December 4, 2019

Global Market Comments
December 4, 2019
Fiat Lux

Featured Trade:

(KOL), (PEA),

August 7, 2019

Global Market Comments
August 7, 2019
Fiat Lux

Featured Trade:

(AMZN), (WMT), (M), (JWN), (KOL)

Why I Sold Short Macy’s

Sorry, the Trade Alert to sell short Macys’ (M) went out late yesterday. I was speaking to a retail expert and his list of things wrong with the marquee name was so long that I couldn’t get off the phone. New Yorkers are going to have to find something else to do on Thanksgiving Day than attend their famous parade.

His bottom line? Retail is in a death spiral from which it will never recover. Trying on clothes in a shopping mall will soon become a thing of the past, going the way of the buggy whip, black and white TV, and six-track tapes.

If you had to pick the biggest loser of our ongoing trade wars, which have just been ratcheted up in intensity, it would be the retail industry (XRT). Higher costs and tariffs can’t be passed on, minimum wages are rising in the big cities, lower selling prices are lower, and a massive inventory glut is NOT what money-making is all about.

The stocks have delivered as expected, providing one of the worst-performing sectors of 2019. Half of them probably won’t even make it until 2020.

In fact, Sears (S) and Macy’s (M) have announced more store closings nationwide. The overhead is killing them in a micro margin world.

So, I stopped at a Walmart (WMT) the other day on my way to Napa Valley to find out why.

I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long-stem roses would prove useful. I happened to know you could get these for $10 a dozen at Walmart.

After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.

The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there, customers OR employees.

The Macy’s downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.

However, it now appears we have reached both a tipping point and a point of no return. The future is happening faster than anyone thought possible. Call it the Death of Retail.

I remember the first purchases I made at Amazon 20 years ago. Even though I personally knew the founder, Jeff Bezos, from my Morgan Stanley days, the idea sounded so dubious that I made my initial purchases with a credit card with only a low $1,000 limit. That way, if the wheels fell off, my losses would be limited.

And how stupid was that name Amazon, anyway? At least, he didn’t call it “Yahoo” because it was already taken.

Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don’t have to fight traffic, engage in the parking space wars, or wait in line to pay.

It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!

A used 42-inch Sub Zero refrigerator with a front-door icemaker and water dispenser? Have it there in two days, with free shipping at one fifth the $17,000 full retail price.

So I was not surprised when I learned this morning that Amazon accounted for 25% of all new online sales in 2018 in a market that is already growing at a breathtaking 20% YOY.

In 2000, after the great “Y2K” disaster that failed to show, I met with Bill Gates Sr. to discuss his foundation’s investments.

It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds, a brilliant move coming mere months before the Dotcom bust and a 16-year bull market in fixed income.

Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that unlike most other foundations their size, they hadn’t invested a dollar in commercial real estate.

It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers and rendering commuting unnecessary. Shopping malls would become low-rent climbing walls and paintball game centers.

Mr. Gates’ prediction may finally be occurring. Some counties in the San Francisco Bay area now see 25% of their workers telecommuting.

It is becoming common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.

The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company with no office. Everyone works at home in four countries around the world. Oh, and we all use Amazon to do our shopping.

The downside to this is that whenever there is a snowstorm anywhere in the country, it affects our output. Two storms are a disaster, and at three, such as last winter, we grind to a virtual halt.

You may have noticed that I can work from anywhere and anytime (although sending a Trade Alert from the back of a camel in the Sahara Desert was a stretch), so was sending out an Alert while hanging on the cliff face of a Swiss Alp, but they both made money.

Moroccan cell coverage is better than ours, but the dromedary’s swaying movement made it hard to hit the keys.

The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we’re hiring, especially in marketing.

It is happening because the entire “bricks and mortar” industry is getting left behind by the march of history.

Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of Amazon with higher prices. It is all “Hour late and dollar short” stuff.

In the meantime, Amazon soared by 49% from December to the May high, and was one of the top performing stocks of 2018. There are now a cluster of Amazon analyst forecasts around the $3,000 mark.

And here is the bad news. Bricks and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!

There’s a good reason why you haven’t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.

I did this when I realized that management never knew beforehand which of their products would succeed, and which would bomb, and therefore were constantly clueless about future earnings.

The business for them was an endless roll of the dice. That is a proposition in which I was unwilling to invest. There were always better trades.

I confess that I had to look up the ticker symbols for this story as I never use them.

You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers, citing how “cheap” they are.

Never confuse a low stock price with “cheap.”

It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when “cheap” was on its way to zero for almost every company.

So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.

Or better yet, go shopping at Amazon. The deals are to die for.

To read “An Evening with Bill Gates Sr.”, please click here. 




February 1, 2019

Global Market Comments
February 1, 2019
Fiat Lux

Featured Trade:

(KOL), (PEA),

October 16, 2018

Global Market Comments
October 16, 2018
Fiat Lux

Featured Trade:

(KOL), (BHP), (UNG),

Oil: Is It Different This Time?

A reader emailed me yesterday to tell me that while visiting his daughter at a college in North Carolina, he refilled his rental car with gas for $1.39 a gallon.

So I got the idea that something really big is going on here that no one is yet seeing. I processed the possibilities in my snowshoe up to the 10,000-foot level above Lake Tahoe last night.

By the way, the view of the snow covered High Sierras under the moonlight was incredible.

For decades, I have dismissed the hopes of my environmentalist friends that alternatives will soon replace oil (USO) as our principal source of energy.

I have long agreed with the views of my fracking buddies in the Texas Barnett Shale that it will be decades before wind, solar, and biodiesel make any appreciable dent in our energy makeup.

It took 150 years to build our energy infrastructure, and you don?t replace that overnight. The current weakness in oil prices is a simple repeat of a predictable cycle that has continued for a century and a half. In a couple years, Texas tea will be posting triple digits once again.

I always thought that oil had one more super spike left in it. After that, it will fade into history, reduced to limited applications, like making plastics and asphalt, probably sometime in the 2030?s.

The price for a barrel of oil should then vaporize to $5.

But given the price action for energy and all other commodities I?m starting to wonder if this time I?m wrong.

I have watched with utter amazement while Freeport McMoRan (FCX) plunged from $38 to $3. I was gob smacked to see Linn Energy (LINE), admittedly a leveraged play, crater from $32 to 30 cents.

And I was totally befuddled to see gas major Chesapeake Energy (CHK) implode from $65 to $1.

Has the world gone mad?

When the data don?t match your view, it?s time to change your view.

Maybe there won?t be another spike in oil prices. Could its disappearance from the modern industrialized economy have already begun?

That would certainly explain a lot of the recent eye-popping price action in the markets. In five short years oil has dropped 82%. It did this while global GDP grew by 20% and auto sales, and therefore gasoline demand, has been booming.

Of course, you could just call all of this a big giant reversion to the mean.

Over the past 150 years, the average, inflation adjusted price of oil has been $35 a barrel. The price for gasoline has been $2.25 a gallon, exactly where it was in 1932, and where it now is in much of the country.

I know all of these numbers because I once did a study to see if oil prices are rigged (conclusion: they are). How can the price of a commodity stay the same for 150 years?

Wait, the naysayers announce. Things don?t happen that fast.

But they do, my friends, they do, especially in energy.

Until 1849, my ancestors were the largest producers of whale oil on Nantucket Island. (Our family name,? Coffin, was mentioned in ?Moby Dick? seven times, and was a focus of the just released film, ?In the Heart of the Sea.?)

Then this stuff called petroleum came along, wrested from the ground with new technology by men like Drake and Rockefeller. The whale oil market crashed, dropping in price by 90%, and virtually disappeared in two years.

My relatives were wiped out and moved to San Francisco, which they already knew from their whaling days, and where gold had just been found.

A half-century later, this thing called an ?automobile? came along meant to replace the ubiquitous horse and buggy. People laughed. It was loud, noisy, smelly, inefficient, and expensive. Only the rich could afford them.

You had to go to a drug store to buy high priced fuel in one-gallon tins. And it scared the horses. England passed a national automobile speed limit of 5 miles per hour, as cars were considered dangerous.

Then huge oil discoveries were made in Texas and California (watch ?There Will Be Blood?), the Hughes drill bit came along, and gasoline prices fell sharply. Suddenly cars were everywhere. The horse population declined from 100 million to only 1 million today.

All of this is a long-winded, history packed way of saving ?This time it may be different?.

I have on my desktop a Trade Alert already written up to buy the (USO) May, 2016 $9 calls. Today, they traded at $1.00. I?m just waiting for another melt down in oil to take a low risk punt on the long side.

If we rocket back up to $100, as many are predicting, these calls will be worth a fortune. But you know what, oil may only peak out at $44 this time. The trade will still make money, but not as much as in past cycles.

So, you better think hard about loading up on too many oil stocks at these distressed levels. Look what has already happened to the coal industry (KOL), which has essentially gone bankrupt.

You could well be buying into the buggy whip industry circa 1900.

FCXLINECHK$WTICHeart of the SeaThere?s Got to Be a Better Way to Make a Living

Woe the Australian Dollar!

If I warned them once, I warned them 1,000 times!

The Australian dollar (FXA) is going to fall.

That?s why I cautioned my Aussie friends to sell their homes, get the money the hell out of the country, and pay for their overseas vacations in advance.

As long as it is a de facto colony of China, the fortunes of the Land Down Under are completely tied to economic prospects there.

It is almost a waste of time looking at the Reserve Bank of Australia?s data releases. They have become a deep lagging, and really irrelevant indicators. You are better off going to the source, and that is in Beijing.

And therein lies the problem.

It is highly unlikely that the government in China has any idea what their economy is actually doing. Sure, they pump out the usual figures on a reliable basis like clockwork. These are educated guesses, at best.

Even in a perfect world, collecting numbers from 1.3 billion participants is a hopeless task. The US is unable to do these with any real accuracy, and we have one quarter of their population and vastly superior technology.

For what it is worth, Chinese President Xi Jinping has promised that his country?s GDP growth will not fall below a 6.5% annual rate for the next five years. At this pace, China is still creating more economic activity that any other country in the world.

Which leaves us nothing else to rely on but commodity prices to look at, far an away Australia?s largest earner. These are suggesting that the worst has yet to come.

Virtually the entire asset class hit new six year lows yesterday. I had to go to the weekly charts to see how ugly things really are.

Australia?s largest exports are iron ore (26%, or $68.2 billion worth), coal (KOL) (16%), gold (GLD) (8.1%), and petroleum (USO) (5.7%). When the world?s largest consumer of these slows down, so does demand for these commodities.

BHP Billiton Ltd. (BHP), the largest producer of iron ore, has seen its shares plunge 57% from last year?s high.

But wait! It gets worse.

I have written at length about the transition of China from an industrial to a services based economy. You would expect this, as the Middle Kingdom has virtually no commodity resources of its own, but lots of smart people.

In a nutshell, they wish they had America?s economy. Where services now account for a staggering 68% of all economic activity.

This is why China?s future lies with Alibaba (BABA), Baidu (BIDU), and (JD). It does NOT lie with its steel factories and coalmines, which by the way, recently announced layoffs of 100,000, the largest in history.

To learn more about the structural remaking of China, please click here for ?End of the Commodities Super Cycle?.

There is one bright spot to mention. Australia is making a transition to a services based economy of its own. Tourism is rocketing, as is the influx of flight capital from the Middle Kingdom.

Walk the streets of Brisbane these days, and you are overwhelmed by the abundance of Asians coming here to learn English, attain a high education, or start a new business. When I came here 40 years ago, they were virtually absent.

How low is low?

It doesn?t help that the governor of the Reserve Bank of Australia, Australia?s central bank, Glenn Stevens, despises his nation?s currency.

He has used every rally this year to talk down the Aussie, threatening interest rate cuts and quantitative easing.

The hope is that a deep discount currency will allow the exporters to maintain some pricing edge on the commodities front.

The market chatter is that the Aussie will take a run as low as $0.55, the 2008-09 Great Recession low.

Whether we actually get that far or not is a coin toss.

And will even $0.55 below enough for Glenn Stevens?

FXA 11-12-15

BHP 11-12-15

COPPER 11-11-15

GOLD 11-11-15

Australian Energie Ressources

Glenn StevensNoted Aussie Dollar Hater

The Price Tag for Clean Coal

I wanted to get the low down on clean coal (KOL) to see how clean it really is, so I visited some friends at Lawrence Livermore National Laboratory in California.

The modern day descendent of the Atomic Energy Commission, where I had a student job in the early seventies, the leading researcher on laser induced nuclear fission, and the administrator of our atomic weapons stockpile, I figured they?d know.

Dirty coal currently supplies us with 35% of our electricity and total electricity demand is expected to go up 30% by 2030. The industry is spewing out 32 billion tons of carbon dioxide (CO2) a year and the great majority of independent scientists out there believe that the global warming it is causing will lead us to an environmental disaster within decades.

Carbon Capture and Storage technology (CCS) locks up these emissions deep underground forever. The problem is that there is only one of these plants in operation in North Dakota, a legacy of the Carter administration, and new ones would cost $4 billion each.

The low estimate to replace the 250 existing coal plants in the US is $1 trillion, and this will produce electricity that costs 50% more than we now pay. In a gridlocked constrained congress, this is a big ticket that is highly unlikely to get picked up.

While we can build a wall to keep out illegal immigrants from Latin America, it won?t keep out CO2. This is a big problem as China is currently completing one new coal fired plant a week.
In fact, the Middle Kingdom is rushing to perfect cheaper CCS technologies, not only for their own use, but also to sell to us. The bottom line is coal can be cleaned, but at a frightful price.

Coal once had a huge price advantage over other energy sources that disappeared when the price of natural gas (UNG) collapsed for $17 BTU to $2/MM BTU. Yesterday, gas closed at a feeble $2.70.

Cost savings aside, virtually every utility in the country would love to get out of the coal business because of the litigation it invites. Read the prospectus for new securities issued by any of them, and you will find a litany of lawsuits over diseases caused by Sulfur Dioxide (SO2), Nitrous Oxides (NO2), and a host of other asthma and cancer causing pollutants.

Burning natural gas only emits carbon dioxide (CO2) (only half the amount that crude oil derived bunker fuel does) and water (H2O). Sorry, but my inner chemist is speaking.

California closed its last coal-fueled power plant a dozen years ago, switching to natural gas, accidently creating a windfall for consumers. Much of the money saved was used to modernize the grid buy installing statewide smart meters which allow customers to both buy and sell electricity back to utilities generated from home solar installations and charged up 1,000 pound 85 kWh lithium ion Tesla batteries.

These moves are expected to save our local Pacific Gas and Electric (PCE) the capital cost of building two new major generating plants. This is not your father?s utility.

Although it is unlikely that another coal fired power plant will ever be built in the US again, don?t expect coal giants like Peabody Energy (BTU) and Joy Global (JOY) to disappear anytime soon. There is still a massive export business to China, as the Burlington Northern freight trains that rumble near my home testify (love that midnight whistle).

But don?t ever confuse a stock price that has gone down a lot with ?cheap.? The shares of these companies could remain in the dumps for a long time and possibly forever, creating a classic value trap. That is, until the Chinese buy them out for pennies on the dollar.

These are jobs I don?t mind exporting to China. They can have them.

KOL 3-2-15

NATGAS 3-2-15

BTU 3-2-15

JOY 3-2-15



Smoke StacksCoal?s Popularity is Fading Fast

The Game Changer in India

So far in 2015 the Indian stock market has handily beaten that of the US, by 10.6% compared to 5.3%.

?The India election result is the biggest development to affect emerging markets over the last 30 years.? That is what retired chairman of Goldman Sachs Asset Management and originator of the ?BRIC? term, Jim O?Neal, told me last week.

Indeed, the stunning news has sent long term country specialists scampering. In my long term strategy lectures I have been titillating listeners for years with predictions that India was about to become the next China.

With half the per capita income of the Middle Kingdom, India was lacking the infrastructure needed to compete in the global marketplace. All that was needed was the trigger.

This is the trigger.

With a new party taking control of the government for the first time in 50 years, the way is now clear to carry out desperately needed sweeping political and economic reforms. At the top of the list is a clean sweep of corruption, long endemic to the subcontinent. I once spent four months traveling around India on the Indian railway system, and the demand for ?bakshish? was ever present.

A reviving and reborn India has massive implications for the global economy, which could see growth accelerate as much at 0.50% a year for the next 30 years. This will be great news for stocks everywhere. It will help offset flagging demand for commodities from China, like coal (KOL), iron ore (BHP), and the base metals (CU).

Demand for oil (USO) grows, as energy starved India is one of the world?s largest importers.

A strengthening Rupee, higher standards of living, and relaxed import duties should give a much needed boost for gold (GLD). India has always been the world?s largest buyer.

The world?s largest democracy certainly delivers the most unusual of elections, a blend of practices from today?.and a thousand years ago. It was carried out over five weeks, and a stunning 541 million voted, out of an eligible 815 million, a turnout of 66.4%. That is far higher than elections seen here in the United States.

Of the 552 members in the Lok Sabha, the lower house (or their House of Representatives), a specific number of seats are reserved for scheduled castes, scheduled tribes, and women. Gee, I wonder which one of these I would fit in?

Important issues during the campaign included rising prices, the economy, security, and infrastructure such as roads, electricity and water. About 14% of voters cited corruption as the main issue.

Some 12 political parties ran candidates. The winner was Hindu Nationalist Narendra Modi of the Bharatiya Janata Party (BJP), who led a diverse collection of lesser parties to take an overwhelming majority. For more details on this fascinating election, please click here at

It is still early days for the Bombay stock market, which has already rocketed by a stunning 20% since the election results became obvious last week.

This could be the beginning of a ten-bagger move over coming decades. Managers are hurriedly pawing through stacks of research on the subcontinent they have been ignoring for the past four years, the last time emerging markets peaked.

In the meantime, the action has spilled over into other emerging markets (EEM), their currencies (CEW), and their bonds (ELD), which have all punched through to new highs for the year.

I?ll be knocking out research o specific names when I find them. Until then, use any dip to pick up the Indian ETF?s (INP), (PIN), and (EPI).

PIN 2-23-15

INP 2-23-15

EPI 2-23-15


India Election Results

Why All Shares Are Now Oil Shares

After the market closes every night, I usually don a 60 pound backpack and climb the 2,000 foot mountain in my back yard.

To pass the time, I listen to audio books on financial and historical topics, about 200 a year (I?ve really got President Grover Cleveland nailed!). That?s if the howling packs of coyotes don?t bother me too much.

I also engage in mental calisthenics, engaging in complex mathematical calculations. How many grains of sand would you have to pile up to reach from the earth to the moon? How many matchsticks to circle the earth?

For last night?s exercise, I decided to quantify the impact of this year?s oil price crash on the global economy.

The world is currently consuming about 92 million barrels a day of Texas tea, or 33.6 billion barrels a year. In May, at the $107.50 high, that much oil cost $3.6 trillion. At today?s $53.60 low you could buy that quantity of oil for a bargain $1.8 trillion.

Buy a barrel of crude, and you get one for free!

This means that $1.8 trillion has suddenly been taken out of the pockets of oil producers, and put into the pockets of oil consumers. Over the medium term, this is fantastic news for oil consumers. But for the short term, things could get very scary.

$1.8 trillion is a lot of money. If you had that amount in hundred dollar bills, it would rise to 180 million inches, 15 million feet, or 2,840 miles, or 1.2% of the way to the moon (another mental exercise).

The global financial system cannot move this amount of money around on short notice without causing some pretty severe disruptions.

For a start, there is suddenly a lot less demand for dollars with which to buy oil. This has triggered short covering rallies in the long beleaguered Japanese Yen (FXY) and the Euro (FXE), which are just now backing off of long downtrends. The fundamentals for these currencies are still dire. But the short term trend now appears to be an upward one.

The US Federal Reserve certainly sees the oil crash as an enormously deflationary event. The use of energy is so widespread that it feeds into the cost of everything. That firmly takes the chance of any interest rate rise off the table for 2015. The Treasury bond market (TLT) has figured this out and launched on a monster rally.

Traders are also afraid that the disinflationary disease will spread, so they have been taking down the price of virtually all other hard commodities as well, like coal (KOL), iron ore (BHP), and copper (CU). For more depth on this, see yesterday?s piece on ?The End of the Commodity Super Cycle?.

The precipitous fall in energy investments everywhere will be felt principally in the 15 US states involved in energy production (Texas, Oklahoma, Louisiana, and North Dakota, etc.). So, the consumers in the other 35 states should be thrilled.

However, the plunge in energy stocks is getting so severe, that it is dragging down everything else with it. ALL shares are effectively oil shares right now. In fact, all asset classes are now moving tic for tic with the price of oil.

Throw on top of that the systemic risk presented by the ongoing collapse of the Russian economy. The Ruble has now fallen a staggering 70% in six months, and there is panic buying of everything going on in Moscow stores. The means that the dollar denominated debt owed by local firms has just risen by 70%. Any foreign banks holding this debt are now probably regretting ever watching the film, Dr. Zhivago.

Russian interest rates were just skyrocketed from 10.50% to 17%. The Russian stock market (RSX) is the world?s worst performing bourse this year. How do you spell ?depression? in the Cyrillic alphabet?

And guess what the new Russian currency is?

IPhone 6.0?s, of which Apple is now totally sold out in Alexander Putin?s domain!

Thankfully, this is more of a European than an American problem. But nobody likes systemic risks, especially going into illiquid yearend trading conditions. It?s a classic case of being careful what you wish for.

Of the $1.8 trillion today, about $430 billion is shifting between American pockets. That amounts to a hefty 2.5% of GDP.

Money spent on oil is burned. However, money spent by newly enriched consumers has a multiplier effect. Spend a dollar at Wal-Mart, and the company has to hire more workers, who then have more money to spend, and so on. So a shifting of funds of this magnitude will probably add 1% to U.S. economic growth next year.

Unfortunately, we will lose a piece of this from the obvious slowdown in housing. Deflation means that home prices will stagnate, or even fall. This is a major portion of the US economy which, for the most part, has been missing in action for most of this recovery.

Ultimately, cheap energy as far as the eye can see is a key element of my ?Golden Age? scenario for the 2020?s (click here for ?Get Ready for the Coming Golden Age? ).

But you may have to get there by riding a roller coaster first.


WTIC 12-15-14

USO 12-15-14

TLT 12-15-14

FXY 12-15-14

KOL 12-16-14

RSX 12-16-14

roller_coaster_monksOil at $53?