How many mutual funds would you guess outperformed the stock market since the bull run started almost nine years ago?
If you guessed 1,000, 100 or even 10, you would be dead wrong and even off by miles. In actual fact, not a single mutual fund has beaten the market since 2009.
Remember all those expensive, slickly produced TV ads boasting market beating ratings and top quartiles?
You know, the ones that show an incredibly good looking, but aging couple walking hand in hand into the sunset on a deserted beach?
They are all just so much bunk. The funds mentioned rarely quote performance beyond one or two years.
Like my college math professor used to tell me, "Statistics are like a bikini bathing suit. What they reveal is fascinating, but what they conceal is essential."
Recently, the New York Times studied the performance of 2,862 actively managed domestic stock mutual funds since 2009. It carried out a simple quantitative analysis, looking at how many managers stayed in the top performance quartile every year.
Their final conclusion: zero.
It gets worse.
It is very rare for a manager to stay in the top quartile for more than one year. All too often, last year's hero is this year's goat.
The harsh lesson here is that investing with your foot on the gas pedal and your eyes on the rear view mirror is certain to get you into a fatal crash.
The Times did uncover two funds that stayed at the top for an impressive five years. They turned out to be small cap energy funds that took inordinate amounts of risk to achieve these numbers and have since lost money.
The reasons for the woeful under performance are legion. Management fees are sky high and grasping. Hidden costs are everywhere. Read the fine print in the prospectus, as I do, and you would be shocked, truly shocked.
Real talent is in short supply in the mutual fund industry, with all the real brains decamping to start their own 2%/20% hedge funds. The inside joke among hedge fund managers is that employment at a mutual fund is proof positive that you are a lousy manager.
Let's go back to those glitzy TV ads, which cost millions to produce. If you are a mutual fund investor you are paying for all of those too. They are made at the expense of a lower return on investment on your money.
And those sexy performance numbers? They benefit from a huge survivor bias. As soon as fund performance starts to tank, the managers close it, lest it pollute the numbers of other funds in the same family.
The number of funds with good, honest 20-year records can almost be counted on one hand.
Now let me depress you even more.
An industry performance this poor under performs random chance. That means chimpanzees throwing darts at the stock pages of the Wall Street Journal would generate a higher investment return than the entire mutual fund industry combined.
So much for all of those Harvard MBAs!
Are you ready to throw your empty beer can at the TV set yet?
If you think all of this stuff should be illegal, you are probably right. But since you watch TV, then you have probably been trained like a barking seal to oppose the regulation that would reign these people in.
This is what the attempt to kill the Dodd-Frank financial regulation bill was all about. The mutual fund industry complains bitterly that they are over regulated and spend millions on lobbyists to get themselves off the hook. By the way, these expenses also come out of your fund performance.
These are all reasons why the Mad Hedge Fund Trader is able to generate such high performance numbers year in and year out.
I am not charging you with any of my overhead. I am not jacking up your commissions. Nor am I selling your order flow to high frequency traders for a tidy sum so they can front run you.
Being a small operation, I'll tell you what I don't have. I lack an investment banking department telling me I have to recommend a stock so we can get the management of their next stock issue or a sweet M&A deal.
I am absent a trading desk telling me I have to move this block of stock before the prices drop and my bonus gets cut.
And I am completely missing a boss screaming at me that if I don't get my orders up, my wife would have to become a prostitute to support our family (yes, some asshole sales manager actually told me that once. I later heard he died of a heart attack).
You just need to pay me a low, flat, annual fee, and I'm done. I don't need any more. It's up to you to search out the best deal you can get on executions.
Don't even think about trying to give me your money to manage. I don't want it.
This is why the overwhelming bulk of investors are better off investing in the cheapest Vanguard index fund they can find, diversifying holdings among a small number of major asset classes, and then rebalancing once a year (click here for my "Buy and Forget Portfolio").
https://www.madhedgefundtrader.com/wp-content/uploads/2015/04/Chimp-e1428960498232.jpg303400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2017-11-06 01:06:332017-11-06 01:06:33Don't Get Scammed by the Mutual Funds
I am constantly on the lookout for ten baggers, stocks that have the potential to rise tenfold over the long term.
Look at the great long-term track records compiled by the most outstanding money managers, and they always have a handful of these that account for the bulk of their out performance, or alpha, as it is known in the industry.
I?ve found another live one for you.
Elon Musk?s Space X is so forcefully pushing forward rocket technology that he is setting up one of the great investment opportunities of the century.
In the past decade, his start up has accomplished more breakthroughs in advanced rocket technology than have been seen in the last half century, since the golden age of the Apollo space program.
As a result, we are now on the threshold of another great leap forward into space. Musk?s ultimate goal is to make mankind an ?interplanetary species?.
There is only one catch.
Space X is not yet a public company, being owned by a handful of fortunate insiders and venture capital firms. But you should get a shot at the brass ring someday.
The rocket launch and satellite industry is the biggest business you have never heard of, accounting for $200 billion a year in global sales. This is probably because there are no pure stock market plays.
Only two major companies are public, Boeing (BA) and Lockheed Martin (LMT), and their rocket businesses are overwhelmed by other aerospace lines.
The high-value-added product here is satellite design and construction, with rocket launches completing the job.
Once dominated by the US, the market for launches has long since been ceded to foreign competitors. The business is now captured by Europe (the Ariane 5), China (the Long March 5), and Russia (the Angara A5).
Until recently, American rocket makers were unable to compete because decades of generous government contracts enabled costs to spiral wildly out of control.
Whenever I move from the private to the governmental sphere, I am always horrified by the gross indifference to costs. This is the world of the $10,000 coffee maker and the $20,000 toilet seat.
Until 2010, there was only a single US company building rockets, the United Launch Alliance (ULA), a joint venture of Boeing and Lockheed Martin. ULA builds the aging Delta IV and Atlas V rockets.
The vehicles are launched from Cape Canaveral, Florida and Vandenberg Air Force Base in California.? I had the privilege of witnessing one such launch. They look like huge roman candles that just keep on going until they disappear into the blackness of space.
Enter Space X.
Extreme entrepreneur Elon Musk has shown a keen interest in space travel throughout his life. The sale of his interest in PayPal, his invention, to Ebay (EBAY) in 2002 for $165 million, gave him the means to do something about it.
He then discovered Tom Mueller, a childhood rocket genius from remote Idaho, who built the largest ever amateur liquid fueled vehicle, with 13,000 pounds of thrust. Musk teamed up with Mueller to found Space X in 2002.
A decade of grinding hard work, bold experimentation, and heart rending testing ensued, made vastly more difficult by the 2008 Great Recession.
Space X?s Falcon 9 first flew in June, 2010 and successfully orbited earth. In December, 2010, it launched the Dragon space capsule and recovered it at sea. It was the first private company ever to accomplish this feat.
Dragon successfully docked with the International Space Station (ISS) in May, 2012. NASA has since provided $440 million to Space X for further Dragon development.
The result was the launch of the Dragon V2 (no doubt another historical reference) in May, 2014. It was large enough to carry seven astronauts.
Space X conducted the first successful flight test of the new Dragon capsule on May 6 of that year.
Then Musk really upped his game by successfully pulling off the first ever landing of a booster rocket on a platform at sea in April, 2016. This is crucial for his plan to dramatically cut the cost of space travel.
Commit all these names to memory. You are going to hear a lot more about them.
Musk?s spectacular success with Space X can be traced to several different innovations.
He has taken the Silicon Valley hyper competitive ethos and financial model and applied it to the aerospace industry:? the home of the bloated bureaucracy, the no bid contract, and the agonizingly long time frame.
For example, his initial avionics budget for the early Falcon 1 rocket was $10,000, and was spent on off-the-shelf consumer electronics. It turns out that their quality had improved so much in recent years they met military standards.
But no one ever bothered to test them. $10,000 wouldn?t have covered the food at the design meetings at Boeing or Lockheed-Martin which would have stretched over years.
Similarly, Musk sent out the specs for a third party valve actuator no more complicated than a garage door opener, and a $120,000, one-year bid came back. He ended up building it in house for $3,000. Musk now tries to build as many parts in house as possible, giving it additional design and competitive advantages.
This tightwad, full speed ahead and damn the torpedoes philosophy overrides every part that goes into Space X rockets.
Amazingly, the company is using 3-D printers to make rocket parts, instead of having them custom made.
Machines guided by computers carve rocket engines out of a single block of inconel nickel-chromium super alloy, foregoing the need for conventional welding, a frequent cause of engine failures.
Space X is using every launch to simultaneously test dozens of new parts on every flight, a huge cost saver that involves extra risks that NASA would never take. It also uses parts that are interchangeable on all its rocket types which is another substantial cost saver.
Space X has effectively combined three nine engine Falcon 9 rockets to create the 27 engine Falcon Heavy, the world?s largest operational rocket. It has a load capacity of a staggering 53 metric tons, the same as a fully loaded Boeing 737. It has half the thrust of the gargantuan Saturn V moon rocket that last flew in 1973.
Musk is able to capture synergies among his three companies not available to any competitor. Space X gets the manufacturing efficiencies of a mass production car maker. Tesla Motors has access to the futuristic space age technology of a rocket maker. Solar City (SCTY) provides cheap solar energy to all of the above.
And herein lies the play.
As a result of all these efforts, Space X today can deliver what ULA does for 76% less money with vastly superior technology and capability. Specifically, its Falcon Heavy can deliver a 116,600 pound payload into low earth orbit for only $90 million, compared to the $380 million price tag for a ULA Delta IV 57, 156 pound launch.
In other words, Space X can deliver cargo to space for $772 a pound, compared to the $7,515 a pound UAL charges the US government. That?s a hell of a price advantage.
You would wonder when the free enterprise system is going to kick in and why Space X doesn?t already own this market.
But selling rockets are not the same as shifting iPhones, laptops, watches, or cars. There is a large overlap with the national defense of every country involved.
Many of the satellite launches are military in nature and top secret. As the cargoes are so valuable, costing tens of millions of dollars each, reliability and long track records are big issues
.
Enter the wonderful world of Washington DC politics. UAL constructs its Delta IV rocket in Decatur, Alabama, the home state of Senator Richard Shelby, the powerful head of the Banking, Finance and Urban Affairs Committee.
The first Delta rocket was launched in 1960, and much of its original ancient designs persist in the modern variants. It is a major job creator in the state.
Shelby has criticized President Obama?s attempt to privatize and modernize the rocket business as ?a faith based initiative.? ULA is a major contributor to Shelby?s campaigns.
ULA has no rocket engine of its own. So it buys engines from Russia, complete with blue prints, hardly a reliable supplier. Magically, the engines have so far been exempted from the economic and trade sanctions enforced by the US against Russia for its invasion of the Ukraine.
ULA has since signed a contract with Amazon?s Jeff Bezos owned Blue Origin, which is also attempting to develop a private rocket business, but is miles behind Space X.
Musk testified in front of Congress in 2014 about the viability of Space X rockets as a financially attractive, cost saving option. His goal is to break the ULA monopoly and get the US government to buy American. You wouldn?t think this would be such a tough job, but it is.
Musk has since sued the US Air Force to open up the bidding.
Elon became a US citizen in 2002 primarily to qualify for bidding on government rocket contracts. This move was to address national security concerns.
NASA did hold open bidding to build a space capsule to ferry astronauts to the International Space Station. Boeing won a $4.2 billion contract while Space X received only $2.6 billion, despite superior technology and a lower price.
It is all part of a 50-year plan that Musk confidently outlined to a venture capital friend of mine two decades ago. So far, everything has played out as predicted.
The Holy Grail for the space industry has long been the building of reusable rockets, thought by many industry veterans to be impossible.
Imagine what the economics of the airline business would be if you threw away the airplane after every flight? It would cost $1 million for one person to fly from San Francisco to Los Angeles.
This is how the launch business has been conducted since the inception of the industry in the 1950s.
Space X is on the verge of accomplishing exactly that. It will do so by using its Super Draco engines and thrusters to land rockets on a platform at sea. Then you just reload propellant and relaunch.
Consequently, launch costs will plummet to pennies on the dollar. If Space X can chop payload costs to under $100, compared to ULAs $7,515, that is a savings which even Richard Shelby can?t argue against.
Talk about disruptive innovation with a turbocharger!
The company is building its own spaceport in Brownsville, Texas that will be able to launch multiple rockets a day.
The Hawthorne, CA factory (where I charge my own Tesla S-1 when in LA) now has the capacity to build 20 rockets a year. This will eventually be ramped up to hundreds.
Space X is the only organization that offers a launch price list on its website, much as Amazon sells its books (http://www.spacex.com/about/capabilities). The Falcon 9 will carry 28,930 pounds of cargo into low earth orbit for only $60.2 million. Sounds like a bargain to me.
Space X currently has $5 billion in contracts to fly over 50 missions for a variety of private and governmental entities, making the company cash flow positive. This includes a $1.6 billion NASA contract to supply the (ISS).
This no doubt includes an assortment of tax breaks which Musk has proven adept at harvesting. Elon has been a quick learner about the ways of Washington.
Customers have included the Thai telecommunications firm, Rupert Murdock?s Sky News Japan, an Israeli telecommunications group, and the US Air Force.
So, when do we mere mortals get to buy the stock? Musk estimates at 12 flights a year the company will earn a 10% return on capital, making it worth $4-5 billion.
The current exponential growth in broadband will lead to a similar growth in satellite orders and therefore rocket launches. So, the commercial future of the company looks especially bright.
However, Musk is in no rush to go public. A permanent, viable, and sustainable colony on Mars has always been a fundamental goal of Space X. It would be a huge distraction for a publicly managed company. That makes it a tough sell to investors in the public markets.
You can well imagine that the next recession would bring cries from shareholders for cost cutting that would put the Mars program at the top of any list of projects to go on the chopping block. So Musk prefers to wait until the Mars project is well established before entertaining an IPO.
Musk expects to launch a trip to Mars by 2025 and establish a colony that will eventually grow to 80,000. Tickets will be sold for $500,000.
There are other considerations. Many employees and early venture capital investors wish to realize their gains and move on. Public ownership would also give the company extra ammunition for cutting through Washington red tape. These factors point to an IPO that is earlier than later.
On the other hand, Musk may not care. The last net worth estimate I saw for him was $13 billion. If his three companies increase in value by ten times over the next decade, as I expect, that would increase his wealth to $130 billion, making him the richest person in the world.
If an IPO does come, investors should jump in with both feet. While the value of the firm may have already increased tenfold by then, there may be another tenfold gain to come. Get on the Elon Musk train before it leaves the station.
To describe Elon as a larger than life figure would be something of an understatement. Musk is the person on which the fictional playboy/industrialist/technology genius, Tony Stark, in the Iron Man movies is based.
When the Disney movie, Tomorrowland,?was released,? a Tesla supercharging station featured prominently. Elon takes all of this in good humor. He loaned a Tesla roadster to the film producers.
Musk says he wishes to die on Mars, but not on impact. Perhaps, it would be the ideal retirement for him, say around 2045, when he will be 75.
To visit the Space X website, please click link: http://www.spacex.com . It offers very cool videos of rocket launches and a discussion with Elon Musk on the need for a Mars mission.
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I had the great pleasure of having breakfast the other morning with my long time friend, Mohamed El-Erian, former co-CEO of the bond giant, PIMCO.
Mohamed argues that there has been a major loss of liquidity in the financial markets in recent decades that will eventually come home to haunt us all.
The result will be a structural increase in market volatility, and wild gyrations in the prices of financial assets that will become commonplace.
We have already seen a few of these in recent weeks. German ten-year bund yields jumped from 0.01% to 0.20% in a mere two weeks, a gap once thought unimaginable. The Euro has popped from $1.08 to $1.03.
Since July, we have watched in awe as the ten-year Treasury yield ratcheted up from 1.23% to 2.40%.
The worst is yet to come.
It is a problem that has been evolving for years.
When I started on Wall Street during the early 1980s, the model was very simple. You have a few big brokers servicing millions of small individual customers at fixed, non-negotiable commissions.
The big houses made so much money they could spend some money facilitating counter cycle customers trades. This means they would step up to bid in falling markets, and make offers in rising ones.
In any case, volatility was so low then that this never cost all that much, except on those rare occasions, such as the 1987 crash (we lost $75 million in a day! Ouch!).
Competitive, meaning falling, commissions rates wiped out this business model. There were no longer the profits to subsidize losses on the trading side, so the large firms quit risking their capital to help out customers altogether.
Now you have a larger numbers of brokers selling to a greatly shrunken number of end buyers, as financial assets in the US have become concentrated at the top.
Assets have also become institutionalized as they are piled into big hedge funds, and a handful of big index mutual funds, and ETFs. These assets are managed by people who are also much smarter too.
The small, individual investor on which the industry was originally built has almost become an extinct species.
There is no more ?dumb money? left in the market.
Now those placing large orders are at the complete mercy of the market, often with egregious results.
Enter volatility. Lots of it.
What is particularly disturbing is that the disappearance of liquidity is coming now, just as the 35 year bull market in bonds is ending.
An entire generation of bond fund managers, and almost two generations of investors, have only seen prices rise, save for the occasional hickey that never lasted for more than a few months. They have no idea how to manage risk on the downside whatsoever.
I am willing to bet money that you or your clients have at least some, if not a lot of your/their? money tied up in precisely these funds. All I can say is, ?Watch out below.?
When the flash fire hits the movie theater, you are unlikely to be the one guy who finds the exit.
We're hearing a lot about when the Federal Reserve finally gets around to raising interest rates next month that it will make no difference, as rates are coming off such a low base.
You know what? It may make a difference, possibly a big one.
This is because it will signify a major trend change, the first one for fixed income in more than three decades. That?s all most of these guys really understand are trends, and the next one will have a big fat ?SELL? pasted on it for the fixed income world.
El-Erian has one of the best 90,000-foot views out there. A US citizen with an Egyptian father, he started out life at the old Salomon Smith Barney in London and went on to spend 15 years at the International Monetary Fund.
He joined PIMCO in 1999, and then moved on to manage the Harvard endowment fund. His book, When Markets Collide, was voted by The Economist magazine as the best business book of 2008.
He regularly makes the list of the world?s top thinkers. A lightweight Mohamed is not.
His final piece of advice? Engage in ?constructive paranoia? and structure your portfolio to take advantage of these changes, rather than fall victim to them.
https://www.madhedgefundtrader.com/wp-content/uploads/2015/05/Mohamed-El-Erian-e1431024366379.jpg400347Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-11-29 01:07:052016-11-29 01:07:05The Liquidity Crisis Coming to a Market Near You
I have long advocated my ?Buy and Forget? portfolio for those who are terrible at trading.
This is where you buy just six self hedging, counterbalancing exchange traded funds and then rebalance once a year (click here for the article).
But what if you want to be a little more aggressive, say twice as aggressive? What if markets don?t deliver any year on year change, as they have done this year?
Then you need a little more juice in your portfolio, and some extra leverage to earn your crust of bread and secure your retirement.
It turns out that I have just the solution for you. This would be my ?Passive/Aggressive Portfolio?.
I call it passive in that you just purchase these positions and leave them alone and not trade them. I call it aggressive as it involves a basket of 2x leveraged ETFs issued by ProShares, based in Bethesda, MD (click here for their site).
The volatility of this portfolio will be higher. But the returns will be double what you would get with an index fund, and possibly much more. It is a ?Do not open until 2035? kind of investment strategy.
Here is the makeup of the portfolio:
(ROM) ?- ProShares Ultra Technology Fund - The three largest single stock holdings are Apple (AAPL), Microsoft (MSFT), and Facebook (FB). It is up 13.7% so far this year. For more details on the fund, please click here: http://www.proshares.com/funds/rom_daily_holdings.html.
(UYG) ? ProShares Ultra Financials Fund - The three largest single stock holdings are Wells Fargo (WFC), Berkshire Hathaway (BRK.B), and JP Morgan Chase (JPM). It is up 6.2% so far this year. For more details on the fund, please click here: http://www.proshares.com/funds/uyg_index.html.
(UCC) ? ProShares Ultra Consumer Services Fund - The three largest single stock holdings are Amazon (AMZN), (Walt Disney), (DIS), and Home Depot (HD). It is up 18.3% so far this year. For more details on the fund, please click here:http://www.proshares.com/funds/ucc.html.
(DIG) -- ProShares Ultra Oil & Gas Fund - The three largest single stock holdings are ExxonMobil (XOM), Chevron (CVX), and Schlumberger (SLB). It is DOWN 38.2% so far this year. For more details on the fund, please click here: http://www.proshares.com/funds/dig.html.
(BIB) ? ProShares Ultra NASDAQ Biotechnology Fund ? The three largest single stock holdings are Amgen (AMGN), Regeneron (REGN), and Gilead Sciences (GILD). It is up 15% so far this year, but at one point (before the ?Sell in May and Go away? I widely advertised) it was up a positively stratospheric 64%. For more details on the fund, please click here; http://www.proshares.com/funds/bib.html.
You can play around with the sector mix at your own discretion. Just focus on the fastest growing sectors of the US economy, which the Mad Hedge Fund Trader does on a daily basis. It is tempting to add more leveraged ETFs for sectors that are completely bombed out, like gold (UGL), which has pared 27% of its value in 2015, and commodities (UCD) which is off 15%.
But it is likely that these despised ETFs will move down before they move up, especially going into year end.
There is also the 2X short Treasury bond fund (TBT), which I have been trading in and out of for years, a bet that long-term bonds will go down, interest rates rise.
There are a couple of provisos to mention here.
This is absolutely NOT a portfolio you want to own going into a recession. So you will need to exercise some kind of market timing, however occasional.
The good news is that I make more money in bear markets than I do in bull markets because the volatility is higher. However, to benefit from this skill set, you have to keep reading the Diary of a Mad Hedge Fund Trader.
There is also a problem with leveraged ETFs in that management and other fees can be high, dealing spreads wide, and tracking errors huge.
This is why I am limiting the portfolio to 2X ETFs, and avoiding their much more costly and inefficient 3X cousins, which are really only good for intraday trading. The 3X ETFs are really just a broker enrichment vehicle.
There are also going to be certain days when you might want to just go out and watch a long movie, like Gone With the Wind, with an all ETF portfolio, rather than monitor their performance, no matter how temporary it may be.
A good example was the August 24 flash crash, when the complete absence of liquidity drove all of these funds to huge discounts to their asset values.
Check out the charts below, and you can see the damage that was wrought by high frequency traders on that cataclysmic day, down -53% in the case of the (ROM). Notice that all of these discounts disappeared within hours. It was really just a function of the pricing mechanism being broken.
I have found the portfolio above quite useful when close friends and family members ask me for stock tips for their retirement funds.
It was perfect for my daughter who won?t be tapping her teacher?s pension accounts for another 45 years, when I will be long gone. She mentions her blockbuster returns every time I see her, and she has only been in them for five years.
Imagine what technology, financial services, consumer discretionaries, biotechnology, and oil and gas will be worth then? It boggles the mind. My guess is up 100 fold from today?s levels.
You won?t want to put all of your money into a single portfolio like this. But it might be worth carving out 10% of your capital and just leaving it there.
That will certainly be a recommendation for financial advisors besieged with clients complaining about paying high fees for negative returns in a year that is unchanged, or up only 1%-2%. Virtually everyone has them right now.
Adding some spice, and a little leverage to their portfolios might be just the ticket for them.
Occasionally I hear from subscribers to the flagship publication of Mad Hedge Fund Trader, Global Trading Dispatch, that they can?t execute one of my market beating Trade Alerts because broker commissions will eat up a large chunk of their potential profits.
This is especially true with low dollar priced stocks, like Bank of America (BAC), involving large numbers of contracts.
When I ask how much they are paying in commissions, I am absolutely flabbergasted. Investors are being raped left, right, and center by excessive commissions, ticket charges, custodial expenses and exchange fees.
Brokerage management philosophy seems to be, ?if it moves or breathes, charge it.? Small individual investors are particularly abused.
You want to be paying for your own yacht, not your broker?s.
So, I decided to go shopping for a new online broker, assuming that I would be executing a typical volume of orders one might execute following the sometimes frenetic Trade Alerts of the Mad Hedge Fund Trader. That works out to about 20 trades a month in options, stocks, and ETFs at about 40 contracts per trade.
After speaking to a dozen different companies, I gained a pretty good read on the current state of the business.
This is a fantastically competitive industry. Firms are fighting tooth and nail to gain customer trade flows which they then sell to high frequency traders, where the real money is made.
If you are strictly passive and simply open an account on your own, the initial commissions will be very high. But lift up the phone, and suddenly everything is negotiable, and the world is your oyster.
Some will offer you 60 days of commission free trading to wrest your account away from the competition. Others will pay cash bonuses up to $2,000, depending on the size of your trading capital.
Services will vary all over the map, from bare bones discount services, to full service houses with massive research and analytical resources. Some companies charge premiums for speaking to live humans, while others don?t.
It is very important that their technical support be easily accessible to sort out the inevitable glitches and mistakes. Before taking any action, visit a potential broker?s website for a test-drive and see if it meets your needs.
Caution: none of these guys have any idea whatsoever what the market is going to do. That is my job.
Before sending that wire transfer, make sure that your new broker is FDIC insured for $250,000. Several houses went bust during the crash, and that government guarantee was worth its weight in gold.
If you have the financial sophistication, you might also ask for the broker?s financial statement. Small private firms won?t have these as they are privately owned.
When times get tough, keeping all your money in a financial institution that is ?too big to fail? is a good idea.
Here?s another warning: the people who work in this business are fantastically aggressive. Don?t give them your home phone number or they will pester you to death until you send them money. It?s almost as bad as talking to solar panel installers.
Remember also that opening a brokerage account these days requires gargantuan amounts of paperwork, thanks to vastly expanded regulation.
I?m sure they cause entire forests to needlessly fall under the axe. It is also one of the last industries, along with real estate, to still use the dinosaurian fax machine.
A further headache: many documents have to be notarized to make sure you are not a terrorist or a drug dealer laundering money.
I would also keep open a minimum of two accounts at different brokers at any one time. The lesson of MF Global is that you never want all your eggs in one basket. Everyone eventually got all their money back, but it took three years of litigation to get the last couple of bucks.
Once your account is open and has established a trade history, call your broker again. If your size or frequency of trading has increased, so has your negotiating leverage, and they will agree to better deals and bigger discounts.
Remember, it is the squeaky wheel that gets the grease.
I spoke to a dozen brokers and here is what I found. Commissions are expressed in terms of a ticket charge per options trade and a fixed commission per contract. A few cents in exchange fees get tacked on to every trade.
Interactive Brokers
Has been rated the number one firm for the last three years by the Barron?s annual survey of online brokers. They also have a large international following among my many readers abroad (we have customers in 135 countries).
They offered me a very competitive 50-cent a share commission, and ticket charges depending on whether I am adding to, or subtracting from, liquidity in the market. To learn more, go to their website: https://www.interactivebrokers.com/ind/en/main.php
OptionsHouse (formerly TradeMonster)
Founded by my friends, Jon and Pete Najarian, TradeMonster is a full service house with extensive analytical and educational resources. You can even find the Mad Hedge Fund Trader in there sometimes. They offered me a flat commission rate of 60 cents a share, no ticket charge, and a $600 cash back signing bonus.
TradeMonster merged with Options House, and the two firms have integrated customer lists, market data management, and services. https://www.optionshouse.com/
Place Trade
A deep discount broker located in Raleigh, North Carolina would charge me a 75-cent commission and a $1.00 ticket charge, but these were soft numbers. I?m sure one more phone call would have dropped them by half. http://www.us.placetrade.com/
TD Ameritrade
Their website offered a 60 cent commission, $600 in cash back and 60 days of free commissions. But when I called to learn more, I was left on hold for 20 minutes, so I gave up. https://www.tdameritrade.com/home.page
TradeStation
This ubiquitous marketer offered me a $4.99 ticket charge and a 20 cent commission if I did more than 200 trades a month. Drop below this and it jumps up quite a lot. http://www.tradestation.com/
OptionsXpress
This Charles Schwab subsidiary could do an $8.95 ticket charge and a 75-cent commission. It has recently invested a lot in mobile (smart phone) executive, one of the fastest growing parts of the market.
About a third of my readers now access my research through their phones, although how they read those tiny letters is beyond me. http://www.optionsxpress.com/
TradeKing
Is giving customers a $4.95 ticket charge and a 65-cent commission. They have been growing through acquisition in recent years, picking up a number of other small online brokers. https://www.tradeking.com/
Fidelity
Its website offers a $7.95 ticket charge and a mere 10 cent commission along with its Trade Armor service. Unfortunately, I couldn?t find out what this is because I was left on hold for 20 minutes. As you can probably tell by now, my patience with poor customer service is pretty low, so I hung up. https://www.fidelity.com/
E*TRADE
This firm earned a perpetual place in the minds of San Francisco based traders when a disgruntled customer shot out one of their massive windows at their Market Street branch at the height of the financial crisis.
This firm seemed one of the most eager to get my business. They have a steep starter $9.95 ticket charge and a 75-cent commission. But that declines dramatically if I trade more than 150 times a month. They also offered me a generous $1,200 cash bonus to switch my account, and 60 days of commission free trading. Tony, I?ll get back to you! https://us.etrade.com/home
Merrill Edge
This old line wire house came close to going under during the crash, and was bought at the last minute by Bank of America (BAC) for a pittance, after no small amount of government pressure.
With a $6.95 ticket charge and a 75-cent commission, they are no bargain. But if you like a lot of hand holding, and want someone to take you out to play golf on your birthday, this is your place. And if you maintain cash balances of over $25,000 at (BAC) you get 100 free trades and a cash back bonus of $1,200. It?s all in the family. https://www.merrilledge.com/
Scottrade
Another prolific advertiser, they came in at a $7 ticket charge and a $1.25 per contract commission. They will offer cash bonuses to move an account from $100 up to $2,000 for amounts over $1 million. They will also toss in another $100 to cover transfer fees.
Although they are an online broker, they boast a 500 branch national network that comes in handy when handling the extensive paperwork for a new account. https://www.scottrade.com/
Charles Schwab
My first impression after looking at the Charles Schwab website was ?Charles, you?re getting really old!? Schwab has graced the box next to mine at the San Francisco Opera for the last 20 years.
It?s interesting to see how this firm has evolved over the last four decades. When it first arrived on the scene, it was a disruptive, iconoclastic discount broker that thumbed its nose at Wall Street.
Today, it is dripping with establishment pretention, and has moved up market, getting more expensive. Its main presence in the options market comes from its purchase of optionsXpress described above. https://www.schwab.com/
https://www.madhedgefundtrader.com/wp-content/uploads/2014/11/Female-Office-Worker.jpg277366Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-11-03 01:06:472016-11-03 01:06:47Shopping for a New Broker
I like to start out my day by calling subscribers on the US east coast and Europe, asking how they like the service, are there any ways I can improve it, and what topics would they like me to write about.
After all, at 5:00 AM Pacific time, they are the only ones awake.
You?d be amazed at how many great ideas I pick up this way, especially when I speak to industry specialists or other hedge fund managers.
Even the 25-year-old day trader operating out of his mother?s garage has been know to educate me about something.
So when I talked with a gentleman from Tennessee recently, I heard a common complaint. Naturally, I was reminded of my former girlfriend, Cybil, who owns a mansion on top of the levee in nearly Memphis.
As much as he loved the service, he didn?t have the time or the inclination to execute my market beating Trade Alerts.
I said ?Don?t worry. There is an easier way to do this.?
Only about a quarter of my subscribers actually execute my Trade Alerts. The rest rely on my research to correctly guide them in the management of their IRAs, 401ks, pension funds, or other retirement assets.
There is also another, easier way to use the Trade Alert service. Think of it as ?Trade AlertLight?. Do the following:
1) Only focus on the four best of the S&P 500?s 101 sectors. I have listed the ticker symbols below.
2) Wait for the chart technicals to line up. Bullish long term ??Golden crosses? are setting up for several sectors.
? 3) Use a macroeconomic tailwind, like the ramp up from a 1.5% GDP growth rate to 3% we are currently seeing.
4) Shoot for a microeconomic sweet spot, companies and sectors that enjoy special attention.
5) Increase risk when the calendar is in your favor, such as during November to May.
6) Use a modest amount of leverage in the lowest risk bets, but not much. 2:1 will do.
7) Scale in, buying a few shares every day on down days. Don?t hold out for an absolute bottom. You will never get it.
The goal of this exercise is to focus your exposure on a small part of the market with the greatest probability of earning a profit at the best time of the year. This is what grown up hedge funds do all day long.
Sounds like a plan. Now what do we buy?
(ROM) ? ProShares Ultra Technology 2X Fund ? Gives you a double exposure to what will be the top performing sector of the market for the next six months, and probably the rest of your life. Click the link for details and largest holdings http://www.proshares.com/funds/rom.html.
(UXI) ? ProShares Ultra Industrial Fund 2X ? Is finally rebounding off the back of a dollar that will slow down its ascent once the first interest rate hike is behind us. . Onshoring and incredibly cheap valuations are other big tailwinds here. For details and largest holdings, click http://www.proshares.com/funds/uxi_index.html.
(UCC) ? ProShares Ultra Consumer Services 2X Fund ? Is a sweet spot for the economy, as tight-fisted consumers finally start to spend their gasoline savings, now that it no longer appears to be a temporary windfall. This is also a great play on a housing market that is on fire. It contains favorites like Home Depot (HD) and Walt Disney (DIS), which we know and love. For details and largest holdings, click http://www.proshares.com/funds/ucc.html.
(UYG) ? ProShares Ultra Financials 2X Fund ? Yes, after six years of false starts, interest rates are finally going up, with a December rate hike by the Fed a certainty. My friend, Janet, is handing out her Christmas presents early this year. This instantly feeds into wider profit margins for financials of every stripe. For details and largest holdings, click http://www.proshares.com/funds/uyg_index.html.
Of course, you?ll need to keep reading my letter to confirm that the financial markets are proceeding according to the script. You will also have to read the Trade Alerts, as we include a ton of deep research in the Updates.
You can then unload your quasi-trading book with hefty profits in the spring, just when markets are peaking out. ?Sell in May and Go Away?? I bet it works better than ever in 2017.
With the British pound (FXB) at a 31-year low, I?m booking my flat in central London for June already.
https://www.madhedgefundtrader.com/wp-content/uploads/2015/11/John-Thomas-e1447108172932.jpg322400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-10-12 01:06:142016-10-12 01:06:14Trading for the Non-Trader
There is no doubt that old tech is back with a vengeance.
Look at the trifecta of blockbuster earnings reports from Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) recently, and you can reach no other conclusion.
The Microsoft turnaround in particular has been amazing.
PCs, and the software to run them were so 1990s.
After the Dotcom bust in 2000, Microsoft was dead money for years.
Founder Bill Gates retired in 2008. CEO Steve Ballmer finally got the message in 2013, and retired to pay through the nose, some $2 billion, for the basketball team, the LA Clippers.
Succeeding operating systems offered little that was new, and they fell woefully behind the technology curve.
Even I gave away my own machines years ago to switch to Apple devices. These virus immune machines are perfect for a small business like mine, as they seamlessly integrate and all talk to each other.
When the company brought out the Windows Phone in 2010, three years after Apple, people in Silicon Valley laughed.
Long given up for dead as a trading and investment vehicle, the shares have been on a tear in 2015.
The stock is hitting a new all time high FOR THE FIRST TIME IN 15 YEARS!
Satya Nadella, who took over management of the company in 2014, clearly had other ideas. The challenge for Nadella from day one was to move boldly into new technologies, while preserving its legacy Windows business lines.
So far, so good.
The key to the company?s new found success was it?s dumping of its old ?Wintel? strategy of yore that focused entirely on the growth of the PC market.
The problem was that the PC market stopped growing, as the world moved onto the Cloud and mobile.
The company is now rivaling Apple with $100 billion in cash, almost all held tax-free overseas.
EPS growth will reach 10% next year, beating other big competitors.
Windows and servers, the (MSFT)?s core products, still account for 80% of the firm?s business.
But its cloud presence is being ramped up at a frenetic pace, where the future for the company lies, nearly doubling YOY. Mobile technologies, where it has lagged until now, are also on fire.
Rave reviews from its latest operating system upgrade, Windows 10, also helped.
On top of all of this, Microsoft is paying a generous 3% dividend. It?s earnings multiple at 15X makes it a bargain compared to other big tech companies and the rest of the market.
As I explained in my recent research piece ?Switching From Growth to Value? (click here?), Microsoft makes a perfect investment for a mature bull market.
It is not only at a multiple discount to the rest of the market, now at 18X, it is cheap when compared to the rest of its own sector as well.
This is when investors and traders bail from their high priced stocks to safer, lower multiple companies.
Obviously, I don?t want to pile into Microsoft, or any other of the big tech stocks on top of a furious 10% spike. But it is now safely in the ?buy on the dip? camp, along with the rest of big tech.
The party has only just stated.
To read my interview with Bill Gates? father, click here for ?An Evening With Bill Gates, Sr.?.
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Are you looking for an investment that does well during modest economic growth, a flat to slightly falling dollar, continued low interest rates, and a stock market that periodically hits the panic button?
Then General Electric (GE) is the stock for you.
I have just spent my day surfing the web for tidbits about GE and found quite a lot that I liked.
Want to get a great deal on a new diesel electric locomotive with teaser financing? That?s why customers flock to GE.
What I found was one of the largest corporate restructuring stories in history.
You can summarize it as ?Out with glitz, leverage, and volatility, and in with the plodding, the stable, and the reliable.? In stock market terms this means out with low price/earnings multiples and in with high ones.
For a start, GE is run by Jeffrey Immelt, considered by many to be one of the most superb large cap managers in the world. He has been cutting costs and ditching business lines not considered essential to its core heavy industrial origins.
Immelt has indicated that he expects that by 2018, General Electric will be earning 90% of its profits from "selling equipment for airplanes, railroads, oil extraction and electricity generation," all safe stuff.
By the way, these are great plays on a recovering Chinese economy as well. No coincidence there.
The most immediate trigger to pile into this stock was its planned sale of GE Finance, which is why wags used to call GE ?The hedge fund that sold light bulbs.?
GE was dragged into this business during the 1990s by predecessor, Jack Welsh, using the logic that ?Everyone else was doing it.? Welsh never inhaled a breath of humility in his life, and chronically suffered from confusing brilliance with a bull market.
In the end, his strategy almost took the company under, requiring a bailout from Warren Buffett during the dark days of 2009, in the form of a 10% convertible preferred stock issue.
If only I could get such terms!
In the most recent quarter, GE had to write off $4.33 billion for the sale of damaged securities left over from this ill conceived venture.
A $30 billion portfolio of such dross was recently sold to Wells Fargo (WFC). GE has also indicated that it will soon spin off consumer finance business Synchrony Financial (SYF).
This is yet another step in the company's plan to divest $200 billion of GE Capital assets as GE returns to its industrial roots.
And how can you not like that 3.10% dividend in this zero return world? This is with a price earnings multiple of 25 for current year earnings, and 19 times next year earnings.
GE?s aviation business is climbing to higher altitudes. Its backlog has ballooned some 36% over the past two years, to $150 billion.
It has been spurred on by a new engine that uses 15% less fuel, enabling their hyper competitive airline customers to cut one of their largest costs.
This will pave the way for GE to grow its installed base of engines from 36,000 to an impressive 46,000 by 2020. Did you know the Chinese have to buy 1,000 airliners over the next decade? ? After an 18-month battle with the French government, GE managed to close its purchase of Alstom for $13.8 billion, a major European energy company. It had to promise to create 1,000 new jobs in France to do so.
The deal brings GE's capabilities that it had previously lacked in renewable energy and heat recovery steam generators. The latter are key components of combined cycle gas-plus-steam plants, which GE forecasts will account for 70% of all future gas-fired plant orders.
Acquiring this capability roughly doubles the General Electric share of the revenues it could capture from orders for such plants.
With it comes considerable expertise in plant design and construction, allowing GE to move from being a supplier to a lead contractor on such projects.
Alstom also delivers a significant presence in China and India, as well as sophisticated products in transmission technology.
(GE)?s sale of its appliance unit to Sweden?s Electrolux (ELUXY), which came with the Alstom deal, is pending antitrust review.
To top all this, activist investor Norman Peltz?s Trian Fund has taken a 1% stake in (GE) (or $2.5 billion worth) with the intention of shaking it up so a few more coins will fall out for shareholders.
That is quite an ambitious bet. Peltz wants the company to ramp up an already ambitious share repurchase program. And you get in at a great price today. ? All in all, GE seems to be the right kind of stock to buy in the market we have at the moment. It also fits neatly into my scenario of new money moving into value, at the expense of growth (click here for ?Switching from Growth to Value?.
All we need to get in is a decent pullback from its recent parabolic move.
For more background on General Electric, click here for ?The American Onshoring Trend is Accelerating?.
https://www.madhedgefundtrader.com/wp-content/uploads/2015/10/Jeff-Immelt.jpg398397Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-09-23 01:06:132016-09-23 01:06:13General Electric?s Imagination Really is at Work
I'm the guy who eternally marches to a different drummer, not in the next town, but the other hemisphere.
I would never want to join a club that would lower its standards so far that it would invite me as a member.
On those rare times when I do join the lemmings, I am punished severely.
Like everyone and his brother, his fraternity mate, and his long lost cousin, I thought bonds would fall this year and interest rates would rise.
After all, this is normally what you get in the seventh year of an economic recovery. This is usually when corporate America starts to expand capacity and borrow money with both hands, driving rates up.
Although I was wrong on the market direction, Treasury bonds have been one of my top performing asset classes this year. I used every spike in prices to buy (TLT) vertical put spreads $3-$5 in the money, and raked in profits almost every month.
Of course, looking back with laser-sharp 20/20 hindsight, it is so clear why fixed income securities of every description have been on a tear all year.
I will give you ten reasons why bonds won't crash. In fact, they may not reach a 3% yield for at least another five years. ? 1) The Federal Reserve is pushing on a string, attempting to force companies to increase hiring, keeping interest rates at artificially low levels.
My theory on why this isn?t working is that companies have become so efficient, thanks to hyper accelerating technology, that they don?t need humans anymore. They also don?t need to add capacity.
?2) The US Treasury wants low rates to finance America?s massive $19 trillion national debt. Move rates from 0% to 6% and you have an instant financial crisis.
3) With Japan and Europe in a currency price war and a race to the bottom, the world is sending its money to the US to chase higher interest rates. An appreciating greenback which is now at close to a five-year peak is also funneling more money into bonds.
The choices for ten-year government bonds are Japan at 0.4%, Germany at 0.0%,?Switzerland at a negative -0.48% and the US at 1.65%. It all makes our bonds look like a screaming bargain.
4) Since the 2009 peak, the US budget deficit has fallen the fastest in history, down 75% from $1.6 trillion to a mere $400 billion, and lower numbers beckon.
Obama?s tax hikes did a lot to shore up the nation?s balance sheet. A growing economy also throws off a ton more in tax revenues. As a result, the Treasury is issuing far fewer bonds, creating a shortage.
5) This recovery has been led by small ticket auto purchases, not big ticket home purchases. The last real estate crash is still too recent a memory for many traumatized buyers, at least for those few who can get a mortgage. This keeps loan demand weak, and interest rates at subterranean levels.
6) The Fed?s policy of using asset price inflation to spur the economy has been wildly successful. Bonds are included in these assets, and they have benefited the most.
7) New rules imposed by Dodd-Frank force institutional investors to hold much larger amounts of bonds than in the past.
8) The concentration of wealth with the top 1% also generates more bond purchases. It seems that once you become a billionaire, you become ultra conservative and only invest in safe fixed income products.
This is happening globally. For more on this, click here for ?The 1% and the Bond Market?.
9) Inflation? Come again? What?s that? Commodity, energy, precious metal, and food prices are disappearing up their own exhaust pipes. Industrial revolutions produce deflationary centuries, and we have just entered the third one in history (after no. 1, steam, and no. 2, electricity).
10) The psychological effects of the 2008-2009 crash were so frightening that many investors will never recover. That means more bond buying and less buying of all other assets. I can?t tell you how many investment advisors I know who have converted their practices to bond only ones.
Having said all of that, I am selling bonds short once again on the next substantial rally. Call me an ornery, stubborn, stupid old man.
But hey, even a blind squirrel finds an acorn sometimes.
Want to know the best way to play the coming recovery in oil, commodities, precious metals, and emerging markets?
Buy the railroads. At least if you are early, you still have a functioning, cash flow positive business, unlike the rest of the above.
Since they peaked in early 2015, railroad stocks have been beaten like the proverbial red-headed stepchild, trading with the collapse in oil and coal tick for tick. Lead stock Union Pacific (UNP) has seen its share price crater by 36% since then before recently recovering half of that.
What follows a global synchronized slowdown, led by China and emerging markets? A global synchronized recovery, led by China and emerging markets.
I love railroads because they used to belch smoke and steam and have these incredibly loud, romantic, wailing whistles.
In fact, my first career goal in life (when I was 5) was to become a train engineer. By the time I was old enough to know better, American railroads almost no longer existed.
It turns out that the railroads today are a great proxy for the health of the entire global economy. They are, in effect, our canary in the coalmine.
If oil prices stay low enough for long enough, it will boost demand for everything else that Union Pacific ships, including houses, furniture, cars, and every other sweet spot for their franchise.
Union Pacific (UNP), in effect, has a great internal hedge for its many businesses. When one product line weakens, another strengthens. This has been going on since the 19th century.
The industry is carefully watching the construction of a second Panama Canal across Nicaragua (click here for ?Who the Grand Nicaragua Canal Has Worried?).
If completed by its Chinese promoters within the next decade, it could bring an incremental shift of traffic from the US West Coast to the Gulf Ports.
Even this is a mixed bag, as this will move some business away from strike-plagued ports that are currently causing so much trouble.
When I rode Amtrak?s California Zephyr from Chicago to San Francisco in 2014, I passed countless trains heading west hauling hoppers full of coal for shipment to China.
Last year? I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.
Take a look at the charts below, and you will see that the shares of virtually the entire railroad industry are breaking out to the upside.
In two short years, the big railroads have completely changed their spots, magically morphing from fading coal plays to emerging oil ones.
You?ve heard of ?fast fashion?? This is ?fast railroading?.
Today the big business is coming from the fracking boom, shipping oil from North Dakota?s Bakken field to destinations south. In fact, the first trainload of Texas tea arrived here in the San Francisco Bay area only a couple of years ago, displacing crude that formerly came from Alaska.
There are a wealth of interesting companies in the railroad sector now. You could almost pick any one.
These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), Kansas City Southern (KSU) and Canadian Pacific (CP).
Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service.
A friend of mine, taking a passenger train from New Mexico to Los Angeles, found his car abandoned on a siding for 24 hours where he froze and starved until he was discovered.
New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy.
The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government-owned Amtrak passenger service was created out of the ashes.
I know all of this because my late uncle was the treasurer of Penn Central.
Fast forward nearly half a century, and what you find is not your father?s railroad.
While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and lines were reorganized and consolidated.
The government provided a major assist with sweeping deregulation. It became tremendously concentrated, with just four companies dominating the country, down from hundreds a century ago, giving you a great oligopoly play.
The quality of management improved dramatically.
Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from West Coast Ports.
A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.
All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment.
The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.
Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa.
Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double stacked sea containers.
Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic.
Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.
I have some firsthand knowledge of this expansion. Every October 1st, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in.
There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.
During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad.
I can guide my guests through that tunnel today with flashlights because Union Pacific (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.
While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing and another energy renaissance) and Canada (natural resources) promise to boost rail traffic with the US.
The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, providing all great cargo for railroads.
And who knew?
Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four time
s more energy efficient than competing trucks.
In fact, many companies are now looking to railroads to reduce their overall carbon footprint. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad six years ago has probably doubled in value since then.
You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities.
My past letters have chronicled adventures riding the Orient Express from London to Venice and Amtrak from New York to San Francisco.
I even once considered buying my own steam railroad, the fabled ?Skunk? train in Mendocino, California, until I figured out it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.
It gets worse.
Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.
The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition, and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.
When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, click hereand hit the ?PLAY? arrow in the lower left hand corner.
Please excuse the shaky picture. I shot this with one hand, while using my other hand to keep my over- excited kids from running onto the tracks to touch the laboring beast.
Railroads all look like ripe, ?buy on dips? low-hanging fruit to me.
Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2016-09-16 01:06:582016-09-16 01:06:58The Big Comeback in Railroads
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These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.
If you do not want that we track your visist to our site you can disable tracking in your browser here:
Other external services
We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.
