Research Archives

Trading for the Non-Trader

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 Alert Light?. 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.

For Those Who Invest at Their Leisure

October 12, 2016/by Mad Hedge Fund Trader

Old Tech is Back!

Diary, Newsletter, Research

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.?.

September 23, 2016/by Mad Hedge Fund Trader

General Electric?s Imagination Really is at Work

Diary, Newsletter, Research

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.
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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

September 23, 2016/by Mad Hedge Fund Trader

Ten Reasons Why Bonds Won?t Crash

Diary, Newsletter, Research

I have never been one to run with the pack.

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.
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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.

Am I Stubborn or Just Plain Stupid?

September 22, 2016/by Mad Hedge Fund Trader

The Big Comeback in Railroads

Diary, Newsletter, Research

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 19^th 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 here and 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.

September 16, 2016/by Mad Hedge Fund Trader

The Final Word on the Tax "Wash Sale" Rule

Diary, Newsletter, Research

Yes, it?s time for another boring tax story. And April 15 is still seven months off, so I can?t even use a tax-filing deadline as an excuse.

However, due to the immense volume of profitable trades the Mad Hedge Fund Trader Alert Service executed in September, I am getting a lot of questions about the dreaded ?Wash Sale? Rule.

The wash what?

The problem arises because the Internal Revenue Service believes that taxpayers are on a never-ending quest to avoid paying taxes. In that belief the despised government agency is largely right.

So what is the wash sale rule?

Let?s say you purchase 100 shares of XYZ Corp. for $25 per share on February 10. Nine days later, on February 19, XYZ drops to $22 per share and you sell your 100 shares.

You now have a capital loss of $3 per share, or $300, which may be tax-deductible.

However, if, on February 26, you then bought the same security for $22.50 per share, this would be considered a ?Wash Sale? because you sold and repurchased shares of the same stock within only a few days.

Without the wash sale rule, the result would be that you could possibly have a tax deduction for your loss, but you would still own the shares, which is why it's called an "artificial" loss by the IRS, and therefore not deductible as a capital loss.

Don?t try hiding your maneuvers by executing one leg of the trade in your personal account, and the second in your wife?s account or your IRA. Both actions still trigger the Wash Sale Rule.

The rule applies whether you are trading stocks, exchange traded funds, mutual funds, or options on any of the above. In fact, wash sales are quite likely if you have arranged for automatic reinvestment of your dividends back into your mutual funds.

The only requirement is that the two securities be substantially similar in nature, the precise definition of which the IRS has left intentionally and maddeningly vague.

The Wash Sale Rule becomes an issue with the vertical bull call and bear put spreads the Mad Hedge Fund Trader has been recommending.

Usually, you are long one option and short another in the same company and both legs generate a profit on closing. No problem there. You just pay more in taxes and hope the government doesn?t blow it on some useless program.

But during periods of extreme volatility, such as August and September, 2015, it is possible to have a large gain on one leg, a substantial loss on the other, but to have a profit overall on the combined paired spread.

Enter the Wash Sale Rule.

Since you had gains and losses in nearly identical securities within 30 days, the IRS will hit you with a short term gain on the profit, but not let you deduct the loss.

Yes, I know this sounds like a rip off, or a ?heads I win, tails you lose? scam perpetrated by a devious IRS.

But it is not the end of the world. NO, I have not designed the most tax inefficient securities trading strategy imaginable.

While you can?t deduct the loss on the losing leg, you CAN use it to increase the cost basis on your winning leg, thus reducing your overall tax bill.

Also, the holding period of the wash sale securities is added to the holding period of the replacement securities.

Do this enough times, and you will eventually make it to the safety and the lower 20% tax rate for long-term capital gains. In this manner, the Wash Sale Rule then becomes a convenient tax avoidance scheme, although it was certainly never intended as such.

So the losses ARE deductible at the end of the day. You just have to get your accountant to undergo some mental gymnastics and file the appropriate IRS Form 8949 to claim them indirectly.

He?ll charge you for the extra time. But at the end of the day, it is worth it.

As I am an ?active trader? to say the least, in my case these filings go on for dozens of pages. As a result, my annual tax return looks like the New York City telephone book.

Actually, I?m told it?s the same length as the corporate return filed by IBM.

Now here are some warnings and provisos for the average taxpayer.

If you use your friendly neighborhood tax preparer, one of the discount firms like H&R Block or Jackson Hewitt, or your fraternity brother from college using TurboTax to file your annual return, they may not know how to handle Wash Sales correctly.

You could well get stuck with the full loss because of their ignorance.

So if you are an active trader yourself, or are dealing in large dollar amounts, I would recommend hiring an accountant who specializes in securities trading.

They will have all of the detailed knowledge readily at hand of the many obscure, arcane tax laws regarding securities trading, know of the recent relevant opinion letters issued by the IRS, and will be well aware of court cases regarding these issues.

Experts such as these can be found in abundance in New York and Chicago. They are easy to find on the Internet. Go to it.

Having spent 45 years dealing with tax matters, and devoting 10 years writing a weekly international tax column for the London Financial Times, I can tell you this is not a new problem.

Ignorance of tax problems outside of the plain vanilla questions is rife, even among accountants (yes, Sunday church deductions are tax deductible. Just make them by check so you leave an auditable paper trail).

There is no living person who knows what?s in the entire 100,000 pages of the Internal Revenue Code, not even the IRS itself.

That?s a scary thought.

During the 1980s, the IRS sent an agent to England every year just to audit me because I was one of the ten highest earning Americans in the country.

For the last audit they sent a frumpy, bespectacled agent who had just spent a month auditing roustabouts on drilling platforms offshore from Louisiana, a notorious source of tax avoidance.

She didn?t have a clue about how to interpret my multicurrency convertible home mortgage on my London mansion, so we spent the afternoon at the American embassy planning her European vacation to follow.

I think I heard the CIA torturing someone in the next room.

Similarly, when I went into the oil and gas business in the 1990s, no California accountant could explain the tax benefits of that industry. I had to go to Houston to learn that, and what I discovered was a real eye opener.

Why isn?t everyone in the oil and gas business?

To learn about my last run in with the IRS, read ?The Letter From the IRS You Should Dread?.

For more background on the IRS, read ?Happy Birthday IRS?.

To get the official explanation of the Wash Sale Rule in the IRS?s own turgid, soporific bureaucratese, IRS Publication 550, see ?Investment Income and Expenses (Including Capital Gains and Losses)?.

Watch Out for the ?Wash Sale? Rule

September 8, 2016/by Mad Hedge Fund Trader

Biotech and Health Care Stocks to Buy at the Bottom

Diary, Newsletter, Research

One has to be truly impressed with the selloff in biotech and health care stocks over the past year.

Since May, there were signs that life was returning to this beleaguered sector. Then Mylan decided to raise the prices of it's EpiPen by 400% and it was back to the penalty box.

Let?s gouge poor small children who may die horrible deaths if they can?t afford our product. That sounds like a great marketing and PR strategy. NOT!

Once the top performing sectors of 2015, they went from heroes to goats so fast, it made your head spin.

What I called ?The ATM Effect? kicked in big time.

That?s when frightened investors run for the sidelines and sell their best stocks to raise cash. After all, no one wants to sell other stocks for a loss and admit defeat, at least in front of their clients.

It?s not that the companies themselves were without blood on their hands. Valuations were getting, to use the polite term, ?stretched? after a torrid five-year run.

Gilead Sciences (GILD) soaring from $18 to $125?

Celgene (CELG) rocketing from $20 to $142?

It has been a performance for the ages.

If a financial advisor wasn?t in health care, chances are that he is driving for Uber in a bad neighborhood by now.

Then there was The Tweet That Ate Wall Street.

Presidential candidate Hillary Clinton made clear in a broadcast on September 21, 2015 that the health care industry would be target number one in her new administration.

Her move was triggered by an overnight 5000% price hike for a specialty HIV drug by a minor player in the industry.

Among the reforms she would implement are:

1) Give the government power to negotiate drug purchases with the industry collectively.
2) Allow Medicare to import drugs from abroad to encourage price competition (which I already do with my annual trips to Switzerland).
3) Ban drug companies from using government grants to pay for sales and advertising.
4) Set an out of pocket limit for drugs bought through Obamacare at $250 a month, thus ending customers? blank checks.
5) Set a 20% of revenue minimum which companies must spend on research and development.

She certainly got our attention.

Competition in the drug industry? Yikes! Not what the shareholders had in mind.

Raise your hand if you think Americans aren?t paying enough for their prescription drugs.

Yes, I thought so.

Drug company CEOs aren?t helping their case by flying to press conferences to complain about the proposals in brand new $65 million Cessna G-5?s.

And that Mylan CEO, Heather Bresch? She took home $18 million last year, and she?s just a kid.

Here?s the key issue for health care and biotech for investors. It all about politics.

Even if Hillary does get elected, the government is likely to remain gridlocked for another 4-8 years. The Democrats will almost certainly retake the Senate in 2016, thanks to a highly favorable calendar, and keep it for at least two years.

But the heavily gerrymandered House is another story.

With the current districting map, the Democrats would have to win 57% of the national vote for them to regain a majority in both houses.

That is a feat even Barack Obama could not pull off in 2008, when a perfect storm in favor of his party blew in.

A Hillary appointed liberal Supreme Court could bring an end to gerrymandering, but that is a multiyear process. Texas hasn?t had a legal districting map since 2000.

Even with Democratic control of congress, Hillary won?t get everything she wants.

Remember, Obamacare passed by one vote only after a year of cantankerous infighting, and then, only when a member changed parties (Pennsylvanian Arlen Spector).

That means few, if any, Clinton proposals will ever make it into law. If they do, they will be severely watered down and subject to the usual horse-trading and quid pro quos.

Beyond what she can accomplish through executive order, her election may be largely symbolic.

Therefore, the biotech and health care stocks are a screaming ?BUY? at these levels, provided you ignore Mylan (MYL), now the poster boy for corporate greed.

It?s a political call I can only make after spending years in the White House and a half century following presidential elections.

It?s easy to understand why these stocks were so popular, and are found brimming to overflowing in client portfolios and personal 401ks and IRAs.

We are just entering a Golden Age for biotech and health care.

Profit growth for many firms is exceeding 20% a year. Hyper accelerating biotechnology is rapidly bringing to market dozens of billion dollar earning drugs that were, until recently, considered in the realm of science fiction.

And we have only just gotten started. Cures for cancer, heart disease, arthritis, diabetes, AIDS, and dementia? You can take your pick.

Most biotech and health care stocks have given up all of their 2015 gains. Here is a chance to hoover up the fastest growing companies in the US at 2014 prices.

If you missed biotech and health care the first time around, you?ve just been given a second chance at the brass ring.

Here?s a list of five top quality names to get your feet wet:

Gilead Sciences (GILD) ? Has the world?s top hepatitis cure, which it sells for $80,000 per treatment. For a full report, see the next piece below.

Celgene (CELG) ? A biotech firm that specializes in cancer cures (thalidomide) and inflammatory diseases. It also produces Ritalin for the treatment of ADHD.

Allergan (AGN) ? Has the world?s third largest low cost generic drug business. In addition, it has built a major portfolio of drug therapies through more than two dozen acquisitions over the last decade.

Regeneron (REGN) ? Already has a great anti-inflammatory drug, and is about to market a blockbuster anti cholesterol drug that will substantially reduce heart disease.

HCA Holdings (HCA) ? Is the world?s largest operator of for profit health care facilities in the world.

If you want a lower risk, more diversified play in the area, you can buy the Health Care Select Sector SPDR (XLV). Please note that a basket of stocks is going to deliver a fraction of the volatility of single stocks.

Therefore, we have to be more aggressive with our positioning to make any money, picking call option strikes that are closer to the money.

Johnson and Johnson (JJ) is the largest holding in the (XLV), with a 12.8% weighting, while Gilead Sciences (GILD) is the fourth, with a 5.1% share. For a list of the largest components of this ETF, please click: https://www.spdrs.com/product/fund.seam?ticker=XLV.

The other classic play in this area is the Biotech iShares ETF (IBB) issued by BlackRock (click their link: https://www.ishares.com/us/products/239699/ishares-nasdaq-biotechnology-etf ).

Their largest holding is Biogen (BIIB), followed by Gilead Sciences (GILD), Celgene (CELG), Amgen (AMGN), and Regeneron Pharmaceutical (REGN).

I?ll be shooting out Trade Alerts on biotech and health care names as soon as I think the coast is clear.

Until then, enjoy the ride!

Say You Were A Biotech Investor, Did You?

September 2, 2016/by Mad Hedge Fund Trader

Why Activist Investors Have the Upper Hand

Diary, Newsletter, Research

Having been in this market for yonks, ages, and even a coon?s age, I have seen trading strategies come and go.

First, there was the nifty fifty during the 1960?s. Junk bonds had their day in the sun. Then portfolio insurance was all the rage.

Oops!

While the dollar was weak, international diversification was the flavor of the day. After foreign stocks turned bitter, the IPO mania and the Dotcom bubble of the nineties followed.

Macro trading dominated the new Millennium until the high frequency traders took over.

What is the cutting edge management strategy today?

According to my friend, Anthony Scaramucci, of Skybridge Capital, activist shareholder trading now has the unfair advantage.

Anthony, known as the ?Mooch? to his friends, is so convinced of the merit of this bold, in-your-face approach that he has devoted nearly 40% of his assets to this aggressive posture.

That is no accident.

Have you ever heard the term ?unintended consequences?? Scaramucci argues that The Financial Stability Act of 2010, otherwise known as Dodd-Frank produced that effect with a turbocharger.

The Act brought in a raft of new shareholder rights intended to help Mom & Pop. But activist investors have, so far, been the prime beneficiaries of the reform, using the new regulations to shake down companies for quick profits.

Historic low interest rates are allowing them to leverage up at minimal cost, increasing their firepower.

These include known sharks (once spurned as ?green mailers?) like my former neighbor, Carl Icahn, and his younger, more agile competitor, Bill Ackman.

They can simply buy a small number of shares in a target company and demand a management change, share buy backs, the spinning off of assets, several seats on the board, and even making allegations of criminal activity, which are often unfounded.

A message from Icahn on the voicemail is not something management is eager to hear.

He even shook down Apple (AAPL) last year, with great success, harvesting a near double on the trade.

This is why names like Herbalife (HLF), Netflix (NFLX), and JC Penny?s (JCP) are constantly bombarding the airwaves.

The net result of this is that savvy activist shareholders have effectively replaced the traditional ?buy and hold? strategy as a way to add alpha, or outperformance.

This has enabled activist oriented hedge funds to beat the pants off of traditional macro hedge funds because many historical cross asset relationships they follow have broken down.

Tell me about it!

Suddenly, the world no longer makes sense to them and has apparently gone mad, at the investors? expense. Long/short equity managers, which comprise 43% of the funds out there, are also underperforming for the sixth consecutive year.

The activist managers themselves justify their often harsh actions by arguing that individual shareholders can ride to riches on their coattails. Shaking up management can result in better-run companies, even if it is at the point of a gun.

Activism accelerates evolution, breaks up clubby boards of insiders, and enhances the bottom line. Corporations can be forced to retool and restructure.

How does the individual investor get involved in the new wave of activist investors? The short answer is that they don?t. There are few, if any, such exchange traded funds (ETFs) in existence.

Doing the quantitative screens to generate short lists of potential activist targets, and then listening to the jungle telegraph regarding who is coming into play, are well beyond the resources of your average Joe.

You can try to give your money to the best activist managers. But they are either closed to new investors, or have very high minimum initial investments, often in the $1-$10 million range.

If you are lucky enough to get your dosh in, you will find the talent very expensive. Activist funds are one of the last redoubts of the old 2%/20% management fee and performance bonus structure. And ?hockey stick? bonus schedules are not unheard of.

When I ran my old hedge fund, we made 40% a year like clockwork. I took the first 10%, the limited partners the remaining 30% and they were thrilled to get it.

And you wonder why the small guys feel the market is rigged.

The activist trend won?t last forever. Interest rates will inevitably rise, making the strategy expensive to finance. If the stock market keeps rising, as I expect, then cheap targets will become as scarce as hen?s teeth.

Eventually, gobs of money will pour into the strategy, compressing returns as the Johnny-come-latelys pile in. In the end, trading around activist shareholders will get tossed into the dustbin of history, along with all the other investment fads.

Checking in With the ?Mooch?

July 19, 2016/by Mad Hedge Fund Trader

Is the 30-Year Mortgage an Endangered Species?

Diary, Newsletter, Research

One of the great anomalies of the American credit markets has always been the existence of the 30-year fixed rate home mortgage.

Long the favorite of homeowners, it has financed the majority of US residential property purchases since a Depression era housing stimulus program created them in 1938.

That is until now.

A perfect storm of institutional, political and economic factors is conspiring to bring an end to this type of loan.

Is it truly going the way of the dodo bird?

Look at the global credit landscape, and the 30 year fixed rate loan exists nowhere else.

Banks in all other countries only offer floating rate loans, where interest rates are adjusted monthly, quarterly, or annually to reflect the ebb and flow of the bond market. Thus, the homeowner assumes all of the interest rate risk.

So if you borrow money to buy a house and interest rates remain unchanged or fall, then so does your monthly payment. If rates rise, then so does your monthly nut. If they rise a lot, then you are toast.

The 30-year fixed only exists thanks to a massive government subsidy. That comes in the form of two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.

They buy home mortgages from banks, securitize them, and sell them on to end investors with a government guarantee. Thus the government took all the credit risk off of the banks and on to their own books. At the peak, the pair owned or guaranteed more than $5 trillion in debt.

And therein lies the problem.

When the 2008-2009 financial crisis came storming in, it didn?t take long for many of GSE?s home loans to default.

Thanks to the credit excesses of the 2000s, liars loans, and excess leverage, it turns out that many of the loans sold to them as prime credits were in fact junk. The default rates of some mortgage-backed securities exceeded 50%.

It didn?t take long for the GSEs' capital to get completely wiped out. They effectively declared bankruptcy (the polite term used was conservatorship), and were only kept alive with a $360 billion government bailout.

Private shareholders in the two were wiped out, and the stocks delisted from the NYSE.

At present, the two GSE?s are stuck in a holding pattern, waiting for congress to decide their fates. Fat chance of congress deciding on anything in its current gridlocked state.

At the very least, they require $150 billion in new capital to operate independently once again. However, congress is in no mood to spend money either.

Many analysts expect that it is just a matter of time before the two GSEs disappear. The daggers are certainly out in Washington, where many see them as just another subsidy or entitlement program, which they are.

Wipe out the GSEs, and you kill off the 30 year fixed rate mortgage, and by implication, the residential housing market as well.

This is happening two years after the Federal Reserve is ending its quantitative easing program, which, at it's highs, bought 50% of all the mortgage backed securities issued, or about $40 billion a month.

A privatized 30-year market would probably boost rates by 200 basis points, up from the present 3.40% to 5.40%, or about what your average subprime borrower might have to cough up.

That means monthly mortgage payments that are 50% higher than now. That is unless you have a near perfect FICO score of 750 or higher, and are willing to move all of your current financial transactions to the new lender.

However, the banks are likely to step in with other products like a 5/1 year adjustable rate mortgage, or just outright floaters to fill the gap.

As long as the world remains in a deflationary funk, the prospects of a serious rate spike are extraordinarily? low. The end result will be more risk for consumers, and less for the banks?.and the government.

In any case, with some 40% of today?s buyers paying all cash, the debt markets are less relevant than they used to be.

The 30-year is a bit of a dinosaur. The average holding period for a home is four years, and I never understood why borrowers paid the extra premium for the 26 years worth of debt they didn?t need. I guess it's because that?s what everyone else does.

It is most efficient to match your loan maturity with the time you expect to stay in your house. Five year loans should cover most of us, and certainly ten years. Shorter-term loans carry interest rates 100-150 basis points cheaper than the 30-year fixed.

This is all another facet of an economy that is evolving at an accelerating rate. It is finding the true value of everything and re-pricing them accordingly at hyper speed.

Think Amazon and books, iTunes and music, Netflix and movies and Ebay and clothes. Suddenly things have gone from expensive to cheap, while others make the trip from artificially cheap to expensive.

The 30-year fixed rate loan is about to make that second trip.

Fannie Mae is Not Long for This World

July 11, 2016/by Mad Hedge Fund Trader

The Ten Baggers in Solar Energy

Diary, Newsletter, Research

What we are seeing now is nothing less than the complete remaking of the American energy supply.

It is a metamorphosis, just as, if not more, dramatic than the initial electrification of the United States launched by Thomas Edison in 1876.

Think of it as a disruptive technology with a turbocharger.

Eventually, the cost of energy will drop to near zero in today?s terms, possibly as soon as 2035. The consequences for your trading and investment portfolio will be tectonic.

This is what people don?t get about solar.

Traditional forms of energy production and consumption, such as for oil, coal, natural gas, and hydroelectric, are subject to only linear improvements. Solar ones benefit from exponential growth.

There is, in effect, a solar Moore?s Law that sees efficiencies per dollar spent doubling every four years, such as we have already seen with the faster growth of microprocessor efficiencies since the 1960?s. Exponential growth of efficiencies will bring exponential growth of profits.

I am old enough to have lived through several solar booms in the past, only to see them crash and burn.

In 1979, President Jimmy Carter installed panels on the White House roof to provide leadership during the Iran oil crisis, only to see them torn down by President Ronald Reagan three years later.

Solar is now growing far faster than any other power source in the US, some 50% a year for the past six years.

Annual installations of photovoltaic panels have soared from a token 0.3 gigawatts in 2000 to an impressive 7.286 gigawatts in 2015, more than enough to fuel 8.5 million American homes.

California alone now has 500,000 homes running on solar, about 4% of the total. Installation trucks from a myriad of different local companies are seen everywhere.

This is all happening because of the simultaneous maturing and cross-pollination of technology, regulation, financing, and venture capital.

A key development was Chinese entry into mass production of solar panels, which led to a near immediate 80% collapse in prices. They now control 70% of the global market.

But this also led to the bankruptcy of a large number of US producers, including the ill-fated Solyndra, which I drive by every time I visit Tesla.

Chinese exports of panels to the US are now subject to anti dumping duties. This was all a windfall for the installation business.

Also helping has been the 90% collapse in the price of polysilicon, a key manufacturing component. Silicone (Si) is, in fact, one of the most common elements on the planet.

Still, the soft costs of sales, design, permitting, and labor, account for two thirds of a new installation today. By the way, solar has also proven a prolific new job creator. I can assure you, the cost of labor is never going to zero.

Some 15 years ago, I tried to install solar on my home and sell peak power to the grid. PG&E told me this was ?illegal? because I would crash the grid, something I knew was patently false.

This time around, my city permits sailed through effortlessly, and I received a polite email from PG&E instructing me how to read my new ?net metering bill?. I wish renewing my driver?s license was so easy (that damn vision test).

For the first time in history, solar power is now cheaper than grid power on a non-subsidized basis. Costs are set to still fall dramatically from here. Fossil fuels are about to become, well, fossils.

The Paris based International Energy Agency, no slouch when it comes to analyzing power data, predicts that solar will account for 27% of the global power supply by 2050, and will become the biggest single source.

But futurologist friends of mine, like Tesla?s (TSLA) Elon Musk, Google?s head of engineering, Ray Kurzweil, and cosmologist Dr. Stephen Hawking, believe there is no reason why it shouldn?t be at 100% by 2030-35. To quote Kurzweil, ?we are only six more doublings away.?

Google (GOOG), by the way, is already one of the world?s largest generators and distributors of solar power, while Musk is the preeminent installer through his participation in Solar City (SCTY).

Governments have been pouring fuel on the solar fire. Germany took an early lead, installing a massive 35 gigawatts over the past decade. It has since decided to shutter its entire nuclear industry, and offset its production with alternatives. But many of its subsidy programs were deep sixed by the crash.

President Obama made a 30% investment tax credit a central plank of his 2009 supplementary budget, which led to the current American solar renaissance.

That incentive expires in 2021, after getting a five year extension in a rare bipartisan deal in congress.

President Obama also upped the ante by using the Environmental Protection Agency to force power utilities to cut carbon emissions by 32% from 2005 levels. That involves setting a target of 28% alternative energy power generation by 2030.

The whole idea of using natural gas as a low carbon stepping stone has been abandoned.

Hillary Clinton has recently weighed in with her own plans to shift the country from a carbon to a solar energy based economy, if elected president.

She wants nothing less than to eliminate all oil and gas subsidies worth $100?s of billions, and shift the money to alternatives.

That is a radical move. Her goal is to increase the solar share of American power generation to 33% by 2027.

Individual states have weighed in with their own measures. California has mandated that its residents obtain 30% of their power from alternatives by 2020.

More than two dozen other states have followed with similar measures, including several red ones. Solar is starting to transcend the political spectrum; the numbers are so compelling.

This isn?t just a US phenomenon, but a global one. Saudi Arabia has two of the world?s largest solar plants on the drawing board, to produce some 2 megawatts.

After all, why burn $5 oil when you can sell it to foreigners (mostly the Chinese) at an extravagant $50 a barrel. They are also major investors in the San Francisco alternative energy scene.

China is building far and away the biggest solar infrastructure, and wants to build 70 gigawatts over the next two years.

Japan has a 20% solar target, thanks to the Fukushima nuclear disaster. India plans to provide cheap electricity via solar to 100,000 villages for the first time.

Improving solar cell efficiencies promises to take us further and faster into this brave new world.

My own SunPower (SPWR) X-335 panels, with their patented Maxeon solar cells, convert 20.3% of the sunlight they receive into electricity, the highest in the industry. Cheap imported Chinese panels offer efficiencies as low as 16% and don't last nearly as long.

University labs have perfected cells with 45% efficiencies using advanced silicon compounds. I happen to know that the military has a 65% efficient cell. All that remains are the economies of mass production to bring them to the public market.

This is crucial for the solarization of the global economy. Every 1% improvement in efficiencies cuts that total cost of a new installed system by 5%.

With the trends already in place, it is safe to assume that solar energy costs will fall by at least 10% a year for the foreseeable future. First Solar (FSLR), which specializes in large scale, thin film, industrial facilities, expects solar costs to plunge from 63 cents per kilowatt in 2014 to only 40 cents by 2017.

Storage is another key part of the equation, as panels alone can only produce electricity during daylight. The cost of home storage batteries, which are charged by day and can run a home at night, have dropped by 70% over the
past five years.

They could drop another 70%, once Solar City completes its Nevada Gigafactory in 2017. That will double the planet?s lithium ion battery capacity in one shot. A second plant is planned.

For a more detailed explanation of that technology and the investment opportunities therein, please click here for Solar Energy?s Missing Link.

What are the investment implications of all this? Clearly all of the companies mentioned in this piece are about to see their market size increase 30 fold.

But, what about everyone else?

The elimination of energy as a cost has enormous consequences for all companies. You can start with the energy intensive ones in transportation, steel, and aluminum, and work your way down the list.

The profitability and efficiency of the entire economy will take a great leap forward, much like we saw with the mass industrialization that was first made possible by electricity during the 1920?s. Share prices of all kinds will go ballistic.

Dow 200,000 anyone?

Since energy costs will eventually fall effectively to zero, that wipes out the present business model of the entire electric power industry. It will be the same as trying to sell something that is free, like air.

That will force them to morph from energy producers to power distributors. Watch this space for a future piece on this issue.

So when readers ask me for the names of shares of companies that have the potential to rise tenfold in ten years, this is one industry I always steer them towards.

To save yourself months of research on how to install your own solar system, please click here for How to Buy a Solar System.