Global Market Comments
August 13, 2019
(THE TRADE OF THE CENTURY IS SETTING UP),
(HOW TO BUY A SOLAR SYSTEM),
(SCTY), (SPWR), (TSLA)
Global Market Comments
August 13, 2019
(THE TRADE OF THE CENTURY IS SETTING UP),
(HOW TO BUY A SOLAR SYSTEM),
(SCTY), (SPWR), (TSLA)
Global Market Comments
June 13, 2018
SPECIAL SPACE X ISSUE
(LAST CHANCE TO ATTEND THE FRIDAY, JUNE 15, 2018, DENVER, CO,
GLOBAL STRATEGY LUNCHEON),
(WILL SPACE X BE YOUR NEXT TEN BAGGER?),
(EBAY), (TSLA), (SCTY), (BA), (LMT)
Global Market Comments
June 6, 2018
SPECIAL SOLAR ISSUE
(FRIDAY, JUNE 15, 2018, DENVER, CO, GLOBAL STRATEGY LUNCHEON)
(HOW TO BUY A SOLAR SYSTEM),
(SCTY), (SPWR), (TSLA)
What we are seeing now is nothing less than the complete remaking of the American energy supply.
It is a metamorphosis, just as, if not more, dramatic than the initial electrification of the United States launched by Thomas Edison in 1876.
Think of it as a disruptive technology with a turbocharger.
Eventually, the cost of energy will drop to near zero in today?s terms, possibly as soon as 2035. The consequences for your trading and investment portfolio will be tectonic.
This is what people don?t get about solar.
Traditional forms of energy production and consumption, such as for oil, coal, natural gas, and hydroelectric, are subject to only linear improvements. Solar ones benefit from exponential growth.
There is, in effect, a solar Moore?s Law that sees efficiencies per dollar spent doubling every four years, such as we have already seen with the faster growth of microprocessor efficiencies since the 1960?s. Exponential growth of efficiencies will bring exponential growth of profits.
I am old enough to have lived through several solar booms in the past, only to see them crash and burn.
In 1979, President Jimmy Carter installed panels on the White House roof to provide leadership during the Iran oil crisis, only to see them torn down by President Ronald Reagan three years later.
Solar is now growing far faster than any other power source in the US, some 50% a year for the past six years.
Annual installations of photovoltaic panels have soared from a token 0.3 gigawatts in 2000 to an impressive 7.286 gigawatts in 2015, more than enough to fuel 8.5 million American homes.
California alone now has 500,000 homes running on solar, about 4% of the total. Installation trucks from a myriad of different local companies are seen everywhere.
This is all happening because of the simultaneous maturing and cross-pollination of technology, regulation, financing, and venture capital.
A key development was Chinese entry into mass production of solar panels, which led to a near immediate 80% collapse in prices. They now control 70% of the global market.
But this also led to the bankruptcy of a large number of US producers, including the ill-fated Solyndra, which I drive by every time I visit Tesla.
Chinese exports of panels to the US are now subject to anti dumping duties. This was all a windfall for the installation business.
Also helping has been the 90% collapse in the price of polysilicon, a key manufacturing component. Silicone (Si) is, in fact, one of the most common elements on the planet.
Still, the soft costs of sales, design, permitting, and labor, account for two thirds of a new installation today. By the way, solar has also proven a prolific new job creator. I can assure you, the cost of labor is never going to zero.
Some 15 years ago, I tried to install solar on my home and sell peak power to the grid. PG&E told me this was ?illegal? because I would crash the grid, something I knew was patently false.
This time around, my city permits sailed through effortlessly, and I received a polite email from PG&E instructing me how to read my new ?net metering bill?. I wish renewing my driver?s license was so easy (that damn vision test).
For the first time in history, solar power is now cheaper than grid power on a non-subsidized basis. Costs are set to still fall dramatically from here. Fossil fuels are about to become, well, fossils.
The Paris based International Energy Agency, no slouch when it comes to analyzing power data, predicts that solar will account for 27% of the global power supply by 2050, and will become the biggest single source.
But futurologist friends of mine, like Tesla?s (TSLA) Elon Musk, Google?s head of engineering, Ray Kurzweil, and cosmologist Dr. Stephen Hawking, believe there is no reason why it shouldn?t be at 100% by 2030-35. To quote Kurzweil, ?we are only six more doublings away.?
Google (GOOG), by the way, is already one of the world?s largest generators and distributors of solar power, while Musk is the preeminent installer through his participation in Solar City (SCTY).
Governments have been pouring fuel on the solar fire. Germany took an early lead, installing a massive 35 gigawatts over the past decade. It has since decided to shutter its entire nuclear industry, and offset its production with alternatives. But many of its subsidy programs were deep sixed by the crash.
President Obama made a 30% investment tax credit a central plank of his 2009 supplementary budget, which led to the current American solar renaissance.
That incentive expires in 2021, after getting a five year extension in a rare bipartisan deal in congress.
President Obama also upped the ante by using the Environmental Protection Agency to force power utilities to cut carbon emissions by 32% from 2005 levels. That involves setting a target of 28% alternative energy power generation by 2030.
The whole idea of using natural gas as a low carbon stepping stone has been abandoned.
Hillary Clinton has recently weighed in with her own plans to shift the country from a carbon to a solar energy based economy, if elected president.
She wants nothing less than to eliminate all oil and gas subsidies worth $100?s of billions, and shift the money to alternatives.
That is a radical move. Her goal is to increase the solar share of American power generation to 33% by 2027.
Individual states have weighed in with their own measures. California has mandated that its residents obtain 30% of their power from alternatives by 2020.
More than two dozen other states have followed with similar measures, including several red ones. Solar is starting to transcend the political spectrum; the numbers are so compelling.
This isn?t just a US phenomenon, but a global one. Saudi Arabia has two of the world?s largest solar plants on the drawing board, to produce some 2 megawatts.
After all, why burn $5 oil when you can sell it to foreigners (mostly the Chinese) at an extravagant $50 a barrel. They are also major investors in the San Francisco alternative energy scene.
China is building far and away the biggest solar infrastructure, and wants to build 70 gigawatts over the next two years.
Japan has a 20% solar target, thanks to the Fukushima nuclear disaster. India plans to provide cheap electricity via solar to 100,000 villages for the first time.
Improving solar cell efficiencies promises to take us further and faster into this brave new world.
My own SunPower (SPWR) X-335 panels, with their patented Maxeon solar cells, convert 20.3% of the sunlight they receive into electricity, the highest in the industry. Cheap imported Chinese panels offer efficiencies as low as 16% and don’t last nearly as long.
University labs have perfected cells with 45% efficiencies using advanced silicon compounds. I happen to know that the military has a 65% efficient cell. All that remains are the economies of mass production to bring them to the public market.
This is crucial for the solarization of the global economy. Every 1% improvement in efficiencies cuts that total cost of a new installed system by 5%.
With the trends already in place, it is safe to assume that solar energy costs will fall by at least 10% a year for the foreseeable future. First Solar (FSLR), which specializes in large scale, thin film, industrial facilities, expects solar costs to plunge from 63 cents per kilowatt in 2014 to only 40 cents by 2017.
Storage is another key part of the equation, as panels alone can only produce electricity during daylight. The cost of home storage batteries, which are charged by day and can run a home at night, have dropped by 70% over the
past five years.
They could drop another 70%, once Solar City completes its Nevada Gigafactory in 2017. That will double the planet?s lithium ion battery capacity in one shot. A second plant is planned.
For a more detailed explanation of that technology and the investment opportunities therein, please click here for Solar Energy?s Missing Link.
What are the investment implications of all this? Clearly all of the companies mentioned in this piece are about to see their market size increase 30 fold.
But, what about everyone else?
The elimination of energy as a cost has enormous consequences for all companies. You can start with the energy intensive ones in transportation, steel, and aluminum, and work your way down the list.
The profitability and efficiency of the entire economy will take a great leap forward, much like we saw with the mass industrialization that was first made possible by electricity during the 1920?s. Share prices of all kinds will go ballistic.
Dow 200,000 anyone?
Since energy costs will eventually fall effectively to zero, that wipes out the present business model of the entire electric power industry. It will be the same as trying to sell something that is free, like air.
That will force them to morph from energy producers to power distributors. Watch this space for a future piece on this issue.
So when readers ask me for the names of shares of companies that have the potential to rise tenfold in ten years, this is one industry I always steer them towards.
To save yourself months of research on how to install your own solar system, please click here for How to Buy a Solar System.
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.
With great fanfare, congress passed a blockbuster $1.8 trillion spending bill in December. President Obama hastily signed the bill into law the next day.
Barley noticed was a measure included in the bill, which extends the 30% investment tax credit for alternative energy investments by five more years, until the end of 2021.
Barely, that is, unless you owned solar stocks.
Since the intention to include this pet democratic program started leaking out in November, shares of the entire industry doubled in value.
Solar City (SCTY) rocketed by 136%. First Solar (FSLR) soared by 81%. Even the normally quiescent Guggenheim Solar ETF (TAN) gained an impressive 28%.
Since then, these shares have given up a big chunk of their gains, thanks to the ongoing stock market correction. Better look hard at this group. They could become one of the top performers this year.
In exchange for the solar extension, the president agreed to permit oil exports for the first time in 40 years. The fact that the country has run out of storage and already has 50 filled takers sitting offshore in the Gulf of Mexico makes this an easy move.
House Minority leader, Nancy Pelosi, my local congressperson, told me the republicans were willing to ?Give away the store? to get the export measure through.
It seems that the Koch Brothers, the republican party?s largest donors and funders of global warming deniers, wanted to use the oil export measure as the means to offshore the entire US petrochemical industry.
It is headed for emerging nations, where labor is cheaper, taxes are lower, and regulation nil. That means the loss of tens of thousands of US jobs, many in California, over which Pelosi complained.
Pelosi complaining about the loss of petrochemical jobs? It?s proof that if you live long enough, you see everything.
Whatever jobs the Golden State loses here, it will make back with solar, big time. Industry analysts estimate that the five-year extension is worth a STAGGERING $125 BILLION IN ADDITIONAL SALES!
That is a multiple of the entire solar industry?s current total annual sales.
What?s more, this is five years during which the solar industry can dramatically improve panel output efficiencies, inverters, designs, and cut costs (remember that the cost of labor and regulation, about half the cost of a solar installation, is still rising).
Solar is already close to grid parity on costs now. It is even competitive in Texas. It will be substantially cheaper in five years.
During the same time, the cost of grid power will keep rising continuously, thanks to rising capital cost of replacing aging infrastructure.
I?m not saying you should rush out and buy solar today. But when the bull market resumes later this year, this group should be at the top of your list.
As for me, I am already getting estimates for a doubling of my existing solar roof system to accommodate the charging of my second Tesla, the Model X.
To learn all the ins and outs of buying and installing a solar roof system for you self, please read ?How to Buy a Solar System? by clicking here.
I am once again writing this report from a first class sleeping cabin on Amtrak?s California Zephyr.
By day, I have two comfortable seats facing each other next to a panoramic window. At night, they fold into bunk beds, a single and a double. There is a shower, but only Houdini could get in and out of it.
I am not Houdini, so I go downstairs to use the larger public showers.
We are now pulling away from Chicago?s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American accomplishment.
I am headed for Emeryville, California, just across the bay from San Francisco. That gives me only 56 hours to complete this report.
I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure, and to keep me up to date with the onboard gossip.
The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Spellchecker can catch most of the mistakes, but not all of them.
Thank goodness for small algorithms.
As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied searches during stops at major stations along the way to chase down data points.
You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.
Who knew that 95% of America is off the grid? That explains a lot about our country today. I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 6.
After making the rounds with strategists, portfolio managers, and hedge fund traders, I can confirm that 2015 was one of the toughest to trade for careers lasting 30, 40, or 50 years. Even the stay-at-home index players had their heads handed to them.
With the Dow gaining 3.1% in 2015, and S&P 500 almost dead unchanged, this was a year of endless frustration. Volatility fell to the floor, staying at a monotonous 12% for eight boring consecutive months before spiking repeatedly many times to as high as 52%. Most hedge funds lagged the index by miles.
My Trade Alert Service, hauled in an astounding 38.8% profit, at the high was up 48.7%, and has become the talk of the hedge fund industry.
If you think I spend too much time absorbing conspiracy theories from the Internet, let me give you a list of the challenges I see financial markets facing in the coming year:
The Four Key Variables for 2016
1) Will the Fed raise interest rates more or not?
2) Will China?s emerging economy see a hard or soft landing?
3) Will Japanese and European quantitative easing increase, or remain the same?
4) Will oil bottom and stay low, or bounce hard?
Here are your answers to the above: no, soft, more later, bounce hard later.
There you go! That?s all the research you have to do for the coming year. Everything else is a piece of cake.
The Ten Highlights of 2015
1) Stocks will finish higher in 2016, almost certainly more than the previous year, somewhere in the 5% range and 7% with dividends. Cheap energy, a recovering global economy, and 2-3% GDP growth, will be the drivers. However, this year we have a headwind of rising interest rates and falling multiples.
2) Expect stocks to take a 15% dive. That gives us a -15% to +5% trading range for the year. Volatility will remain permanently higher, with several large spikes up. That means you are going to have to pedal harder to earn your crust of bread in 2016.
3) The Treasury bond market will modestly grind down, anticipating the next 25 basis point rate rise from the Federal Reserve, and then the next one after that.
4) The yen will lose another 5% against the dollar.
5) The Euro will fall another 5%, doing its best to hit parity with the greenback, with the assistance of beleaguered continental governments.
6) Oil stays in a $30-$60 range, showering the economy with hundreds of billions of dollars worth of de facto tax cuts.
7) Gold finally bottoms at $1,000 after one more final flush, then rallies $250. (My jeweler was right, again).
8) Commodities finally bottom out, thanks to new found strength in the global economy, and begin a modest recovery.
9) Residential real estate has made its big recovery, and will grind up slowly from here for years.
The Thumbnail Portfolio
Equities – Long. A rising but high volatility year takes the S&P 500 up to 2,200. Technology, biotech, energy, solar, consumer discretionary, and financials lead. Energy should find its bottom, but later than sooner.
Bonds – Short. Down for the entire year, but not by much, with long periods of stagnation.
Foreign Currencies – Short. The US dollar maintains its bull trend, especially against the Yen and the Euro, but won’t gain nearly as much as in 2015.
Commodities – Long. A China recovery takes them up eventually.
Precious Metals – Buy as close to $1,000 as you can. We are overdue for a trading rally.
Agriculture – Long. El Nino in the north and droughts in Latin American should add up to higher prices.
Real estate – Long. Multifamily up, commercial up, single family homes up small.
1) The Economy – Fortress America
I think real US economic growth will come in at the 2.5%-3% range.
With a generational demographic drag continuing for five more years, don?t expect more than that. Big spenders, those in the 46-50 age group, don?t return in larger numbers until 2022.
But this negative will be offset by a plethora of positives, like hyper-accelerating technology, global expansion, and the lingering effects of the Fed?s massive five year quantitative easing.
US corporate profits will keep pushing to new all time highs. But this year we won?t be held back by the collapsing economies of Europe, China, and Japan, which subtracted about 0.5% from American economic growth, nor weak energy.
US Corporate earnings will probably come in at $130 a share for the S&P 500, a gain of 10% over the previous year. During the last six years, we have seen the most dramatic increase in earnings in history, taking them to all-time highs.
Technology and dramatically lower energy costs are the principal sources of profit increases, which will continue their inexorable improvements. Think of more machines and software replacing people.
You know all of those hundreds of billions raised from technology IPO?s in 2015? Most of that is getting plowed right back into new start ups, increasing the rate of technology improvements even further, and the productivity gains that come with it.
We no longer have the free lunch of zero interest rates. But the cost of money will rise so slowly that it will barely impact profits. Deflation is here to stay. Watch the headline jobless rate fall below 5% to a full employment economy.
Keep close tabs on the weekly jobless claims that come out at 8:30 AM Eastern every Thursday for a good read as to whether the financial markets will head in a ?RISK ON? or ?RISK OFF? direction.
2) Equities (SPX), (QQQ), (AAPL), (XLF), (BAC), (EEM),(EWZ), (RSX), (PIN), (FXI), (TUR), (EWY), (EWT), (IDX)
For the first time in seven years, earnings multiples are going to fall, but not by much. That is the only possible outcome in a world with rising interest rates, however modestly.
If multiples fall by 5%, from the current 18X to 17.1X, profits increase by 10%, and you throw in a 2% dividend, you should net out a 7% return by the end of the year.
S&P 500 earnings fell by 6% in 2015, but take out oil and they grew by 5.6%. In 2016, energy will be a lesser drag, or not at all. That makes my 10% target doable.
That is not much of a return with which to take on a lot of risk. But remember, in a near zero interest rate world, there is nothing else to buy.
This is not an outrageous expectation, given the 10-22 earnings multiple range that we have enjoyed during the last 30 years.
The market currently trades around fair value, and no market in history ever peaked out here. An overshoot to the upside, often a big one, is mandatory. Yet, that is years off.
After all, my friend, Janet Yellen, is paying you to buy stock with cheap money, so why not? Borrowing money at close to zero and investing in 2% dividend paying stocks has become the world?s largest carry trade.
Rising interest rates will have one additional worrying impact on stock prices. They will pare back mergers and acquisitions and corporate buy backs in 2016.
Together these were the sources of all new net buying of stocks in 2015, some $5.5 trillion worth. Call it financial engineering, but the market loves it.
Although energy looks terrible now, it could well be the top-performing sector by the end of the year, to be followed by commodities.
Certainly, every hedge fund and activist investor out there is undergoing a crash course on oil fundamentals. After a 13-year expansion of leverage in the industry, it is ripe for a cleanout.
Solar stocks will continue on a tear, now that the 30% federal investment tax subsidy has been extended by five more years. Look at Solar City (SCTY), First Solar (FSLR), and the solar basket ETF (TAN). Revenues are rocketing and costs are falling.
After spending a year in the penalty box, look for small cap stocks to outperform. These are the biggest beneficiaries of cheap energy and low interest rates.
Share prices will deliver anything but a straight-line move. Expect a couple more 10% plus corrections in 2015, and for the Volatility Index (VIX) to revisit $30 multiple times. The higher prices rise, the more common these will become.
3) Bonds ?(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP), (KMP), (LINE)
Amtrak needs to fill every seat in the dining car, so you never know who you will get paired with for breakfast, lunch, and dinner.
There was the Vietnam vet Phantom jet pilot who now refused to fly because he was treated so badly at airports. A young couple desperate to get out of Omaha could only afford seats as far as Salt Lake City, sitting up all night. I paid for their breakfast.
A retired British couple was circumnavigating the entire US in a month on a ?See America Pass.? Mennonites returning home by train because their religion forbade airplanes.
I have to confess that I am leaning towards the ?one and done? school of thought with regards to the Fed?s interest rate policy. We may see a second 25 basis point rise in June, but only if the economy takes off like a rocket and international concerns disappear, an unlikely probability.
If you told me that US GDP growth was 2.5%, unemployment was at a ten year low at 5.0%, and energy prices had just plunged by 68%, I would have pegged the ten-year Treasury bond yield at 6.0%. Yet here we are at 2.25%.
We clearly are seeing a brave new world.
Global QE added to a US profit glut has created more money than the fixed income markets can absorb.
Virtually every hedge fund manager and institutional investor got bonds wrong last year, expecting rates to rise. I was among them, but that is no excuse.
Fixed income turned out to be a winner for me in 2015, as I sold short every bond price spike from the summer onward. It worked like a charm.
You might as well take your traditional economic books and throw them in the trash. Apologies to John Maynard Keynes, John Kenneth Galbraith, and Paul Samuelson.
The reasons for the debacle are myriad, but global deflation is the big one. With ten year German bunds yielding a paltry 62 basis points, and Japanese bonds paying a paltry 26 basis points, US Treasuries are looking like a steal.
To this, you can add the greater institutional bond holding requirements of Dodd-Frank, a balancing US budget deficit, a virile US dollar, the commodity price collapse, and an enormous embedded preference for investors to keep buying whatever worked yesterday.
For more depth on the perennial strength of bonds, please click here for ?Ten Reasons Why I?m Wrong on Bonds?.
Bond investors today get an unbelievable bad deal. If they hang on to the longer maturities, they will get back only 80 cents worth of purchasing power at maturity for every dollar they invest a decade down the road.
But institutions and individuals will grudgingly lock in these appalling returns because they believe that the potential losses in any other asset class will be worse.
The problem is that driving eighty miles per hour while only looking in the rear view mirror can be hazardous to your financial health.
While much of the current political debate centers around excessive government borrowing, the markets are telling us the exact opposite.
A 2% handle on the ten-year yield is proof to me that there is a Treasury bond shortage, and that the government is not borrowing too much money, but not enough.
There is another factor supporting bonds that no one is looking at. The concentration of wealth with the 1% has a side effect of pouring money into bonds and keeping it there. Their goal is asset protection and nothing else.
These people never sell for tax reasons, so the money stays there for generations. It is not recycled into the rest of the economy, as conservative economists insist. As this class controls the bulk of investable assets, this forestalls any real bond market crash, at lest for the near term.
So what will 2016 bring us? I think that the erroneous forecast of higher yields I made last year will finally occur this year, and we will start to chip away at the bond market bubble?s granite edifice.
I am not looking for a free fall in price and a spike up in rates, just a move to a new higher trading range.
We could ratchet back up to a 3% yield, but not much higher than that. This would enable the inverse Treasury bond bear ETF (TBT) to reverse its dismal 2015 performance, taking it from $46 back up to $60.
You might have to wait for your grandchildren to start trading before we see a return of 12% Treasuries, last seen in the early eighties. I probably won?t live that long.
Reaching for yield suddenly went out of fashion for many investors, which is typical at market tops. As a result, junk bonds (JNK) and (HYG), REITS (HCP), and master limited partnerships (AMLP) are showing their first value in five years.
There is also emerging market sovereign debt to consider (PCY). If oil and commodities finally bottom, these high yielding bonds should take off on a tear.
This asset class was hammered last year, so we are now facing a rare entry point.
There is a good case for sticking with munis. No matter what anyone says, taxes are going up, and when they do, this will increase tax-free muni values.
The collapse of the junk bond market suddenly made credit quality a big deal last year. What is better than lending to the government, unless you happen to live in Puerto Rico or Illinois.
So if you hate paying taxes, go ahead and buy this exempt paper, but only with the expectation of holding it to maturity. Liquidity could get pretty thin along the way, and mark to markets could be shocking.
Be sure to consult with a local financial advisor to max out the state, county, and city tax benefits.
One question I always get asked at lunches, conferences, and lectures is what is going to happen to the budget deficit?
The short answer is that it disappears in 2018 with no change in current law, thanks to steady growth in tax revenues and no big new wars.
And Social Security? It will be fully funded by 2030, thanks to a huge demographic tailwind provided by the addition of 86 million Millennials to the tax rolls.
A bump up in US GDP growth from 2% to 4% during the 2020?s will also be a huge help, again, provided we don?t start any more wars.
It looks like I am going to be able to collect after all.
4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
Without much movement in interest rates in 2016, you can expect the same for foreign currencies.
Last year, we saw never ending expectations of aggressive quantitative easing by foreign central banks, which never really showed. What we did get, was always disappointing.
The decade long bull market in the greenback continues, but not by much. You can forget about those dramatic double digit gains the dollar made against the Euro at the beginning of last year, which we absolutely nailed.
The fundamental play for the Japanese yen is still from the short side. But don?t expect movement until we see another new leg of quantitative easing from the Bank of Japan. It could be a long wait.
The problems in the Land of the Rising Sun are almost too numerous to count: the world?s highest debt to GDP ratio, a horrific demographic problem, flagging export competitiveness against neighboring China and South Korea, and the world?s lowest developed country economic growth rate.
The dramatic sell off we saw in the Japanese currency since December, 2012 is the beginning of what I believe will be a multi decade, move down. Look for ?130 to the dollar sometime in 2016, and ?150 further down the road.
I have many friends in Japan looking for an overshoot to ?200. Take every 3% pullback in the greenback as a gift to sell again.
With the US having the world?s strongest major economy, its central bank is, therefore, most likely to continue raising rates the fastest.
That translates into a strong dollar, as interest rate differentials are far and away the biggest decider of the direction in currencies. So the dollar will remain strong against the Australian and Canadian dollars as well.
For a sleeper, use the next plunge in emerging markets to buy the Chinese Yuan ETF (CYB) for your back book. Now that the Yuan is an IMF reserve currency, it has attained new respectability.
But don?t expect more than single digit returns. The Middle Kingdom will move heaven and earth in order to keep its appreciation modest to maintain their crucial export competitiveness.
5) Commodities (FCX), (VALE), (MOO), (DBA), (MOS), (MON), (AGU), (POT), (PHO), (FIW), (CORN), (WEAT), (SOYB), (JJG)
There isn?t a strategist out there not giving thanks for not loading up on commodities in 2015, the preeminent investment disaster of the year. Those who did are now looking for jobs on Craig?s List.
It was another year of overwhelming supply meeting flagging demand, both in Europe and Asia. Blame China, the one big swing factor in the global commodity.
The Middle Kingdom is currently changing drivers of its economy, from foreign exports to domestic consumption. This will be a multi decade process, and they have $3.5 trillion in reserves to finance it.
It will still demand prodigious amounts of imported commodities, especially, oil, copper, iron ore, and coal, all of which we sell. But not as much as in the past. This trend ran head on into a decade long expansion of capacity by the industry.
The derivative equity plays here, Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE), have all taken an absolute pasting.
The food commodities were certainly the asset class to forget about in 2015, as perfect weather conditions and over planting produced record crops for the second year in a row, demolishing prices. The associated equity plays took the swan dive with them.
Not even the arrival of one of the biggest El Nino events in history could bail them out.
However, the ags are still a tremendous long term Malthusian play. The harsh reality here is that the world is making people faster than the food to feed them, the global population jumping from 7 billion to 9 billion by 2050.
Half of that increase comes in countries unable to feed themselves today, largely in the Middle East. The idea here is to use any substantial weakness, as we are seeing now, to build long positions that will double again if global warming returns in the summer, or if the Chinese get hungry.
The easy entry points here are with the corn (CORN), wheat (WEAT), and soybean (SOYB) ETF?s. You can also play through (MOO) and (DBA), and the stocks Mosaic (MOS), Monsanto (MON), Potash (POT), and Agrium (AGU).
The grain ETF (JJG) is another handy fund. Though an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cakewalk. You can participate in this most liquid of assets with the ETF?s (PHO) and (FIW).
6) Energy (DIG), (RIG), (USO), (DUG), (DIG), (UNG), (USO), (OXY), (XLE), (X)
You are now an oil trader, even if you didn?t realize it. Yikes!
The short-term direction of the price of Texas tea will be the principal driver for the prices of all asset classes, as it was for the 2015.
The smartest thing I did in 2015 was to ignore the professional traders, who called the bottom in oil monthly, based on key technical levels.
Instead, I hung on every word uttered by my old drilling buddies in the Barnett Shale, who only saw endless supply.
Guess whom I?ll be paying attention to this year?
I expect oil to bottom in 2016, and then launch a ferocious short covering rally. But when and where is anyone?s guess.
If energy legends John Hamm, John Arnold, and T. Boone Pickens have no idea where the absolute low will be, who am I to second-guess them?
When that happens, a trillion dollars will pour out of the sidelines into this troubled sector. Energy shares should be top-performers in 2016.
That makes energy Master Limited Partnerships, now yielding 10%-15%, especially interesting in this low yield world. Since no one in the industry knows which issuers are going bankrupt, you have to take a basket approach and buy all of them.
The Alerian MLP ETF (AMLP) does this for you in an ETF format (click here for details). At its low this fund was down by 41% this year. The last printed annualized yield I saw was 10%. That kind of return will cover up a lot of sins.
Our train has moved over to a siding to permit a freight train to pass, as it has priority on the Amtrak system. Three Burlington Northern engines are heaving to pull over 100 black, brand new tank cars, each carrying 30,000 gallons of oil from the fracking fields in North Dakota.
There is another tank car train right behind it. No wonder Warren Buffet tap dances to work every day, as he owns the railroad.
Who knew that a new, younger Saudi king would ramp up production to once unimaginable levels and crush prices, turning the energy world upside down?
They aren?t targeting American frackers, who at 1 million barrels a day in a 92 million barrel a day demand world barely move the needle. Their goal is to destroy the economies of enemies Iran, Yemen, Russia, and of course ISIS, which need high prices to stay in business.
So far, so good.
Cheaper energy will bestow new found competitiveness on US companies that will enable them to claw back millions of jobs from China in dozens of industries.
At current prices, the energy savings works out to an eye popping $550 per American driver per year!
This will end our structural unemployment faster than demographic realities would otherwise permit.
We have a major new factor this year in considering the price of energy. The nuclear deal with Iran promises to add 500,000 to 1 million barrels a day to an already glutted global market. Iraq is ramping up production as well.
We are also seeing relentless improvements on the energy conservation front with more electric vehicles, high mileage conventional cars, and newly efficient building. Anyone of these inputs is miniscule on its own. But add them all together and you have a game changer.
Enjoy cheap oil while it lasts because it won?t last forever. American rig counts are already falling off a cliff and will eventually engineer a price recovery.
As is always the case, the cure for low prices is low prices. But we may never see $100/barrel crude again.
Add to your long term portfolio (DIG), Exxon Mobil (XOM), Cheniere Energy (LNG), the energy sector ETF (XLE), Conoco Phillips (COP), and Occidental Petroleum (OXY).
Skip natural gas (UNG) price plays and only go after volume plays, because the discovery of a new 100-year supply from ?fracking? and horizontal drilling in shale formations is going to overhang this subsector for a very long time.
It is a basic law of economics that cheaper prices bring greater demand and growing volumes, which have to be transported. However, major reforms are required in Washington before use of this molecule goes mainstream.
These could be your big trades of 2016, but expect to endure some pain first, nor to get much sleep at night.
7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)
The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.
On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders. The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a train over on to its side.
In the snow filled canyons we sight a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It?s a good omen for the coming year.
We also see countless abandoned 19th century gold mines and the broken down wooden trestles leading to them, relics of previous precious metals busts. So it is timely here to speak about precious metals.
As long as the world is clamoring for paper assets like stocks and bonds, gold is just another shiny rock. After all, who needs an insurance policy if you are going to live forever?
We have already broken $1,040 once, and a test of $1,000 seems in the cards before a turnaround ensues. There are more hedge fund redemptions and stop losses to go. The bear case has the barbarous relic plunging all the way down to $700.
But the long-term bull case is still there. Gold is not dead; it is just resting.
If you forgot to buy gold at $35, $300, or $800, another entry point is setting up for those who, so far, have missed the gravy train. The precious metals have to work off a severely, decade old overbought condition before we make substantial new highs.
Remember, this is the asset class that takes the escalator up and the elevator down, and sometimes the window.
If the institutional world devotes just 5% of their assets to a weighting in gold, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation adjusted all-time high, or more.
This is why emerging market central banks step in as large buyers every time we probe lower prices. China and India emerged as major buyers of gold in the final quarter of 2015.
They were joined by Russia, which was looking for non-dollar investments to dodge US economic and banking sanctions.
For me, that pegs the range for 2016 at $1,000-$1,250. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP).
I would also be using the next bout of weakness to pick up the high beta, more volatile precious metal, silver (SLV), which I think could hit $50 once more, and eventually $100.
What will be the metals to own in 2015? Palladium (PALL) and platinum (PPLT), which have their own auto related long term fundamentals working on their behalf, would be something to consider on a dip.
With US auto production at 18 million units a year and climbing, up from a 9 million low in 2009, any inventory problems will easily get sorted out.
8) Real Estate (ITB)
The majestic snow covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write.
My apologies to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.
It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my own immigrant forebears in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80.
There is no doubt that there is a long-term recovery in real estate underway. We are probably 5 years into a 17-year run at the next peak in 2028.
But the big money has been made here over the past two years, with some red hot markets, like San Francisco, soaring. If you live within commuting distance of Apple (AAPL), Google (GOOG), or Facebook (FB) headquarters in California, you are looking at multiple offers, bidding wars, and prices at all time highs.
While the sales figures have recently been weak, it is a shortage of supply that is the cause. You can?t sell what you don?t have, at least in the real estate business.
From here on, I expect a slow grind up well into the 2020?s. If you live in the rest of the country, we are talking about small, single digit gains. The consequence of pernicious deflation is that home prices appreciate at a glacial pace.
At least, it has stopped going down, which has been great news for the financial industry.
There are only three numbers you need to know in the housing market for the next 20 years: there are 80 million baby boomers, 65 million Generation Xer?s who follow them, and 86 million in the generation after that, the Millennials.
The boomers have been unloading dwellings to the Gen Xer?s since prices peaked in 2007. But there are not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis.
If they have prospered, banks won?t lend to them. Brokers used to say that their market was all about ?location, location, location?. Now it is ?financing, financing, financing?.
Banks have gone back to the old standard of only lending money to people who don?t need it. But expect to put up your first-born child as collateral, and bring in your entire extended family in as cosigners if you want to get a bank loan.?
There is a happy ending to this story. Millennials, now aged 21-37 are already starting to kick in as the dominant buyers in the market. They are just starting to transition from 30% to 70% of all new buyers in this market. The Great Millennial Migration to the suburbs has begun.
As a result, the price of single family homes should rocket tenfold during the 2020?s, as they did during the 1970?s and the 1990?s, when similar demographic influences were at play.
This will happen in the context of a coming labor shortfall and rising standards of living. Inflation returns.
Rising rents are accelerating this trend. Renters now pay 35% of the gross income, compared to only 18% for owners, and less when multiple deductions and tax subsidies are taken into account.
Remember too, that by then, the US will not have built any new houses in large numbers in 10 years. We are still operating at only a quarter of the peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.
That makes a home purchase now particularly attractive for the long term, to live in, and not to speculate with.
You will boast to your grandchildren how little you paid for your house, as my grandparents once did to me ($18,000 for a four bedroom brownstone in Brooklyn in 1922).
Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now.
If you borrow at a 3% 5/1 ARM rate, and the long-term inflation rate is 3%, then over time you will get your house for free.
How hard is that to figure out?
We have pulled into the station at Truckee in the midst of a howling blizzard.
My loyal staff have made the 20 mile trek from my beachfront estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.
After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.
Well, that?s all for now. We?ve just passed the Pacific mothball fleet moored in the Sacramento River Delta and we?re crossing the Benicia Bridge. The pressure increase caused by an 8,200 foot descent from Donner Pass has crushed my water bottle.
The Golden Gate Bridge and the soaring spire of the Transamerica Building are just around the next bend across San Francisco Bay.
A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my Macbook Pro and iPhone 6, pick up my various adapters, and pack up.
We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten mile night hike up Grizzly Peak and still get home in time to watch the opener for Downton Abbey’s final season.
I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.
I?ll shoot you a Trade Alert whenever I see a window open on any of the trades above.
Good trading in 2016!
The Mad Hedge Fund Trader
Let the Sunshine In!
I?ll never forget those immortal words for the hit musical Hair, where I took my senior prom date in 1970.
I had no idea that the entire cast would drop their clothes off at the end of the first act, standing there stark naked. I remember that they guy sitting in front of me almost hard a heart attack. I didn?t know then that such words existed.
My date?s dad would not have been amused.
He was the legendary founder of Wham-O, marketer of famed novelty toys like the Frisbee, the hula-hoop, the Slinky, the Super Ball, and the Slip?n Slide, a multi millionaire, and a famed African lion hunter.
He was a real tough guy.
But he never found out. There were a lot of things he never found out, thank goodness!
But I digress.
I?m sure that California Governor Jerry Brown was humming a few bars of Let the Sunshine In this week, although I doubt he ever saw the play.
Back then, he had just graduated from divinity school as a Jesuit priest (click here for my exclusive interview with the Moon Beam governor ?An Afternoon with California Governor Jerry Brown?.
But the words would have been appropriate, for my illustrious neighbor with the great security detail signed a bill this week that brings into law the most ambitious alternative energy goals seen anywhere in the world.
Jerry?s aspiration is for the Golden State TO OBTAIN 50% OF ITS ELECTRICITY NEEDS BY 2030, IN A MERE 15 YEARS!
In 2014, the state garnered an already impressive 22% of its electricity from non hydro renewables, including solar, wind, biomass, and geothermal sources, already the highest share in the world for a major economy.
There has not been a traditional coal fired electric power plant in the state for more than a decade.
Also included in the legislation are provisions to double the energy efficiencies of homes, offices, and factories. Another goal to cut gasoline consumption by half was axed from the measure after heavy lobbying by big oil.
Lucky for me that I?m already there with my new SunPower Solar installation (click here for ?How to Buy a Solar System? ).
Jerry thoughtfully signed the bill at the Los Angeles Griffith Park Observatory, which offered a panoramic view of the legendary LA smog, the city barely visible.
Some of it is probably still coating the inside of my lungs from my childhood there in the 1950?s.
My readers in all 50 states and 137 countries are constantly begging me to tell them what the Hell is going on in California.
As a technology and regulatory leader, what is adopted here is often imitated across the country and around the world, both the good, and the bad.
You know those seat belts, safety glass, and catalytic converters you find in your cars? They are all the result of laws first passed in California. But then it?s always easy to pile regulation on the industries entirely based out of state.
It doesn?t always work out so well. Adolph Hitler entirely imported the state?s racial purity laws to Germany during the 1930?s, and we all know where that went.
But that is a story for another day.
Of course, there are many who say that the lofty 50% target is unobtainable, or will drive us all broke if we ever get there.
But there is one fact that is utterly undeniable. This will be an absolute windfall of the US solar industry, which has the only technology advanced enough to meet governor Brown?s aggressive targets.
There is, in effect, a solar Moore?s Law that sees efficiencies per dollar spent doubling every four years, such as we have already seen with the faster growth of microprocessor efficiencies since the 1960?s.
Exponential growth of efficiencies will bring exponential growth of company profits.
Annual installations of photovoltaic panels have soared from a token 0.3 gigawatts in 2000 to an impressive 45 gigawatts in 2014, more than enough to fuel 7.4 million American homes.
They are about to grow much larger.
This is all happening because of the simultaneous maturing and cross-pollination of technology, regulation, financing, and venture capital.
A key development was the Chinese entry into mass production of solar panels during the late 2000?s, which led to a near immediate 80% collapse in prices. They now control 70% of the global market.
For the first time in history, solar power is now cheaper than grid power on a non-subsidized basis. Costs are set to still fall dramatically from here.
Fossil fuels are about to become, well?fossils.
The Paris based International Energy Agency, no slouch when it comes to analyzing power data, predicts that solar will account for 27% of the global supply by 2050, and will become the biggest single source.
But futurologist friends of mine, like Tesla?s (TSLA) Elon Musk, Google?s head of engineering, Ray Kurzweil, and cosmologist Dr. Stephen Hawking, believe there is no reason why it shouldn?t be at 100% by 2030-35.
To quote Kurzweil, ?we are only six more doublings away.?
Hillary Clinton wants nothing less than to eliminate all oil and gas tax subsidies worth $100?s of billions, and shift the money to alternatives.
That is a radical move.
Her goal is to increase the solar share of American power generation to 33% by 2027. To expect that this will cause the shares of solar companies to skyrocket is an understatement of the highest order.
Improving solar cell efficiencies promises to take us further and faster into this brave new world.
My own SunPower (SPWR) X-335 panels, with their patented Maxeon solar cells (made in Georgia), convert 20.3% of the sunlight they receive into electricity, the highest in the industry. Cheap imported Chinese panels offer efficiencies as low as 15%.
University labs have perfect cells with 45% efficiencies using advanced silicon compounds. I happen to know that the military has a 65% efficient cell. All that remains are the economies of mass production to bring them to the public market.
This is crucial for the solarization of the global economy. Every 1% improvement in efficiencies cuts that total cost of a new installed system by 5%.
With the trends already in place, it is safe to assume that solar energy costs will fall by at least 10% a year for the foreseeable future.
What are the investment implications of all this? Clearly, the solar industry is about to see its market size increase 30 fold.
Here is the great thing about solar shares.
They have been mercilessly beaten down by the recent collapse in oil prices, which is trading at the $30 handle as I write this, even though its business prospects are vastly improving.
Oil is giving you a once in a lifetime entry point into solar.
Call it guilt by association. Isn?t energy just energy.
These investment plays are the obvious ones that I have been recommending for the past couple of years. They include Solar City (SCTY), First Solar (FSLR), SunPower (SPWR), and more recently, Sun Edison (SUNE).
If you want a broader diversification, you can buy the (TAN).
I am writing this to you from a dive boat headed for the Molokini Crater off the coast of Maui in Hawaii. The rolling of the boat makes typing challenging, so please excuse me for more than the usual number of typos.
In the distance farmers are burning off their harvested cane fields, creating giant plumes of smoke, a practice banned in the continental US decades ago.
A pod of dolphins are racing the bow of the boat and humpback whales are blowing their spouts on the horizon. Periodically, the boat scares up a school of flying fish going airborne to find safety.
Life is good.
Another thing I have noticed cruising off the Maui leeward coast is that almost every building has solar roof panels. Of course, the incentive here is huge, as costly imported fuel for power plants makes electricity in Hawaii 20%-50% more expensive than it is on the mainland.
By now, you probably are sick to death of my banging on about the fantastic investment opportunities in the solar industry. But I am not recommending the sector because I wear Birkenstocks, eat organic bean sprouts and recycle even my vegetable waste. Putting money into solar now also makes solid business sense.
Did I also mention that it prevents millions of tons of carbon from entering the atmosphere, or about 5 tons per household per year?
With the stocks expected to rise by ten times over the next decade, you better get ready for more abuse. The solar industry is about to cross an epochal, sea changing benchmark.
Thanks in part to heavy competition from China, South Korea and Japan, the cost of solar panels has collapsed by 75% over the past four years.
Indeed, Chinese flooding of the US market with cheap imported panels almost wiped out every American producer. If you don?t believe me, then check out the long-term stock charts.
More importantly, the cost of industrial, utility sized solar power plants has fallen by 50%.
Only four years ago, large solar power plants made economic sense only after heavy government subsidies were included. They were all part of a ?stimulate the economy and save the world? philosophy demanded by the global economic collapse.
Now we are about to attain the Holy Grail: solar that is profitable on a stand-alone basis.
Don?t get me wrong. Subsidies are nice, as the oil and gas industry well know. I have been sidling up to the trough myself lately with my own solar projects (more on that in a future research piece). But subsidies are no longer the lifeblood of the business.
The economics of solar roof installations are now so compelling, that they are going up everywhere across the country. In fact, everyone on my street has one except me.
That is because the technology, which I keep close track of, is evolving so quickly that it has paid to wait. I did the same when I skipped six track tapes and waited for eight tracks ones, ignored Betamax in favor of VHS, and passed on Windows 1 (which always froze), but soaked up Windows 2.
A solar installation now also protects you from the hefty price increases that will be demanded by your local utility to pay for long overdue infrastructure upgrades.
I am also holding out for the best possible deal (you know me). With one Tesla Model S in the garage, and a Model X on order, I also happen to be one of the largest residential electric power consumers in the state. So, we?re not talking small beer here.
This is starting to have a sizeable impact on the American electricity market. A reader who works for Southern California Edison (SCE/PF) has told me that the cumulative effect of millions of home silicon roof panels is now so great that the traditional daily afternoon power demand spike is starting to disappear.
Even Saudi Arabia is building solar plants now, and they have access to nearly unlimited crude at a mere $5 a barrel.
The Spanish engineering company TSK has just signed a contract with Dubai to build a sizeable, state of the art 100-megawatt photovoltaic plant. The production costs there will work out to just $5.85 a kilowatt hour.
For oil to be competitive with this capital cost, the price would have to stay under $50 a barrel for the next 20 years. Technological advances on stream will make solar competitive at $20 a barrel in a year or two. This explains why some $2.7 billion worth of solar contracts with the Middle East are currently in negotiation.
Oil poor states are rushing even faster to the solar panacea. Jordan is planning to obtain 20% of its power from alternative sources by 2020, while Egypt has set a more ambitious 20% target. Morocco, which I will be visiting this summer, is the most aggressive, with an impressive 42% goal.
All of the means dramatically falling costs and soaring revenue for the solar companies. That sounds like a great business plan to me.
The usual suspects here include First Solar (FSLR), at $11 billion, the largest capitalized behemoth in the industry, and the master of thin film technology. Their power plant near Las Vegas is a sight to behold from the air.
There is Solar City (SCTY), Elon Musk?s highly competitive entry in the field, which will be able to draw from Tesla?s massive $6 billion giga factory in Reno, Nevada.
Sunpower (SPWR) is the Rolls Royce of the solar industry, producing the highest efficiency rated 340-watt panels (thanks to the pure copper substrate), which I will soon be installing in my own home. Love that biochemistry degree!
You could also go risk averse and buy all of them through the Guggenheim Solar ETF (TAN).
The key here is the price of oil, which has unnecessarily dragged down the shares of solar companies over the past nine months. Once it bottoms, if it has not already done so, it will be off to the races.
While your big cap oil majors might add on 40% in value in any recovery, the solars could be in for a tenfold return.
Back to me whale watching. Thar she blows!
Long time solar observers were stunned by the news that First Solar (FSLR) and Sunpower (SPWR) were teaming up to create a joint venture.
The stock market certainly got the message. Sunpower rocketed by 18%, while First Solar soared by 17%.
Imagine Macy?s merging with Gimbels, Coke tying up with Pepsi or the Los Angeles Dodgers teaming up with the San Francisco Giants?
It?s a little more complicated than that.
The move further convinces me that solar is one of the few industries that could offer investors a ten-bagger over the coming decade. Revenues are soaring, costs are plunging.
Throwing the fat on the fire are generous government subsidies that create a massive incentive for consumers to go solar by the end of next year.
The entity that (FSLR) and (SPWR) are forming is known as a ?yieldco.?
A yieldco is a publicly traded company that is formed to own operating assets that produce a predictable cash flow. Separating volatile activities (like research and development and construction) from stable and less volatile cash flows of operating assets can lower the cost of capital.
Yieldcos are expected to pay a major portion of their earnings in dividends, which may be a valuable source of funding for parent companies which own a sizeable stake. They are commonly used in the energy industry, particularly in renewable energy to protect investors against regulatory changes.
Yieldcos are in effect first cousins to other high yielding securities like Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs). Yieldcos give investors a chance to participate in renewable energy without many of the associated risks.
The announcement came on the heels of blowout earnings announced by the two companies. SunPower said it expects to install another 215 megawatts of generation in 2015 and that its project pipeline now totals more than 4,000 megawatts.
First Solar became the first solar photovoltaic (PV) maker to install 10,000 megawatts of capacity last month. Its project pipeline exceeds a monstrous 2,600 megawatts.
A 30% tax credit on any alternative energy investment is set to expire at the end of 2016. I think this will trigger the mother of all stampedes by consumers to buy solar systems while they can still get the government to pick up one third of the tab.
The entire solar industry looks attractive here. Collapsing oil prices has had a leveraged effect on solar shares, dropping them a heart stopping 40% in only three months.
Heaven knows investors are starved for cheap stocks these days.
There is one cautionary note to add here. The government subsidies that help float the company expire in 2017, making the entire proposition financially less attractive. That is, unless they get renewed.
Think President Hillary.
The only things that would save them are dramatically higher conventional energy costs. However, right now energy costs are heading the opposite direction, thanks to fracking and a well-publicized war for market share at OPEC.