"It is difficult to get a man to understand something when his salary depends upon his not understanding it," said the Pulitzer Price winning author, Upton Sinclair."
What if you want to be a little more aggressive with your investment strategy, say twice as aggressive? What if markets don't deliver any year on year change?
Then you need a little more pizzazz 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 ETF's issued by ProShares, based Bethesda, MD (click here for their link).
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 was up 80.95% last year. For more details on the fund, please click here.
(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 was up 38.42% last year. For more details on the fund, please click here.
(UCC) - ProShares Ultra Consumer Services Fund - The three largest single stock holdings are Amazon (AMZN), Walt Disney (DIS), and Home Depot (HD). It was up 3.71% last year. For more details on the fund, please click here.
(DIG)- ProShares Ultra Oil & Gas Fund - The three largest single stock holdings are ExxonMobil (XOM), Chevron (CVX), and Schlumberger (SLB). It was DOWN 9.20% last year. For more details on the fund, please click here.
(BIB) - ProShares Ultra NASDAQ Biotechnology Fund - The three largest single stock holdings are Amgen (AMGN), Regeneron (REGN), and Gilead Sciences (GILD). It was up 40.49% last year, please click here.
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 ETF's for sectors like gold (UGL), to act as an additional hedge.
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 so high. 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 ETF's in that management and other fees can be high, dealing spreads wide, and tracking error huge.
This is why I am limiting the portfolio to 2X ETF's, and avoiding their much more costly and inefficient 3X cousins, which are really only good for intraday trading. The 3X ETF's 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 flash crash, when the complete absence of liquidity drove all of these funds to huge discounts to their asset values.
Check out the long-term charts, 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.
It's Time to Spice Up Your Portfolio
Now that China has ended its "One Child" policy, it is time to assess its long-term costs.
Adopted 33 years ago, there are now 32 million more boys under the age of 20 than girls.
Large scale interference with the natural male:female ratio has been tracked with some fascination by demographers for years, and is constantly generating unintended consequences.
Until early in the last century, starving rural mothers abandoned unwanted female newborns in the hills to be taken away by "spirits."
Today, pregnant women resort to the modern-day equivalent by getting ultrasounds and undergoing abortions when they learn they are carrying girls.
Millions of children are "little emperors," spoiled male-only children who have been raised to expect the world to revolve around them.
The resulting shortage of women has led to an epidemic of "bride kidnapping" in surrounding countries. Stealing of male children is widespread in Vietnam, Cambodia, Laos, and Mongolia.
The end result has been a barbell shaped demographic curve unlike that seen in any other country. The Beijing government says the program has succeeded in bringing the fertility rate from 3.0 down to 1.8, well below the 2.1 replacement rate.
As a result, the Middle Kingdom's population today is only 1.3 billion instead of the 1.6 billion it would have been.
Political scientists have long speculated that an excess of young men would lead to more bellicose foreign policies by the Middle Kingdom. But so far the choice has been for commerce, to the detriment of America's trade balance and Internet security.
In practice, the one child policy has only been applied to those who live in cities or have government jobs. That is about two thirds of the population.
On my last trip to China I spent a weekend walking around Shenzhen city parks. The locals doted over their single children, while visitors from the countryside played games with their three, four, or five children. The contrast couldn't have been more bizarre.
Economists now wonder if the practice will also understate China's long-term growth rate. Parents with boys tend to be bigger savers, so they can help sons with the initial big-ticket items in life, like an education, homes, and even cars.
The end game for this policy has to be the Japan disease; a huge population of senior citizens with insufficient numbers of young workers to support them. The markets won't ignore this.
In the latest round of reforms announced by the Chinese government was the demise of the one child policy. But no matter how hard you try, you can't change the number of people born 30 years ago.
The boomerang effects of this policy could last for centuries.
Passing through Dallas, Texas on the way to my Strategy luncheon, I couldn't help but remember the assassination of president John F. Kennedy, on November 22, 1963, over 50 years ago.
The tragedy offers valuable lessons for today's traders, although we have to travel a circuitous route to get there.
It was one of those epochal events, where people remember exactly what they were doing when they heard the news, like the 1942 Japanese attack on Pearl Harbor, and the 9/11 attacks on the World Trade Center.
During the middle of my 5th grade class there was a school wide announcement that the president had been shot while campaigning in Dallas, Texas, but was still alive. Hours later, we were told he was dead. The teachers started crying, and we were all sent home.
For the rest of the week, we were transfixed by the tumultuous events on our black and white, rabbit eared television sets. Lyndon Johnson was sworn in as president on Air Force One. Lee Harvey Oswald was arrested. Then nightclub owner Jack Ruby shot him in a Dallas jail.
It was all so surreal, witnessing history unfold before you. I remember that my dad told me this all might be a prelude to a military coup d' etat, or a Soviet nuclear attack, and that we should be prepared for the worst.
Our stockpile of canned food to feed our family of nine from the previous year's Cuban Missile Crisis was still in its cases. So were the boxes of ammunition. Those were scary times.
It seemed like the country went to pieces after that. The Vietnam War ramped up, igniting huge national demonstrations. Some 60,000 of our guys died, including three from my high school graduating class.
Race riots followed, setting cities on fire. I got caught in the ones in Los Angeles and Detroit. Then came the Oil Crisis, Watergate, and the Iran Hostage Crisis.
Things didn't get back to normal until the 1980's, and guess what? The stock market started going up, and I got into the hedge fund business.
The Kennedy assassination sparked an entire industry of conspiracy theorists, armchair historians, and assorted nut jobs, whose mission was to debunk the conclusions of the Warren Report.
Thousands of books were published, and even more lectures delivered. It inspired us all to distrust our government.
After all, we were told that Oswald made an impossible shot, and only a "magic bullet" could achieve what the report claimed. Witnesses died like flies, against all actuarial probability. The old Italian rifle he used to commit the crime was impossibly flawed.
I tended to believe the version that was taught in California state textbooks as late as the 1990s, that Kennedy was the victim of either a CIA, Mafia, or Cuban plot. The Hollywood director, Oliver Stone, fanned the flames with his 1991 film, JFK.
Then one day during the late eighties, while visiting big oil clients for Morgan Stanley, I found myself with a couple of free hours to kill in Dallas, Texas. I took a taxi to the Texas School Book Depository on Elm Street, now a museum.
It was a weekday, and I was the only visitor. So I took the elevator up to the 6th floor. There, at a corner window, cases of books were set up exactly as Oswald had placed them on that fateful day.
I looked around, saw no one else, and then deftly stepped over the rope that barred public access.
It turned out that I shared some personal history with Lee Harvey Oswald. We had both been in the Marine Corps, and obtained a marksman's rating, which earned you a few extra dollars a month.
He had also been stationed in Japan a few years before, at a base I knew well. So I had always been curious about Oswald's incredible shot.
I sat down in the exact spot that Oswald had and watched the traffic below. At 62 feet away, the cars were moving at 8 miles per hours, the same speed as the Kennedy motorcade. Then it hit me.
This was not an impossible shot. This was not even a hard shot. I could make this shot. In fact, half the Marines who went through basic training at Camp Pendleton could have made this shot on a bad day with a stiff wind.
It was a revelation.
It meant that the Warren Report was right. Oswald was the single shooter. It meant that all of the conspiracy theories I had heard about over the decades were lies.
Not only that, I also realized then that all conspiracy theories about everything were untrue, usually manufactured by people with ulterior motives, almost always driven by the desire to make money. The level of cooperation required between large numbers of people is far too improbable.
After that, theories about the Kennedy assassination started to unravel. During the 1990s, the investigative TV program, 60 minutes, got several professional marksmen to easily replicate Oswald's feat of getting off three shots with the same antiquated bolt action rifle in less than three seconds.
After a deal with congress in 1992, the government released 5 million pages of evidence on which the Warren Report conclusion was based, which had previously been secret (click here for the National Archives link).
We obtained hours of classified testimony from Marina Oswald, Lee Harvey's Russian wife, about how troubled the man was.
We discovered that a dozen people saw a man with a rifle in the window of the Book Depository minutes before Kennedy was due to pass by. They screamed at the police to intervene, but none could hear them over the noise.
The fourth shot from the "grassy knoll" recorded over a police radio with a broken microphone button turned out to be an echo off a building.
The FBI was aware that Oswald had taken a shot at the home of an army general only months before. A memo warning the Secret Service of the threat was found crumpled up in a Dallas agent's desk drawer.
The Kennedy assassination has become a favorite topic of modern risk analysts who advise hedge funds. The Secret Service was well aware of many assassination risks for the liberal, democratic president from Boston from a wide assortment of right wing fanatics in the Deep South, and they chased down many of them.
No one imagined that the actual attempt would come from the left, and they were blindsided. It is a valuable lesson that we trade and invest by today.
Finally, it was all put together is a 2007 book by Vincent Bugliosi, Reclaiming History: The Assassination of President John F. Kennedy.
I had the misfortune of working with Bugliosi while he was prosecuting cult mass murderer, Charles Manson (while working for the Los Angeles County Coroner, I had dug up some of his victims in the California desert, one with a missing head). I always found him a show boater and a tireless self-promoter.
However, in the book, Bugliosi does a masterful job of weaving together declassified evidence, testimony from missing witnesses, and the contribution of modern technology.
His conclusion: the Warren Report was dead right. As deranged as Oswald was, there was one thing he could do well, and that was to shoot straight. He then proceeds to expertly demolish every conspiracy theory out there, and uncover their promoters as the profit driven charlatans that they are.
Oliver Stone was a better storyteller than a historian.
It turns out that being perennially disbelieving of conspiracy theories is quite a useful philosophy to have as a trader. We are often asked by the media to believe in the conspiracies that underpin certain investment theses. Bet against them, and you'll win every time.
If we don't fight them in El Salvador, then we'll be fighting them in the streets of Los Angeles. Russia wants to take over the world, and when they finish their work in the Ukraine, we are next.
We have to invade Iraq because Saddam Hussein is imminently going to use his weapons of mass destruction against us. And don't get me started on the Ebola Virus.
When gold hit $1,900 an ounce six years ago, I heard that the bars inside Fort Knox were made of lead and painted gold. When this was discovered, the price of the barbarous relic was supposed to soar to $50,000 an ounce. I sold gold short.
After Barack Obama was elected president in 2008, the Internet abounded with assumptions of a vast left wing conspiracy that pegged our new president as a socialist, was born in Kenya, was going to destroy corporate America, and take away all of our guns.
Those who bought the story sold all their stocks because the market bottom, unloaded their homes, and ditched all their bonds because the US government was going to default on its debt, ignite hyperinflation, and collapse the dollar. The advice was to put all your money into gold.
I didn't believe any of this for a second, and did the exact opposite of what the Armageddon crowd was urging on to followers.
I bought stocks, ultra high yielding junk bonds, MLP's, REITS, and every other risk asset out there while avoiding gold like the plague. I sold short the Japanese yen and the Euro against the US dollar. So did my subscribers. You know the rest of the story. Some of my picks rose tenfold.
I met Senator Ted Kennedy when he was running for president in 1982, and have kept in touch with his staff ever since. They told me he hit the deck whenever he heard a loud noise, be it a firecracker, a backfiring car, or even a slammed door. He lived a lifetime in constant fear of assassination.
Some scars never heal.
On my next trip to Tokyo I will be spending some time at the magnificent, white stucco edifice that has been the residence of US ambassadors there for nearly 100 years.
I will also give a briefing to our ex ambassador, Caroline Kennedy, the daughter of the late president, who served as the 29th United States ambassador to Japan until January, 2017.
The National Archives will release the last of its files on the assassination 70 year after the event, on November 22, 2033.
I hope to live that long, for by then I'll be nearly 82. Then for me, the Kennedy story will come full circle.
Taking the Story Full Circle
Today is a good day to tell you the story of my Uncle Mitch.
I'll be putting on my faded Marine Corp fatigues, with gold railroad track bars on my shoulders, and leading the hometown's parade.
Since job prospects for high school graduates in rural Pennsylvania in 1936 were poor, Mitch walked 200 miles to the nearest Marine Corp recruiting station in Baltimore.
After basic training, he spent five years rotating between duty in China and the Philippines, manning the fabled gunboats up the Yangtze River.
When WWII broke out, he was a seasoned sergeant in charge of a machine gun platoon. That put him with the seventh regiment of the First Marine division at Guadalcanal in October, 1942.
When the Japanese counterattacked, Mitch was put in charge of four Browning .30 caliber water-cooled machine guns and 33 men, dug in at trenches on a ridge above Henderson Field.
The Japanese launched massive waves of suicide attackers in a pouring tropical rainstorm all night long, frequently breaking through the line and engaging in fierce hand-to-hand combat.
If the position fell, the flank would have been broken, leading to a loss of the airfield, and possibly the entire battle. WWII would have lasted two more years.
After the first hour, all of Mitch's men were either dead or severely wounded, shot or slashed with samurai swords.
So Mitch fired one gun until it was empty, then scurried over to the next, and then the next. In between human waves, he ran back and reloaded all the guns.
To more easily pitch hand grenades, he cut the arms off his herringbone fatigues. When the Japanese launched their final assault, and then retreated, he picked up a 40-pound Browning and ran down the hill after them, firing all the way, and burning all the skin off his left forearm.
Mitch's commanding officer, Col. Herman H. Hanneken, heard the guns firing all night from the field below.
He was shocked when he visited the position the next morning, finding Mitch alone in front of a twisted sea of 1,000 Japanese bodies, not a scratch on him.
Mitch was awarded the Congressional Medal of Honor in Australia a few months later.
Henderson's Ridge in 1942
After the war, Mitch, now a colonel, was handed the plum of all Marine Corp jobs, acting as the liaison officer with Hollywood. He provided the planes, ships, and beaches needed to make the great classic war films. He got to know stars like John Wayne, Lee Marvin, and yes, even Elvis Presley.
The iconic fictional hero in the 1949 film, Sands of Iwo Jima, Sergeant John M. Striker, was modeled after Mitch.
Tradition dictated that all military officers salute Mitch, even five star generals, and he was given a seat to attend every presidential inauguration from FDR on. Pacific countries issued stamps with his image, and Mattel sold a special GI Joe in his likeness.
When Mitch got older and infirm, I used my captain's rank to escort him on diplomatic missions overseas to attend important events, like the 40th anniversary of D-Day in Normandy.
Whenever Mitch was in town, he would join me for lunch with some of my clients with a history bent, and a more humble and self-effacing guy you never met. Mitch passed away in 2003 while he was working as a technical consultant for the pre-production of the HBO series, The Pacific. The funeral in Riverside, California was marked by an eagle continuously circling overhead which, according to the Indian shaman present, only occurs at the services for great warriors.
When I got back from the parade, I took out the samurai sword Mitch captured on that fateful day, a 1692 Muneshige, the hilt still scarred with 30-caliber slugs, and gave it a ritual polishing in sesame oil and powdered deer horn, as samurai have done for millennia.
To learn more about the First Marine Division's campaign during the war, please read the excellent paperback, The Island: A History of the First Marine Division on Guadalcanal by Herbert Laing Merillat, which you can buy from Amazon by clicking on the title.
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").
Welcome to the brave new world.
But We're In the Top Quartile!
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.
The concept has so far been successfully tested to an altitude of 1,000 meters (click link for the YouTube video: https://www.youtube.com/watch?v=SBUtlOnNc5E .
Attempts to do this from a live launch have had some setbacks (click links for that video where they almost made it: https://www.youtube.com/watch?v=PT0xCSJbt88 and https://www.youtube.com/watch?v=ycLKqRDjoZA), but it was successfully pulled off? (click here:? https://www.youtube.com/watch?v=3G8GJQumBFs
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.
Catching a Dragon by the Ta
il
This Could Be the Stock Performance
Is Mars the Next Hot Retirement Spot?
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.
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.
It?s Time to Spice Up Your Portfolio
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/
To get more in-depth information on the many broker offerings out there, please read the Barron?s annual online broker rankings by clicking here at
http://online.barrons.com/articles/SB50001424053111904628504579433251867361162