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Why Solar Stocks are Catching on Fire

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.

SPWR 2-24-15

FSLR 2-24-15

SCTY 2-24-15

Solar Panels

A Note on the Friday Options Expiration

We have several options positions that expire on Friday, and I just want to explain to the newbies how to best maximize their profits.

These include:

The Currency Shares Japanese Yen Trust (FXY) February $84-$87 vertical bear put spread

The Gilead Sciences (GILD) February $87.50-$92.50 vertical bull call spread

The S&P 500 (SPY) February $199-$202 vertical bull call spread

My bets that (GILD) and the (SPY) would rise, and that the (FXY) would fall during January and February proved dead on accurate. We got a further kicker with the two stock positions in that we captured a dramatic plunge in volatility (VIX).

Provided that some 9/11 type event doesn?t occur today, all three positions should expire at their maximum profit point. In that case, your profits on these positions will amount to 13% for the (FXY), 19% for (GILD) and 20% for the (SPY).

This will bring us a fabulous 5.58% profit so far for February, and a market beating 6.11% for year-to-date 2015.

Many of you have already emailed me asking what to do with these winning positions. The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck and pat yourself on the back for a job well done. You don?t have to do anything.

Your broker (are they still called that?) will automatically use your long put position to cover the short put position, cancelling out the total holding. Ditto for the call spreads. The profit will be credited to your account on Monday morning, and he margin freed up.

If you don?t see the cash show up in you account on Monday, get on the blower immediately. Although the expiration process is now supposed to be fully automated, occasionally mistakes do occur. Better to sort out any confusion before losses ensue.

I don?t usually run positions into expiration like this, preferring to take profits two weeks ahead of time, as the risk reward is no longer that favorable.

But we have a ton of cash right now, and I don?t see any other great entry points for the moment. Better to keep the cash working and duck the double commissions. This time being a pig paid off handsomely.

If you want to wimp out and close the position before the expiration, it may be expensive to do so. Keep in mind that the liquidity in the options market disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration. This is known in the trade as the ?expiration risk.?

One way or the other, I?m sure you?ll do OK, as long as I am looking over your shoulder, as I will be.

This expiration will leave me with a very rare 100% cash position. I am going to hang back and wait for good entry points before jumping back in. It?s all about getting that ?buy low, sell high? thing going again.

There are already interesting trades setting up in bonds (TLT), the (SPY), the Russell 2000 (IWM), NASDAQ (QQQ), solar stocks (SCTY), oil (USO), and gold (GLD).

The currencies seem to have gone dead for the time being, so I?ll stay away.

Well done, and on to the next trade.

FXY 2-19-15

GILD 2-19-15

SPY 2-19-15

Pat on the backPat Yourself on the Back

Solar Stocks Get a Jolt

The blockbuster for me in President Obama?s budget speech on Monday was his suggestion that the 30% alternative energy investment tax credit be made permanent. All solar stocks, including front-runners Solar City (SCTY), Sun Edison (SUNE), and SunPower (SPWR), rocketed on the news.

Now slated to expire at the end of 2017, the tax break is credited with igniting a solar building boom in recent years. Solar panels are becoming commonplace on roofs in better off residential neighborhoods across the country.

They are becoming so pervasive that they are changing the market for electricity beyond all recognition in lead states like California. The afternoon demand spike, once a regular feature of power management, is rapidly disappearing as consumers now sell excess peak electricity back to utilities at favorable rates.

Of course, this is all wishful thinking on the part of Obama, who couldn?t get a Republican led congress to agree with him on what day it is. Still, it has been outlined a priority with the administration, and could be a bargaining chip used in some broader tax compromise with the opposition.

And where President Obama mail fail, a future President Hillary may succeed.

Indeed, there has recently been an onslaught of good news showering the solar industry. China has announced a 43% increase in its installed solar base, an increase of 15 gigawatts. At the very least, this will divert cheap Chinese made panels from flooding the US market, the recent punitive import duty notwithstanding.

A 15% rally in the price of oil over the past three trading days has also provided a major assist. Solar actually has nothing to do with the price of oil. Its main competitor is the retail cost of electricity, which is driven by future capital spending budgets of local utilities. That has costs rising as far as the eye can see, as the industry replaces aging, 100 year old infrastructure.

The market sees it otherwise, which lumps all energy firms in the same category, be they oil, fracking, natural gas, coal, or even nuclear. Whether it makes sense or not, solar stocks are still tarred by the price of oil. Check out the charts below, and you find a correlation that is almost perfect.

The great irony in the president?s proposal is that solar is now profitable even without the tax breaks. They just provide the juice to accelerate widespread solar adoption.

I think solar is one of a handful of industries that could generate a tenfold return over the coming decade. Costs are plummeting, profit margins are expanding, and the overall market size is growing by leaps and bounds.

The fact that you can buy them now 40% off of their recent peaks is a gift. A $30 recovery in the price of oil could bring a 40% recovery in the shares of the oil majors. It could deliver a ten bagger for solar companies.

Let me pass on a little tidbit I picked up from Solar City a few weeks ago. By the end of this year, used Tesla Model S-1 batteries will become available in large numbers for the first time, including my own. (SCTY) plans to offer these for sale to their customers as backup batteries for home use. One battery can store three days worth of normal power consumption. This would make customers totally independent of the power grid.

No mention has been made of prices. My guess is that since these lithium ion batteries cost $30,000 new, a second hand one should come out at $10,000. These will still have 80% of their original capacity, not enough for a long-range car, but plenty for home storage.

For more depth on Solar City, please refer to my recent piece, ?Loading the Boat with Solar City? by clicking here.

SCTY 2-3-15

SUNE 2-3-15

SPWR 2-3-15

WTIC 2-2-15

Solar Panel InstallationMeet the New Bull Market

2015 Annual Asset Class Review

Zephyr

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 broad 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.

We are now pulling away from Chicago?s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. 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.

 

station

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 politics 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.

After making the rounds with strategists, portfolio managers, and hedge fund traders, I can confirm that 2014 was one of the toughest to trade for careers lasting 30, 40, or 50 years. Yet again, the stay at home index players have defeated the best and the brightest.

With the Dow gaining a modest 8% in 2014, and S&P 500 up a more virile 14.2%, this was a year of endless frustration. Volatility fell to the floor, staying at a monotonous 12% for seven boring consecutive months. Most hedge funds lagged the index by miles.

My Trade Alert Service, hauled in an astounding 30.3% profit, at the high was up 42.7%, and has become the talk of the hedge fund industry. That was double the S&P 500 index gain.

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:

 

JT & conductor

The Ten Highlights of 2015

1) Stocks will finish 2015 higher, almost certainly more than the previous year, somewhere in the 10-15% range. Cheap energy, ultra low interest rates, and 3-4% GDP growth, will expand multiples. It?s Goldilocks with a turbocharger.

2) Performance this year will be back-end loaded into the fourth quarter, as it was in 2014. The path forward became so clear, that some of 2015?s performance was pulled forward into November, 2014.

3) The Treasury bond market will modestly grind down, anticipating the inevitable rate rise from the Federal Reserve.

4) The yen will lose another 10%-20% against the dollar.

5) The Euro will fall another 10%, doing its best to hit parity with the greenback, with the assistance of beleaguered continental governments.

6) Oil stays in a $50-$80 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 (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.

10) After a tumultuous 2014, international political surprises disappear, the primary instigators of trouble becalmed by collapsed oil revenues.

 

windmills

The Thumbnail Portfolio

Equities – Long. A rising but low volatility year takes the S&P 500 up to 2,350. This year we really will get another 10% correction. Technology, biotech, energy, solar, and financials lead.

Bonds – Short. Down for the entire year with long periods of stagnation.

Foreign Currencies – Short. The US dollar maintains its bull trend, especially against the Yen and the Euro.

Commodities – Long. A China recovery takes them up eventually.

Precious Metals – Stand aside. We get the final capitulation selloff, then a rally.

Agriculture – Long. Up, because we can?t keep getting perfect weather forever.

Real estate – Long. Multifamily up, commercial up, single family homes sideways to up small.

 

farmland

1) The Economy – Fortress America

This year, it?s all about oil, whether it stays low, shoots back up, or falls lower. The global crude market is so big, so diverse, and subject to so many variables, that it is essentially unpredictable.

No one has an edge, not the major producers, consumers, or the myriad middlemen. For proof, look at how the crash hit so many ?experts? out of the blue.

This means that most economic forecasts for the coming year are on the low side, as they tend to be insular and only examine their own back yard, with most predictions still carrying a 2% handle.

I think the US will come in at the 3%-4% range, and the global recovery spawns a cross leveraged, hockey stick effect to the upside. This will be the best performance in a decade. Most company earnings forecasts are low as well.

There is one big positive that we can count on in the New Year. 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 five years, we have seen the most dramatic increase in earnings in history, taking them to all-time highs.

This is set to continue. Furthermore, this growth will be front end loaded into Q1. The ?tell? was the blistering 5% growth rate we saw in Q3, 2014.

Cost cutting through layoffs is reaching an end, as there is no one left to fire. That leaves hyper accelerating technology and dramatically lower energy costs the remaining sources of margin 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 2014. Most of that is getting plowed right back into new start ups, accelerating the rate of technology improvements even further, and the productivity gains that come with it.

You can count on demographics to be a major drag on this economy for the rest of the decade. Big spenders, those in the 46-50 age group, don?t return in large numbers until 2022.

But this negative will be offset by a plethora of positives, like technology, global expansion, and the lingering effects of Ben Bernanke?s massive five year quantitative easing. A time to pay the piper for all of this largess will come. But it could be a decade off.

I believe that the US has entered a period of long-term structural unemployment similar to what Germany saw in the 1990?s. Yes, we may grind down to 5%, but no lower than that. 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.

Most of the disaster scenarios predicted for the economy this year were based on the one off black swans that never amounted to anything, like the Ebola virus, ISIS, and the Ukraine.

Being continually afraid is expensive.

 

Moose on Snowy MountainA Rocky Mountain Moose Family

 

2) Equities (SPX), (QQQ), (AAPL), (XLF), (BAC), (EEM),(EWZ), (RSX), (PIN), (FXI), (TUR), (EWY), (EWT), (IDX)

With the economy going gangbusters, and corporate earnings reaching $130 a share, those with a traditional ?buy and hold? approach to the stock market will do alright, provided they are willing to sleep through some gut churning volatility. A Costco sized bottle of Jack Daniels and some tranquillizers might help too.

Earnings multiples will increase as well, as much as 10%, from the current 17X to 18.5X, thanks to a prolonged zero interest rate regime from the Fed, a massive tax cut in the form of cheap oil, unemployment at a ten year low, and a paucity of attractive alternative investments.

This is not an outrageous expectation, given the 10-22 earnings multiple range that we have enjoyed during the last 30 years. If anything, it is amazing how low multiples are, given the strong tailwinds the economy is enjoying.

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.
After all, my friend, Janet Yellen, is paying you to buy stock with cheap money, so why not?

This is how the S&P 500 will claw its way up to 2,350 by yearend, a gain of about 12.2% from here. Throw in dividends, and you should pick up 14.2% on your stock investments in 2015.

This does not represent a new view for me. It is simply a continuation of the strategy I outlined again in October, 2014 (click here for ?Why US Stocks Are Dirt Cheap?).

Technology will be the top-performing sector once again this year. They will be joined by consumer cyclicals (XLV), industrials (XLI), and financials (XLF).

The new members in the ?Stocks of the Month Club? will come from newly discounted and now high yielding stocks in the energy sector (XLE).

There is also a rare opportunity to buy solar stocks on the cheap after they have been unfairly dragged down by cheap oil like Solar City (SCTY) 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, and also have minimal exposure to the weak European and Asian markets.

Share prices will deliver anything but a straight-line move. We finally got our 10% correction in 2014, after a three-year hiatus. Expect a couple more in 2015. The higher prices rise, the more common these will become.

We will start with a grinding, protesting rally that takes us up to new highs, as the market climbs the proverbial wall of worry. Then we will suffer a heart stopping summer selloff, followed by another aggressive yearend rally.

Cheap money creates a huge incentive for companies to buy back their own stock. They divert money from their $3 trillion cash hoard, which earns nothing, retire shares paying dividends of 3% or more, and boost earnings per share without creating any new business. Call it financial engineering, but the market loves it.

Companies are also retiring stock through takeovers, some $2 trillion worth last year. Expect more of this to continue in the New Year, with a major focus on energy. Certainly, every hedge fund and activist investor out there is undergoing a crash course on oil fundamentals. After a 13-year bull market in energy, the industry is ripe for a cleanout.

This is happening in the face of both an individual and institutional base that is woefully underweight equities.

The net net of all of this is to create a systemic shortage of US equities. That makes possible simultaneous rising prices and earnings multiples that have taken us to investor heaven.

 

SPX 12-31-14

QQQ 12-31-14

IWM 12-31-14

XLE 12-31-14

snowy hillsFrozen Headwaters of the Colorado River

 

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.

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.

If you told me that US GDP growth was 5%, unemployment was at a ten year low at 5.8%, and energy prices had just halved, I would have pegged the ten-year Treasury bond yield at 6.0%. Yet here we are at 2.10%.

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. At least I have good company.

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 50 basis points, and Japanese bonds paying a paltry 30 basis points, US Treasuries are looking like a bargain.

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.

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%, 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, possibly for decades.

So what will 2015 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.

The high and low for ten year paper for the past nine months has been 1.86% to 3.05%. We could ratchet back up to the top end of that range, but not much higher than that. This would enable the inverse Treasury bond bear ETF (TBT) to reverse its dismal 2014 performance, taking it from $46 back up to $76.

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 will continue to be a popular strategy among many investors, which is typical at market tops. That focuses buying on junk bonds (JNK) and (HYG), REITS (HCP), and master limited partnerships (KMP), (LINE).

There is also emerging market sovereign debt to consider (PCY). At least there, you have the tailwinds of long term strong economies, little outstanding debt, appreciating currencies, and higher interest rates than those found at home. This asset class was hammered last year, so we are now facing a rare entry point. However, keep in mind, that if you reach too far, your fingers get chopped off.

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. 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.

 

TLT 12-31-14

TBT 12-31-14

MennonitesA Visit to the 19th Century

 

4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)

There are only three things you need to know about trading foreign currencies in 2015: the dollar, the dollar, and the dollar. The decade long bull market in the greenback continues.

The chip shot here is still to play the Japanese yen from the short side. Japan?s Ministry of Finance is now, far and away, the most ambitious central bank hell bent on crushing the yen to rescue its dying economy.

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 ?125 to the dollar sometime in 2015, and ?150 further down the road. I have many friends in Japan looking for and 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 raise interest rates first. 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.

The Euro looks almost as bad. While European Central Bank president, Mario Draghi, has talked a lot about monetary easing, he now appears on the verge of taking decisive action.

Recurring financial crisis on the continent is forcing him into a massive round of Fed style quantitative easing through the buying of bonds issued by countless European entities. The eventual goal is to push the Euro down to parity with the buck and beyond.

For a sleeper, use the next plunge in emerging markets to buy the Chinese Yuan ETF (CYB) for your back book, 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.

 

FXY 1-2-15

FXE 1-5-15

CYB 1-2-15

mountains

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 2014, the preeminent investment disaster of 2015. Those who did are now looking for jobs on Craig?s List.

2014 was the year that overwhelming supply met flagging demand, both in Europe and Asia. Blame China, the 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 $4 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. 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 2014, 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.

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 soybeans (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).

 

CORN 1-2-15

DBA 1-2-15

PHO 1-2-15

JT snow angelSnow Angel on the Continental Divide

 

6) Energy (DIG), (RIG), (USO), (DUG), (DIG), (UNG), (USO), (OXY), (XLE), (X)

Yikes! What a disaster! Energy in 2014 suffered price drops of biblical proportions. Oil lost the $30 risk premium it has enjoyed for the last ten years. Natural gas got hammered. Coal disappeared down a black hole.

Energy prices did this in the face of an American economy that is absolutely rampaging, its largest consumer.

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 Buffett tap dances to work every day, as he owns the road. US Steel (X) also does the two-step, since they provide immense amounts of steel to build these massive cars.

The US energy boom sparked by fracking will be the biggest factor altering the American economic landscape for the next two decades. It will flip us from a net energy importer to an exporter within two years, allowing a faster than expected reduction in military spending in the Middle East.

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. 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. Peace in the Middle East, especially with Iran, always threatened to chop $30 off the price of Texas tea. But it was a pie-in-the-sky hope. Now there are active negotiations underway in Geneva for Iran to curtail or end its nuclear program. This could be one of the black swans of 2015, and would be hugely positive for risk assets everywhere.

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.

Add the energies of oil (DIG), 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 2015, but expect to endure some pain first.

 

Baker Hughes Rig Count

WTIC 1-2-15

UNG 1-2-15

OXY 1-2-15

Train

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 gold mines and the broken down wooden trestles leading to them, 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 $1,200 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. Someday, we are going to have to pay the piper for the $4.5 trillion expansion in the Fed?s balance sheet over the past five years, and inflation will return. Gold is not dead; it is just resting. I believe that the monetary expansion arguments to buy gold prompted by massive quantitative easing are still valid.

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. For me, that pegs the range for 2015 at $1,000-$1,400. 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 17 million units a year and climbing, up from a 9 million low in 2009, any inventory problems will easily get sorted out.

 

GOLD 1-2-15

SILVER 1-2-15

sunsetWould You Believe This is a Blue State?

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 8 years into an 18-year run at the next peak in 2024.

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.

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: there are 80 million baby boomers, 65 million Generation Xer?s who follow them, and 85 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.

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.

Consider the coming changes that will affect this market. The home mortgage deduction is unlikely to survive any real attempt to balance the budget. And why should renters be subsidizing homeowners anyway? Nor is the government likely to spend billions keeping Fannie Mae and Freddie Mac alive, which now account for 95% of home mortgages.

That means the home loan market will be privatized, leading to mortgage rates higher than today. It is already bereft of government subsidies, so loans of this size are priced at premiums. This also means that the fixed rate 30-year loan will go the way of the dodo, as banks seek to offload duration risk to consumers. This happened long ago in the rest of the developed world.

There is a happy ending to this story. By 2022 the Millennials will start to kick in as the dominant buyers in the market. Some 85 million Millennials will be chasing the homes of only 65 Gen Xer?s, causing housing shortages and rising prices.

This will happen in the context of a labor shortfall and rising standards of living. Remember too, that by then, the US will not have built any new houses in large numbers in 15 years.

The best-case scenario for residential real estate is that it gradually moves up for another decade, unless you live in Cupertino or Mountain View. We won?t see sustainable double-digit gains in home prices until America returns to the Golden Age in the 2020?s, when it goes hyperbolic.

But expect to put up your first-born child as collateral, and bring your entire extended family in as cosigners if you want to get a bank loan.

That makes a home purchase now particularly attractive for the long term, to live in, and not to speculate with. This is especially true if you lock up today?s giveaway interest rates with a 30 year fixed rate loan. At 3.3% this is less than the long-term inflation rate.

You will boast about it to your grandchildren, as my grandparents once did to me.

 

Case-Shiller Home Prices Indices

ITB 1-2-15

BridgeCrossing the Bridge to Home Sweet Home

9) Postscript

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.

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 season opener for Downton Abbey season five. 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 2015!

John Thomas
The Mad Hedge Fund Trader

 

JT at workThe Omens Are Good for 2015!

Loading the Boat with Solar City

In recent weeks, I couldn?t help but notice the green and white vans of Solar City (SCTY) visiting my neighbors. My trader?s radar went up, so I thought there might be an opportunity here.

What I found made an intriguing investment opportunity. As a preeminent supplier of solar energy, Solar City is a de facto indirect call option on the price of oil, not a bad bet here at $74 and change.

As a huge consumer of capital, the company is a major beneficiary of the prolonged low interest rate scenario which I envision.

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.

Solar City has also recently completed several high tech acquisitions which will enable it to lower costs while enhancing output efficiencies.

Did I mention that anything Elon Musk Touches turns to gold?

The stock here also looks attractive. Collapsing oil prices had a leveraged effect on (SCTY) shares, dropping a heart stopping 42% in only three months. Heaven knows investors are starved for cheap stocks these days.

This week, (SCTY) poked its nose above the 50 day moving average. If it hold?s then it is off to the races. My only concern here is the volatility that the Thursday OPEC meeting in Vienna is certain to bring to energy markets.

With my second Tesla (TSLA) about to be delivered, the Model X SUV, it was time for me to review my electricity bill.

My first Tesla, a very early Model S-1 (chassis number 125), boosted my monthly power consumption from 600 kWh to 1,800 kWh per month, about what a small industrial facility might use.

Yet, my bill from PG&E increased from only $350 to $450 a month. This is because they effectively give away power for free from 12:00 AM to 7:00 AM to qualified EV users, charging me only a scant 4.7 cents per kWh.

On my suggestion, Tesla then upgraded their software so vehicles could be programmed to recharge only at these hours. That means it is costing me $4.00 for a full 80 kWh charge that can take me 255 miles, or 1.6 cents a mile. That doesn?t include the enormous savings on maintenance (there is none).

Well then! The IRS currently allows a mileage deduction of 56 cents per mile for business purposes, so that?s an opportunity to exploit right there.

Given that the average US car now gets 25 miles per gallon of gasoline (and that is being generous), that means my equivalent cost for running my S-1 works out to paying a scant 40 cents a gallon.

This compares to the $2.79 at the local service station ($2.57 at Costco), which is at a four year low, or a savings of 86%. That is a little more than I paid for gas when I first started driving a beat up VW Bug at the Santa Anita Race Track parking lot back in 1967.

That sounds like a deal to me.

However, the second Tesla is likely to boost my monthly power consumption from 1,800 kWh to 3,000. When PG&E sees bills that big, they assume someone is operating an illegal marijuana grow house and send the DEA to kick your door down at 5:00 AM on a Monday morning.

So I was on the phone to Solar City the next morning. What I heard was nothing less than amazing.

For a start, they called up a Google Earth mapping program that focused on a picture of my roof from a low earth orbit satellite (Google has invested $280 million in Solar City). Then a second program autofits their existing solar panels to my roof and spit out a mass of numbers.

This complete stranger told me things about my roof that I never knew, like it was 4,000 square feet of flat concrete tiles on 14 planes. Welcome to the 21st century.

I nervously looked down and made sure my fly was fully zipped up.

He went on to tell me that he could fit a 15 kW DC system on my roof that would generate 106% of my power needs, generating 19,365 kWh a year. That would make me completely self sufficient in electricity, even though I will be charging two hulking Tesla 1,000 pound lithium ion batteries every day.

They will install a ?net? two-way electric meter on my house. When the sun shines, it will run backwards as I can sell power to PG&E at high prices. So many people are doing this now that the traditional afternoon price spike in electricity had virtually disappeared.

At night, when I recharge my cars, I would then buy cheap power from Solar City. No storage devices are required. The PG&E grid is effectively the storage system. That would turn me into a day trader of electricity, selling high by day and buying low by night. I love it!

How did their satellite know I was a hedge fund trader? What else does it know?

Now comes the best part. The cost of the installation and panels was $66,000. Solar City would do it for free. Yes, free, as in gratis, with no money down.

They would lease me the panels for 20 years, with an annual price increase of 6.2%. That would cut my monthly electricity bill from $450 to $200. It does this by eliminating the tier 3, 4, and 5 prices I am currently paying PG&E.

If I sell my house, I can either buy out my contract at the discounted, fully depreciated value, or pass it on to the new owners. It is well known that solar panels significantly increase the value of existing homes.

Installation can be done in a day. But it can only take place on unbreakable concrete tile roofs. Those made of clay tiles, metal, tar and gravel, wood shakes, or slate don?t work for various reasons. You need a FICO score of 680 or better to qualify. There is a 60-day waiting list to get this done.

It didn?t take me long to figure out the game here. By purchasing the panels and leasing them to me, they keep the 30% government subsidy for capital investments in alternative energy, which works out to $19,890 for my house alone. Solar City also gets to depreciate these panels on an accelerated schedule, mostly in the first five years.

This explains why Solar City has grown larger than the next 15 competitors combined. Solar City?s largest customer is the US Army, which has already installed panels on 1 million structures.

There is one cautionary note to add here. The government subsidies that help float the company expire in 2018, 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.

As with everything else Elon Musk touches, an investment in Solar City has been wildly successful. Since the company went public at the end of 2012, the shares have risen by an awesome 670%. Needless to say, with no earnings, and no dividend, the $5.5 billion market cap company may appear hopelessly expensive.

Like with Elon?s other company, Tesla, you aren?t betting on the value of the business today, but where it will be in five years, when it has a far larger share of the market.

Given Musk?s track record so far, that is a bet that I am willing to take.

For a detailed training video on how to execute a vertical bull call spread, please click here at https://www.madhedgefundtrader.com/ltt-executetradealerts/.

 

John's RoofMy Home from Outer Space

 

VW BeetleIt?s Been a Long and Winding Road Driving From this?

 

John ThomasTo This

 

SCTY 11-25-14

USO 11-25-14

Solar ShieldsThere?s a Profit in Here Somewhere

Taking a Look at Solar City

In recent weeks, I couldn?t help but notice the green and white vans of Solar City (SCTY) visiting my neighbors. My trader?s radar went up, so I thought there might be an opportunity here.

With my second Tesla (TSLA) about to be delivered, the Model X SUV, it was time for me to review my electricity bill.

My first Tesla, an S-1, boosted my monthly power consumption from 600 kWh to 1,800 kWh per month, about what a small industrial facility might use. Yet, my bill from PG&E increased from only $350 to $450 a month. This is because they effectively give away power for free from 12:00 AM to 7:00 AM to qualified EV users, charging me only 4.7 cents per kWh.

On my suggestion, Tesla then upgraded their software so vehicles could be programmed to recharge only at these hours. That means it is costing me $4.00 for a full 80 kWh charge that can take me 255 miles, or 1.6 cents a mile. That doesn?t include the enormous savings on maintenance (there is none).

Well then! The IRS currently allows a mileage deduction of 56 cents per mile for business purposes, so that?s an opportunity to exploit right there.

Given that the average US car now gets 25 miles per gallon of gasoline (and that is being generous), that means my equivalent cost for running my S-1 works out to paying a scant 40 cents a gallon.

This compares to the $3.60 at the local service station ($3.45 at Costco), which is at a one year low, or a savings of 89%. That is a little more than I paid for gas when I first started driving a beat up VW Bug at the Santa Anita Race Track parking lot back in 1967.

That sounds like a deal to me.

However, the second Tesla is likely to boost my monthly power consumption from 1,800 kWh to 3,000. When PG&E sees bills that big, they assume someone is operating an illegal marijuana grow house and send the DEA to kick your door down at 5:00 AM on a Monday morning.

So I was on the phone to Solar City the next morning. What I heard was nothing less than amazing.

For a start, they called up a Google Earth mapping program that focused on a picture of my roof from a low earth orbit satellite (Google has invested $280 million in Solar City). Then a second program autofit their existing solar panels to my roof and spit out a mass of numbers.

This complete stranger told me things about my roof that I never knew, like it was 4,000 square feet of flat concrete tiles on 14 planes. Welcome to the 21st century.

I nervously looked down and made sure my fly was fully zipped up.

He went on to tell me that he could fit a 15 kW DC system on my roof that would generate 106% of my power needs, generating 19,365 kWh a year. That would make me completely self sufficient in electricity, even though I will be charging two hulking Tesla 1,000 pound lithium ion batteries every day.

They will install a ?net? two-way electric meter on my house. When the sun shines, it will run backwards as I can sell power to PG&E (PCG) at high prices.

At night, when I recharge my cars, I would then buy cheap power from Solar City. No storage devices are required. The PG&E grid is effectively the storage system. That would turn me into a day trader of electricity, selling high by day and buying low by night. I love it!

How did their satellite know I was a hedge fund trader? What else does it know?

Now comes the best part. The cost of the installation and panels was $66,000. Solar City would do it for free. Yes, free, as in gratis, with no money down. They would lease me the panels for 20 years, with an annual price increase of 6.2%. That would cut my monthly electricity bill from $450 to $200. It does this by eliminating the tier 3, 4 and 5 prices I am currently paying PG&E.

If I sell my house, I can either buy out my contract at the discounted, fully depreciated value, or pass it on to the new owners. It is well known that solar panels significantly increase the value of existing homes.

Installation can be done in a day. But it can only take place on unbreakable concrete tile roofs. Those made of clay tiles, metal, tar and gravel, wood shakes, or slate don?t work for various reasons. You need a FICO score of 680 or better to qualify. There is a 60-day waiting list to get this done.

It didn?t take me long to figure out the game here. By purchasing the panels and leasing them to me, they keep the 30% government subsidy for capital investments in alternative energy, which works out to $19,890 for my house alone. Solar city also gets to depreciate these panels on an accelerated schedule, mostly in the first five years.

This explains why Solar City has grown larger than the next 15 competitors combined. Solar City?s largest customer is the US Army, which has already installed panels on 1 million structures.

There is one cautionary note to add here. The government subsidies that help float the company expire in 2018, 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.

As with everything else Elon Musk touches, an investment in Solar City has been wildly successful. Since the company went public at the end of 2012, the shares have risen by an awesome 670%. Needless to say, with no earnings, and no dividend, the $6.5 billion market cap company may appear hopelessly expensive.

Like with Elon?s other company, Tesla, your aren?t betting on the value of the business today, but where it will be in five years, when it has a far larger share of the market.

Given Musk?s track record so far, that is a bet that I am willing to take.

SCTY 8-27-14

TSLA 8-27-14

John's RoofMy Home from Outer Space

 

VW BeetleIt?s Been a Long and Winding Road Driving from This?

 

John Thomas - TeslaTo This

An Update on the Tesla Fire

Once again, Tesla (TSLA) visionary, Elon Musk, surprised to the upside with his latest reports on earnings and production for his revolutionary vehicle.

Musk, who also founded groundbreaking Space X and Solar City (SCTY), expanded on his plans to manufacture in China and expand sales in Europe, where 220 volts is already standard.

The first ever left hand drive Model S-1 was just delivered in London to E.L. James, author of Fifty Shades of Grey, a fictional tome that is racy in its own right (worst book I ever read).

You can? keep a good stock down, which is now spitting distance from an all time high. That was the obvious message on Tesla (TLSA) shares in the wake of last year?s fire that consumed one of its $80,000 Model S-1?s on a Washington state road after it ran over the rear bumper of the truck it was following.

The video was quickly plastered all over YouTube (click here to view). Tesla quickly delivered a new car to the grateful owner within a week.

This was the first S-1 to catch fire since the production run started two years ago. There have been two others since. Compare that to the roughly 400 gasoline powered vehicles that catch fire on US roads nearly every day.

If you really want to see how volatile gasoline is, try lighting a campfire with it some day. Even tossing in matches in from a great distance, as I once did, you?ll be lucky to have your eyebrows left. I didn?t.

To make amends, Tesla is installing titanium armor plating on the bottom of every S-1 for free. They did mine this week, and gave me new a new Tesla as a loaner!

Tesla followed up quickly with an analysis and a letter with a complete explanation sent to all other S-1 drivers signed by none other than CEO Elon Musk. I have included the entire text below in italics. He doesn?t leave much to the imagination.

If only all car manufacturers behaved like this!
?Earlier this week, a Model?S traveling at highway speed struck a large metal object, causing significant damage to the vehicle. A curved section that fell off a semi-trailer was recovered from the roadway near where the accident occurred and, according to the road crew that was on the scene, appears to be the culprit. The geometry of the object caused a powerful lever action as it went under the car, punching upward and impaling the Model?S with a peak force on the order of 25 tons. Only a force of this magnitude would be strong enough to punch a 3 inch diameter hole through the quarter inch armor plate protecting the base of the vehicle.

The Model?S owner was nonetheless able to exit the highway as instructed by the onboard alert system, bring the car to a stop and depart the vehicle without injury. A fire caused by the impact began in the front battery module ? the battery pack has a total of 16 modules ? but was contained to the front section of the car by internal firewalls within the pack. Vents built into the battery pack directed the flames down towards the road and away from the vehicle.

When the fire department arrived, they observed standard procedure, which was to gain access to the source of the fire by puncturing holes in the top of the battery’s protective metal plate and applying water. For the Model?S lithium-ion battery, it was correct to apply water (vs. dry chemical extinguisher), but not to puncture the metal firewall, as the newly created holes allowed the flames to then vent upwards into the front trunk section of the Model?S. Nonetheless, a combination of water followed by dry chemical extinguisher quickly brought the fire to an end.

It is important to note that the fire in the battery was contained to a small section near the front by the internal firewalls built into the pack structure. At no point did fire enter the passenger compartment.

Had a conventional gasoline car encountered the same object on the highway, the result could have been far worse. A typical gasoline car only has a thin metal sheet protecting the underbody, leaving it vulnerable to destruction of the fuel supply lines or fuel tank, which causes a pool of gasoline to form and often burn the entire car to the ground. In contrast, the combustion energy of our battery pack is only about 10% of the energy contained in a gasoline tank and is divided into 16 modules with firewalls in between. As a consequence, the effective combustion potential is only about 1% that of the fuel in a comparable gasoline sedan.

The nationwide driving statistics make this very clear: there are 150,000 car fires per year according to the National Fire Protection Association, and Americans drive about 3 trillion miles per year according to the Department of Transportation. That equates to 1 vehicle fire for every 20 million miles driven, compared to 1 fire in over 100 million miles for Tesla. This means you are 5 times more likely to experience a fire in a conventional gasoline car than a Tesla!

For consumers concerned about fire risk, there should be absolutely zero doubt that it is safer to power a car with a battery than a large tank of highly flammable liquid.?

Elon Musk
CEO,
Tesla Motors

 

TSLA 8-6-14

SCTY 8-6-14

TeslaTesla Traffic Jam

 

Tesla - 2

Buy Solar Stocks on the Dip

Now that the stock market appears destined to soon enter correction territory, I have started searching for industries and companies that I want to buy at the bottom. The solar industry is at the top of that list.

Solar has a been a long time in coming. For decades, it was a niche energy source with very narrow following among scientists, the military, and Greenpeace activists. The problem was that it was just too expensive. It made sense only to those with unlimited budgets (the army), pursuing a political agenda (environmentalists), or when there was no other alternative power source (outer space).

Ironically, what really got the solar bandwagon moving was oil, which saw prices soar to $150 a barrel in 2008. That dramatically raised the breakeven cost of solar. Projects that only existed on paper suddenly made economic sense.

Then, Barack Obama was elected president. One of his first moves was to make available over $100 billion in subsidies for alternative energy projects of every description. All of a sudden, it was off to the races for solar.

This led to the first solar stock market boom in 2009. Some highflyers, like First Solar (FSLR) rose tenfold (it was a favorite ?BUY? recommendation of mine at the time). They were aided by states like sun-drenched California that mandated 20% of power consumption comes from alternative sources, to rise to 30% in the 2020?s.

This created an enormous solar and wind infrastructure throughout the west to meet the state?s voracious needs. Some 29 other states have passed similar laws with varying targets.

I inspected the centerpiece of the state?s solar strategy, flying over the gigantic Ivanpah facility in a wheezing, rented Cessna 172 in the barren, baking, but beautiful Mojave Desert. I brought plenty of extra water bottles and a compass in case I crash-landed and had to walk home.

It all looks like a film set from a science fiction movie, with 347,000 concave mirrors placed in enormous circles focusing light on hot water boilers atop three 460-foot towers. The plant opened in February, 2014 and is generating 377 megawatts of electricity, enough to power 140,000 homes in the Los Angeles area.

Planned a decade ago, the technology is now so primitive that it is unlikely to be ever used again. Far more advanced than film, solar is now taking over the world.

Then China came in and spoiled the party. Overproduction by poorly managed and weakly financed Chinese solar firms using inferior technologies quickly glutted the global market, and solar prices crashed by 80% or more. Many companies did not survive, such as the San Francisco Bay Area?s Solyndra, which defaulted on some $536 million in federal government loans (the feds got $143 million back).

This triggered a Darwinian clearing out of the industry, where only the strongest, the most innovative, and the most desperate survived. Technologies and efficiencies improved. The administration extended a helping hand by slapping hefty anti dumping tariffs on Chinese imports. The industry is lobbying for further restrictions. This all set the stage for a solar renaissance.

For the first time in history, solar is now cost competitive with conventional sources of power on a standalone, unsubsidized basis. As a result, the industry is exploding. In 2013, solar accounted for 29% of new power generation capacity in the US, after quasi-green natural gas, at 46%.

The advent of cheap solar roof panels and ?smart? electric meters in 43 states has enabled individuals to get in on the act. Such devices are now a standard feature on most new high-end homes. They genuinely do save money, especially when considering that utilities will bill you up to 50 cents per kilowatt hour for prime time consumption, compared to their average rate of 11 cents. There have been over 200,000 such installations in the past two years, half in the Golden State.

The Department of Energy wants to see solar grow from 1% of total generation today to 27% by 2050. This is creating the basis for a gigantic industry in the future. Hence, my interest as a long-term equity investor.

All of this will require a complete rethinking of the electric utility industry (XLU), which still uses a volume based business model that has remained unchanged for 120 years. The more they sold the more money they made.

The utility industry has mixed feeling about the new solar revolution. They are going to have to evolve from distributors of power for a single, large, capital-intensive source to an intermediary operation that buys and sells power between millions of users and producers. This is easier said than done, as this is the most conservative of American industries. People run to utilities in a bear market for a reason.

Only the other hand, moving towards solar and other alternatives gets them out of the carbon burning business, either through using coal or oil as fuel. There is not a utility in the country that isn?t swamped by lawsuits from well represented consumers claiming that the byproducts from burning these traditional fuels gave them asthma, lung cancer, or worse.

In the end, it won?t be a desire to save the environment, or the expediency to appear politically correct that will convert utilities to solar. It will be hard-nosed business sense.

The buy on the dip list is fairly short. The front-runner in this industry is the aforementioned First Solar (FSLR), which has been an industry leader for two decades. Not only is their US business booming, they have a gigantic project in western China that promises to spin off profits for years to come.

SunPower Corp (SPWR) has the attraction of a $1 billion order backlog. Or you can go generic and buy the Guggenheim Solar ETF (TAN), which tacked on and impressive 270% last year.

I am less enamored with Solar City (SCTY). It is in the business of installing roof panels on homes. It takes advantage of generous government subsidies and the current ultra low cost of financing to keep prices low.

As much as I applaud the long-term vision of founder, Elon Musk, his association with the company has given it a cult like status. That is good for the share prices, but bad for valuations, which are through the roof. A greater dependence on subsidies could hurt them in the future.

Some formidable challenges lie ahead. In 2017 the government?s investment tax credit for solar drops from 30% to 10%. Other state subsidies are expiring as well. If this coincides with a recession that triggers a collapse in the price of oil, we could be in for another great clearing out.

Hopefully, by then, steadily advancing technology will further cut costs by half, making it possible for more firms to survive.

Until then, let the sun shine in!

FSLR 4-15-14

SPWR 4-15-14

WTIC 4-15-14

XLU 4-15-14

SCTY 4-15-14

Solar Energy Chart

Ivanpath Solar Facility

Ivanpath Solar

House - Solar Panels

On The Tesla Melt Up

Tesla (TSLA) was the short squeeze that was begging to happen. Five guys owned 50% of the company, including the visionary founder, Elon Musk. Of the remaining float, 45% had been borrowed and sold short by hedge funds. All that was needed to ignite a rally was for someone to say ?Boo?.

Someone said exactly that, and their shares rocketed from $30 to $265 in little more than a year.

A poorly researched hatchet job by the New York Times on the new all electric Tesla Model S-1 produced a flood of countervailing positive reviews extolling the many virtues of the revolutionary vehicle (click ?My Take on the Tesla Tiff?). The Times could not have delivered a more effective marketing campaign if you paid them millions.

Then the company announced its first profit in history. It sold 4,900 cars, versus an expected 4,500, one of which was to me. Some 70% were of the highest margin, 80 kWh, $80,000, 300-mile range version. This was on the heels of its first ever price increase. The Q1, 2013 net jumped to $11.9 million compared to an $89.9 million loss in the earlier quarter. It boosted its forecast of this year?s total production from 20,000 to 21,000 vehicles. In 2014, this figure could hit 40,000.

There is now a one-year waiting list for the least expensive $60,000 model. Cash is pouring in so fast that Tesla announced it would pay back its $465 million Department of Energy loan five years early. It is also talking to Google about adopting its driverless technology.

South African native, Elon Musk, is said to be the model on which the Iron Man character, Tony Stark, is based. His late 2012 IPO for Solar City (SCTY) has also delivered a gangbusters performance, up 216%. Next on the calendar is taking Space X public, his heavy lift rocket company with a NASA contract potentially worth $1 billion. Since last year, his personal fortune has soared to $15 billion. This is truly the man with the golden touch.

The onslaught of good news triggered one of the sharpest and most furious short squeezes in stock market history. (TSLA) is now one of the top performing shares in the world this year, for the second year in a row. Elon did get some outside help. Squeezing the largest short open interest stocks was one of the most profitable trading strategies of 2013. Tesla simply followed on the heels of BlackBerry (BBRY), Herbalife (HLF), and Netflix (NFLX), with similar results.

There is a cautionary tale in the Tesla action. Many of the players on the short side were global warming deniers who believed the whole thing was a leftist hoax. They thought Tesla, and all the other ?green? plays, like First Solar (FSLR), were the artificial creations of government subsidy that were all going to zero once the free money was withdrawn.

After I toured the Tesla factory and saw that he car was real, I warned some of these guys they were out of their mind. Whenever one filters investment decisions through a political prism, whatever that prism is, you might as well pile up your money and set fire to it.

At $206 a share, with a market capitalization of $25 billion, Tesla is now one of the world?s largest car companies, beating out Fiat (FIATY), which owns Chrysler and Peugeot (PEUGY) and is nearly half the size of General Motors (GM). This is for a company that has only made 60,000 cars!

Tesla is now considering whether it should sue the states of Texas and New Jersey, which have banned sales of the cars. They are trying to force the company to sell through a local, good ol? boy dealer network. Tesla only sells its cars online, another ground breaking and cost cutting aspect of their business model. So much for deregulation in the Lone Star State. I guess they are trying to keep us hooked on Texas Tea.

Next year Tesla broadens out its product line to include the Model X, an all electric SUV, which should cost about the same. I am number 465 on the waiting list for that one, even though I ordered it on the first day it went on sale (everyone else ordered the car on their cell phones, while I waited to get home and do it on my Mac).

Most on Wall Street have completely missed the main point of the whole Tesla story. The real play here is for a low end mass market vehicle, which Tesla will bring out in 4-5 years, using the manufacturing expertise and technology they developed with the earlier Roadster and the S-1.

Keep in mind that electric car battery ranges are doubling about every four years. Look no further than my own garage, where I jumped from an 80 mile range Nissan Leaf to the Tesla S-1 in just two years. I just sold my starter electric car to an ecstatic PhD in biochemistry at UC Berkeley for a bargain $18,500.

That means that by 2018, you will be able to buy a 300-mile range, five passenger Tesla hatchback for about $40,000. This will enable the company to grow into a major worldwide industry presence. That?s when the ?Big Three? becomes the ?Big Four?. That?s what a $206 share price is screaming at you.

Let me explain what else is in the works. By next year, there will be 20,000 Tesla?s in the San Francisco Bay Area. Our local utility, PG&E (PGE), currently sells us power for electric cars for 5 cents a kWh between midnight and 7:00 AM. By some time in 2014, if you leave your car plugged in, it will then buy it back from you during the day at 40 cents a kWh!

With the backup supply of 20,000 1,000-pound Tesla lithium ion batteries, (PGE) might be able to take a few natural gas power plants offline (the last coal fired plant in California was closed about 10 years ago). Not only will the power for your car be free, your utility will pay you to drive it! The system is already undergoing beta testing at a utility in Delaware. Welcome to the future!

Last weekend, I drove to the local shopping mall to run some errands. There was a classic car show on, so there was no spare parking. I asked the show organizers if they were accepting late entries, just to get a parking space.

Both the fans and the other exhibitors were drawn to my S-1 like a magnet, mobbing the car and barraging me with questions. Some thought it was a joke, as there was no visible motor. I felt like Marty McFly bringing a car from Back to the Future. I popped out to run my errands. When I returned, I had won first prize and a blue ribbon.

There is one battery problem that I should write about here. Since the end of the ski season, my Toyota Highlander Hybrid has sat neglected in my driveway, accumulating pine needles and bird poop. ?Since I?m not driving it enough to recharge the conventional lead acid battery, it keeps going dead. The Auto Club has already been out to give me a jump-start three times, and they say next time, they are going to bill me.

I have written at length about Tesla since the inception of this letter five years ago. To read another recent piece with more details on the engineering and the specs, please click here ?Follow Up on Tesla?. Expect to hear a lot more.

TSLA 3-27-14

SCTY 3-27-14

Cars - ClassicThe Competition

 

JT with TeslaFirst Prize for a Late Entry

 

TeslaI Could Have Sworn I Left the Engine There Yesterday

 

Cars - ElectricIn Your Future

Another Miracle from Tesla

Tesla has announced a new battery swapping service that will enable drivers to get a full charge for their all-electric Model S-1 sedans in 90 seconds. The service will be available at strategically located charging stations around the country, and will cost $60, about the cost of an equivalent full tank of gas.

The swap is fully automated. You just drive over a machine and it is all done for you. No crawling under the car on your back is required.

There, owners will have the option of getting a fast charge for free in 45 minutes, or the instant battery swap. Given that the 270-mile range of the car is greater than the range of by bladder, I?ll probably be opting for the former.

The move offers some very interesting long-term implications. It certainly means that Tesla is not worried about the life of its 1,000-pound lithium ion batteries, which cost about $32,000 per vehicle to produce. If the range starts to fade, you just take it in for a swap.

In any case, the company?s mercurial founder and Iron Man model, Elon Musk, has other plans for old, depleted batteries. For a start, they can be used as backup storage devices for solar powered homes wired by his other firm, Solar City (SCTY), a top performing stock of 2013.

In the meantime, Tesla?s shares are impossibly maintaining a stratospheric price of over $100, valuing the company at $11 billion, and making it the number one performing American stock this year. This is despite announcing its first recall for a minor weld holding down the rear seat.

I tell my kids that I rode a time machine ten years into the future, bought the Tesla, and brought it back home to drive them. Ever the wise aleck, my oldest son asked why I didn?t obtain something more valuable, like a sports statistics magazine showing who will win the next ten Super Bowls. Now, that would be useful!

For a video of Elon demonstration the battery swap process last week and a fabulous piece of marketing, please click here. No wonder people are going gaga over this company!

TSLA 6-25-13

SCTY 6-25-13

John Thomas

Tesla