January 17, 2019

Global Market Comments
January 17, 2019
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($INDU), (EK), (S), (BS), (CVX), (DD), (MMM),
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November 30, 2018

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November 30, 2018
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November 5, 2018

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November 5, 2018
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November 2, 2018

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November 2, 2018
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October 3, 2018

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October 3, 2018
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(USO), (AMZN), (MCD), (WMT), (TGT)

June 25, 2018

Global Market Comments
June 25, 2018
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May 25, 2018

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May 25, 2018
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The American Onshoring Trend is Accelerating

Onshoring, the return of US manufacturing from abroad, is rapidly gathering momentum.

It is increasingly playing a crucial part in the unfolding American industrial renaissance. It could well develop into the most important new trend on the global economic scene during the early 21st century. It is also paving the way for a return of the roaring twenties to our home shores.

Of course, it is hard to quantify this assumption with hard data. US government statistics are a deep lagging indicator and are unable to keep up with a rapidly changing, interconnected, fluid world. No doubt, they will tell us this epoch-making sea change is underway in ten years.

However, it is possible to track what a single company is accomplishing. In 1973, General Electric (GE) ran the largest home appliance manufacturing facility in the world.

Its Appliance Park in Louisville, Kentucky, employed 23,000 workers packed into six gigantic buildings, each as large as a shopping mall. It was so big, it even earned its own postal zip code (40225).

After that, the offshoring mania kicked in, with the firm motivated by a single factor: hourly wages. You could hire 30 men in China for the cost of one American union worker. The savings were too compelling to pass up, and The Great Hollowing Out of US manufacturing was off to the races.

GE tried to sell the entire operation, but was too late. The 2008 financial crisis decimated the market for Midwest industrial facilities. You could only get the scrap metal value, or three cents on the dollar.

By 2011 employment at Appliance Park had plunged to 1,863 and the region?s new ?Rust Belt? sobriquet was well earned.

Then, almost imperceptibly at first, the trend started to reverse. Decades of 20% a year wage increases took the cost of a skilled Chinese worker from $300 a year to $25,000.

The 2011 Japanese tsunami, followed by huge floods in Thailand, caused massive disruptions to the international parts supply network.

A minor strike by the Longshoreman?s Union at the Port of Oakland in California brought the distribution channel to a grinding halt. Business plans that looked great on an Excel spreadsheet turned out to be not so hot in practice.

It gets worse.

When Chinese workers walked across the street to collect bigger pay packages, they often took blue prints, business plans, and proprietary software with them.

Six months later, a local competitor would show up with a similar, although inferior, product at half the cost. Suddenly, globalization was not all it was cracked up to be.

In the meantime, the American labor force, reading the Chinese characters on the wall, evolved. Unions were disbanded. Antiquated work rules were tossed. The unions that were left agreed to two-tier wage structures that had entry level employees coming in at $13.50 an hour, a fraction of the original rate.

Then management got smarter. By removing the assembly line from the marketplace, companies lost touch with customers. Designers lost contact with the manufacturing process, creating products that could only be built expensively, or not at all.

Quality plummeted. Innovation suffered. By bringing manufacturing home, firms not only solved these problems, they were able to build better products for less money.

China turned out to be farther away than people thought. Having middle management jet lagged up to three months a year proved to be very expensive. It takes six weeks to ship an appliance from the Middle Kingdom to the US if the shipping schedules are perfect.

An American plant can truck product to most US stores within two days. That wasn?t a problem when consumer products saw lives that ran into decades. It is a big deal when rapidly accelerating technological improvements require them to be turned over every three years or less, as they are today.

Better American management techniques are giving US based factories an edge. I saw this up close at the Tesla (TSLA) factory in Fremont, California, where workers have the ability to improve the assembly process daily and are incentivized to do so.

The place was so clean and quiet, it felt more like a hospital than a factory. It turns out that a drive train with only 11 parts doesn?t require much labor to assemble it, and robots do most of that.

By adopting similar techniques, GE, is building the same number of appliances it did during the 1960s peak, about 250,000 a year, with one third of the employees.

Using the new thinking, many companies are finding out that offshoring was a big mistake in the first place and are bringing production home.? Some business analysts estimate that up to a quarter of the companies that offshored lost money doing it.

The fact that GE is onshoring is important. It is considered by many to be the best run industrial company in the United States, and where it leads, many follow.

On the heels of the GE move, Whirlpool has relocated its mixer assembly from China to Ohio, and Otis has brought home elevator making from Mexico.

Did I mention that because of all of this GE stock is a screaming buy?

Even Wham-O has jumped on board, the maker of Frisbees, Slinkies, and Hula Hoops, and a company that is dear to my heart (I dated the founder?s daughter in high school), moving production from the Middle Kingdom back to Southern California.

If I am right, and onshoring speeds up into the next decade, we may get another opportunity to relive the roaring twenties. By then, a shortage of workers will lead to higher wages, greater consumer spending, and rising standards of living.

The price of everything will rocket, including your stocks and your home. GDP growth will surge to 4%-5% a year. Inflation will, at long last, make its long predicted return.

It will be an economy in which Jay Gatsby would feel right at home

US Mfg JobsA Trend Reversal?

Job Growth
ge tsla
Leonard DiCaprioThe Roaring Twenties Are Headed Our Way

General Electric?s Imagination Really is at Work

Are you looking for an investment that does well during modest economic growth, a flat to slightly falling dollar, continued low interest rates, and a stock market that periodically hits the panic button?

Then General Electric (GE) is the stock for you.

I have just spent my day surfing the web for tidbits about GE and found quite a lot that I liked.

Want to get a great deal on a new diesel electric locomotive with teaser financing? That?s why customers flock to GE.

What I found was one of the largest corporate restructuring stories in history.

You can summarize it as ?Out with glitz, leverage, and volatility, and in with the plodding, the stable, and the reliable.? In stock market terms this means out with low price/earnings multiples and in with high ones.

For a start, GE is run by Jeffrey Immelt, considered by many to be one of the most superb large cap managers in the world. He has been cutting costs and ditching business lines not considered essential to its core heavy industrial origins.

Immelt has indicated that he expects that by 2018, General Electric will be earning 90% of its profits from "selling equipment for airplanes, railroads, oil extraction and electricity generation," all safe stuff.

By the way, these are great plays on a recovering Chinese economy as well. No coincidence there.

The most immediate trigger to pile into this stock was its planned sale of GE Finance, which is why wags used to call GE ?The hedge fund that sold light bulbs.?

GE was dragged into this business during the 1990s by predecessor, Jack Welsh, using the logic that ?Everyone else was doing it.? Welsh never inhaled a breath of humility in his life, and chronically suffered from confusing brilliance with a bull market.

In the end, his strategy almost took the company under, requiring a bailout from Warren Buffett during the dark days of 2009, in the form of a 10% convertible preferred stock issue.

If only I could get such terms!

In the most recent quarter, GE had to write off $4.33 billion for the sale of damaged securities left over from this ill conceived venture.

A $30 billion portfolio of such dross was recently sold to Wells Fargo (WFC). GE has also indicated that it will soon spin off consumer finance business Synchrony Financial (SYF).

This is yet another step in the company's plan to divest $200 billion of GE Capital assets as GE returns to its industrial roots.

And how can you not like that 3.10% dividend in this zero return world? This is with a price earnings multiple of 25 for current year earnings, and 19 times next year earnings.

GE?s aviation business is climbing to higher altitudes. Its backlog has ballooned some 36% over the past two years, to $150 billion.

It has been spurred on by a new engine that uses 15% less fuel, enabling their hyper competitive airline customers to cut one of their largest costs.

This will pave the way for GE to grow its installed base of engines from 36,000 to an impressive 46,000 by 2020. Did you know the Chinese have to buy 1,000 airliners over the next decade?
After an 18-month battle with the French government, GE managed to close its purchase of Alstom for $13.8 billion, a major European energy company. It had to promise to create 1,000 new jobs in France to do so.

The deal brings GE's capabilities that it had previously lacked in renewable energy and heat recovery steam generators. The latter are key components of combined cycle gas-plus-steam plants, which GE forecasts will account for 70% of all future gas-fired plant orders.

Acquiring this capability roughly doubles the General Electric share of the revenues it could capture from orders for such plants.

With it comes considerable expertise in plant design and construction, allowing GE to move from being a supplier to a lead contractor on such projects.

Alstom also delivers a significant presence in China and India, as well as sophisticated products in transmission technology.

(GE)?s sale of its appliance unit to Sweden?s Electrolux (ELUXY), which came with the Alstom deal, is pending antitrust review.

To top all this, activist investor Norman Peltz?s Trian Fund has taken a 1% stake in (GE) (or $2.5 billion worth) with the intention of shaking it up so a few more coins will fall out for shareholders.

That is quite an ambitious bet. Peltz wants the company to ramp up an already ambitious share repurchase program. And you get in at a great price today.
All in all, GE seems to be the right kind of stock to buy in the market we have at the moment. It also fits neatly into my scenario of new money moving into value, at the expense of growth (click here for ?Switching from Growth to Value?.

All we need to get in is a decent pullback from its recent parabolic move.

For more background on General Electric, click here for ?The American Onshoring Trend is Accelerating?.

geGE Emblem

Jeff ImmeltJeff?s Got Some New Tricks Up His Sleeve

The Solar Missing Link is Here!

I have seen the future, and it works.

In my never-ending search for my readers for ?ten-baggers,? or investments that will rise in value tenfold over the foreseeable future, I keep circling back to the solar industry.

Tesla founder Elon Musk never does anything small.

Last year he announced the first ever, economical home battery electrical storage system, which he calls the Powerwall.

The device will enable your roof-mounted solar panels to supply power to your home 24 hours a day, not just when the sun is shining.

It is an innovation on the scale of Thomas Edison?s invention of the light bulb in 1879, or the launch of the Internet in 1969, in terms of the long-term impact on our economy.

Shifting the source of a third of our power supply is a big deal.

You may recall that the early investors in these earlier transitions made fortunes, General Electric (GE) in Edison?s case, and Netscape that spun out of the early Internet days.

Today, General Electric is the only company that has remained in the Dow Average for the past 100 years. So, investors take note.

During the day, the panels will charge up the battery mounted on your garage wall, which is about the size of a big screen TV. At night, you can then run your home off battery power.

Alternatively, you can engage in what is known in the industry as ?load shifting.? Charge your battery at night when you can buy electricity for as little as 4 cents a kilowatt hour, and sell it back to your local utility during a power demand surge the next afternoon for as much as 50 cents a kWh.

Buy low, sell high, it works for me!

And what is the cost of the miracle technology?

Only $3,000 for a 7 kWh battery or $3,500 for the 10 kWh version for energy hogs, like me, who has to charge a Tesla Model S-1 every day, soon to be two.

You can also include as immediate customers for this new product sports addicts, who watch multiple games on ESPN 24/7, paranoids who keep the lights on all night and indoor pot farmers, whose energy needs are said to be prodigious. Of course, the military will be another big consumer.

I ran some numbers on the possibilities for the Powerwall and they are mind-boggling.

The average home in the US has 2,500 square feet, which uses 7,000 kWh per year, or 19 kWh per day. The current cost for this power will be around $2,000 a year, depending where you live, more in California, and less in Texas, Oklahoma, and North Carolina.

A solar/ battery combination for such a home should cost about $14,000, including installation, the panels, the inverter, and all the gizmos. Net out the alternative energy investment tax credit of 30% (IRS Form 5695 ), and your cost falls to only $10,500.

That means your power savings will cover the cost of your solar investment in a mere 5 years, compared to the present 7 or 8 years. After that, your home will have free electricity for another 20 years, as the life of these systems is usually 25 years.

Make the investment, and the value of your home rises, by $2 for every dollar spent, or so local real estate agents tell me.

You also will be guaranteed against any future power rate increases, an absolute certainty. America?s power grid is currently in a woeful state of disrepair, with much of the hardware 50 years old, or more.

The demands on the power industry are also about to take a quantum leap forward, as millions of consumers buy electric cars. Tesla plans to ramp up production of vehicles from 40,000 units last year to 500,000 by 2020, when the $35,000, 300 mile range Tesla 3 achieves mass production.

Some of my over-the-horizon-thinking hedge fund friends believe that figure could hit 15 million by 2030.

Add to that new, competing electric models produced by every other major carmaker, and that?s a lot of juice that will be needed. As a result, electric power utilities will probably have to endure more structural changes to their business model than any other industry.

Trillions of dollars are needed to modernize it, and all of that is going to come out of your pocket, but only if you remain an existing power customer.

Indeed, I have already been notified by my own utility, Pacific Gas and Electric Company (PGE), that I am due for two consecutive 7% price increases over the next two years.

The battery will also provide a backup power supply for home for when the grid crashes. Twice in the last two decades I have lost a freezer full of venison, pheasants, quail, trout, and salmon that I hunted and fished when storms knocked out power, for a week each time.

The Powerwall prices are so low that they beat the cost of a conventional backup diesel or gasoline generator.

They will also wipe out most of the existing back up battery industry, as Tesla?s advantages gained through massive economies of scale are enormous. Musk is talking about producing billions of batteries.

The Powerwall is a game changer for the solar industry, which has long been hobbled by the limitation that it could only supply power for 12 hours a day, and less in the winter, depending on your latitude.

It certainly gives a shot in the arm for the solar industry, which I have been banging the table about for years. My favorite is Solar City (SCTY). Other names to look at are First Solar (FSLR) and SunPower (SPWR), which manufactures my own solar panels.

It also casts Musk?s own Tesla (TSLA) in a new light. It is no longer just a car company, but a comprehensive energy solution. Musk has already made one of the largest capital investments in history to build a $5 billion ?Giga? factory near Reno, Nevada.

Much of that plant?s production has already been pre sold, and I understand that the decision has already been made to build a second one. Wow!

Consumers are able to purchase the new batteries from the Texas based retailer, TreeHouse, (their link ).

Musk explains that the world consumes 20 trillion kWh per year of electricity.

In the US, 1/3 of our fossil fuel consumption goes to transportation, and another 1/3 generates electric power, which is the equivalent to consuming 225 billion gallons of gasoline per year (or 8 billion barrels of oil per year, or 22 million barrels a day).

His goal is nothing less than to largely substitute those fossil fuel uses with solar energy, cutting our fossil fuel consumption by 2/3.

I guess there is no point in setting the bar low.



TeslaMeet the Next Light Bulb