Mad Hedge Technology Letter
July 19, 2018
Fiat Lux
Featured Trade:
(AVOIDING THE BULLY),
(MSFT), (AMZN), (WMT), (GME), (ORCL), (GE), (CPB)
Posts
A bully stealing your lunch is not fun.
Partnering up to subdue a bully isn't only happening on the school playground.
Walmart (WMT) is doing it now, too.
Let me explain.
The Amazon (AMZN) effect is understood as the disruption of traditional brick-and-mortar business by Amazon's domination in e-commerce sales.
This phenomenon was all about how Amazon would take over, and by all means they are, and in brisk fashion.
That is why Amazon trade alerts from the Mad Hedge Technology Letter are nestled away in your email inbox.
Desperate times call for desperate measures.
Amazon competitors are facing an existential crisis they have never seen before.
The newest member of the FANG group, Walmart, is transforming into a tech company, and this metamorphosis is picking up steam.
To read my recent story about Walmart's headfirst dive into India, the newest battleground country, by way of its purchase of Indian e-commerce juggernaut Flipkart, please click here.
The second part of its strategy was revealed by announcing that Walmart would partner with Microsoft's (MSFT) cloud platform Azure to tap into the deep A.I. (artificial intelligence) and machine learning expertise.
If you can't beat them, find another competitor to help you change the status quo.
The five-year deal is a game changer in a coveted cloud industry pitting David vs. Goliath.
Amazon's footprint is wide reaching and bosses 33% of the cloud market it invented, far and away surpassing runner-up Microsoft, which garners just 13% market share.
Microsoft is catching up fast and that 13% was just 10% in 2016.
Microsoft and Walmart have a common foe that haunts them in their dreams.
These companies feel they are better served combining forces than being isolated from each other.
In an exclusive Wall Street Journal interview with Satya Nadella, Microsoft's CEO, Nadella directly confirmed what people already knew.
This strategic move "is absolutely core to this (Amazon threat)."
Walmart will use Microsoft's advanced cloud technology to optimize its operations from managing inventory, selecting the most suitable products to display, and running its equipment efficiently.
In 2016, Walmart's purchase of e-commerce company Jet.com was thoroughly integrated onto the Microsoft Azure. This further cooperation will help boost a company that has been aggressively vocal about its tech exploits.
High-quality products sell themselves and the story has played itself over again.
Microsoft is a master at luring in business through the front door, and padlocking the front gate procuring business for decades.
This case is no different and a vital reason the Mad Hedge Technology Letter has pinned down Microsoft as a top three tech stock.
Walmart also has made it crystal clear that a prerequisite for doing business with them is not doing business with Amazon Web Services (AWS), Amazon's lucrative cloud division.
Any profit dropping down to the (AWS) bottom line is used to wield against the retail landscape, damaging Walmart's prospects.
The Amazon effect is starting to work against Amazon, as the threat is forcing other businesses to adopt the same mind-set as Walmart.
Snowflake Computing, a private data firm focused on warehouse databases established by Bob Muglia in 2014, was exclusively available on the AWS platform.
However, more and more retailers such as Walmart started banging on Snowflake Computing's door demanding that it offer its cloud services on a cloud platform that is not its competitor.
Snowflake Computing obliged and is now up and running on Microsoft Azure.
Can you imagine the competition being able to sift through troves of data understanding every strength and weakness?
It's a one-way street to bankruptcy court.
Perhaps that explains why GameStop (GME) is such a poor performer, as its operations are entirely on (AWS).
GameStop is a stock that I am bearish on, because selling video games as a middleman is a legacy business.
Kids just download everything direct from the manufacturer from their broadband connection, making GameStop's business model obsolete.
It has a turnaround plan, apparently Oracle (ORCL) has one too, but it's barely begun.
Microsoft is a bad choice as well for GameStop, which is heart and center in the video game industry as well.
There are many alternatives; someone should notify recently installed GameStop CEO Daniel A. DeMatteo about one.
(AWS)'s dominance is benefitting Microsoft Azure explaining the rapid pace of cloud market share advancement.
This is just the tip of the iceberg. Walmart has some other irons in the fire.
Enter Project Kepler.
This is Walmart's response to Amazon Go stores, a partially automated retail store with no cashiers or checkout station, which currently has one functional location in Seattle.
Project Kepler is being developed by Jet.com co-founder and CTO Mike Hanrahan. And guess who is providing the technology for this alternative retail experience store - Microsoft.
Microsoft poached a computer vision specialist from Amazon Go who will help develop the appropriate sensors and computer vision algorithms necessary to get this store up and running.
These same sensors can be found in autonomous driving technology.
Shopping cart cameras could also be added to the mix to ensure quality and hopefully avoid the teething pains new technology grapples with.
Microsoft Azure CTO Mark Russinovich commented lately saying firms are on the front foot utilizing "A.I. and machine learning to automate processes to get insights into operations that they didn't have before."
Microsoft is perfectly set up to harvest many of these new contracts.
The deals have started to roll in.
Microsoft is successfully broadening its relationship with GE (GE), using the Azure data analytics capabilities to transform GE Digital's industrial IoT solutions.
This week also saw Microsoft scoop up Campbell Soup Company (CPB) as a new client, which decided on Microsoft Azure to modernize its IT infrastructure.
Campbell Soup will deploy Azure for real-time access to critical operations data, offering deeper intelligence for Campbell's senior management team.
This robust business activity is all because Microsoft is not Amazon, along with having a stellar product about which companies gloat.
Retailers have chosen Microsoft as the cloud platform of choice and expect the majority of retailers to tie their futures to Microsoft.
That's not the only iron in the fire.
Jetblack is another experimental retail service that Walmart is testing as we speak.
The service is still in beta mode in Manhattan targeting urban, high net worth mothers.
It emphasizes a personalized shopping experience in a narrow segment of goods that include household products, cosmetics, health and beauty products.
Shoppers will be able to snap photos of products and send them to Jetblack, receiving them at home with free shipping.
Customer service will be carried out by a high-quality lifelike bot, and Walmart intends to charge a membership fee to take part in this specialized shopping experience.
Microsoft subsidiary LinkedIn has also been leaning more on its parent company's technology lately.
LinkedIn software engineer Angelika Clayton wrote in her blog that "dozens of languages" are being converted into English via Microsoft Translator Text application programming interface, ballooning the candidate database for English speaking headhunters.
Could foreign language learning soon go way of the dodo bird and woolly mammoth?
Machine learning and A.I. have that type of power.
Tech analysts on the street must avoid issuing reports boasting that "everything is priced in," because these tech behemoths are driving innovation faster than people can understand it.
Walmart has turned into one of the most innovative companies around.
Who would have imagined this development a few years ago?
Nobody, not even Walmart itself.
Everything Microsoft touches lately turns into gold, along with being one of the more trusted tech titans out of the motley crew that has ruffled a few feathers this year.
Walmart is aggressively experimenting, systematically attempting to hop on new trends in retail hoping one or two will catch fire.
The credit must go to CEO Doug McMillon who has brought a tech first approach since being installed as CEO in 2014.
Even though conservative Walmart investors have penalized Walmart for the heavy spending, they must come to terms that Walmart's model is plain different now.
It's either spend or die in 2018.
Microsoft is in store to report its status on its pursuit of AWS, and I expect the company to inch closer with each earnings report.
Its outperforming Azure cloud business is in the first stages of a marathon, and sometimes it's not always salubrious to be the schoolyard bully because everybody starts avoiding you like the plague.
________________________________________________________________________________________________
Quote of the Day
"They broke the law on several occasions after being warned," said Larry Kudlow, director of the United States National Economic Council, when asked about Chinese company ZTE, which sold telecommunications equipment to Iran and North Korea.
Global Market Comments
June 25, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR IS THIS A 1999 REPLAY?),
(AAPL), (FB), (NFLX), (AMZN), (GE), (WBT),
(JOIN ME ON THE QUEEN MARY 2 FOR MY JULY 11, 2018 SEMINAR AT SEA),
(JUNE 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(SQ), (PANW), (FEYE), (FB), (LRCX), (BABA), (MOMO), (IQ), (BIDU), (AMD), (MSFT), (EDIT), (NTLA), Bitcoin, (FXE), (SPY), (SPX)
Another week, another trade war.
The stock market did not take well the administration's escalation of international tensions by threatening to increase Chinese imports subject to punitive duties from $50 billion to $250 billion.
Today, it got much worse with our government now targeting French luxury goods, including wine, handbags, and Roquefort cheese.
Please! Anything but the Roquefort cheese!
In the meantime technicians are getting increasingly nervous about the market concentration. Take out the top-performing 15 stocks, such as big tech and Boeing (BA) and we are already in a bear market. Some 60% of S&P 500 stocks are below their 200-day moving averages and in solid downtrends.
One manager told me that a year from now we will be kicking ourselves for not selling, for all the signs to get out of Dodge were there.
In the meantime, I am hearing an alternative theory about technology stocks. The earnings growth is so prolific that they could continue to melt up for the rest of 2018. Indeed, Amazon (AMZN), Facebook (FB), Netflix (NFLX), and Salesforce (CRM) all hit new all-time highs this week.
Tech stocks are melting up because of blowout earnings expected in a month. After all, in this industry great quarters are followed by more great quarters.
By my calculation the shares prices of technology stocks have to double to bring their market capitalization of only 26% in line with their 50% share of the S&P 500 total earnings.
By the way, California now accounts for 19% of the U.S. population, 21% of U.S. GDP, but a staggering 35% of corporate profits, with two of four FANGs just spitting distance from my office.
Holy smokes! Are we seeing a replay of 1999, the notorious dot-com bubble top?
I hope not. Tech earnings multiples now average 25X compared to 100X back in the day. But this analysis does neatly fit in with my prediction that stocks top in the May-September 2019 time frame.
Last week also saw the shares of General Electric (GE) tossed on the ashcan of history, and the stock was taken out of the Dow Average, to be replaced by sedentary drug store Walgreens (WBA).
That's what a decade of lousy management gets you, which has vaporized a half trillion dollars of market capitalization since 2000. Back then, GE was the largest market cap company in the world, the equivalent of Apple (AAPL) today.
During this same time Apple created $900 billion in new market cap, the shares rocketing from $2.50 to $195. What a trade! Long Apple, short (GE) for 18 years.
As for Apple, it is unique among the FANGs in having the biggest exposure to China. It employs 1 million there, sells more iPhones in the Middle Kingdom than in the U.S., and is crucial to the company's long-term growth plans. The rest of the FANGs have virtually NO China exposure.
This realization caused me to stop out of my position in Apple shares for a loss during its $12 plunge off its all-time high at $195. That brought my 2018 year-to-date performance down to 24.91% and my 8 1/2 year return to 301.38%.
Fortunately, aggressive longs in Amazon, Salesforce, Microsoft, and the iShares Nasdaq Biotechnology ETF (IBB) still have me up +4.54% in June, my 12th consecutive positive month.
This coming week will be all about the May real estate and housing data, which we already know will be hotter than a pistol.
On Monday, June 25, at 10:00 AM, May New Home Sales are out.
On Tuesday, June 26, at 9:00 AM, the S&P CoreLogic Case-Shiller National Home Price Index for April is released. May Consumer Confidence is out at 10:00 AM.
On Wednesday, June 27, at 8:30 AM, May Durable Goods is published. May Pending Home Sales are out at 10:00 AM.
Thursday, June 28, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 3,000 last week to 218,000. Also announced is another read on US Q1 GDP. The last report came in at a moderate 2.2%.
On Friday, June 29, at 9:45 AM EST, we get the May Chicago Purchasing Managers Index. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, I will be headed to Los Angeles for my one beach weekend this year. Got to keep those body surfing skills finely tuned, and I'll have a chance to work on my tan before going to sea for a week in July.
In California it's all about the tan.
Good Luck and Good Trading.
Global Market Comments
May 25, 2018
Fiat Lux
Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(MAY 23 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (SPY), (TSLA), (EEM), (USO), (NVDA),
(GILD), (GE), (PIN), (GLD), (XOM), (FCX), (VIX)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader May 23 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: Would you short Tesla here?
A: Tesla (TSLA) is on the verge of making the big leap to mass production, so they're in somewhat of an in-between time from a profit point of view, and the burden of proof is on them. Elon Musk is notorious for squeezing shorts. I would not want to bet him.
Musk has been successfully squeezing shorts for 10 years now, from the time the stock was at $16.50 all the way up to $392. So, I would not short Tesla. Buy the car but don't play in the stock; it's really a venture capital play that happens to have a stock listing because so many people are willing to back his vision of a carbon-free economy.
Q: What is your takeaway on the China trade war situation?
A: The Chinese said "no," and that is positive for economic growth. Anything that enhances international trade is good for growth and good for the stock market; anything that damages international trade is bad for corporate earnings and bad for the stock market. So, the China win in the trade war is essentially positive, but I don't think we'll see that reflected in stock prices until the end of the year.
Q: What do you think about Gilead Sciences?
A: I don't really want to touch Gilead (GILD), or the entire sector, for that matter. We shouldn't be seeing such a poor performance at this point in the market. Health care has been dead for a long time, and you would have expected a rally based purely on fundamentals; they are delivering good earnings, it's just not reflected in the price action of the stocks. I think with no new money going into the market, there's nothing to push up other sectors; it's really become a "technology on and off" market. Health care doesn't fit anywhere in that world.
Q: Do you still like Nvidia?
A: I love Nvidia (NVDA). The chip sector still has another year to go. Nvidia has the high value-added product, and I'm looking for $300 dollars a share sometime this year/next year. The reason the stock hasn't really been moving is that it's over-owned; too many people know about the Nvidia story, which continues to go "gangbusters," so to speak. The chairman has also put out negative comments on short-term inventories, which have been a drag.
Q: Treasuries (TLT) are over 3%. Will they go over 3.5% by then end of this year?
A: I would say yes. Since that is only 50 basis points away from the current market, I would say it's a pretty good bet. So, if you get any good entry points you can do LEAPS going out to next year, betting that Treasuries will not only be below $116 by the end of the year, but they'll probably be below 110. And that would give you a very good high return LEAP with a yield of 50% in the next, say 8 months. By the way, if the Treasury yield rises to 4% that takes the (TLT) down to $98!
Q: Any chance General Electric will be acquired this year?
A: Absolutely not. General Electric (GE) worth far more if you break it up into individual pieces and sell them. Some parts are very profitable like jet engines and Baker Hughes, while other parts, like their medical insurance exposure, are awful.
Q: What do you see about the India ETF?
A: The one I follow is the PowerShares India Portfolio ETF (PIN) and we love it long term. Short term, they can take some pain with the rest of the emerging markets.
Q: What should I do with my January 2019 Gold calls?
A: I would sell them. It's not worth hanging on to here with too many other better things to do in stocks.
Q: Would you continue to hold ExxonMobile?
A: I would not. If you were lucky enough to get in at the bottom on ExxonMobile (XOM). I would be taking profits here. I'm not sure how long this energy rally will last, especially if the global economic slowdown continues.
Q: Is Freeport-McMoRan (FCX) a buy?
A: Yes, but only buy the dip in the recent range, so you don't get stopped out when the price goes against you. Commodities are the best performing asset class this year and that should continue.
Q: How high is oil (USO) headed?
A: I think we're probably peaking out short of $80 a barrel currently unless we get a major geopolitical event. Then it could go up to $100 very quickly and trigger a recession.
Q: Are you looking to buy the Volatility Index here?
A: Buy the next dip, but the trick with (VIX) is buying after it sits on a bottom for about five days. You also want to buy it when stocks (SPY) are at the top of a range, like yesterday.
Q: How long do you think the market will be range-bound for?
A: My bet is at least three months, and possibly four or five. We should start to anticipate the outcome of the midterm congressional elections in September/October; that's when you get your upside breakout.
Q: Is Gold (GLD) not worth buying since Bitcoin has taken over market share from Gold buyers?
A: Essentially, yes. That's probably why you're not getting these big spikes in Gold like you're used to. Instead, you're getting them in Bitcoin. Bitcoin is clearly stealing Gold's thunder. That's a major reason why we haven't been chasing Gold this year.
Q: After the emerging market sell-off, is it a good time to go in?
A: No, I think the emerging market (EEM) sell-off is being created by rising interest rates and a strong dollar. I don't see that ending anytime soon. In a year let's take another look in emerging markets. By then overnight Fed funds should be at 2.50% to 2.75%.
Are you looking for an investment that does well during modest economic growth, a flat to slightly falling dollar, continued low interest rates, and a stock market that periodically hits the panic button?
Then General Electric (GE) is the stock for you.
I have just spent my day surfing the web for tidbits about GE and found quite a lot that I liked.
Want to get a great deal on a new diesel electric locomotive with teaser financing? That?s why customers flock to GE.
What I found was one of the largest corporate restructuring stories in history.
You can summarize it as ?Out with glitz, leverage, and volatility, and in with the plodding, the stable, and the reliable.? In stock market terms this means out with low price/earnings multiples and in with high ones.
For a start, GE is run by Jeffrey Immelt, considered by many to be one of the most superb large cap managers in the world. He has been cutting costs and ditching business lines not considered essential to its core heavy industrial origins.
Immelt has indicated that he expects that by 2018, General Electric will be earning 90% of its profits from "selling equipment for airplanes, railroads, oil extraction and electricity generation," all safe stuff.
By the way, these are great plays on a recovering Chinese economy as well. No coincidence there.
The most immediate trigger to pile into this stock was its planned sale of GE Finance, which is why wags used to call GE ?The hedge fund that sold light bulbs.?
GE was dragged into this business during the 1990s by predecessor, Jack Welsh, using the logic that ?Everyone else was doing it.? Welsh never inhaled a breath of humility in his life, and chronically suffered from confusing brilliance with a bull market.
In the end, his strategy almost took the company under, requiring a bailout from Warren Buffett during the dark days of 2009, in the form of a 10% convertible preferred stock issue.
If only I could get such terms!
In the most recent quarter, GE had to write off $4.33 billion for the sale of damaged securities left over from this ill conceived venture.
A $30 billion portfolio of such dross was recently sold to Wells Fargo (WFC). GE has also indicated that it will soon spin off consumer finance business Synchrony Financial (SYF).
This is yet another step in the company's plan to divest $200 billion of GE Capital assets as GE returns to its industrial roots.
And how can you not like that 3.10% dividend in this zero return world? This is with a price earnings multiple of 25 for current year earnings, and 19 times next year earnings.
GE?s aviation business is climbing to higher altitudes. Its backlog has ballooned some 36% over the past two years, to $150 billion.
It has been spurred on by a new engine that uses 15% less fuel, enabling their hyper competitive airline customers to cut one of their largest costs.
This will pave the way for GE to grow its installed base of engines from 36,000 to an impressive 46,000 by 2020. Did you know the Chinese have to buy 1,000 airliners over the next decade?
?
After an 18-month battle with the French government, GE managed to close its purchase of Alstom for $13.8 billion, a major European energy company. It had to promise to create 1,000 new jobs in France to do so.
The deal brings GE's capabilities that it had previously lacked in renewable energy and heat recovery steam generators. The latter are key components of combined cycle gas-plus-steam plants, which GE forecasts will account for 70% of all future gas-fired plant orders.
Acquiring this capability roughly doubles the General Electric share of the revenues it could capture from orders for such plants.
With it comes considerable expertise in plant design and construction, allowing GE to move from being a supplier to a lead contractor on such projects.
Alstom also delivers a significant presence in China and India, as well as sophisticated products in transmission technology.
(GE)?s sale of its appliance unit to Sweden?s Electrolux (ELUXY), which came with the Alstom deal, is pending antitrust review.
To top all this, activist investor Norman Peltz?s Trian Fund has taken a 1% stake in (GE) (or $2.5 billion worth) with the intention of shaking it up so a few more coins will fall out for shareholders.
That is quite an ambitious bet. Peltz wants the company to ramp up an already ambitious share repurchase program. And you get in at a great price today.
?
All in all, GE seems to be the right kind of stock to buy in the market we have at the moment. It also fits neatly into my scenario of new money moving into value, at the expense of growth (click here for ?Switching from Growth to Value?.
All we need to get in is a decent pullback from its recent parabolic move.
For more background on General Electric, click here for ?The American Onshoring Trend is Accelerating?.
Jeff?s Got Some New Tricks Up His Sleeve
I have seen the future, and it works.
In my never-ending search for my readers for ?ten-baggers,? or investments that will rise in value tenfold over the foreseeable future, I keep circling back to the solar industry.
Tesla founder Elon Musk never does anything small.
Last year he announced the first ever, economical home battery electrical storage system, which he calls the Powerwall.
The device will enable your roof-mounted solar panels to supply power to your home 24 hours a day, not just when the sun is shining.
It is an innovation on the scale of Thomas Edison?s invention of the light bulb in 1879, or the launch of the Internet in 1969, in terms of the long-term impact on our economy.
Shifting the source of a third of our power supply is a big deal.
You may recall that the early investors in these earlier transitions made fortunes, General Electric (GE) in Edison?s case, and Netscape that spun out of the early Internet days.
Today, General Electric is the only company that has remained in the Dow Average for the past 100 years. So, investors take note.
During the day, the panels will charge up the battery mounted on your garage wall, which is about the size of a big screen TV. At night, you can then run your home off battery power.
Alternatively, you can engage in what is known in the industry as ?load shifting.? Charge your battery at night when you can buy electricity for as little as 4 cents a kilowatt hour, and sell it back to your local utility during a power demand surge the next afternoon for as much as 50 cents a kWh.
Buy low, sell high, it works for me!
And what is the cost of the miracle technology?
Only $3,000 for a 7 kWh battery or $3,500 for the 10 kWh version for energy hogs, like me, who has to charge a Tesla Model S-1 every day, soon to be two.
You can also include as immediate customers for this new product sports addicts, who watch multiple games on ESPN 24/7, paranoids who keep the lights on all night and indoor pot farmers, whose energy needs are said to be prodigious. Of course, the military will be another big consumer.
I ran some numbers on the possibilities for the Powerwall and they are mind-boggling.
The average home in the US has 2,500 square feet, which uses 7,000 kWh per year, or 19 kWh per day. The current cost for this power will be around $2,000 a year, depending where you live, more in California, and less in Texas, Oklahoma, and North Carolina.
A solar/ battery combination for such a home should cost about $14,000, including installation, the panels, the inverter, and all the gizmos. Net out the alternative energy investment tax credit of 30% (IRS Form 5695 http://www.irs.gov/pub/irs-pdf/f5695.pdf ), and your cost falls to only $10,500.
That means your power savings will cover the cost of your solar investment in a mere 5 years, compared to the present 7 or 8 years. After that, your home will have free electricity for another 20 years, as the life of these systems is usually 25 years.
Make the investment, and the value of your home rises, by $2 for every dollar spent, or so local real estate agents tell me.
You also will be guaranteed against any future power rate increases, an absolute certainty. America?s power grid is currently in a woeful state of disrepair, with much of the hardware 50 years old, or more.
The demands on the power industry are also about to take a quantum leap forward, as millions of consumers buy electric cars. Tesla plans to ramp up production of vehicles from 40,000 units last year to 500,000 by 2020, when the $35,000, 300 mile range Tesla 3 achieves mass production.
Some of my over-the-horizon-thinking hedge fund friends believe that figure could hit 15 million by 2030.
Add to that new, competing electric models produced by every other major carmaker, and that?s a lot of juice that will be needed. As a result, electric power utilities will probably have to endure more structural changes to their business model than any other industry.
Trillions of dollars are needed to modernize it, and all of that is going to come out of your pocket, but only if you remain an existing power customer.
Indeed, I have already been notified by my own utility, Pacific Gas and Electric Company (PGE), that I am due for two consecutive 7% price increases over the next two years.
The battery will also provide a backup power supply for home for when the grid crashes. Twice in the last two decades I have lost a freezer full of venison, pheasants, quail, trout, and salmon that I hunted and fished when storms knocked out power, for a week each time.
The Powerwall prices are so low that they beat the cost of a conventional backup diesel or gasoline generator.
They will also wipe out most of the existing back up battery industry, as Tesla?s advantages gained through massive economies of scale are enormous. Musk is talking about producing billions of batteries.
The Powerwall is a game changer for the solar industry, which has long been hobbled by the limitation that it could only supply power for 12 hours a day, and less in the winter, depending on your latitude.
It certainly gives a shot in the arm for the solar industry, which I have been banging the table about for years. My favorite is Solar City (SCTY). Other names to look at are First Solar (FSLR) and SunPower (SPWR), which manufactures my own solar panels.
It also casts Musk?s own Tesla (TSLA) in a new light. It is no longer just a car company, but a comprehensive energy solution. Musk has already made one of the largest capital investments in history to build a $5 billion ?Giga? factory near Reno, Nevada.
Much of that plant?s production has already been pre sold, and I understand that the decision has already been made to build a second one. Wow!
Consumers are able to purchase the new batteries from the Texas based retailer, TreeHouse, (their link https://treehouse.co/treehouse-is-first-retailer-to-sell-tesla-home-battery/ ).
Musk explains that the world consumes 20 trillion kWh per year of electricity.
In the US, 1/3 of our fossil fuel consumption goes to transportation, and another 1/3 generates electric power, which is the equivalent to consuming 225 billion gallons of gasoline per year (or 8 billion barrels of oil per year, or 22 million barrels a day).
His goal is nothing less than to largely substitute those fossil fuel uses with solar energy, cutting our fossil fuel consumption by 2/3.
I guess there is no point in setting the bar low.
Meet the Next Light Bulb
I firmly believe that simple solutions to our energy problems are in the process of coming out of the blue, and are something no one is thinking about now.
Add up the contributions of many small improvements, and the cumulative change will alter our economic future beyond all recognition. Here are two of them.
General Electric (GE) is now mass-producing their ?Smart Energy LED Bulb,? which can screw into a conventional socket and produce the same amount of light as a 60-watt bulb, but consume only nine watts of power.
Some 22% of America?s electric power supply is used for lighting, and this bulb could cut our total consumption by 17.6%.
Other bulb manufacturers are getting into the game, like Philips, Osram, Toshiba, and Panasonic, which are already offering more efficient designs. The downside is that, while they last 25,000 hours, or ten times longer than a conventional incandescent bulb, they will initially cost $15-$25.
Economies of scale are expected to bring costs down dramatically in a few years. The Department of Energy has selected Seattle as the test bed for an all LED (light emitting diode) public lighting system.
Here is another game changer for our energy woes. If you double conventional car engine efficiency, US oil consumption drops by half. This is not so hard to do. The US government has already mandated that US car makers achieve an average fleet mileage of 54.5 miles per gallon by 2025.
They are hoping this will lower the cost of gasoline to $1 a gallon by then. They may get their wish this year instead.
One of the first things you learn in a freshman level physics class is how inefficient an internal combustion engine is, using hundreds of moving parts operating at 500 degrees to convert only 25% of the energy input into to motion.?
Tesla?s (TSLA) entire electric drive train has just 11 moving parts, operate at room temperature, and convert 80% of its energy into motion. When they go to the mass market in two years with the $35,000 Tesla 3, it will have a huge impact on our overall energy picture
Add this in with the surging supplies of American shale oil, and the utter collapse of the price of Texas tea (USO) over the past six months is suddenly starts to make incredible sense.
All good things must come to an end.
For most of 2015, growth stocks far and away have been the outstanding performers in the US stock market.
Almost daily, I delighted in sending you trade alerts to buy winners, like Palo Alto Networks (PANW), Tesla (TSLA), and the Russell 2000 (IWM).
And so they delivered.
The reasons for their impressive gains were crystal clear.
The expectation all year was that the Federal Reserve would raise interest rates imminently. This gave us a perennially strong dollar (UUP).
Thus, one could only direct focus towards companies that were immune from plunging foreign currencies and falling international earnings.
It really was a year to ?Buy American?.
But a funny thing happened on the way to the bear market for bonds. It never showed up.
The final nail in the coffin was Fed governor Janet Yellen?s failure to move on September 17. She looked everywhere for inflation, but only found the chronically unemployed (the 10% U-6 discouraged worker jobless rate).
Not only did we NOT get the rate hike, the prospects are that WE MAY NOT SEE A SUBSTANTIAL INCREASE IN THE COST OF MONEY FOR YEARS!
At this point, the worst-case scenario is for the Fed to deliver only two 25-basis point rises over the next six months, AND THAT?S IT!
This reinforces my belief that the top of the coming interest rate cycle may only reach the bottom of past cycles, since deflation is so pernicious, and so structural.
All of a sudden, the bull case for the dollar, which has been driving our US stock selection all year, went wobbly at the knees.
Europe, Japan, and China are all now in between new quantitative easing and stimulus cycles, giving a decided bud to the Euro (FXE), the Yen (FXY), (YCS), the Yuan (CYB), the Aussie (FXA), and the Loonie (FXC).
New round of QE will come, but those could be months off.
Therefore, I am sensing a sea change in the market leadership. Rushing to the fore are the shares of companies that benefit from flat interest rates and a flagging greenback.
Those would be value stocks.
Value stocks are easy to find. Do any quantitative screen based on low price earnings multiples, low price to book value, and low price to cash flow, and you will find thousands of them. This is what the big boys do.
There is another reason to refocus on value stocks, but it is more psychological than analytical.
We are now into our sixth year in this bull market, one of the strongest in history. Portfolio managers are very wary of paying high multiples at market tops, as many did at the summit of the Dotcom bubble in 2000.
At least if they buy cheap share at market highs they have adequate job preserving explanations for their actions. There is also some inherent built in safety in increasing weightings in companies that haven?t appreciated very much.
I probably don?t know you personally (although I call about 1,000 of you a year), but I bet you don?t have 100 in-house analysts at hand to help you sift through the wheat and the chaff.
So let me do the heavy lifting for you. I?ll distill down the value play to a handful of high quality, high probability sectors.
1) Industrials ? Remember those, the decidedly unsexy, heavy metal bashing companies that you have been ignoring for years? With global businesses and hefty borrowing for capital spending, they do very well in a flat interest rate environment. What?s my favorite industrial? The former hedge fund that made light bulbs, General Electric (GE). They make really cool jet engines and diesel electric locomotives too.
2) Consumer Discretionary ? Finally, people are spending their gas savings, now that they realize it is more than a temporary windfall. A housing market that is on fire is creating enormous demand for all the things owners stuff in their homes, both in new purchases and upgrades. Low rates will keep the 30-year mortgage under 4% for longer. You already know my best names here, Home Depot (HD), and Disney (DIS).
3) Old Technology ? Tired of paying 100 plus multiples for the latest non yielding cloud highflyer? Mature old technology stocks offer some of the cheapest valuations in the market. As, yes, they pay dividends now! I?ll go with Microsoft here (MSFT) as the action in the options market has suddenly seen a big spike.
And what about the biggest old tech stock of all, Apple (AAPL)? I think this will be a 2016 story, and investors reposition themselves to take advantage of the run up to the iPhone 7 launch in a year. But as the recent price action shows, some portfolio managers may not want to wait.
4) Financials ? Are not the first sector to leap to mind when looking for a low interest rate play. Overnight interest rates will remain depressed as far as the eye can see. However, rates at the long end, maturities of five years or more, are rising.
This steepening yield curve is where it really matters for banks, as it allows them to expand their profit margins. On top of that, bank valuations are at the bargain basement end of the market, with many still trading at below book value. Go for Citibank (C), Bank of America (BAC), and Goldman Sachs (GS).
New leadership from low-priced sectors could give us the rocket fuel for a melt up in the indexes into the end of 2015. It could take us right to the low end of my forecast yearend range for the S&P 500 I made on January 6 of 2,200-2,300 (click here for ?My 2015 Annual Asset Class Review?).
After five months of derisking, both institutions and hedge funds are underweight stocks and shy of exposure. As a result this underperforming year has ?chase? written all over it.
Keep your fingers crossed, but stranger things have happened.
