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October 3, 2018

Global Market Comments
October 3, 2018
Fiat Lux

Featured Trade:
(TAKING A LOOK AT GENERAL ELECTRIC LEAPS), (GE),
(TEN SURPRISES THAT WOULD DESTROY THIS MARKET),
(USO), (AMZN), (MCD), (WMT), (TGT)

June 25, 2018

Global Market Comments
June 25, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR IS THIS A 1999 REPLAY?),
(AAPL), (FB), (NFLX), (AMZN), (GE), (WBT),
(JOIN ME ON THE QUEEN MARY 2 FOR MY JULY 11, 2018 SEMINAR AT SEA),
(JUNE 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(SQ), (PANW), (FEYE), (FB), (LRCX), (BABA), (MOMO), (IQ), (BIDU), (AMD), (MSFT), (EDIT), (NTLA), Bitcoin, (FXE), (SPY), (SPX)

May 25, 2018

Global Market Comments
May 25, 2018
Fiat Lux

Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(MAY 23 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (SPY), (TSLA), (EEM), (USO), (NVDA),
(GILD), (GE), (PIN), (GLD), (XOM), (FCX), (VIX)

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?
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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.
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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 http://www.irs.gov/pub/irs-pdf/f5695.pdf ), 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 https://treehouse.co/treehouse-is-first-retailer-to-sell-tesla-home-battery/ ).

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.

SCTY
FSLR
SPWR
TSLA

 

TeslaMeet the Next Light Bulb

The ?Black Swan? Solution to Our Energy Problems

I firmly believe that simple solutions to our energy problems are in the process of coming out of the blue, and are something no one is thinking about now.

Add up the contributions of many small improvements, and the cumulative change will alter our economic future beyond all recognition. Here are two of them.

General Electric (GE) is now mass-producing their ?Smart Energy LED Bulb,? which can screw into a conventional socket and produce the same amount of light as a 60-watt bulb, but consume only nine watts of power.

Some 22% of America?s electric power supply is used for lighting, and this bulb could cut our total consumption by 17.6%.

Other bulb manufacturers are getting into the game, like Philips, Osram, Toshiba, and Panasonic, which are already offering more efficient designs. The downside is that, while they last 25,000 hours, or ten times longer than a conventional incandescent bulb, they will initially cost $15-$25.

Economies of scale are expected to bring costs down dramatically in a few years. The Department of Energy has selected Seattle as the test bed for an all LED (light emitting diode) public lighting system.

Here is another game changer for our energy woes. If you double conventional car engine efficiency, US oil consumption drops by half. This is not so hard to do. The US government has already mandated that US car makers achieve an average fleet mileage of 54.5 miles per gallon by 2025.

They are hoping this will lower the cost of gasoline to $1 a gallon by then. They may get their wish this year instead.

One of the first things you learn in a freshman level physics class is how inefficient an internal combustion engine is, using hundreds of moving parts operating at 500 degrees to convert only 25% of the energy input into to motion.?

Tesla?s (TSLA) entire electric drive train has just 11 moving parts, operate at room temperature, and convert 80% of its energy into motion. When they go to the mass market in two years with the $35,000 Tesla 3, it will have a huge impact on our overall energy picture

Add this in with the surging supplies of American shale oil, and the utter collapse of the price of Texas tea (USO) over the past six months is suddenly starts to make incredible sense.

 

LED Lights

 

Switching From Growth to Value

All good things must come to an end.

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

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

And so they delivered.

The reasons for their impressive gains were crystal clear.

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

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

It really was a year to ?Buy American?.

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

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

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

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

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

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

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

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

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

Those would be value stocks.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Keep your fingers crossed, but stranger things have happened.

GE 10-21-15

HD 10-21-15

DIS 10-21-15

John ThomasIt?s My Turn to Do the Heavy Lifting

It?s Pedal to the Metal Once Again

If the prospect of WWIII can?t knock this market down, what will it take? A giant asteroid that destroys the earth?

I would have used ?Balls to the Wall? in the headline for this piece. But as this is a family oriented newsletter I opted for the more politically correct screamer.

Even the most hardened and seasoned traders, like me and Mad Day Trader Jim Parker, were stunned by how fast the markets bounced back from Monday?s war scares in the Ukraine. Of course, everything I said in my Monday letter came true.

It would have been nice if the recovery stretched out over a longer period of time, giving me better entry points for my Trade Alerts. But that was not to be. Too many people are still frantically trying to get in this market. There are oceans of cash everywhere earning virtually nothing. It seems the new trading strategy is that if something hasn?t gone down for three days, you buy it.

Bizarre as it may seem, the weather is emerging as the big driver of markets this year. Even the Federal Reserve is now saying that the weather was a big drag on the economy. This means that every negative data point for the next few months has a great excuse to be ignored.

It also means the growth which was lost in Q1 will get added back in during Q2 as the economy plays catch up. This has the potential to create a growth surge, possibly from a 1% annualized rate to as much as a 5% in the spring.

It is inevitable that this would trigger a major spike up in all risk assets. This realization is rippling throughout the markets to create one of those ?Aha? moments, much like we saw last October, when it became obvious that the indexes would melt up for the rest of 2013. Fasten your seat belt!

If you have any doubts about this scenario, you better take a look at the commodities markets, both hard and soft (DBA). After a dreadful three years, the chart now has the trajectory of a bat out of hell. What might cause this? How about a global synchronized economic recovery that boost US growth by a full 100 basis points or higher in 2014?

So I am going to take advantage of the pre Friday nonfarm payroll doldrums to start loading the boat with positions and scaling up risk. That?s why I picked up General Electric (GE) and Delta Airlines (DAL) today, classic cyclical names. Also on the short list are EBAY (EBAY), Gilead Sciences (GILD) for another visit to the trough, Goldman Sachs Group (GS), and QUALCOMM (QCOM).

Today?s new trades graciously turned immediately profitable, taking my performance up to yet another all time high of 134.41% since inception, and a 2014 year to date gain of 11.91%. That improves my average annualized return to a stratospheric 41.4%. Incredibly, after last year?s torrid 68% profit, my performance is getting even better. It appears that, like a fine Napa Valley wine, I improve with age.

Yes, I know you have been told by the talking heads on TV that stocks are expensive, and that a crash is imminent. Personally, I think equities are cheap and that we are on our way to a Dow Average of 100,000-200,000 by 2030 (no typo here). I will keep that view as long as the stocks that I am buying pay higher dividends than the ten-year Treasury yield (TLT), now at 2.69%.

To support my view take a look at the chart below produced by my friends at Business Insider. It shows that the share of technology names, the lead sector for the entire market, trading at more than five times sales is below 40%, a fraction of the 2000 peak.

I think we have to match, or exceed, this peak before the party is over and the lights get turned out.

GE 3-5-14

DAL 3-5-14

DBA 3-5-14

Markets Chart of the Day

Delta

The American Onshoring Trend is Accelerating

Onshoring, the return of US manufacturing from abroad, is rapidly gathering pace. 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, 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 $20,000. 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 ones 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, as they are today.

The energy picture is undercutting the arithmetic that used to justify offshoring. Oil prices levitating near $100 a barrel are up 400% in 14 years, elevating the cost of production in Asia and shipments to the US. In the US, the fracking boom has let lose a gusher of cheap oil. It has also freed up a few centuries worth of low carbon burning natural gas, giving American manufacturers a further cost advantage.

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 incented to do so. The place was so clean and quiet, it felt more like a hospital than a factory. By adopting similar techniques, GE, is building the same number of appliances as it did during the 1960?s 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 when 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. Even Wham-O has jumped on board, the maker of Frisbees, 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 homes. 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 will feel right at home.

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Leonard DiCaprio The Roaring Twenties Are Headed Our Way