Global Market Comments
September 28, 2016
Fiat Lux
Featured Trade:
(THE ELECTION IS OVER),
(HOW TO FIND A GREAT OPTIONS TRADE)
Global Market Comments
September 27, 2016
Fiat Lux
Featured Trade:
(SEPTEMBER 28TH GLOBAL STRATEGY WEBINAR),
(OCTOBER 21ST SAN FRANCISCO, CA GLOBAL STRATEGY LUNCHEON),
(WHY CHINA IS GOLD?S BEST FRIEND),
(GLD), (GDX), (TLT)
SPDR Gold Shares (GLD)
VanEck Vectors Gold Miners ETF (GDX)
iShares 20+ Year Treasury Bond (TLT)
The good news is that you don?t have to be crazy, paranoid, or delusional to own gold (GLD).
However, the ?hundreds of individual investors I know who absolutely love the barbarous relic may not know exactly why.
They originally filled safe deposit boxes with old jewelry, American Eagles, and bullion bars as a hedge against the return of the double-digit INFLATION we endured during the 1970s.
Then gold became a DEFLATION hedge, as yielding nothing outperforms the negative interest rates offered by paper currencies, still -0.35% for the Euro and the Swiss Franc.
They are joined by what I call the tin hat, black helicopter, conspiracy theorists who eternally believe in the collapse of the US dollar and a default of US Treasury debt.
After all, it's always handy to have a few krugerrands in your pocket to bribe the border guards and escape the country (I never understood to where).
Recently, a new crowd of gold buyers has emerged.
Investors are soaking up the yellow metal as a hedge against a Trump presidential win. He has promised a crash of both the debt and equity markets.
Gold should soar.
However, few are aware of the true fundamental reasons for the long-term appreciation of the barbarous relic.
That would be the unrelenting accumulation of gold as a reserve asset by emerging market central banks, especially China.
The Middle Kingdom has long kept any information regarding its gold holdings a state secret.
Individual gold ownership was punishable by death, originally by firing squad, and more recently through organ harvesting.
That changed in June, 2015 when Beijing reported that it owned 1,658 metric tonnes. That is 56.7% higher than the last figure reported in 2009.
Since then, it has added another 165 metric tonnes. Its total holdings are now 1,823 metric tonnes worth $78.6 billion. This compares to the 8,134 metric tonnes, or $350 billion worth of gold owned by the US Treasury.
From these numbers, it is safe to assume that China will continue to add at least another 120 tonnes of gold to its reserve annually for at least another decade.
This should exert upward pressure on prices until we see a serious spike upward in global interest rates.
With ten year Treasury bonds (TLT) yielding 1.61% today, don?t hold your breath for that happening any time soon.
In addition, all of China?s domestic gold production is thought to go into a secret internal account not included in the nation?s central bank reserves.
Apparently, organ harvesting still applies to any release of statistics about THIS gold.
China?s gold buying is only part of an effort to recycle its massive trade surpluses back into the world economy, which last year ran a staggering $593 billion. Of this, $365.6 billion was with the United States.
Run a chart of China?s merchandise trade surpluses against the price of gold and you get an almost perfect match.
China isn?t loading up on gold because of any value or inflationary considerations. It is desperately attempting to diversify away from the US dollar, on which it has become overly reliant due to the massive size of its reserves.
As of July, China?s foreign exchange reserves totaled $3.23 trillion (see table below). America?s only ran to $120 billion, putting it only 14th in the world after the United Kingdom.
China owns $1.4 trillion worth of US Treasury bonds, notes, and bills, making it the largest holder after the Federal Reserve (which still owns $3.4 trillion left over from its quantitative easing programs).
In addition China owns trillions more in dollar cash, banks deposits, and other cash equivalents.
As long as the world remains a gigantic love fest, this is all fine. But what happens if Trump captures the White House?
China isn?t the only country engaging in a gold strategy.
When Iran was subject to trade sanctions and was banned from dollar clearing, it transacted a significant port of its business through gold barter transactions. Russia has lately been very active in the gold market for the same reason.
Other countries running big trade surpluses, like Germany, Russia, South Korea, the Netherlands, Taiwan, and Singapore, are doing the same.
And here is the number that will blow your mind.
For China to raise its gold holdings to the 17.4% of total reserves typical for developed countries, it needs to buy an incredible 10,101 metric tonnes worth $471 billion.
Add in gold purchases by other high surplus nations, and the total amount of net buying to come is truly mind boggling.
It all sounds like a prolonged bull market in gold to me, especially if interest rates stay lower for longer as I expect. This explains why the gold miners (GDX) had such a hyperbolic move early in 2016.
So you really don?t have to be crazy to own gold.
Well ?. maybe it helps a little bit.
China Trade Surplus 2004-2015
China Foreign Exchange Reserves
Global Market Comments
September 26, 2016
Fiat Lux
Featured Trade:
(NOVEMBER 18TH LAS VEGAS, NV GLOBAL STRATEGY LUNCHEON),
(MARKET OUTLOOK FOR THE COMING WEEK),
(SPY), (VIX), (USO),
(BATTERY BREAKTHROUGH PROMISES BIG DIVIDENDS),
(TSLA)
SPDR S&P 500 ETF (SPY)
VOLATILITY S&P 500 (^VIX)
United States Oil (USO)
Tesla Motors, Inc. (TSLA)
There is only one event this week of any real consequence, and that is the first presidential debate on Monday, September 26 at 6:00 PM EST at Hoftsra University in New York City.
You don?t need to know the channel. It will be broadcast on all of them, as well as streamed live on multiple online platforms.
The venue is well chosen. Hillary Clinton was the US Senator representing the Big Apple for eight years, while Trump runs his global real estate empire from there.
With 100 million viewers expected, it will be the most watched presidential debate in history.
We are about to see the least watched NFL football game in history, the Atlanta Falcons versus the New Orleans Saints, as the? game is scheduled at the exactly the same time.
As Clinton is well ahead in the polls, Trump will have to play offense and take all the risks. A clear Trump win will deliver a 400 point plunge in the Dow Average (INDU) the next day, while a Clinton win might give us a 200 point rally.
Warning: One week after presidential debates, markets are historically down 83% of the time, by an average of 2%. Trading just short of an all time high, markets may give us a similar result.
It is a simple contest between the status quo and radical change, and markets absolutely hate change, uncertainty, and unpredictability.
The debate will tell us whether last week?s frenetic rally in stocks was simply a short covering rally to the top of the recent range at (SPX) of 2,180, or the beginning of a more substantial upside breakout.
One way or the other, I expect stocks to eventually rally to new all time highs by yearend, as I have been predicting all year.
I am going into the Monday evening event long the Volatility Index (VIX) which rallied smartly on Friday.
Watching the overnight futures trade real time during the debate should be one of the most interesting experiences of the year from a trader?s point of view. To do so, please click here.
To make this week interesting, no less than 11 Fed governors will be speaking. This speaking schedule should give us a more clear picture of how severe the voting split was on last week?s controversial interest rates decision.
So look for dueling governors every day for December rate hike insights.
On Monday, September 26 at 10:00 AM we get August New Home Sales that should show continued improvement. Also, today starts a three day emergency OPEC meeting in Algiers which no doubt will lead to palpitations in the oil market (USO). Expectations are low.
On Tuesday, September 27 at 9:00 AM EST we learn the June S&P Case Shiller Home Price Index, which should continue to bring us marginal gains at a seven year high.
On Wednesday, September 28 at 8:30 AM EST we get August Durable Goods. The latest round of macro data has shown a definite slowing trend which no doubt contributed to the Fed?s decision to hold on rates.
On Thursday, September 29 we get the third and final read on US Q2 GDP at 8:30 AM EST, with a consensus view at 2.3%. Also out then will be the Weekly Jobless Claims, which should confirm that employment remains at four decade highs.
Friday, September 30 delivers us the Consumer Sentiment at 10:00 AM EST, which should edge higher. We wind up with the Baker Hughes Rig Count on Friday at 1:00 PM EST. Worryingly, the trend has been up for 12 out of the past 13 weeks, to the eternal distress of oil prices.
All in all, I expect us to continue trading in narrow ranges with profits accruing only to the quick and the nimble.
Good luck and good trading. ? Keep your hard hat on.
John Thomas
The Mad Hedge Fund Trader
Get Your Information Here!
The electric car industry is about to get turned right side up.
The dozen manufacturers out there have long struggled to achieve ranges that could match the 300 miles that is standard for competing gasoline engines.
All electric cars on the market today max out at 100-mile ranges or less. Except, that is, my Tesla S-1 (TSLA), which can drive 305 miles ? but for $110,000.
That is, unless I am driving back from Lake Tahoe. By descending 6,200 feet the regenerative braking system enables me to add 100 miles to my range, increasing it to 405 miles. All four wheels essentially act as electric turbines.
In a research paper published in the prestigious journal Science, a Cambridge University research team announced a major breakthrough in electrochemistry that would lead to a 500% increase in electric car ranges.
Expressed in terms of the S-1, it would drop the cost of the 1,000 pound lithium ion battery from $30,000 to $6,000, shrinking the overall cost of the vehicle to $86,000. That would enable it to compete with equivalent luxury models from Daimler Benz, BMW, and Lexus.
Alternatively, it could maintain the same battery weight and cost and boost the S-1 range to 1,450 miles.
Yikes!
The research was partially funded by the US Department of Energy. Cambridge University retains the patent, and is already working with several firms to move the technology forward.
The great leap forward is made possible through the use of a lithium-air formula in battery construction. The basic chemistry of lithium-air batteries is simple.
The cell generates electricity by combining lithium with oxygen to form lithium peroxide and is then recharged by applying a current to reverse the reaction. Making these reactions take place reliably, over many cycles, is the challenge.
The attraction here is that lithium air battery energy densities are ten times higher than the lithium ion batteries now in use. The Cambridge team was able to tweak battery performance through adding lithium iodide to the process.
Elon Musk has told me that he is shown dozens of new battery technologies every year. The problem is always the same.
The newfangled batteries can only be recharged once or twice. They develop ?tendrils? on the anodes and cathodes which make future recharges impossible.
The Cambridge professor, Dr. Clare Grey, says her team has been able to recharge their lithium air battery 2,000 times. That?s enough to get to the eight-year battery lifetime guarantee mandated by the state of California.
Tesla is no slouch. They have been tinkering with the electrochemistry of their batteries on their own. The recent series of cars has achieved a 5% boost in range to 290 miles through the addition of silicon to the battery cathodes.
Of course, it will take a few years before lithium-air batteries reach full commercial viability. New technology doesn?t exactly leap out of labs on to store shelves.
After all, current electric battery design is not too different from that first introduced in electric street trollies of the 1880s.
But my guess is that further research will bring greater battery ranges, not lesser ones.
The news could be better for Tesla. It has always been a ?faith? type stock, reliant on the development of futures technologies to achieve future profitability.
All of the profits announced so far have really been accounting tricks, reliant on generous government subsidies and the sale of carbon credits.
Shareholders have to believe that Tesla will become the world?s largest car maker in a decade, or they shouldn?t be in the shares. I believe Tesla can do it, but expect the road to be rocky.
Tesla is in effect a high risk venture capital investment that has already gone public.
Now, at last, we have the technology in hand.
For more background about this car from the future, read ?16 Facts and 6 Big Problems I discovered by Tearing Apart my Tesla S-1? by clicking here.? You must be logged into your account to view this article.
Tesla Has a Lot More Than Meets the Eye
Global Market Comments
September 23, 2016
Fiat Lux
Featured Trade:
(OCTOBER 7TH INCLINE VILLAGE, NV GLOBAL STRATEGY LUNCHEON),
(OLD TECH IS BACK!),
(GENERAL ELECTRIC?S IMAGINATION REALLY IS AT WORK),
(GE), (ELUXY), (SYF)
General Electric Company (GE)
AB Electrolux (ELUXY)
Synchrony Financial (SYF)
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.?.
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?.
Jeff?s Got Some New Tricks Up His Sleeve
?It is by the goodness of God that in our country we have those three unspeakably precious things: freedom of speech, freedom of conscience, and the prudence never to practice either of them.? said the 19th century American humorist, Mark Twain.