Mad Hedge Technology Letter
October 1, 2018
Fiat Lux
Featured Trade:
(ZINC AIR BATTERIES WILL REVOLUTIONIZE ELECTRIC CARS),
(TSLA), (NIO), (FB), (GOOGL), (NFLX)
Posts
As Panasonic ramps up its battery production at the Tesla Gigafactory 1 in Sparks, Nevada, the demand and business for renewable energy has never been more robust.
And as the world’s population balloons and man-made pollutants roil the natural ecosphere, business needs an answer to these potential apocalyptic bombshells or there will be nowhere clean enough to live.
Energy security and population growth will have a complicated relationship going forward and cannot be ignored for the sake of mankind.
This isn’t me being a tree-hugging, Birkenstock-trotting, save-the-earth, love and peace-type of guy.
This problem is real and whoever discovers the solution could reap untold profits.
The answer has been found - rechargeable zinc air batteries.
Spearheading this massive initiative is South African-born entrepreneur, sports team owner, Los Angeles Times owner, and more importantly the founder, chairman and CEO of NantEnergy Dr. Patrick Soon-Shiong.
This El Segundo, California-based company presented an utter game changer to the future of the world and the world’s economy.
NantEnergy debuted a rechargeable battery powered by oxidizing zinc with oxygen from the air for commercial use at the One Planet Summit in New York.
It also has the capability to store energy.
Not only is this technology and product cutting edge, but it has the cost basis to support broad-based scalability and adoption.
Ramkumar Krishnan, chief technology officer of NantEnergy claimed this revolutionary battery can “deliver energy for $100 per kilowatt-hour (kWh).”
Lithium-ion batteries have been the mainstay choice for clean energy or clean enough energy since 1992, and its usage varies in cost from $300 to $500 kWh.
Tesla, with its phalanx of superior engineers, has been able to suppress that cost all the way down to a level between $100 to $200 kWh level.
NantEnergy has already registered more than100 related patents in its name and envisions a $50 billion addressable market.
I believe the addressable market is substantially bigger.
For all the hoopla about lithium-ion batteries, there are severe drawbacks in its usage and application.
Let’s concisely run down the pitfalls of batteries of this ilk.
Once out the factory door, the performance starts to go downhill.
Lithium-ion batteries react poorly to high temperatures.
These batteries become inoperable if completely discharged.
There is a slight chance a battery could burst into flames and burn off your face.
Simply put, lithium-ion batteries incorporate cobalt, an extremely toxic material hazardous to human health.
If a Samsung Galaxy smartphone explodes, cover your mouth to avoid inhaling the cobalt-laced fumes.
Dr. Soon-Shiong characterized this new technology as the “holy grail” of renewable energy.
Wide-scale adoption would bring the need for cobalt to its knees.
No longer would tech companies need to scramble to secure a sufficient amount of cobalt supply from the deepest reaches of the Congo jungle.
It would be the end of cobalt as we know it.
At first, lithium would be required for a stopgap measure while engineers refine the battery on its way to a full-fledged zinc alone battery.
The lithium placeholder would only be temporary.
The clean energy movement must be grinning widely as the potential to finally do away with cobalt from renewable energy has pronounced social and economic consequences.
An estimated 1.4 billion people still live in the dark and do not have access to electricity.
This technology is being tested in villages in Africa and desolate communities in Asia as we speak.
The absence of electricity isolates these undeveloped communities in third-world Africa and Asia without access to health care, education, and technology.
It’s hard to kick-start your life as a sprouting little kid when you’re lost in the dark half the time.
Importing fossil fuel to put these communities online is unfeasible and just plain too expensive for communities that have a dire shortage of capital.
Currently, NantEnergy’s rechargeable zinc air batteries are online in 110 villages located in nine Asian and African countries.
The batteries have been combined to establish a microgrid system powering entire areas.
The company will start delivery this product next year widening its type of use to telecommunications towers.
The next step after that would be the home energy storage market targeting California and New York as the first American cities.
Engineers have pointed out that this development could transform the electric grid into a “round-the-clock carbon-free system.”
In addition, with cooperation with Duke Energy, a major utility, NantEnergy’s batteries have been powering communications towers in America for the past six years.
The design is mind-boggling utilitarian - plastic, a circuit board, and zinc oxide wrapped up in a briefcase-size shell.
One charge can offer 72 hours of battery life.
The charging process is easy - electricity from solar installations is stored by converting zinc oxide to zinc and oxygen.
The discharge process is straightforward, too - the system produces energy by oxidizing the zinc with air.
The pursuit of energy reduction is in full throttle, and this is the next leg up for energy aficionados.
Your lithium-ion-run Tesla could become a legacy company in a matter of years if this technology disrupts Elon Musk’s brainchild.
Lately, Musk has been falling behind the eight ball with fresh innovators hot on his heels.
This is the latest company to enter into its market even though still in the incubation stage.
Competitors have popped out of nowhere and are coming for his bacon.
Shanghai headquartered electric car manufacturer Nio (NIO) went public and raised more than $2 billion.
Even though it is not yet a threat to Tesla, it shows that Tesla isn’t the only game in town anymore.
In any case, NantEnergy has the magic to unlock the “holy grail” of renewable energy. And if it can promise on its cost projections, I see no reason why this won’t be furiously adopted by corporations worldwide.
As it is, America has been losing out in the Congo, as China has cornered the cobalt market there.
And, as the evolution of fracking technology quelled the Middle-East situation, it could also have the same effect in the Congo.
More excitingly, it could put online an additional 1.2 billion new customers to devour iPhones and watch Netflix (NFLX).
Companies such as Facebook (FB) and Alphabet (GOOGL) have been developing a way for these remote and poverty-prone places to use Internet from a satellite.
They would need electricity first to power their devices unless Mark Zuckerberg has found a way to use a smartphone without electricity.
NantEnergy’s renewable batteries have already cut the need of 1 million lithium-ion batteries, and warded off the need to release 50,000 metric tons of carbon dioxide since 2012.
California is the flag-bearer in renewable energy policy by forcing its populace to be at 100% carbon-free electricity by 2045.
Musk is on record by saying he expects to break the 100-kWh level, which would contribute to better power storage and expedited electric vehicle (EV) adoption.
In contrast, energy storage analyst Mitalee Gupta at GTM Research has retorted that he’s “unsure $100/kWh is achievable this year.”
Musk, being a naturally optimistic entrepreneur, sets targets then does everything he can to break them.
Either way, two South African born visionaries are doing their part to crater the cost per kWh in the renewable energy market, and Elon Musk might not be the biggest disruptor from South Africa.
Time will tell if this market will become zinc-based or lithium-based – the higher-grade technology eventually wins out spelling doom for Musk.
But it appears that Musk has other things to worry about now.
NantEnergy plans to inaugurate a battery manufacturing facility in California next year.
As for Tesla, buy the car and not the stock.
And for Nio, don’t buy the car or the stock.
Disrupting the Disrupter
Global Market Comments
September 26, 2018
Fiat Lux
SPECIAL CAR ISSUE
Featured Trade:
(SAY GOODBYE TO THAT GAS GUZZLER),
(GM), (F), (TSLA), (GOOGL), (AAPL)
Do you want to get in on the ground floor of another major new trend?
Well, here’s another new trend. Get this one right and your retirement funds should multiple like rabbits.
There have been some pretty amazing announcements by governments lately.
The United Kingdom has banned the use of gasoline-powered engines by 2040.
China is considering doing the same by 2035.
And now the State of California is targeting 100% alternative energy use by 2040. That’s only 22 years away.
The only unknown is what such a planned obsolescence program will look like, and how soon it will be implemented.
With 20% of the U.S. car market, don’t take the Golden State’s ruminations lightly.
California was the first state to require safety glass, seat belts, and catalytic converters, and the other 49 eventually had to follow. Some 20% of the market is just too big to ignore.
The death of the car is now upon us, and it is still early, very early.
This is a very big deal.
Earlier in my lifetime, car production directly and indirectly accounted for about one-third of the U.S. economy.
Much of the growth during our earlier Golden Ages, in the 1920s and the 1950s, were driven by a never-ending cycle of upgrades of our favorite form of transportation, and the countless ancillary products and services needed to support them. Tail fins, radios, and tons of chrome assured you always had to have the next new model.
Today, 253 million automobiles and trucks prowl America’s roads, about half the world’s total, with an average age of 11.4 years.
The demise of this crucial industry started during the 2008 crash, when (GM) and Chrysler (owned by Fiat) went bankrupt. Only more conservatively run, family owned Ford (F) survived on its own.
The government stepped in with massive bailouts. That was the cheaper option for the Feds, as the cost of benefits for an entire unemployed industry was far greater than the cost of the companies absorbed.
If it hadn’t done so, the auto industry would have decamped for a new base near the technology hubs in California, and today would be a decade closer to their futures than they are now.
And remember, the government made billions of dollars of profits from its brief foray into the auto industry as an investor. It was one of the best returns on investment in history in major size.
I’ll breakout the major directions the industry is now taking. Hint: It doesn’t have much to do with traditional metal bashing.
The Car as a Peripheral
The important thing about a car today is not the car, but the various doodads, doohickeys, gizmos, and gadgets they stick in them.
In this category you can include 24/7 4G wireless, full Internet access, mapping software, artificial intelligence, and learning programs.
(GM) is now installing more than 100 microprocessors in its vehicles to control and monitor various functions.
Good luck doing your own tune-ups.
The Car as a Service
When you think about it, automobile ownership is a wildly inefficient use of capital. It is usually a family’s second largest expense, after their home, running $30,000 to $80,000.
It then sits unused in garages or public parking for 96% to 98% of the day. Insurance, maintenance, and liability costs can be off the charts.
What if your car was used 24/7, as is machinery in well-run industrial plants? Your cost drops by 96% to 98% to the point where it is almost free.
The sharing economy is the way to accomplish this.
We are already seeing several start-ups attempting to achieve this in major U.S. cities, such as Zipcar, Car2Go, Getaround, RelayRides, and City CarShare.
What happens to conventional car companies when consumers shift from ownership to sharing? Demand plunges by 96% to 98%.
Perhaps that is why auto shares (GM), (F) have performed so abysmally this year relative to technology and the main market.
Self-Driving Technology
This is the hottest development area in the industry, with Apple (AAPL), Alphabet (GOOG), and the big European carmakers committing thousands of engineers.
Let’s say your car is now comfortably driving you to work, allowing you to read the morning papers and catch up on your email. Or maybe you’re lazy and would rather watch the season finale of Game of Thrones.
What else is possible?
How about if, instead of parking, your car drops you off, saving that exorbitant fee.
Then it joins Uber, picking up local riders and paying for its own way. It then dutifully returns to pick you up at your office when it’s time to go home.
Since the crash rate for computers is vastly lower than for humans, car insurance rates will collapse, gutting that industry.
Ditto for life insurance, as 35,000 people a year will no longer die in car crashes.
Half of all emergency room visits are the result of car accidents, so that business disappears too, dramatically shrinking health care costs in the process.
I have been letting my new Tesla S-1 drive me since last year, and I can assure you that the car can drive better than I can, especially at night.
What better way to get home after I have downed a bottle of Caymus cabernet at a city restaurant?
Driverless electric cars are totally silent, increasing the value of land near freeways.
Nor do they require much maintenance, as they have so few moving parts. Exit the car repair industry.
I could go on and on, but you get the general idea.
For more on the topic, please read “Test Driving Tesla's Self Driving Technology” by clicking here.
Virtual Reality
After 30 years of inadequate infrastructure budgets, trying to get into any America city center is a complete nightmare.
Only last week, a cattle truck turned over on the Golden Gate Bridge, bringing traffic to a halt. Fortunately, a cowboy traveling to a nearby rodeo was able to unload his horse and lasso the errant critters (no, it wasn’t me!).
Even if you get into the city, you will be greeted by a $40 tab for a parking space. Hopefully, no one will smash your windows and steal your laptop (happened to me last year).
Why bother?
Thirty years ago, teleconferencing services pitched themselves as replacing the airplane.
Today, we are taking the next step, using Skype and GoToMeeting to conduct even local meetings, as we do at the Mad Hedge Fund Trader.
Virtual reality is clearly the next step, providing a 3D, 360 degree experience that makes you feel like you and your products are actually there.
Better to leave that car in the garage where it can get a top up on its charge. BART is cheaper anyway, when it runs.
New Materials
We are probably five years away from adopting the carbon fiber technology now used in the aircraft industry for mass-market cars. Carbon has one-tenth the weight of steel, with five times the strength.
The next great leap forward for electric cars won’t be through better batteries. It will come through a 70% reduction of the mass of a car, tripling ranges with existing technology.
San Francisco Becomes the Car Capital of the World
This will definitely NOT happen, as sky-high rents assure that the city by the bay will never attract large, labor-intensive industries.
Instead, the industry will develop much as the one for smartphones. The high value-added aspects, design and programming, will stay in California.
The assembly of the chassis, the body, and the rest of the vehicle will be best done in low-cost, tax-free states with a lot of land, such as Texas and Nevada.
What will happen to Detroit? It has already become a favored destination of new venture capital financial start-ups - the cost of offices and housing is virtually free.
Seems Alive to Me
Global Market Comments
September 21, 2018
Fiat Lux
Featured Trade:
(SEPTEMBER 19 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (VIX), (VXX), (GS), (BABA), (BIDU), (TLT), (TBT),
(TSLA), (NVDA), (MU), (XLP), (AAPL), (EEM),
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA,
GLOBAL STRATEGY LUNCHEON)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 19 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: Do you expect a correction in the near term?
A: Yes. In fact, we may even see it in October. Markets (SPY) have been in extreme, overbought territory for a month now, the macro background is terrible, trade wars are accelerating, and interest rates are rising sharply. The only thing holding the market up is the prospect of one more quarter of good earnings, which companies start reporting next month. So once that’s out of the way, be careful, because people are just hanging on to the last final quarter before they sell.
Q: I just got out of my cannabis stock, what should I do now?
A: Thank your lucky stars you got away with that—it was an awful trade and you made money on it anyway. Stay away in droves. After all, the cannabis industry is all about growing a weed and how hard is that? This means the barriers to entry are zero. In fact, I’m thinking of growing some in my own backyard. My tomatoes do well, so why not Mary Jane?
Q: The Volatility Index (VIX) is now at $11.79—should I buy?
A: No, the rule of thumb for the (VIX) is to wait for it to sit on a bottom for one to two weeks and let some time decay work itself out. You’ll see that in the ETF, the iPath S&P 500 VIX Short-Term Futures ETN (VXX). When it stops breaking to new lows, that means it’s ready for another bounce. I would wait.
Q: What do you think about banks here? Is it time to get in?
A: No, these are not promising charts. If anything, I’d say Goldman Sachs (GS) is getting ready to do a head and shoulders and go to new lows. I would stay away from financials unless I see more positive evidence. The industry is ripe for disruption from fintech, which has already started. That’s said, they are way overdue for a dead cat bounce. That’s a trade, not an investment.
Q: Would you short Alibaba (BABA) and Baidu (BIDU) here?
A: No. Shorting is what I would have done six months ago; now it’s far too late. If anything, I would be a buyer of those stocks here, based on the possibility that we will see progress or an end to the trade war in the next couple of months. If the trade wars continue, they will put the U.S. in recession next year, and then you don’t want to own stocks anywhere.
Q: Is Apple (AAPL) going to get hit by the trade wars?
A: So far, this has not been the case, but they are whistling past the graveyard right now—an obvious target in the trade wars from both sides. For instance, the U.S. could suddenly start applying a 25% import duty to iPhones from China, which would make your $1,000 phone a $1,250 phone. Similarly, the Chinese could hit it in China, restricting their manufacturing in one way or another. I’m being very cautious of Apple for this reason. The stock already has one $10 drop just because of this worry.
Q: Can the U.S. ban China from selling bonds?
A: No, they can’t. The global U.S. Treasury bond market (TLT) is international by nature—there is no way to stop the selling. It would take a state of war to reach the point where the Fed actually seizes China’s U.S. Treasury bond holdings. The last time that happened was when Iran seized the U.S. embassy in Tehran in 1979. Iran didn’t get its money back until the Iran Nuclear Deal in 2015. Before that you have to go back to WWII, when the U.S. seized all German and Japanese assets. They never got those back.
Q: What are your thoughts on the chip sector?
A: Stay away short-term because of the China trade war, but it’s a great buy on the long term. These stocks, like NVIDIA (NVDA) and Micron Technology (MU) have another double in them. The fundamentals are outrageously good.
Q: Is the market crazy, or what?
A: Yes, it is crazy, which is why I’m keeping 90% cash and 10% on the short side. But “Markets can remain irrational longer than you can stay liquid,” as my friend John Maynard Keynes used to say.
Q: What’s your take on the Consumer Staples sector (XLP)?
A: It will likely go up for the rest of the year, into the Christmas period; it’s a fairly safe sector. The uptrend will remain until it doesn’t.
Q: Should we buy TBT now?
A: No, the time to buy the ProShares Ultra Short 20+ Year Treasury ETF (TBT) was two months ago. Now is the time to sell and take profits. I don’t think 10-year U.S. Treasury yields (TLT) are going above 3.11% in this cycle, and we are now at 3.07%. Buy low and sell high, that’s how you make the money, not the opposite.
Q: Does this webinar get posted on the website?
A: Yes, but you have to log in to access it. Then hover your cursor over My Account and a drop-down menu magically appears. Click on Global Trading Dispatch, then the Webinars button, and the last nine years of webinars appear. Pick the webinar you want and click on the “PLAY” arrow. Just give us a couple of hours to get it up.
Q: Can Chinese companies use Southeast Asia as a conduit to export to the U.S.?
A: Yes. This is an old trick to bypass trade restrictions. For example, most of the Chinese steel coming into the U.S. is through third countries, like Singapore. Eventually they do get found out, at which point companies or imports from Vietnam will be identified as Chinese origin and get hit with the import duties anyway, but it could take a year or two for those illegal imports to get discovered. This has been going on ever since trade started.
Q: Will the currency crisis in Argentina and Turkey spread to a global contagion?
A: Yes, and this could be another cause of a global recession late next year. The canaries in the coal live there (EEM).
Q: Would you use the DOJ probe to buy into Tesla (TSLA)?
A: No, buy the car, not the stock as it is untradeable. This is in fact the third DOJ investigation Tesla has undergone since Trump came into office. The last one was over how they handled the $400 million they have in deposits for their 400,000 orders. It turns out it was all held in an escrow account. There are easier ways to make money. It’s a black swan a day with Tesla. This is what happens when you disrupt about half of the U.S. GDP all at once, including autos, the national dealer network, big oil, and advertising. All of these are among the largest campaign donors in the U.S.
Time to Bring Out the Big Guns
Global Market Comments
September 14, 2018
Fiat Lux
Featured Trade:
(SOME GOOD NEWS FROM TESLA), (TSLA),
(SOME SAGE ADVICE ABOUT ASSET ALLOCATION)
I’ll give you a chance to pick yourself off the floor first.
While the media focus seems to be overwhelmingly on problems with the Tesla 3 (TSLA) production these days, the fact is that some of the company’s other business lines are growing like gangbusters.
Orders for the groundbreaking Tesla Powerwall were up an eye-popping 450% during the first half of 2018. This device costs $5,800 ($4,060 after the federal alternative investment tax credit) and can store enough power to run your house for three days. When integrated with your solar rooftop array the combined system allows you to reap a greater return from your alternative energy investment.
Tesla could sell more Powerwalls but is constrained by lithium ion battery supplies from its Sparks, Nevada, Gigafactory. Doubling the world’s lithium ion battery supply in one shot, Tesla is already shopping for a location for a second Gigafactory.
As the company made ramping up Tesla 3 production to 100,000 units this year its top priority, the car has first call on battery supplies.
Tesla has also recently completed several utility-sized battery projects that have consumed lithium ion supplies, including those in Australia, Moss Landing, California, for PG&E, and for Green Mountain Energy in Vermont.
This means that Tesla has already carved out a dominant position in a market that is expected to grow by tenfold over the next five years. GTM Research estimated that sales of energy storage products in the U.S. will soar from $541 million in 2018 to $1 billion in 2019 and $4.6 billion by 2013.
It is developing into a global market. The U.S. only accounts for 30% of the global battery storage market, with energy poor Japan and South Korea holding major shares.
Tesla competitors include Florida-based NextEra Energy in America, E.on in Germany, and Fluence, a joint venture between Siemens and AES, also from Germany. Germany seems to be the place where green energy philosophies and top-rate engineering meet.
It’s impossible to see how much the battery business is contributing to Tesla’s overall bottom line as it does not break out earnings separately. They are subsumed within a Tesla division that once comprised Solar City, which Tesla took over in 2016. Running two businesses off a single lithium ion supply was a stroke of genius, permitting vertical integration and vast economies of scale.
However, Tesla’s solar business saw revenues rise by 56.7% to $784 million over the year-earlier period. Selling a product with exponential demand but limited supply is a good place to be in.
It is puzzling to see so much media attention paid to a company with a market capitalization of only $50 billion. Last week, the controversial firm soaked up perhaps a quarter of all financial reporting coverage.
But when you add up all of the industries that Tesla is radically disrupting, such as autos, the oil industry, the dealer local network, local power utilities, and advertising, it comes close to 25% of U.S. GDP.
If I had just taken the online payments system, auto, rocket, solar, and the battery industries a decade into the future and made $30 billion for myself along the way, I’d probably be smoking a joint, too.
And Elon is only 47. It makes you wonder what you’ve been doing with all your free time.
Send Me Another Half Dozen
Global Market Comments
September 12, 2018
Fiat Lux
THE FUTURE OF AI ISSUE
Featured Trade:
(THE NEW AI BOOK THAT INVESTORS ARE SCRAMBLING FOR),
(GOOG), (FB), (AMZN), MSFT), (BABA), (BIDU),
(TENCENT), (TSLA), (NVDA), (AMD), (MU), (LRCX)
Global Market Comments
September 7, 2018
Fiat Lux
Featured Trade:
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA,
GLOBAL STRATEGY LUNCHEON),
(SEPTEMBER 5 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (MU), (MSFT), (LRCX), (GOOGL), (TSLA),
(TBT), (EEM), (PIN), (VXX), (VIX), (JNK), (HYG), (AAPL)
