(GOOG) Archives

Cyber Security is Only Just Getting Started

It looks like the cyber security sector is about to take off like a rocket once again. There could be another 25%-50% in it this year.

The near destruction of Sony (SNE) by North Korean hackers last November has certainly put the fear of God into corporate America. Apparently, they have no sense of humor whatsoever north of the 38th parallel.

As a result, there is a generational upgrade in cyber security underway, with many potential targets boosting spending by multiples.

It's not often that I get a stock recommendation from an army general. However that's exactly what happened the other day when I was speaking to a three star about the long-term implications of the Iran peace deal.

He argued persuasively that the world will probably never again see large-scale armies fielded by major industrial nations. Wars of the future will be fought online, as they have been, silently and invisibly, over the past 15 years.

All of those trillions of dollars spent on big ticket, heavy metal weapons systems are pure pork designed by politicians to buy voters in marginal swing states.

The money would be far better spent where it is most needed, on the cyber warfare front. Needless to say, my friend shall remain anonymous.

The problem is that when wars become cheaper, you fight more of them, as is the case with online combat.

A little known fact is that during the Bush administration, the Chinese military downloaded the entire contents of the Pentagon's mainframe computers at least seven times.

This was a neat trick because these computers were in stand alone, siloed, electromagnetically shielded facilities not connected to the Internet in any way.

In the process, they obtained the designs of all of out most advanced weapons systems, including our best nukes. And what have they done with this top-secret information?

Absolutely nothing.

Like many in senior levels of the US military, the Chinese have concluded that these weapons are a useless waste of valuable resources. Far better value for money are more hackers, coders and servers, which the Chinese have pursued with a vengeance.

You have seen this in the substantial tightening up of the Chinese Internet through the deployment of the Great Firewall, which blocks local access to most foreign websites.

Try sending an email to someone in the middle Kingdom with a gmail address. It is almost impossible. This is why Google (GOOG) closed their offices there years ago.

My awareness of this comes from several Chinese readers complaining to me that they are unable to open my Trade Alerts or access their foreign online brokerage accounts.

As a member of the Joint Chiefs of Staff recently told me, "The greatest threat to national defense is wasting money on national defense."

If wars are now being fought online, then investing in national defense has actually come to mean investing in cyber security.

And although my brass-hatted friend didn't mention the company by name, the implication was that I need to go out and buy Palo Alto Networks (PANW) right now.

Palo Alto Networks, Inc. is an American network security company based in Santa Clara, California just across the water from my Bay Area office. The company's core products are advanced firewalls designed to provide network security, visibility and granular control of network activity based on application, user, and content identification.

Palo Alto Networks competes in the unified threat management and network security industry against Cisco (CSCO), FireEye (FEYE), Fortinet (FTNT), Check Point (CHKP), Juniper Networks (JNPR), and Cyberoam, among others.

The really interesting thing about this industry is that there are no real losers. That's because companies are taking a layered approach to cyber security, parceling out contracts to many of the leading firms at once, looking to hedge their bets.

To say that top management has no idea what these products really do would be a huge understatement. Therefore, they buy all of them.

This makes a basket approach to the industry more feasible than usual. You can do this through buying the $435 million capitalized PureFunds ISE Cyber Security ETF (HACK), which boasts Cyberark Software (CYBR), Infoblox (BLOX) and FireEye (FEYE) as its three largest positions. (HACK) has been a hedge fund favorite since the Sony attack.

For more information about (HACK), please click here: http://www.pureetfs.com/etfs/hack.html.

And don't forget to change your password.

March 24, 2016/by Mad Hedge Fund Trader

The Solar Road Revisited

Diary, Newsletter

?The Solar Road Revisited?. Somehow this modernized version of Bob Dylan?s epic folk album doesn?t quite ring true when couched in terms of our hyper accelerating 21^st century technology. Perhaps a Millennial bard will improve on this in the future on iTunes, Pandora, and Beats, of course?

Yet, such a futuristic invention has already been created, is raising money through crowdfunding, and even landed a small Federal Highway Administration grant.

We live in an age of exploding technologies. So, when I find some that are especially interesting, offer a potential long term impact on the global economy, or present immediate investment opportunities, I am going to update you in this newsletter.

One common complaint I hear during my road shows is that we are moving into the future so fast, that it is getting increasingly hard to keep up. That is, unless you live within sight of Apple (AAPL), Google (GOOG), Twitter (TWTR), and Facebook (FB) headquarters, which I do. These companies all have venture capital arms, which fund many of these things.

Sandpoint, Idaho based engineers Julie and Scott Brusaw are the founders of Solar Roadways, a tiny engineering company that seeks to convert the American highway system from old fashioned asphalt and concrete to tempered glass and LED?s.

They have raised $2 million through the crowdsourcing website Indiegogo, which saw its amazing videos on the project go viral and attract 15 million views (https://www.indiegogo.com/projects/solar-roadways ).

Caution: conservatives may want to avert their eyes during all of the global warming, anti gasoline, and tree hugging references. But this stuff raises big bucks in California.

What can solar roads do? Obviously, the green hexagonal panels they are made of convert sunlight into electricity, heating roads so they can remain free of ice and snow all year. I could really use that up at Lake Tahoe.

Surplus power can be sold to local utilities to pay for it. Electric cars, like my Tesla Model S-1 (TSLA), can recharge their batteries just by parking on it, as my toothbrush already does in my bathroom.

You can program the LED?s to embed changeable road signs, borders, parking lots, and crosswalks. They can highlight crossing animals (200 deaths a year now in the US), or impending road obstructions.

They can even display layouts for every kind of sport (basketball, tennis, etc). The glass can be cast to give it a better grip than contemporary roads. Highway deaths would plunge, as would insurance costs.

Driving trucks on glass? The material is so strong that it can support the heaviest, or some 62 tons. My question, can handle steel caterpillar tractor treads used in road repair equipment?

Of course, it always comes down to cost with these new technologies, many of which remain pie in the sky forever. Estimates are that these roads cost 50%-300% more than existing ones. Large-scale construction would bring that down through economies of scale via mass production. The design is really quite simple.

The vision is big. It would probably cost over $1 trillion just to pave over the existing 48,000 miles of the interstate highway system. Tens of thousands of blue-collar jobs would be created. It all sounds like a massive public works project would be required, of Rooseveltian, CCC magnitude.

This just gives you a flavor of the incredibly interesting things going on here in the San Francisco Bay area, which I learn about on a daily basis. Check out the site, if only to see the future of start up funding.

You can contribute $5, or just buy a tote bag.

Somehow, It?s Just Not the Same

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July 6, 2015/by Mad Hedge Fund Trader

Is the Turnaround at Hand, and Ten Stocks to Buy at the Bottom?

Newsletter, Research

War threatens in the Ukraine. Iraq is blowing up. Rebels are turning our own, highly advanced weapons against us. Israel invades Gaza. Ebola virus has hit the US. Oh, and two hurricanes are hitting Hawaii for the first time in 22 years.

Should I panic and sell everything I own? Is it time to stockpile canned food, water and ammo? Is the world about to end?

I think not.

In fact the opposite is coming true. The best entry point for risk assets in a year is setting up. If you missed 2014 so far, here is a chance to do it all over again.

It is an old trading nostrum that you should buy when there is blood in the streets. I had a friend who reliably bought every coup d? etat in Thailand during the seventies and eighties, and he made a fortune, retiring to one of the country?s idyllic islands off the coast of Phuket. In fact, I think he bought the whole island.

Now we have blood in multiple streets in multiple places, thankfully, this time, it is not ours.

I had Mad Day Trader, Jim Parker, do some technical work for me. He tracked the S&P 500/30 year Treasury spread for the past 30 years and produced the charts below. This is an indicator of overboughtness of one market compared to another that reliably peaks every decade.

And guess what? It is peaking. This tells you that any mean reversion is about to unleash an onslaught of bond selling and stock buying.

There is a whole raft of other positive things going on. Several good stocks have double bottomed off of ?stupid cheap? levels, like IBM (IBM), Ebay (EBAY), General Motors (GM), Tupperware (TUP), and Yum Brands (YUM). Both the Russian ruble and stock market are bouncing hard today.

There is another fascinating thing happening in the oil markets. This is the first time in history where a new Middle Eastern war caused oil price to collapse instead of skyrocket. This is all a testament to the new American independence in energy.

Hint: this is great news for US stocks.

If you asked me a month ago what would be my dream scenario for the rest of the year, I would have said an 8% correction in August to load the boat for a big yearend rally. Heavens to Betsy and wholly moley, but that appears to be what we are getting.

It puts followers of my Trade Alert service in a particularly strong position. As of today, they are up 24% during 2014 in a market that is down -0.3%. Replay the year again, and that gets followers up 50% or more by the end of December.

Here is my own shopping list of what to buy when we hit the final bottom, which is probably only a few percent away:

Longs

JP Morgan (JPM)
Apple (AAPL)
Google (GOOG)
General Motors (GM)
Freeport McMoRan (FCX)
Corn (CORN)
Russell 2000 (IWM)
S&P 500 (SPY)

Shorts

Euro (FXE), (EUO)
Yen (FXE), (YCS)

No, Not This Time

August 11, 2014/by Mad Hedge Fund Trader

My Briefing from the Joint Chiefs of Staff

Diary, Newsletter

I have always considered the US military to have one of the world?s greatest research organizations. The frustrating thing is that their ?clients? only consist of the President and a handful of three and four star generals. So I thought that I would review my notes from a dinner I had with General James E. Cartwright, the former Vice Chairman of the Joint Chiefs of Staff, and known as ?Hoss? to his close subordinates.

Meeting the tip of the spear in person was fascinating. The four star Marine pilot was the second highest ranking officer in the US armed forces, and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes. As he spoke, I was ticking off the stock, ETF, and futures plays that would best capitalize on the long term trends he was outlining.

The cycle of warfare is now driven by Moore?s Law more than anything else (XLK), (CSCO), and (GOOG). Peer nation states, like Russia, are no longer the main concern. Budgeting for military expenditures is a challenge in the midst of the worst economic environment since the Great Depression.

Historically, inertia has limited changes in defense budgets to 5%-10% a year, but in 2010 defense secretary Robert Gates pulled off 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.

The war on terrorism will continue for at least 4-8 more years. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. ?We?re not going to be able to kill our way or buy our way to success in Afghanistan,? said the general. However, the 30,000-man surge there brought a dramatic improvement on the ground situation.

Iran is a big concern, and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.

Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.

Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites. We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of ?voluntarism.? General Cartwright said ?Anyone in business will tell you that they?re losing intellectual capital on a daily basis.?

The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI). The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.

I left the dinner with dozens of more ideas percolating through my mind, which I will write about in future letters.

July 5, 2013/by Mad Hedge Fund Trader

Where?s This Market Bottom?

Newsletter

After yesterday?s 217 point swoon, the S&P 500 (SPX) has fallen 4.3% from its late May peak. It looks like the ?Sell in May? crowd is having the last laugh after all, of which I was one.

Is this a modest 5% correction in a continuing bull market? Or is it the beginning of a Harry Dent style crash to (SPX) 300 (click here for the interview on Hedge Fund Radio)? Let?s go to the videotape.

This was one of the most overbought stock markets in my career. I have to think back to the top of the dotcom boom in 2000 and the pinnacle of the Tokyo bubble in 1989 to recall similar levels of ebullience. In fact, two weeks ago we were at a real risk of a major melt up if we didn?t encounter some sort of pullback. So the modest selling we have seen so far has been welcome, even by the bulls.

There is still a reasonable chance the final decline will be nothing more than a pit stop on the way to new highs. Institutional weightings in equities are at a lowly 31%, compared to 50% 20 years ago. It seems that everyone in the world is overweight bonds (see yesterday?s piece on ?Welcome to the Sack of Rome?).

In recent weeks, the S&P 500 yield ratio has fallen behind that of the 10 year Treasury bond, at 2.10%, but only just. With a price/earnings multiple of 16, we are bang in the middle of a long time historic range of 10-22. Zero overnight interest rates argue that we should be at the top end of that range. The argument that the ?Buy the Dip? crowd is still lurking under the market is real, just a little further than the recent dips allowed.

So how much lower do we have to go? After the close, I enjoyed an in depth discussion with my old friend, Jim Parker, of Mad Day Trader fame about the possible permutations. The following is an itinerary of what your summer trading might look like, expressed in (SPX) terms:

6.2% - 1,605 was the Wednesday low, the 50 day moving average, and the downside of the most recent upward sloping channel on the chart below. This trifecta of support is many traders? first stop for a bounce.

5.4% - 1,590 is the first major downside Fibonacci level. We could see this as soon as the May nonfarm report payroll is announced on Friday.

6.0% - 1,580 is the old 13-year high. Markets always love to retrace to old breakout levels.

6.5% - 1,570 represents a give back of one third of the November-May 330 point rally.

8.3% - 1,540 is the double bottom off the April low.

11.1% - 1,493 is the 200-day moving average. This is the worst-case scenario. I doubt we?ll get there, unless the fundamentals change, which they always do.

Jim gave me a couple more cogent insights. The average big swing move is 100-110 points. The last 100-point move sprung off of the March nonfarm payroll report, which came out on April 5. Big swings also often start and finish around an options expiration, the next one of those is coming on June 21. So for the short term, 1580-1590 is looking good.

To confuse you even further, contemplate the concept that I refer to as the ?Lead Contract.? There is always a lead contract around, one on which all traders maintain a laser like focus, which leads every other financial product out there. It says ?Jump,? and we ask ?How High?? It is also always changing.

Right now, the Nikkei average (DXJ) is the lead contract. The Japanese yen ETF (FXY) is the close inverse. Every flight from risk during the past two weeks has been preceded by a falling Nikkei and a rising yen.
If you want to get a preview of each day?s US trading, stay up the night before and watch the action in Tokyo, as I often do.

You might even learn a word or two of Japanese, which will come in handy when ordering in the better New York sushi shops.