).

There has been a steady drip, drip of data warning that something big was headed our way for the last several months. November auto sales a 17 million annualized rate was a key piece of the puzzle, as consumers cashed in on cheap gas prices to buy low mileage, high profit margin SUV?s. The Chrysler Jeep Cherokee, a piece of crap car if there ever was one, saw sales rocket by a mind-boggling 60%!

It reaffirms my view that the 40% collapse in the price of energy since June is not worth the 10% improvement in stock indexes we have seen so far. It justifies at least a double, probably to be spread over the next three years.

It also looks like Santa Claus will be working overtime this Christmas. Retailers are reporting a vast improvement over last year?s weather compromised sales results. A standout figure in the payroll report was the 50,000 jobs added by the sector. This is much more than just a seasonal influence, as FedEx and UPS pile on new workers.

The market impact was predictable. Treasury bond yields (TLT) spiked 10 basis points, the biggest one-day gain in four years. My position in the short Treasury ETF (TBT) saw a nice pop. Unloved gold (GLD) got slaughtered, again, cratering $25.

Stocks (SPY) didn?t see any big moves, and simply failed to give up their recent humongous gains once again. A major exception was the financials (XLF), egged on by diving bond prices. My long in Bank of America (BAC) saw another new high for the year.

All in all, it was another good day for followers of the Mad Hedge Fund Trader.

To understand how overwhelmingly positive the report was, you have to dive into the weeds. Average hourly earnings were up the most in 17 months. The September payroll report was revised upward from 256,000 to 271,000, while October was boosted from 214,000 to 243,000.

Professional and business services led the pack, up a whopping 86,000. There are serious, non minimum wage jobs. Job gains have averaged an impressive 278,000 over the last three months.

The broader U-6 unemployment rate fell to 11.4%, down from 12.7% a year ago. Most importantly, wage growth is accelerating, and hours worked are at a new cyclical high.

In view of these impressive numbers, it is unlikely that we will see any substantial pullback in share prices for the rest of 2014. For that, we will have to wait until 2015.

Here is Your Big New Year Trade

Diary, Newsletter, Research

When Dr. Copper (CU), the only commodity with a PhD in economics, suddenly collapses from a heart attack, risk takers everywhere have to sit up and take notice.

Since the 2011 top, the red metal has collapsed a shocking 40%. It has given back a nausea inducing 10% just in the last two weeks. Will copper take down the rest of the financial markets with it?

Is the bull case for risk assets over?

I doubt it.

So called because of its uncanny ability to predict the future of the global economy, copper is warning of dire things to come. The price drop suggests that the great Chinese economic miracle is coming to an end, or is at least facing a substantial slowdown, the government?s 7.5% GDP target for 2014 notwithstanding.

It?s a little more complicated than that. Copper is no longer the metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals are now hoarding 100 pound copper bars and posting them as collateral for loans from banks or backstreet money lenders.

China is, in effect, on a copper standard. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash, crushing spot prices.

The latest plunge has been fueled by continuing rumors of an imminent Chinese banking crisis. The Middle Kingdom?s first corporate bond default in history, by a third tier solar company a few years ago, further heightened fears. The implicit government guarantee that was believed to back this paper suddenly went missing in action.

The high frequency traders are now in the copper futures and spot markets in force, whipping around prices and creating unprecedented volatility. Notice how they seem to be running the movie on fast forward everywhere these days? Because of this, we could now be seeing an overshoot on the downside in copper.

Copper, along with all other hard assets, have also been taking a pasting from the strong US dollar. A robust greenback has effectively raised the price of copper in non dollar currencies in big consuming countries, like Japan and Europe. The only way to adjust for this is for the traders to take down dollar prices, which the markets have been doing with a vengeance.

It is no coincidence that copper has been falling in almost perfect lockstep with the rest of the hard asset universe, including gold, silver, oil, natural gas, coal, all the ags and ag stocks, and the commodity producing currencies of the Australian (FXA) and Canadian (FXC) dollars. The world wants paper assets (stocks and bonds), and none of the stuff you can drop on your foot (thanks Dennis).

However, cheaper copper is ultimately great news for we copper consumers, as with everything else.

Watch Dr. Copper closely. At the first sign of any real bottom, you should load up on long dated calls for Freeport McMoRan (FCX), the world?s largest producer, which also has been similarly decimated. The leverage in the company is such that a 10% rise in the price of copper triggers a rapid 20% rise or more in (FCX) shares.

I can wax one here about major structural changes in the Chinese economy that are underway, as the real problem. As the Middle Kingdom shifts from an export driven economy to a domestic demand one, there is less need for the red metal and more need for silicon and brains. But this isn?t something you can trade off of today.

So what is copper really telling us? The longer-term charts show a prolonged bottoming process. If $2.90 fails, we could see a revisit to the five-year low at $2.50.

That?s your load the boat price. During the global synchronized economic recovery that is underway, you want to view every panic sell off in a single asset class like this as a gift.

There is one further hope for copper. The Shanghai stock market has been absolutely on fire this year, rocketing some 40% since June, even beating the heady US exchanges. When risk accumulation accelerates to this extent in the world?s largest copper consumer that is great news for copper.

The two asset classes are now wildly out of sync. Either Chinese stocks are ridiculously overpriced and soon have to crash to come back in line with the red metal. Or copper has to rise.

I vote for the latter. It could be your big New Year trade.

Loading Up On Linn Energy

Diary, Newsletter, Research

You can pay up to $17 a unit for (LINN) and have a good chance of making a quick, snapback profit.

All of a sudden, everyone I know in Texas, and there are quite a few of them, called to tell me to buy Linn Energy, all within the space of one hour. I summarize their diverse comments below.

We have reached a margin call induced capitulation sell off in Linn Energy this morning, when oil was trading as low as $64 a barrel at the European opening.

There were obviously also a couple of leveraged energy and commodity funds that blew up and are undergoing forced liquidation at the market.

Add to that all the individuals who bought (LINN) on margin when the yield was only 8% so they would take 16% home to the bank.

This has taken the price of the units down to an artificial, and hopefully temporary, low of $15.90. At that price, the yield was a mind blowing 17% (after all, this is California).

It was a classic ?Throwing out the baby with the bathwater? moment. (LINN) gets 54% of its $1.6 billion in revenues from natural gas, which has held up remarkably well in the energy melt down, thanks to the early arrival of the polar vortex this winter.

Only 22% of its income derives from oil related projects, and half of this is hedged in the futures market from any downside exposure in the price of oil, according to the company?s recent pronouncements. Linn has actually plunged more than oil from its recent peak.

Does a loss on 10% of its revenues justify a gut wrenching 50% drop in the units? I think not.

But then, I am being rational and analytical, and I can assure you that the energy markets are now anything but rational and analytical.

Its not like oil is going to stay this low forever. Try to buy oil for delivery in the futures market two years out, and it has already recovered to $75/barrel, and there is very little available at that price.

What happens when the price of something goes down? Demand increases, and that will be good for Linn Energy, which is inherently more of a volume play on gas and oil, not a price play.

Keep also in mind that the absurd salaries the company was paying for workers in the Midwest has also vaporized. Roustabouts can now be had for as little as $75,000 a year compared to $200,000 only six months ago. This will cut (LINN)?s costs quickly and flow straight to the bottom line.

Falling costs and rising volumes sound like a winning formula to me.

And if you have the courage to buy the units here on margin, the yield rockets to a breathtaking 34%. It therefore can?t stay this low for long.

Linn Energy, LLC is an independent oil and natural gas company based in Houston, Texas. It holds oil and gas producing assets in many parts of the United States: Mid-Continent, including properties in Texas, Louisiana, and Oklahoma; the Hugoton Basin in Kansas; the Green River Basin in Wyoming; East Texas; California, including the Brea-Olinda Oil Field in Los Angeles and Orange Counties; the Williston/Powder River Basin, which includes a position in the Bakken Formation; Michigan/Illinois; and the Permian Basin in Texas.

At the end of 2012, the firm reported proved reserves of 4,796 bcfe (billion cubic feet equivalent) of oil and gas combined. Of this total, 24% was crude oil, 54% natural gas, and 22% natural gas liquids.

Structured as a master limited partnership for tax purposes, the firm is required to pay out most of its cash reserve to unitholders (stockholders) each quarter as distributions, thereby ducking the double taxation of corporate taxation.

However Linn retains some attributes of a limited liability corporation, including giving voting rights to its unitholders. Linn Energy also operates a subsidiary, LinnCo, a C Corporation, which is subject to different tax rules from its parent company.

All we have to do is survive the near term volatility and Linn Energy will be a winner.

An Iran Peace Deal and Your Portfolio

Diary, Newsletter, Research

With the price of oil (USO), (XLE) hitting an eye popping $64 this morning, in the wake of the failed OPEC summit in Vienna, it is clear that something long term, structural, and epochal is going on.

But what is it?

We mere mortals are blind to it, but the financial markets haven?t the slightest doubt. Blame the wisdom of crowds. There is something big going on somewhere.

So I thought it would be a good time to check in with my friend and expert on all things international, David Hale, of David Hale Global Economics.

I have been relying on David as my global macro economist for decades, and I never miss an opportunity to get his updated views.

The challenge is in writing down David?s eye popping, out of consensus ideas fast enough, because he spits them out in such a rapid-fire succession.

Since David is an independent economic advisor to many of the world?s governments, largest banks, and investment firms, I thought his views would be of riveting interest. For my last interview with David, please click here.

On November 21, David was on Capitol Hill testifying in front of congress about the implications of a peace deal with Iran. He was kind enough to pass on to me a transcript of his talk.

The Iran nuclear negotiations broke up last week, extending the deadline for the current round by another seven months, to June 2015.

What David had to say was eye opening. If successful, a deal would have momentous implications for not just the US, but the global economy as well.

All trade with Iran ceased in the wake of the overthrow of the Shah of Iran by fundamentalist religious fanatics led by the Ayatollah Khomeini in 1979. The tortuous yearlong Iran Hostage Crisis followed, and relations with the US went into a deep freeze.

US Secretary of State John Kerry certainly has his work cut out for him today. Iran and America deeply distrust each other and philosophically couldn?t be further apart. They have been fighting proxy wars against each other for three decades, both in the analogue and digital worlds.

Remember Stuxnet?

It also doesn?t engender Iranian trust that the US has decimated a half dozen Arab countries in 30 years, and has more than the means to continue on that path, if it so desires.

Now 35 years later, America and Iran oddly find themselves on the same side of the latest Middle Eastern conflict. Sunni extremist forces lead by ISIL has launched a full-scale invasion of Iraq, capturing about one third of the country, and butchering Shiite opponents along the way in true, barbaric, 14^th century fashion.

It has not gone unnoticed in Tehran that steady US air attacks against ISIL have meshed nicely with Iranian ground support to accomplish the same, although ?officially? there has been no cooperation whatsoever.

Not surprisingly, nuclear talks between the two countries, long considered a pipedream and simmering on a distant back burner have suddenly come to life.

If successful, a nuclear deal with Iran would have momentous implications, for not just the US, but the global economy as well.

First and foremost, Iran would be able to increase its oil exports by 1 million barrels a day, and then 1.5 million barrels a day over 2-3 years. The deluge could take the price of Texas tea down to $50-$60 a barrel and keep it there for a while.

Such a collapse, down 56% from the June peak, would amount to a $400 billion annual tax cut for the global economy. It would add 0.2% a year of GDP growth for every $10 price drop.

So the boost that we have seen so far amounts to an impressive 1% growth pop. That is an enormous number, increasing the world?s projected economic activity by a full third.

Major energy importers, like Europe, Japan, China, and India would benefit mightily. The US would prosper as well, as one third of its oil still comes from abroad.

It would be a disaster for high cost energy exporters, including Russia, Venezuela, Nigeria, and Canadian tar sands.

Russia, in particular, would get it right between the eyes. Oil and gas account for a whopping 68% of Russian exports and 45% of government revenues. To defend a crashing Ruble, the central bank has embarked on a series of gut wrenching interest rate hikes.

Russia is now looking into the jaws of its own Great Recession. After seeing its economy shrink this year by -0.2%, it could nosedive by at least 5% in 2015.

When they talk about self-sufficiency, they really mean starvation. This is why I have been saying all along that the Ukrainian crisis is going nowhere, except to create buying powers for equity investors.

Venezuela is a basket case, depending on oil for 90% of its exports. Expect hyperinflation, leading to a headline grabbing default on its national debt. Political instability is to follow.

Another big plus for the world economy is the reemergence of Iran as a significant consumer. This is not a small country. It has a population of 78 million and a $369 billion GDP. Sanctions have successfully crippled the economy, shrinking its GDP by -5.8% in 2012 and another -1.9% last year.

The sanctions have not been a one-way street. They have cost the US a not inconsequential $175 billion in sales over the past 17 years. A rebound would lead to a surge of exports of consumer goods (iPhones), and oil drilling equipment to facilitate a long delayed modernization of the industry there.

A major roadblock to peace has been the Revolutionary Guard. Originally an elite group of fighters during the revolution, it has evolved into a modern day Mafia.

It controls the black market, smuggling and a host of other illegal activities, earning billions in illicit profits along the way. It has a vested interest in maintaining the status quo. War with America is good business for them.

Iran is now a classic case of where the government hates us, and the people love us.

I have written extensively in the past about the global implications of peace with Iran. For my latest opus, please click the titles: Here Comes the Next Peace Dividend and Why You Should Care About the Iranian Rial Collapse.

To learn more about David Hale and the extensive list of services he offers; please visit the website of David Hale Global Economics, http://www.davidhaleweb.com.

Loading the Boat with Solar City

Diary, Newsletter, Research

In recent weeks, I couldn?t help but notice the green and white vans of Solar City (SCTY) visiting my neighbors. My trader?s radar went up, so I thought there might be an opportunity here.

What I found made an intriguing investment opportunity. As a preeminent supplier of solar energy, Solar City is a de facto indirect call option on the price of oil, not a bad bet here at $74 and change.

As a huge consumer of capital, the company is a major beneficiary of the prolonged low interest rate scenario which I envision.

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.

Solar City has also recently completed several high tech acquisitions which will enable it to lower costs while enhancing output efficiencies.

Did I mention that anything Elon Musk Touches turns to gold?

The stock here also looks attractive. Collapsing oil prices had a leveraged effect on (SCTY) shares, dropping a heart stopping 42% in only three months. Heaven knows investors are starved for cheap stocks these days.

This week, (SCTY) poked its nose above the 50 day moving average. If it hold?s then it is off to the races. My only concern here is the volatility that the Thursday OPEC meeting in Vienna is certain to bring to energy markets.

With my second Tesla (TSLA) about to be delivered, the Model X SUV, it was time for me to review my electricity bill.

My first Tesla, a very early Model S-1 (chassis number 125), boosted my monthly power consumption from 600 kWh to 1,800 kWh per month, about what a small industrial facility might use.

Yet, my bill from PG&E increased from only $350 to $450 a month. This is because they effectively give away power for free from 12:00 AM to 7:00 AM to qualified EV users, charging me only a scant 4.7 cents per kWh.

On my suggestion, Tesla then upgraded their software so vehicles could be programmed to recharge only at these hours. That means it is costing me $4.00 for a full 80 kWh charge that can take me 255 miles, or 1.6 cents a mile. That doesn?t include the enormous savings on maintenance (there is none).

Well then! The IRS currently allows a mileage deduction of 56 cents per mile for business purposes, so that?s an opportunity to exploit right there.

Given that the average US car now gets 25 miles per gallon of gasoline (and that is being generous), that means my equivalent cost for running my S-1 works out to paying a scant 40 cents a gallon.

This compares to the $2.79 at the local service station ($2.57 at Costco), which is at a four year low, or a savings of 86%. That is a little more than I paid for gas when I first started driving a beat up VW Bug at the Santa Anita Race Track parking lot back in 1967.

That sounds like a deal to me.

However, the second Tesla is likely to boost my monthly power consumption from 1,800 kWh to 3,000. When PG&E sees bills that big, they assume someone is operating an illegal marijuana grow house and send the DEA to kick your door down at 5:00 AM on a Monday morning.

So I was on the phone to Solar City the next morning. What I heard was nothing less than amazing.

For a start, they called up a Google Earth mapping program that focused on a picture of my roof from a low earth orbit satellite (Google has invested $280 million in Solar City). Then a second program autofits their existing solar panels to my roof and spit out a mass of numbers.

This complete stranger told me things about my roof that I never knew, like it was 4,000 square feet of flat concrete tiles on 14 planes. Welcome to the 21^st century.

I nervously looked down and made sure my fly was fully zipped up.

He went on to tell me that he could fit a 15 kW DC system on my roof that would generate 106% of my power needs, generating 19,365 kWh a year. That would make me completely self sufficient in electricity, even though I will be charging two hulking Tesla 1,000 pound lithium ion batteries every day.

They will install a ?net? two-way electric meter on my house. When the sun shines, it will run backwards as I can sell power to PG&E at high prices. So many people are doing this now that the traditional afternoon price spike in electricity had virtually disappeared.

At night, when I recharge my cars, I would then buy cheap power from Solar City. No storage devices are required. The PG&E grid is effectively the storage system. That would turn me into a day trader of electricity, selling high by day and buying low by night. I love it!

How did their satellite know I was a hedge fund trader? What else does it know?

Now comes the best part. The cost of the installation and panels was $66,000. Solar City would do it for free. Yes, free, as in gratis, with no money down.

They would lease me the panels for 20 years, with an annual price increase of 6.2%. That would cut my monthly electricity bill from $450 to $200. It does this by eliminating the tier 3, 4, and 5 prices I am currently paying PG&E.

If I sell my house, I can either buy out my contract at the discounted, fully depreciated value, or pass it on to the new owners. It is well known that solar panels significantly increase the value of existing homes.

Installation can be done in a day. But it can only take place on unbreakable concrete tile roofs. Those made of clay tiles, metal, tar and gravel, wood shakes, or slate don?t work for various reasons. You need a FICO score of 680 or better to qualify. There is a 60-day waiting list to get this done.

It didn?t take me long to figure out the game here. By purchasing the panels and leasing them to me, they keep the 30% government subsidy for capital investments in alternative energy, which works out to $19,890 for my house alone. Solar City also gets to depreciate these panels on an accelerated schedule, mostly in the first five years.

This explains why Solar City has grown larger than the next 15 competitors combined. Solar City?s largest customer is the US Army, which has already installed panels on 1 million structures.

There is one cautionary note to add here. The government subsidies that help float the company expire in 2018, 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.

As with everything else Elon Musk touches, an investment in Solar City has been wildly successful. Since the company went public at the end of 2012, the shares have risen by an awesome 670%. Needless to say, with no earnings, and no dividend, the $5.5 billion market cap company may appear hopelessly expensive.

Like with Elon?s other company, Tesla, you aren?t betting on the value of the business today, but where it will be in five years, when it has a far larger share of the market.

Given Musk?s track record so far, that is a bet that I am willing to take.

For a detailed training video on how to execute a vertical bull call spread, please click here at https://www.madhedgefundtrader.com/ltt-executetradealerts/.

My Home from Outer Space

It?s Been a Long and Winding Road Driving From this?

To This

There?s a Profit in Here Somewhere

The Yearend Melt Up Has Started!

Diary, Newsletter, Research

Any doubts that my bullish call on global risk markets would play out as promised were blown away on Friday.

That was when the central banks of China and Europe delivered a surprise, one two punch of monetary stimulus for their own troubled economies. The quantitative easing baton has successful been passed from America?s Federal Reserve to central bankers abroad.

The net net for you and I is that stocks and the dollar will continue to appreciate.

Specifically, China came out of the blue with a 0.4% interest rate cut, thus stimulating the world?s largest emerging market.

Then the European Central Bank?s president, Mario Draghi, said he would take whatever steps necessary to return the continent to a 2% inflation rate, up from today?s 0.40%. Unbelievably, Spanish ten-year bond yield fell below 2% in a heartbeat and German ten year funds pierced 0.80%.

For good measure, the Japanese central bank then chimed in, boosting the country?s money supply growth by 33% as promised earlier. Saying is one thing, but doing it is much better, especially when it carries a radical tinge.

The measures make my 2,100 target for the S&P 500 by the end of December a pretty safe bet. Look for a tedious, prolonged sideways grind, followed by rapid headline driven pop. Easy entry points will be few.

It really is one of those ?Close your eyes and buy? type of markets. I doubt we get pullback of less than 3% in the major indexes this year. Volatility will remain muted. All the black swans of landed.

It gets better.

This kind of market action could continue for another three years. After the ?Great Recession?, we are now witnessing the ?Great Recovery?. That means returning to a 3% or better GDP growth rate and 10% annual corporate earnings increases.

Add in 2% a year in dividend yields, and you get a (SPY) that rises by 10% a year. Look at the 100-year average gain for stocks and it comes in remarkably close to this number. Factor in an earnings multiple increase from the current 16, and they will rise faster.

This is all Goldilocks on steroids. Interest rates, the cost of labor, energy, and commodity price inputs stay low, earnings rise, and everybody else in the world sends their money here because it is the best bet going.

I all works for me, and I hope, you too!

It All Works for Me!

Trade Alert Drought Explanation and My Market Take

Diary, Newsletter, Research

Those of you who recently purchased the Mad Hedge Fund Trader?s mentoring service may have noticed a sudden drop off in Trade Alerts.

During October, I sent out a record 44 Alerts and Updates. As a result, that month was my best of the year, bringing in a gain of 6.69%. This month, only 5 Trade Alerts have gone out.

What gives?

I assure you, I have not been basking in the sun on a yacht in the Caribbean. Nor have I been catching the end of the ski season on New Zealand?s South Island. I have not even taken off on a hundred mile snowshoe across the High Sierras (that is not scheduled until Thanksgiving week).

No, I?m afraid that I have to tell you that the problem has been the market. I like to focus on sending out Trade Alerts that have an overwhelming chance of success. The fundamentals, the technical?s, the sun, moon, and stars all have to line up perfectly.

When they don?t, I don?t trade. It?s called maintaining discipline. The same is true for my friend, Mad Day Trader, Jim Parker. Sometimes, the best trades are the ones you think about, but never do, because your models say ?Stay away!?

When I ran my big hedge fund during the 1990?s I developed a perfect leading indicator. It was based my own clients? cash flows. When money poured in, it reliably signaled a market top. When it flowed out, it presciently indicated a market bottom.

It made absolutely no difference what my own performance was. If I was up 40% on the year, and the stock market dove 10%, investors wanted their money back?and now! No excuses, no explanations.

When investors wanted to redeem, I bought them out with my own money. Eventually, over the years, I ended up owning the entire hedge fund, which I then sold at a big premium at the market top to a group of foreign investors.

The closing date was January 1, 2000, four months before the beginning of the Great Dotcom crash. People told me I was stupid for four months?then I never heard from them again, except to occasionally see their resumes put in front of me by hopeful headhunters.

I am seeing the same sort of behavior in the newsletter business. Market surges bring in large numbers of new subscribers, who then expect immediate gratification in the form of a ton of Trade Alerts. At market bottoms the PayPal account goes completely dormant.

If I met new subscriber expectations, I would create a perfect money destruction machine, one that mechanically buys tops and sells bottoms. That is a great way to buy a spanking brand new mega yacht for your broker, but not for yourself.

So what should you expect from the Mad Hedge Fund Trader? To get buried in Trade Alerts when conditions are ideal, and sit on your hands when they aren?t.

That is when you?re supposed to be reading those deep, insightful research pieces that I send you every day, and drawing up short lists of things to do when the call to action arises. Chance rewards the prepared.

Keeping you out of a high risk/low return market is a far more valuable service that I can provide than tying you to a low risk/high return one.

Hint: Just because you bought a new subscription to the Global Trading Dispatch doesn?t mean that trading conditions have suddenly become ideal.

If you have to wait for an entire market cycle for the sweet spots to start appearing in large numbers, that is the best way to protect and expand your wealth. Market discipline is the most valuable thing I can teach you.

With all that said, let?s talk about the markets.

This is a particularly tricky place for traders. The lowest risk day of the year to buy stocks was October 15. Since then, the risks have increased daily. We are now at the top of one of the extended runs in market history. Should we throw caution to the wind and buy with reckless abandon?

Hell no!

So maybe we should consider flipping to the short side?

We have just entered the six-month period when stocks are traditionally the strongest. You can add to this big upward influence the end of the year run up.

In fact, I think we will close 2014 at the high of the year. Looking at the way the Volatility Index (VIX) is trading, it could be another three years before we see another full 10% correction.

So I don?t think that selling short any risk asset is a good idea here either.

That leaves us the small weekly 1%-2% mini corrections we have been getting to get involved with on the long side. But since we are running into the annual book closing, you have to use tight stop losses to protect your investment.

The high frequency traders all know this, and will program their algorithms to trigger as many stop losses as possible before reversing markets. That?s how I lost my long vertical call spread in Alibaba (BABA) this year, for a -2.38% hickey.

This is why I wrote in the Trade Alert that short term traders should sell, but long-term investors should hold. I think the stock is going to $140 next year.

Long-term investors have no problem. My fundamental economic call remains unchanged. Analysts and investors alike are underestimating the strength of the US economy.

Almost every data point confirms my convictions. Everyone else is shocked, befuddled, and bemused. Not me.

So, this bull market could continue for three or more years, and all they need to do is take an extended cruise when the markets suffer their periodic corrections.

This is why those owning the deepest discount Vanguard index funds have outperformed both active and hedge fund mangers for the third year running.

Sometimes it pays to be lazy.