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August 23, 2018

Global Market Comments
August 23, 2018
Fiat Lux

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Why the Dow is Going to 120,000

For years, I have been predicting that a new Golden Age was setting up for America, a repeat of the Roaring Twenties. The response I received was that I was a permabull, a nut job, or a conman simply trying to sell more newsletters.

Now some strategists are finally starting to agree with me. They too are recognizing that a ganging up of three generations of investment preferences will combine to drive markets higher during the 2020s, much higher.

How high are we talking? How about a Dow Average of 120,000 by 2030, up another 465% from here? That is a 20-fold gain from the March 2009 bottom.

It’s all about demographics, which are creating an epic structural shortage of stocks. I’m talking about the 80 million Baby Boomers, 65 million from Generation X, and now 85 million Millennials. Add the three generations together and you end up with a staggering 230 million investors chasing stocks, the most in history, perhaps by a factor of two.

Oh, and by the way, the number of shares out there to buy is actually shrinking, thanks to a record $1 trillion in corporate stock buybacks.

I’m not talking pie in the sky stuff here. Such ballistic moves have happened many times in history. And I am not talking about the 17th century tulip bubble. They have happened in my lifetime. From August 1982 until April 2000 the Dow Average rose, you guessed it, exactly 20 times, from 600 to 12,000, when the Dotcom bubble popped.

What have the Millennials been buying? I know many, like my kids, their friends, and the many new Millennials who have recently been subscribing to the Diary of a Mad Hedge Fund Trader. Yes, it seems you can learn new tricks from an old dog. But they are a different kind of investor.

Like all of us, they buy companies they know, work for, and are comfortable with. During my Dad’s generation that meant loading your portfolio with U.S. Steel (X), IBM (IBM), and General Motors (GM).

For my generation that meant buying Microsoft (MSFT), Intel (INTC), and Dell Computer (DELL).

For Millennials that means focusing on Netflix (NFLX), Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL).

That’s why these four stocks account for some 40% of this year’s 7% gain. Oh yes, and they bought a few Bitcoin along the way too, to their eternal grief.

There is one catch to this hyper-bullish scenario. Somewhere on the way to the next market apex at Dow 120,000 in 2030 we need to squeeze in a recession. That is increasingly becoming a topic of market discussion.

The consensus now is that an impending inverted yield curve will force a recession sometime between August 2019 to August 2020. Throwing fat on the fire will be a one-time only tax break and deficit spending that burns out sometime in 2019. These will be a major factor in U.S. corporate earnings growth dramatically slowing down from 26% today to 5% next year.

Bear markets in stocks historically precede recessions by an average of seven months so that puts the next peak in top prices taking place between February 2019 to February 2020.

When I get a better read on precise dates and market levels, you’ll be the first to know.

To read my full research piece on the topic please click here to read “Get Ready for the Coming Golden Age.” 

 

 

Dow 1982-2000 Up 20 Times in 18 Years

 

 

Dow 2009-Today Up 4.3 Times in 9 Years So Far

 

August 10, 2018

Global Market Comments
August 10, 2018
Fiat Lux

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June 20, 2018

Global Market Comments
June 20, 2018
Fiat Lux

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May 31, 2018

Global Market Comments
May 31, 2018
Fiat Lux

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March 23, 2018

Global Market Comments
March 23, 2018
Fiat Lux

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My Personal Leading Economic Indicator

There is no limit to my desire to get an early and accurate read on the US economy, which at the end of the day is what dictates the future of all of our investments.

Honda (HMC) and Nissan (NSANY) import millions of cars each year through their Benicia, California facilities, where they are loaded on to hundreds of rail cars for shipment to points inland as far as Chicago.

In 2009, when the US car market shrank to an annualized 8.5 million units, I flew over the site and it was choked with thousands of cars parked bumper to bumper, rusting in the blazing sun, bereft of buyers.

Then, ?cash for clunkers? hit (remember that?). The lots were emptied in a matter of weeks, with mile long trains lumbering inland, only stopping to add extra engines to get over the Sierras at Donner Pass. The stock market took off like a rocket, with the auto companies leading.

I flew over the site last weekend, and guess what? The lots are full again. During the most recent quarter, demand for new cars raced up to an annual 17 million car rate. Japanese cars are selling so fast in the US that they can?t load them on to trains fast enough.

It is all further evidence that my bullish view on the US economy is correct, that multiple crisis overseas are meaningless, and that the stock market is going to add another 5-10% by the end of the year. The auto industry should lead, especially General Motors (GM) and Ford (F).

As for Tesla (TSLA), better to buy the car than the stock.

Sorry the photo is a little crooked, but it’s tough holding a camera in one hand and a plane’s stick with the other, while flying through the turbulence of the San Francisco Bay’s Carquinez Straight.

Air traffic control at nearby Travis Air Force base usually has a heart attack when I conduct my research in this way, with a few joyriding C-130?s having more than one near miss.

F
GM
HMC

Honda Car Lot

TeslaTesla: Better to Buy the Car than the Stock

Onshoring Takes another Great Leap Forward

Have you tried to hire a sewing machine operator lately?

I haven?t, but I have friends running major apparel companies who have (guess where I get all those tight fitting jeans?).

Guess what? There aren?t any to be had.

Since, 1990, some 77% of the American textiles workforce has been lost, when China joined the world economy in force, and the offshoring trend took flight.

Now that manufacturing is at last coming home, the race is on to find the workers to man it. Welcome to onshoring 2.0.

The development has been prompted by several seemingly unrelated events. There is an ongoing backlash to several disasters at garment makers in Bangladesh, the current low cost producer, which have killed thousands.

Today?s young consumers want to look cool, but have a clean conscience as well. That doesn?t happen when your threads are sewn together by child slave laborers working for $1 a day.

Several firms are now tapping into the high-end market where the well off are willingly paying top dollar for a well-made ?Made in America? label.

Look no further than?7 For All Mankind, which is offering just such a product at a discount to all recent buyers of the Tesla Model S-1 (TSLA), that other great all American manufacturer (click here for their website).

As a result, wages for cut and sew jobs are now among the fastest growing in the country, up 13.2% in real terms since 2007, versus a paltry 1.4% for industry as a whole.

Apparel industry recruiters are plastering high schools and church communities with flyers in their desperate quest for new workers. They advertise in languages with high proportions of blue-collar workers, like Spanish, Somali, and Hmong.

New immigrants are particularly being targeted. And yes, they are resorting to the technology that originally hollowed out their industry, creating websites to suck in new applicants.

Chinese workers now earn $3 an hour versus $9 plus benefits at the lowest paying US factories. But the extra cost is more than made up for by savings in transportation and logistics, and the rapid time to market.

That is a crucial advantage in today?s fast paced, high turnover fashion world. Some companies are even returning to the hiring practices of the past, offering free training programs and paid internships.

By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls.

The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades. It has also been blamed for losses of US jobs, with some estimates reaching as high as 25 million.

When offshoring first started 50 years ago, it was a total no brainer.? Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years.

So American electronics makers began flying overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines. After the US normalized relations with China in 1978, the action moved there and found that labor was even cheaper.

Then, a funny thing happened. After 30 years of falling real American wages and soaring Chinese wages, offshoring isn?t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977.

Today, it is $6,000 and $24,000 for trained technicians, with total compensation rising 20% a year. At this rate, US and Chinese wages will reach parity in about 10 years.

But wages won?t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks. Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here.

Natural disasters like earthquakes, fires and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a finely tuned, incredibly complex watch.

There are also far larger political risks keeping a chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the US fleet and the Chinese military playing an endless game of chicken off the coast, we are one mid air collision away from a major diplomatic incident.

Protectionism constantly threatens to boil over in the US, whether it is over the dumping of chicken feet, tires, or the latest, solar cells.

This is what the visit to the Foxcon factory by Apple?s CEO, Tim Cook, was all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what?

Work will come back to the US all the faster. The Chinese press was ripe with speculation that Apple induced reforms might spread to the rest of the country like wildfire.

Former General Motors (GM) CEO, Dan Akerson, told me his company was reconsidering its global production strategy in the wake of the Thai floods.

Which car company was most impacted by the Japanese tsunami? General Motors, which obtained a large portion of its transmissions there.

The impact of a real onshoring move on the US economy would be huge. Some economists estimate that as many as 10%-30% of the jobs lost to offshoring could return. At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least.

It would add $20-60 billion in GDP per year, or up to 0.4% in economic growth per year. It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us by failing to have any meaningful correction for the past 2 ? years?

Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico (UMX) (EWW), which took the biggest hit when China started soaking up all the low waged jobs in the world.

After that, the industrial Midwest has to figure pretty large, especially gutted Michigan. With real estate prices there under their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.

 

 

Man Fixing MachineSo How Does This Thing Work?

Time to Take Another Ride with General Motors

It is safe to say that all of the bad news is finally in the price at General Motors (GM).

In the wake of the latest batch of recalls, the total number of cars slated for mandatory repairs now equals virtually all of the company?s production of the last five years.

Woe to the outside supplier who provided those faulty, but cheap ignition switches to the beleaguered company! Penny wise, but 100 million pounds foolish!

What is more important is that ace mediator, Kenneth Feinberg, has finally come up with a number to offer the grieving families of the 17 who were senselessly killed driving GM?s deathtraps of yore. A fatality is now worth $1 million, and the company is offering as little as $20,000 for lesser accidents.

GM should put these numbers on their new car stickers.

In all honesty, this is just a ?feel good? gesture. The company that is actually responsible for these deaths went bankrupt in 2009, and the management long since sent into retirement to practice their gold swings. The new GM bears no legal liability whatsoever.

However, the company needs to preserve the value of its brand. The GM logo still goes out with every vehicle the firm manufactures. So, it will do the right thing for the victims.

Even if you apply these numbers to the much higher number of deaths claimed by plaintiffs? lawyers, more than 88, the total liability will not be enough to put a substantial dent in GM?s earnings. It is really just sofa change for them.

Many of the higher figures include drunk-driving deaths and fatalities of those driving at high speed without seatbelts. But every law school graduate out there is gunning for a piece of the action.

Don?t you just love America!

So all of this bad news is really good news in disguise. This will enable GM shares to catch up with those at Ford and Toyota, which have been on a tear this year. The industry seems poised to reach annual production of 17 million in 2014, an eight-year high. This will be great for profits for everyone.

I knew as much a few weeks ago, when I learned of massive insider buying of stock at GM all the way down to the middle management level. As has so often been the case this year, I waited for a dip that never came.

Now that the upside breakout is undeniable, I have to jump in. A share price appreciation up into the mid $40?s is in the cards.

The shares are starting from such a low base that even if a 5%-10% correction comes, the August, 2015 $32-$34 in-the-money bull call spread should be able to weather the selling. This strike combination particularly benefits from huge chart support at the 200 day moving average.

It doesn?t hurt that during the entire ignition crisis, GM?s market share actually rose. This was no doubt due to the heavy discount and attractive financing that was offered. What they?re losing in margin, they?re making up on volume.

Things are not so good that I am going to run out and buy a GM tomorrow. I am happy with my Tesla Model S-1, thank you very much.

GM 5-12-15

CorvetteTime to Take Another Ride with GM

An Evening with ?Government Motors?

Yesterday, the auto industry announced blowout sales figures for February which came in at an eye popping SAAR of 17 million units. We are now within a hairs breadth of the peak last during the salad days of 2001-2002.

It all provides more evidence the ultra bull scenario for the rest of 2015, which has the economy growing a 3% annualized rate during the final three quarters of the year. The stock market should follow, especially the shares of General Motors (GM), which are clearly breaking out to the upside, targeting the low $40?s.

It looks like the controversial ignition disaster is now fully priced into the shares. The only remaining question is which low level subordinate will go to jail over this. The cost to the firm will be a pittance.

Technically, the current GM is not liable for these transgressions. That belongs to the old, bankrupt GM. But I expect the company will do the right thing and settle with the aggrieved plaintiffs to maintain the image of their brand, if nothing else.

So I though it would be timely to review my last interview of the CEO of General Motors, Dan Akerson, who, sadly, recently retired for health reasons. He was replaced by the new litigation target du jour, GM child, Mary T. Barra.

Long-term readers of this letter are well aware of my antipathy towards General Motors (GM). For decades, the company turned a deaf ear to customer complaints about shoddy, uncompetitive products, arcane management practices, entitled dealers, and a totally inward looking view of the world that was rapidly globalizing.

It was like watching a close friend kill himself through chronic alcoholism.

During this time, Japan?s share of the US car market rose from 1% to 42%. The only surprise when the inevitable bankruptcy came was that it took so long. This was traumatic for me personally, since for the first 30 years of my life General Motors was the largest company in the world.

Their elegant headquarters building in Detroit was widely viewed as the high temple of capitalism. I was raised to believe that what was good for GM was good for the country. Oops!

I opposed the bailout because it interfered with creative destruction, something America does better than anyone else, and gives us a huge competitive advantage in the international marketplace. Probably 10% of the listed companies in Japan are zombies that should have been killed off 20 years ago. Without GM a large part of the US car industry would have moved to California and gone hybrid or electric.

When an opportunity arose to spend a few hours with the new CEO, Dan Akerson, I gratefully accepted. After all, he wasn?t responsible for past sins, and I thought I might gain some insights into the new GM.

Besides, he was a native of the Golden State and a graduate in nuclear engineering from the Naval Academy at Annapolis and the London School of Economics. How bad could he be?
When I shook hands, I remarked that his lapel pin looked like the hood ornament on my dad?s old car, a Buick Oldsmobile. He noticeably winced. So to give the guy a break, I asked him about the company?s outlook.
Last year was the best in the 105-year history of the company. It is now the world?s largest car company, with the biggest market share. The 40-mpg Chevy Cruze is the number one selling sub compact in the US. GM competed in no less than 117 countries, and was a leader in the fastest growing emerging market, China.

I asked how a private equity guy from the Carlyle Group was fitting in on the GM board. He responded that all of the Big Three Detroit automakers were being run by ?non-car guys? now, and they generated profits for the first time in 20 years.

However, it was not without its culture clashes. When he publicly admitted that he believed in global warming, he was severely chastised by other board members. He wasn?t following the official playbook.
When I started carping about the bailout, he cut me right off at the knees. Liquidation would have been a deathblow for the Midwestern economy, killing 1 million jobs, and saddling the government with $23 billion in pension fund obligations.

It also would have deprived the Treasury Department of $135 billion in annual tax revenues. It was inevitable that in the last election year the company became a political punching bag. Akerson said that he was still a Republican, but just.
GM?s Chevy Volt is so efficient, running off a 16kWh lithium ion battery charge for the first 25-50 miles that many are still driving around with the original tank of gas they were delivered with a year ago.

Extreme crash testing by the government and the bad press that followed forced a relaunch of the brand. Despite this, I often get emails from readers saying they love the car.
The summer production halt says more about GM?s more efficient inventory management than it does about the hybrid car. GM?s recent investment in California based Envia Systems should succeed in increasing battery energy densities threefold.

However the Volt is just a bridge technology to the Holy Grail, hydrogen fuel cell powered cars, which will start to go mainstream in four years. These cars burn hydrogen, emit water, and cost about $300,000 a unit to produce now. By 2017, GM hopes to make it available as a $30,000 option for the Chevy Aveo.
Another bridge technology will be natural gas powered conventional piston engines. These take advantage of the new glut of this simple molecule and its 80% price discount per BTU compared to gasoline.

The company announced a dual gas tank pickup truck that can use either gasoline or compressed gas. Cheap compressors that enable home gas refueling are also on the horizon. Fleet sales will be the initial target.
Massive overcapacity in Europe will continue to be a huge headache for the global industry. There are just too many carmakers there, with Germany, England, Italy, France, and Sweden each carrying multiple manufacturers.

Governments would rather bail them out to save jobs and protect entrenched unions than allow market forces to work their magic. GM lost $700 million on its European operations last year, and Akerson doesn?t see that improving now that the continent is clearly moving into recession.
I asked if GM stock was cheap, given the dismal performance since the IPO. It is still just above the $33/share launch price. Now that the government has unloaded its shareholding the way for further appreciation should be clear.

Also, the old bondholders once owned substantial numbers of shares and were selling into every rally, holding back the stock price. That overhead supply now appears to be gone.
Akerson said that a cultural change had been crucial in the revival of the new GM. Last year, the Feds announced an increase in mileage standards from 25 to 55 mpg by 2025. Instead of lawyering up for a prolonged fight to dilute or eliminate the new rules, as it might have done in the past, it is working with the appropriate agencies to meet these targets.
Finally, I asked Akerson what went through his head when the top job at GM was offered him at the height of the crisis. Were they crazy, insane, delusional, or all the above? He confessed that it offered him the management challenge of a generation and that he had to rise to it.

Spoken like a true Annapolis man.

GM 3-3-15

 

Shifting GM from This?.

 

To This?.

 

And This