Posts

July 8, 2019

Global Market Comments
July 8, 2019
Fiat Lux

Featured Trade:

(STANDBY FOR THE COMING GOLDEN AGE OF INVESTMENT),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)

December 12, 2018

Global Market Comments
December 12, 2018
Fiat Lux

Featured Trade:

(STANDBY FOR THE COMING GOLDEN AGE OF INVESTMENT),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)

September 27, 2018

Global Market Comments
September 27, 2018
Fiat Lux

Featured Trade:
(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F),
(TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (RSX), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL),
(TUESDAY, OCTOBER 16, 2018, MIAMI, FL,
GLOBAL STRATEGY LUNCHEON)

How to Gain an Advantage with Parallel Trading

One of the most fascinating things I learned when I first joined the equity trading desk at Morgan Stanley during the early 1980s was how to parallel trade.

A customer order would come in to buy a million shares of General Motors (GM) and what did the in-house proprietary trading book do immediately?

It loaded the boat with the shares of Ford Motors (F).

When I asked about this tactic, I was taken away to a quiet corner of the office and read the riot act.

“This is how you legally front run a customer,” I was told.

Buy (GM) in front of a customer order, and you will find yourself in Sing Sing shortly.

Ford (F), Toyota (TM), Nissan (NSANY), Daimler Benz (DDAIF), BMW (BMWYY), or Volkswagen (VWAPY), are no problem.

The logic here was very simple.

Perhaps the client completed an exhaustive piece of research concluding that (GM) earnings were about to rise.

Or maybe a client old boy network picked up some valuable insider information.

(GM) doesn’t do business in isolation. It has tens of thousands of parts suppliers for a start. While whatever is good for (GM) is good for America, it is GREAT for the auto industry.

So through buying (F) on the back of a (GM) might not only match the (GM) share performance, it might even exceed it.

This is known as a Primary Parallel Trade.

This understanding led me on a lifelong quest to understand Cross Asset Class Correlations, which continues to this day.

Whenever you buy one thing, you buy another related thing as well, which might do considerably better.

I eventually made friends with a senior trader at Salomon Brothers while they were attempting to recruit me to run their Japanese desk.

I asked if this kind of legal front running happened on their desk.

“Absolutely,” he responded. But he then took Cross Asset Class Correlations to a whole new level for me.

Not only did Salomon’s buy (F) in that situation, they also bought palladium (PALL).

I was puzzled. Why palladium?

Because palladium is the principal metal used in catalytic converters, which remove toxic emissions from car exhaust, and have been required for every U.S. manufactured car since 1975.

Lots of car sales, which the (GM) buying implied, ALSO meant lots of palladium buying.

And here’s the sweetener.

Palladium trading is relatively illiquid.

So, if you catch a surge in the price of this white metal, you would earn a multiple of what you would make on your parallel (F) trade.

This is known in the trade as a Secondary Parallel Trade.

A few months later, Morgan Stanley sent me to an investment conference to represent the firm.

I was having lunch with a trader at Goldman Sachs (GS) who would later become a famous hedge fund manager and asked him about the (GM)-(F)-(PALL) trade.

He said I would be an IDIOT not to take advantage of such correlations. Then he one-upped me.

You can do a Tertiary Parallel Trade here through buying mining equipment companies such as Caterpillar (CAT), Cummins (CMI), and Komatsu (KMTUY).

Since this guy was one of the smartest traders I ever ran into, I asked him if there was such a thing as a Quaternary Parallel Trade.

He answered “Abso******lutely,” as was his way.

But the first thing he always did when searching for Quaternary Parallel Trades would be to buy the country ETF for the world’s largest supplier of the commodity in question.

In the case of palladium, that would be Russia (RSX) followed by South Africa (EZA), which together account for 74% of the world’s total production.

Since then, I have discovered hundreds of what I can Parallel Trading Chains, and have been actively making money off of them. So have you, you just haven’t realized it yet.

I could go on and on.

Do this for decades as I have and you learn that some parallel trades break down and die. The cross relationships no longer function.

The best example I can think of is the photography/silver connection. When the photography business was booming, silver prices rose smartly.

Digital photography wiped out this trade, and silver-based film development is still only used by a handful of professionals and hobbyists.

Oh, and Eastman Kodak (KODK) went bankrupt in 2012.

However, it seems that whenever one Parallel Trading Chain disappears, many more replace it.

You could build chains a mile long simply based on how well Apple (AAPL) is doing.

Suffice it to say that parallel trading is an incredibly useful trading strategy.

Ignore it at your peril.

 

 

 

 

 

It’s a Long and Winding Road to Get Here

May 15, 2018

Global Market Comments
May 15, 2018
Fiat Lux

Featured Trade:
(FRIDAY, JUNE 15, 2018, DENVER, CO, GLOBAL STRATEGY LUNCHEON)
(GET READY FOR THE COMING GOLDEN AGE),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)

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

Get Ready for the Next Golden Age

I believe that the global economy is setting up for a new golden age reminiscent of the one the United States enjoyed during the 1950?s, and which I still remember fondly. This is not some pie in the sky prediction. It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.

What I call ?intergenerational arbitrage? will be the principal impetus. The main reason that we are now enduring two ?lost decades? is that 80 million baby boomers are retiring to be followed by only 65 million ?Gen Xer?s?. When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and ?RISK ON? assets like equities, and more buyers of assisted living facilities, health care, and ?RISK OFF? assets like bonds.

The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.

Fast forward ten years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home. That is when you have 65 million Gen Xer?s being chased by 85 million of the ?millennial? generation trying to buy their assets.

By then we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes. The middle class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990?s.

The stock market rockets in this scenario. Share prices may rise very gradually for the rest of the teens as long as tepid 2% growth persists. A 5% annual gain takes the Dow to 20,000 by 2020. After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 80,000 by 2030. Emerging stock markets (EEM) with much higher growth rates do far better.

This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well. The 100-year supply of natural gas (UNG) we have recently discovered through the new ?fracking? technology will finally make it to end users, replacing coal (KOL) and oil (USO). Fracking applied to oilfields is also unlocking vast new supplies.

Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC?s share of global reserves is collapsing. This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.? Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years. Total gasoline consumption is now at a five year low.

OPEC Share of World Crude Oil Reserves 2010

Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation. I now have an all-electric garage, with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. The net result of all of this is lower energy prices for everyone.

It will also flip the US from a net importer to an exporter of energy, with hugely positive implications for America?s balance of payments. Eliminating our largest import and adding an important export is very dollar bullish for the long term. That sets up a multiyear short for the world?s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.

Accelerating technology will bring another continuing positive. Of course, it?s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos. But at the enterprise level this is enabling speedy improvements in productivity that is filtering down to every business in the US, lower costs everywhere.

This is why corporate earnings have been outperforming the economy as a whole by a large margin. Profit margins are at an all time high. Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development. When the winners emerge they will have a big cross-leveraged effect on economy.

New health care breakthroughs will make serious disease a thing of the past, which are also being spearheaded in the San Francisco Bay area. This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented. It raised $3 billion through a bond issue to fund its own research, even though it couldn?t afford it.

I tell my kids they will never be afflicted by my maladies. When they get cancer in 40 years they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday. What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver?s seat on these innovations? The USA.

There is a political element to the new Golden Age as well. Gridlock in Washington can?t last forever. Eventually, one side or another will prevail with a clear majority. Conservatives may grind their teeth, but if Hillary Clinton wins in 2016, the Democrats will control the White House until 2025. Right now, she is leading by a 60% margin with Republican women.

This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for. That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don?t need the $30,156 annual supplement. Nor do I.

The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cuts defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.

I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up. A Pax Americana would ensue. That means China will have to defend its own oil supply, instead of relying on us to do it for them. That?s why they have recently bought a second used aircraft carrier.

Medicare also needs to be reformed. How is it that the world?s most efficient economy has the least efficient health care system, with the worst outcomes? This is going to be a decade long workout and I can?t guess how it will end. Raise the growth rate and trim back the government?s participation in the credit markets, and you make the numerous miracles above more likely.

The national debt comes under control, and we don?t end up like Greece. The long awaited Treasury bond (TLT) crash never happens. Ben Bernanke has already told us as much by indicating that the Federal Reserve may never unwind its massive $3.5 trillion in bond holdings.

Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won?t kick in for another decade. But some individual industries and companies will start to discount this rosy scenario now. Perhaps this is what the nonstop rally in stocks since November has been trying to tell us.

Dow Average 1970-2012 Dow Average 1970-2012

US Profit Margin 1929 - Q2 2012

'57 T-Bird Another American Golden Age is Coming

What?s up with BYD?

When I first bought shares in the Chinese electric car manufacturer, BYD (BYDDF) (or Build Your Dreams) in 2009 on the heels of Warren Buffet?s 10% investment, it looked like a total home run. The stock soared from $1.50 to $11, given me a paper return of 730%.

Undercover, I Totally Blend

Last year, the stock started to roll over, retracing all the way back to my cost. I called the company?s Los Angeles office, but the line was disconnected. I tried the New York office, but my call was never returned. An email I sent their headquarters in Shenzhen, China went unanswered. I even had a friend in the Chinese government make some inquires, and he told me the company wasn?t seeing anyone.

That?s it! Off with the gloves. No more Mr. nice guy. I did what I usually do when a company I follow won?t talk to me. I fly to their headquarters and break into the facility.

It was easier than you think. I simply pulled up to the main gate in Northern Shenzhen and told security that I was a friend of Mr. Buffet and was there to see Mr. Li. They waved me through and went scurrying to find the appropriate Mr. Li. I knew full well that in a company of 100,000, at least 10,000 had to be named Mr. Li, and by the time they figured out that there was no Mr. Li, I would be long gone. It worked like a charm.

This Could Be Your Next Car

At this point, my editor is saying, ?You did what!?? Indeed, my staff worries about my antics from time to time, fearing the dole if I fail to return from one of my adventures. But the nine life limitation that cats face doesn?t seem to apply to me, so I just keep on going.

I then set off and roamed the factory floors freely, stopping workers wherever I could and asking about conditions. The great thing about this approach is that the man on the assembly line, in R&D, and the girl in accounting are totally unfamiliar with management?s sanitized view for public consumption, and haven?t been professionally trained to lie. As a result, I was able to get a first class read on the state of the company.


E-Taxis

When I met with the Shenzhen venture capital community in the days before, the rumors were rampant. When founder and CEO, Wang Chuanfu, launched his assault on the global car market three years ago, expectations were high. He promised investors, like Berkshire Hathaway?s Charlie Munger, that BYD would soon become the world?s largest car manufacturer. He ramped up production from 500,000 vehicles to 800,000 in 2010, anticipating a huge demand for the company?s conventional cars and hybrids.

But quality issues persisted, and the resale rate to past BYD car owners fell to zero. Sales peaked at just over 500,000, leaving the company with a huge inventory of unsold vehicles. Profits collapsed. Mercedes was brought in to provide technical assistance, but has so far been unable to improve sales. Was BYD going under? Was Warren Buffet pulling his investment? Speculation was rife.

One salesman told me that the information blackout was ordered not due to any financial problems, but because the company was releasing its new, all electric Model E6 the following week. This car is much larger than other electric cars, gets an amazing 186 miles per charge, and will be offered for sale for $39,000 after government incentives.

If true, this would be a revolutionary, highly disruptive advance. BYD plan to export the car to the US as soon as possible. It has already been test driving a fleet of ?E-Taxis? on the streets of Shenzhen for the past 18 months, with much success. If the company cans delivery on the vehicle, Wang Chuanfu might realize his ambitious goals after all.

China currently subsidizes energy prices, with gasoline available for about $3.50 a gallon, or 10% lower than US prices. That means a smaller cost advantages for alternative car producers. That disadvantage could disappear during the next oil price spike. Government subsidies will also eventually have to disappear because they are too costly.

Finally, after two hours of scouring the grounds, inspecting the physical remains of their crash tests, inspecting the assembly line, and peeking through windows, I was ready to go. There once was a day when I could have been put in front of a firing squad for doing something like this. But the People?s Republic has grown soft in its old age, and I figured that, worst case, I would just get kicked off the grounds. Not, so for my Chinese staff, however, who were sweating bullets and begging me to leave.

So what are investors to take away from this? For a start, you run out and buy tsunami afflicted, beaten down Nissan Motors (NSANY). If BYD can squeeze 186 miles out of its batteries, so can Nissan, and there is already talk that the second generation all-electric Leaf will reach that target. That will eliminate the ?range anxiety? afflicting current owners with their 80 mile limitation.

As for BYD itself, the story is a little more complicated. At this share price, you are essentially getting a world class multinational lithium ion battery company with the car company thrown in for free. If the car division continues to sputter along, you can expect modest appreciation in the shares. But if the E-6 becomes the next big car of the future, the stock could go ballistic and potentially make a new high, delivering investors a multi bagger.

Whoa, That Was Close