The end of Apple

The end of Apple

“Oh man, that’s almost a month’s rent for me…”

Here I am sitting in a cab in New York City.

I’m headed uptown to Columbia University where we’re holding the first-ever American Disruption Summit.

You can register to watch for free here… more on that in a minute.

The driver and I are talking about the absurd price tag of the latest Apple (AAPL) iPhone.

He’s shocked when I tell him the cheapest model is $1,149.

Who can afford that?” he asks.

  • In today’s letter I’m going to show you why Apple stock is a terrible investment.

Apple has had an incredible decade.

Since the iPhone debuted in 2007 its sales have jumped 10X.

Its stock has appreciated over 700%. And up until November it was the world’s largest publicly traded company.

But two weeks ago, Apple management issued a rare warning that shocked investors.

For the first time since 2002 it slashed its earnings forecast. The stock cratered 10% for its worst day in six years.

This capped off a horrible few months that saw Apple stock crash roughly 35% since its November peak.

The plunge erased $446 billion in shareholder value… the biggest wipeout of wealth in a single stock ever.

  • Apple has a dirty secret…

From looking at its sales numbers, you wouldn’t know anything is wrong.

Apple’s revenue has marched up since 2001, as you can see here.

By the looks of the chart, Apple’s business is perfectly healthy. But there’s a secret hidden behind these headline numbers.

Although Apple’s revenue has grown… it is selling less iPhones every year.

In fact, iPhone unit sales peaked way back in 2015. Last year Apple sold 14 million fewer phones than it did three years ago.

  • Apple has kept revenue growth alive solely by raising iPhone prices...

In 2010 you could buy a brand new iPhone 4 for 199 bucks.

In 2014 the newly released iPhone 6 cost 299 bucks.

As I mentioned, the cheapest model of the latest iPhone X costs $1,149!

That’s more expensive than many laptop computers. It’s a 500% hike from what Apple charged eight years ago.

  • It’s an iron law of disruption that technology gets cheaper over time...

Not all that long ago, a flat-screen high-definition TV was a luxury. Even a small one cost thousands of dollars.

Today you can get a 55-inch one from Best Buy for $500.

In 1984, Motorola sold the first cell phone for $4,000.

According to research firm IDC, the average price for a smartphone today is $320.

Cell phone prices have come down roughly 92%...

But Apple has hiked its smartphone prices by 500%!

Frankly, it’s remarkable that Apple has managed to pull this off.

  • But let me tell you… Apple is a disruptor in decline.

It comes down to the lifecycle of disruptive businesses.

Twelve years ago only 120 million people owned a cell phone. Today over 5 billion people own a smartphone, according to IDC.

Apple was the driving force behind this explosion. As the dominant player in a rapidly growing market, it grew into the most profitable publicly traded company in history.

As I mentioned, iPhone sales growth stalled out in 2015. This would’ve been the end of the line for most businesses.

But Apple did a masterful job of extending its prime through price hikes. Its prestigious brand and army of die-hard fans allowed it to charge prices that seemed crazy just a few years ago.

But now iPhone price hikes have gone about as far as they can go.

  • After all… what’s the most you would pay for a smartphone?

$1,500?

$2,000?

You might wonder… how bad, exactly, is the decline in iPhone sales?

It’s so bad that Apple now keeps it a secret.

In November, Apple announced it would stop disclosing iPhone unit sales.

This is a very important piece of information. Investors deserve to know it. Yet Apple now keeps it secret…

  • Keep in mind, the iPhone is Apple’s crown jewel.

It generates two-thirds of Apple’s overall sales.

Let that sink in…

A publicly traded company that makes most of its money from selling phones is no longer telling investors how many phones it sells!

And its other business lines can’t pick up the slack for falling iPhone sales.

Twenty percent of Apple’s revenue comes from iPads and computers. Those segments are also stagnant.

Which means 86% of Apple’s business is going nowhere.

Could Apple go the other way and slash iPhone prices?

I ran the numbers. If Apple cut prices back to 2016 levels, it would have to sell 41 million additional phones just to match 2018’s revenue.

  • We’ve seen the fall of a cell phone giant before…

Before Apple, Nokia (NOK) was king of cell phones.

In 2007 the front-cover headline of a major business magazine read:

“Nokia: One billion customers—can anyone catch the cell phone king?”

The iPhone debuted in 2007. Here’s Nokia’s stock chart since then:

  • Before I sign off, an important announcement…

Next Wednesday I’m taking part in the first-ever American Disruption Summit.

It’s going to be a fun and profitable night for all attendees. Just for showing up, you’ll get the name and ticker of a small $5 “disruptor” stock that has 500%+ upside in the next two and a half years.

We’re broadcasting from New York City, but you can watch online for free. Go here to reserve your seat.

As a RiskHedge reader, you already know how important disruption is to your investing results. At the American Disruption Summit, we’re gathering together world-class disruption experts to tell us where they’re putting their money in 2019.

Hope to see you there. You can reserve your seat right here.

And if you can’t make the premiere, no worries—a replay will be available to all who register.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Chris has a question about my projection for uranium prices:

“Stephen,

I don't disagree with your argument that uranium prices will move higher, but the timing and extent of the move may not be what you expect.

The reason prices have rebounded is that several of the major producers have cut production. When the uranium price gets into the low $40s, that production likely will be brought back on line.”

Thanks for your note, Chris. As I mentioned in my last article, the catalyst for much higher uranium prices will be the tidal wave of demand from nuclear power plants in the next 2–3 years. From talking to industry insiders, I can tell you many producers are holding out for about $70/lb. uranium.

As for the price of uranium itself, remember it rarely stops at a “rational” price. A shortage leads to surging prices, and momentum often carries the price well past “equilibrium.” That’s the norm not just in uranium, but for most commodities.

“Druck” the bloodhound is buying disruptors. Are you?

“Druck” the bloodhound is buying disruptors. Are you?

Has billionaire Stan Druckenmiller been reading RiskHedge?

“Druck,” if you don’t know him, might be the greatest investor alive today.

He’s low-key and rarely gives interviews. But his track record is astonishing…

Druck strung together 30 straight profitable years from 1980 to 2010.

During that time he earned returns of 30% per year.

If you took $10,000 and compounded it at 30% per year for 30 years… you’d amass a $26.2 million fortune.

And Druck has never had a losing year… ever!

He made money in 2001 during the dot-com crash. And reportedly made $260 million in 2008, while most investors were losing their shirts.

  • In a rare interview with Bloomberg, Druck was asked what he’s investing in today...

He said:

We are long the disruptors and short the disrupted… it has worked beautifully.”

Regular RiskHedge readers know all about disruptor stocks.

Disruptors are not ordinary stocks. They don’t come in and compete with industry leaders. They destroy them.

They steamroll the competition… and often hand investors big gains of 3x, 4x, 5x, or better.

  • Take a company like Adobe Systems (ADBE), whose “PDF” software transformed American offices…

Remember Xerox (XRX)? It makes those big, clunky paper copiers.

Believe it or not, Xerox was once a mighty tech giant. 30 years ago it was America’s 20th largest company.

Today its stock chart is a sad reminder of what it’s like to get steamrolled by a disruptor.

Xerox stock peaked at $168/share in the late 1990s. Today it trades for just $21/share… a wipeout of 87%, as you can see on this chart:

Canon (CAJ), one of the world’s biggest manufacturers of printers, is a victim of Adobe’s disruption too. In the past decade printer sales have plunged 30%, and Canon’s stock has been cut in half since 2007.

Meanwhile, Adobe stock has surged 600% since 2010. That’s four and a half times better than the S&P 500.

And if you’d bought Adobe when it was an “early stage” disruptor in the late 1990s, you’d be sitting on profits of over 20,000%.

  • Today, Druck is plowing billions into a disruptive trend we’ve talked about before…

“The cloud.”

As I explained recently, the cloud gives businesses cheap access to powerful supercomputers.

Druckenmiller has invested over $1 billion in cloud businesses including Microsoft (MSFT)… Amazon (AMZN)… and ServiceNow (NOW).

In fact according to SEC filings, 52% of his stock holdings are in cloud companies.

In the chart below, you can see how cloud disruptors have crushed the S&P 500 over the last five years.

  • Druck isn’t the only legend buying disruptors…

Have you seen the movie The Big Short?

It tells the story of a few investors who made a killing by betting on the US housing collapse in 2007-8.                                               

Steve Eisman, who was played by Steve Carrell, was a mastermind behind the trade. His fund made about $1 billion from the housing collapse.

In a recent interview, Eisman was asked “what are the biggest opportunities you see today?”

He said “the disruptor vs. disruptee theme. [It] will last for a long time and there’s lots of way to play that...”

  • Druck and Eisman are what I call “bloodhound investors...”

As you may know, many investors got rich by specializing in one strategy.

Warren Buffett buys undervalued businesses and holds them forever.

Carl Icahn is an “activist” investor. He buys big chunks of companies and influences CEOs to make changes.

Neither Druck nor Eisman specialize. Instead, they seek out moneymaking opportunities like bloodhounds.

Druck has famously made big money across all assets: stocks… bonds… currencies.

Eisman made his fortune during the worst market crash since the Great Depression.

You could say they’re agnostic in what they buy.

It’s like when bank robber Willie Sutton was asked why he robbed banks? He answered “because that’s where the money is.”

Go where the money is.

In a recent interview Druckenmiller said “We’re in the most economically disruptive period since the 1880s.”

Clearly, these guys know the big money today is in disruptor stocks.

I like to see two of the world’s smartest money managers on our side, buying disruptors along with us.

That’s all for today. Be sure to check out next week’s issue. I’ll be making an important announcement…

Plus I’ll make the case for why one of the world’s largest companies—whose stock you almost certainly own—is in big trouble.

Write me at stephen@riskhedge.com with any questions or comments.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

In response to my article about Waymo’s self-driving cars, RiskHedge reader Syd asks:

“Stephen, great article on Waymo & self-driving cars, thank you.

Which Google shares do you recommend, Class A (GOOGL) or Class C (GOOG)? What's the difference, other than a small difference in price?”

Syd, the difference is Class C shares (GOOG) have no voting rights, while Class A shares (GOOGL) have one vote each.

For this reason, GOOGL trades at a slight premium to GOOG. But the two move in tandem. For example, since the stock split in April 2014, the correlation between GOOG and GOOGL has been 0.9988. 1.0 is a perfect correlation. So you can go ahead and buy either one.

RiskHedge reader Jim has some good thoughts on self-driving cars.

“I read the RiskHedge report on AI and self-driving cars. I probably wouldn't climb in one today, but in a few years, I'm not sure I'd have a problem with it.

I realize that self-driving cars have a lot more sensors and computational power than the average vehicle. I love the driver-assist package in my wife's 2014 Jeep Cherokee. I don't think I'll ever own anything without adaptive cruise control again. Really helps for those "not so good" drivers who pass you then pull in front and slow down.

Nice thing about self-driving cars is the millions of senior drivers who should no longer be driving can stay more independent. As someone nearing 65, I know I'll be there one day. If the self-drivers aren't there, I hope I have the sense to give up my car, as my grandmother did... first stopping driving at night, then giving up her license at around 89. She lived several more years and despite living in a country village, never missed her car.”

Jim, I completely agree. Elderly folks who can’t drive will be the first big winners when self-driving cars rollout. They’ll no longer have to take public transport to get groceries or visit family.

This is why Waymo is smart partnering with city councils to fill the gaps in their public transport systems. And bringing people to buy their groceries at Walmart.

On the face of it, self-driving cars seem like a young person’s thing. But in a few years, Americans of all ages will be riding in them.

What to do with your money in a bear market

What to do with your money in a bear market

“Sell everything, I can’t take anymore!”

My stockbroker friend got a phone call from a hysterical client on Christmas Eve.

She was panicking over all the money she had lost in the market… and was demanding to sell her whole portfolio of stocks.

December, as you surely know, was horrendous for U.S. markets.

The S&P fell 10% for its worst December since 1931 during the Great Depression.

In fact, it was the S&P’s worst month overall since February 2009.

  • From 2009 to 2017, U.S. stocks posted a gain every single year…

That nine-year winning streak is now over. On Monday the S&P closed out 2018 with a 6% loss.

All this bad news has many investors freaking out that a dreaded “bear market” in stocks has arrived.

If we are in a bear market, there’s likely more downside from here. In the 10 bear markets since the 1920s, stocks fell an average of 32% from their highs.

Meanwhile the S&P has already fallen 17% since peaking in September 2018.

So if we’re in for an “average” bear market, stocks should continue falling.

  • Of course, markets often defy averages… 

And I’ve heard from a lot of readers who are nervous stocks are headed for a full-blown crash.

So in the rest of today’s letter, we’re going to look at how “disruptor” stocks perform in a worst-case scenario…

Like when U.S. markets cratered 57% during the 2008 financial crisis.

  • As regular RiskHedge readers know, “disruptors” are stocks that create, transform, and disrupt whole industries.

“Disruptors” are not ordinary stocks. They don’t come in and compete with industry leaders. They destroy them.

Buy a disruptor early on, before it becomes a household name, and you’ll often stand to make profits of 1,000% or greater.

Take online travel disruptor Priceline (BKNG) for example.

Remember when you had to talk to a travel agent to book a vacation?

Now you can book a whole trip from your computer in under ten minutes.

Priceline was the main driving force behind this disruption.

Its online booking platform dominates the $240 billion global travel services industry. Close to half of all vacations booked online today are booked through Priceline’s network of websites.

  • Early investors in Priceline stock earned profits up to 14,000%...

Back in 2007, just before the financial crisis, Priceline was still a small firm with just $140 million in sales.

In the next two years—2008 and 2009—its earnings surged 249%.

Let me repeat that…

During the darkest days of the worst financial crisis since the Great Depression, Priceline’s business didn’t just hold up...

It grew faster than ever.

And its stock price soared 144% from 2008–2009. You can see from this chart it crushed the S&P 500.

  • Priceline wasn’t the only disruptor that sailed through the 2008 crisis…

A few months ago we talked about a super-profitable business called the cloud. 

In short, the cloud gives businesses cheap access to powerful supercomputers.

Salesforce.com (CRM) pioneered this business two decades ago. Today over 150,000 clients pay Salesforce a monthly fee to use its customer relationship tools. Investors who got into Salesforce stock early booked profits up to 1,750%.

Like Priceline, Salesforce’s profit and revenue growth powered right through 2008 and 2009.

During this period the average S&P 500 company’s earnings tanked by -77%.

Salesforce’s earnings, meanwhile, more than doubled.

Look at the chart below. You’ll see that after markets bottomed in 2009, Salesforce stock rocketed six times higher than the S&P by the end of 2010.

  • The financial crisis was barely a speed bump for great disruptor stocks.

Iconic American stocks like Lehman Brothers, Bear Stearns, and Merrill Lynch couldn’t survive 2008. How did these disruptors do it?

It comes down to the difference between a business and a stock price.

The father of “value investing” Benjamin Graham once said:

 “In the short run, the market is a voting machine. But in the long run, it’s a weighing machine.”

In the short run, emotional buyers and sellers push stock prices around. When fear grips markets, stock prices go haywire.

But ultimately, business performance is what matters.

True disruptor stocks have a rare quality: they grow… and grow… and grow… no matter what the broad markets are doing.

As I mentioned, their profit engines kept on purring right through the 2008–2009 meltdown.

Priceline’s earnings surged 249% during the financial crisis. Salesforce’s more than doubled.

Earnings for another disruptor—Amazon (AMZN)—shot up 89%.

To put some numbers to it, say you had invested 10,000 bucks each in Priceline, Salesforce and Amazon at the beginning of 2008.

So $30,000 total.

By the end of 2009, your stake would’ve grown to $54,000.

  • In other words, you would have made an 80% profit during the worst crash in 70 years.

Compare that to markets as a whole. If you’d bought the S&P 500 on January 1, 2008, it would have taken until March 2012 just to recoup your losses.

Your investment was dead money for over four years.

Look, I doubt we’re headed for a crushing bear market like 2008.

Huge crashes like that just don’t occur often.

But if we are headed for stormy markets… I want to own disruptor stocks that will power right through it.

Where do you think markets are going in 2019? Tell me at stephen@riskhedge.com.

Until next week,

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Terry asks about overseas disruptors:

“Can you please mention any UK companies that come up in your research?”

Terry, as you likely know, the majority of great disruptive companies are born in America. But one UK-based company did catch my attention recently.

Ocado Group (OCDO.L) (OCDDY) is an online grocery retailer with some pretty unique technology. You might have seen the video of its fully automated grocery warehouse. I’m not recommending Ocado today, but it’s a player in one of the disruptive trends I’ll be talking a lot about this year—disruption of grocery stores.

Longtime reader Rakesh asks about Netflix:

“Hello Stephen, I've been following RiskHedge for a while now. It’s thorough and has one of the best edges in the market. Do you think vernacular language content creation will help Netflix grow going forward?”

Thanks for your kind comment Rakesh. I believe you’re asking if creating original content in several different languages can propel Netflix forward.

Around 60% of Netflix subscribers are from outside America. And in the past year, it’s added 4x more international subscribers than US ones. As I explained back in July, Netflix’s US growth is nearly tapped out. So to continue growing, it MUST create successful programming in many different languages.

The problem, as I wrote here, is that it will be extremely difficult for Netflix to develop programming expertise in many languages and countries. It’s possible they’ll succeed, but I wouldn’t put money on it.

A special peek behind the curtain at RiskHedge

A special peek behind the curtain at RiskHedge

Happy holidays from the whole team here at RiskHedge.

Our offices are closed this week while we spend time with family. So today we’re doing something a little different…

Instead of the usual weekly essay, I’m sharing a lively “behind the scenes” conversation I recently had with RiskHedge Chief Investment Officer Chris Wood. He’s the smartest guy I know when it comes to investing in early stage disruptive companies.

Below, we chat about what it really takes for a small disruptive company to grow into a large one… discuss which disruptive stocks you should avoid… and divulge early details of a unique project we’re working on.

Enjoy your holidays,

Stephen McBride
Chief Analyst, RiskHedge

*  *  *  *  *  *  *  *  *  *

Stephen McBride: Chris, our readers hear from me every week. They probably don’t know we have a whole team of talented people working here at RiskHedge. Tell them who you are.

Chris Wood: Yeah Stephen, you really hog the spotlight! I’m only kidding. As chief investment officer here at RiskHedge, I do two things. First, I co-manage the RiskHedge Fund with you, which all of RiskHedge’s founders are personally invested in.

Second, I specialize in finding “early stage disruptor” stocks.

SM: Which are what, exactly? 

CW: As you often say, disruptive companies literally invent the future. The true disruptors aren’t out there making small improvements. Instead they’re blowing up norms… taking down the entrenched players… creating or transforming whole industries.

I specialize in finding these stocks years before you’ll ever read about them in the Wall Street Journal. By getting into these tiny disruptors early, you give yourself a real shot at very large gains—often 1,000% or more. Sometimes a lot more.

SM: Give our readers an example.

CW: Take a company like Adobe Systems (ADBE). Its “PDF” software changed how we read things. Most American professionals use it a dozen times a day without giving it a second thought. Adobe’s software was a driving force behind the whole “going paperless” trend that swept through American offices.

Had you got into Adobe stock early on, when it was an early stage disruptor, you’d be sitting on gains of over 130,000%. That’s enough to turn even a small stake of a thousand bucks into well over a million.

SM: A lot of skeptical folks will assume you’re cherry-picking with that example.

CW: I know, a gain that big is hard to fathom for most investors who have never seen anything close to it. But the fact is, there are dozens and dozens of examples of early stage disruptors achieving tremendous gains.

One your readers know well is Netflix (NFLX). I know you’re no fan of Netflix’s (NFLX) stock—and its certainly nowhere near “early stage disruptor” status today.

But think back to 2007 when it was just getting off the ground. Its disruption of the movie rental business was only getting warmed up, right? It would go on to disrupt not only Blockbuster video, but the whole American cable TV business.

Today, Netflix is bigger than networks ABC, CBS, NBC, and Fox. And as you know, its stock has handed early investors something like 47,000% gains.

SM: So which stocks you buy is only half the challenge. The other half is when you buy them.

CW: Right. You have to get in well before the crowd catches on. Like you, I have zero interest in owning Netflix today.

SM: You’re known for recommending both Amazon (AMZN) and Google (GOOG) way back in 2012, long before they became two of the so-called “FAANG” stocks. Any interest in owning them today? 

CW: They’re both great businesses. But they’re gigantic already. Its mathematically impossible for either of them to grow, say, 10X over the next few years. The best you can really hope for is a double.

I only want to buy tiny businesses taking on very large markets. The ideal early stage disruptor is a tiny, little-known stock on the cusp of transforming a big industry. That’s how a company can realistically set itself up to grow 10x–100x, which leads to a soaring stock price.

SM: And finding these gems is much easier said than done. Its not something an investor can do part-time or on the side.

CW: Right—and that’s why we set up RiskHedge. As far as I know, we’re the world’s only investment research firm 100% focused on disruption.

I want to mention one more big advantage to investing in early stage disruptors. If you identify the right stocks, you don’t have to time your buys and sells precisely.

Take Adobe. As I said earlier, you’d have made something like a 130,000% gain if you got in and out at the right times. Of course, no one can consistently nail the timing. But with gains that big on the table, you’re afforded plenty of leeway. Even if you totally botched the timing and made only 1/20th of the available gain, you’d take home a profit of 6,500%.

SM: Okay, let me shift gears a little bit. You’ve been a professional investor for 15 years, and you know as well as I do there are a whole lot of what I’ll call “pretend” disruptors out there. For every truly disruptive stock, there are a dozen others that claim to be the next big thing but are really just capitalizing on hollow hype.

Tell our readers the unique way you pinpoint true winning disruptors when there’s so much “fool’s gold” out there.

CW: You’re talking about my CHAOS Formula. It’s my proprietary tool for evaluating the profit potential in disruptive stocks.

I like to explain it like this. Finding early stage disruptors with 1,000% or greater profit potential is like finding a needle in a haystack. My CHAOS Formula is like a powerful magnet that homes in on truly disruptive stocks and discards all the others.

SM: Why “CHAOS”? 

CW: It’s an acronym. Very briefly, it evaluates a stock based on five criteria—Change, Hype, Acceleration, Ownership, and Size.

I’ll only invest in a stock that passes all five. Its sets the bar high—only about 1 in 85 stocks I feed into it earn a passing grade.

SM: I’m sure readers are wondering where they can get your CHAOS Formula picks.

CW: I’ve always kept them confidential. The challenge, as you know, is these stocks are often tiny. They typically have a market cap of around $100 million. Which means too many investors buying in a short window would skew the price.

We have a pretty big following at RiskHedge. Tens of thousands of investors read this weekly letter, and millions more read our work in the media. Your recent piece on Forbes was read by, what, 2.5 million people? And that’s just one article. Even if just 0.1% of them followed along and bought a tiny disruptor I recommended, it would artificially inflate the price.

SM: But we’re creating a solution. We’re not quite ready to announce the details yet, but can you give readers a little taste of the special project we’re working on? 

CW: Sure. In January, I’ll be launching a new service where I share my early stage disruptor stock recommendations with a small circle of investors. For the reasons I just explained, we’ll only be able to accept around 1,000 members max. I hate to turn folks away, but the stocks I recommend are just too small and under-the-radar to share beyond a small circle of serious investors.

That’s really all I can share for now.

SM: Thanks Chris. Looking forward to hearing more in January.

Buy this small stock that turns data into cash

Buy this small stock that turns data into cash

Peter Cavicchia got fired for spying on his bosses.

He was a former US Secret Service agent in charge of running JPMorgan’s (JPM) employee surveillance program.

His job was to make sure employees weren’t up to anything illegal, like insider trading.

Although all big banks have surveillance teams, Cavicchia’s was different.

It was one of the first to use data to inform its spying.

His team read personal emails of employees… tracked GPS locations of work phones… trawled through internet history… and even transcribed employee phone conversations.

It then fed all this data into special computer algorithms that could identify suspicious patterns of behavior… ones that simple surveillance would have missed.

Cavicchia was fired in 2013 when JPMorgan’s top brass discovered he was spying on them, too.

  • Today, using data to predict people’s behavior is BIG business.

Whether you’re aware of it or not, you generate a lot of data every day.

Every time you shop online, use your phone for driving directions, send an email, browse Facebook (FB), or watch YouTube… you’re generating data that savvy companies turn into cash.

25 years ago before any of this was around, the whole world generated just 100 gigabytes of data a day.

That’s equal to downloading 30 HD movies.

Today we generate roughly 4.3 billion gigabytes per day… which is a 4,300,000,000% explosion from 25 years ago!

Here’s how this incredible growth looks on a chart:

Amazon (AMZN), Google (GOOG), and Facebook are three of the largest, most powerful companies on earth. Data is the lifeblood of their businesses.

Take Amazon for example. Did you know that one in every three items it sells comes from its “recommended for you” tab?

This is where it offers you items you’re likely to buy based on what you’ve bought in the past.

This one strategy generated $36 billion in sales last year alone!

That’s more revenue than fast food giant McDonalds (MCD) earned.

  • But while tech giants like Amazon and Google have figured out how to turn data into cash…. most firms don’t have a clue how to unlock the value in their data.

Today many companies collect tons of raw data on their customers. But most don’t have the tools to make good use of it.

You see, data is like oil. When oil is first sucked out of the ground, it’s a raw, useless muck.

It only becomes useful when refined into gasoline to power our cars.

Like oil, a big blob of raw data does you no good. Data must be refined and analyzed into valuable information.

This year alone, companies will spend at least $50 billion on data analysis.

  • A small company called Alteryx (AYX) is quietly becoming a top data “refiner.”

Its platform gives companies access to powerful data tools previously reserved for the Amazons and Googles of the world.

Internet giant Cisco (CSCO), for example, is a happy Alteryx customer.

It used to take Cisco seven days to tally up all the money the company was spending on things like research and development. Its well-paid data scientists were wasting 90% of their time tracking down data rather than analyzing it to gain insights.

Using Alteryx’s platform, Cisco slashed reporting time from seven days to 20 minutes.

And by freeing up its data scientists’ time, it cut expenses by about 4%.

  • Southwest Airlines (LUV) is a happy Alteryx customer, too.

Over 150 million people took a Southwest flight last year. Southwest built a computer model to identify which of these folks are likely to use its frequent flyer program, and therefore become a repeat customer.

It used to take Southwest eight weeks to update this complicated model. Using Alteryx, Southwest automated the whole process and saved $80 million.

Alteryx counts some of America’s biggest businesses as its clients, including Wells Fargo (WFC), T-Mobile (TMUS), Home Depot (HD), Nike (NKE), and McDonalds (MCD).

  • Alteryx’s sales have exploded 140% in the past two years.

It went public in 2017, and in each of the past eight quarters, its sales have soared over 50%.

Alteryx has doubled its customer base since 2016. And existing customers are spending more and more money.

For every dollar a customer spent with Alteryx in 2017, it spent $1.30 in 2018. This puts its dollar “retention rate” at a world-class 130%.

For comparison, this crushes even mighty Apple’s 92% retention rate.

  •  Alteryx is an “autopilot stock.”

If you’ve been reading RiskHedge you know why autopilot stocks are ideal investments. In short, they earn heaps of recurring cash by selling subscriptions.

Every one of Alteryx’s 4,300+ customers pay a monthly fee to access its platform. 95% of its sales come from selling subscriptions, giving it a constant stream of cash.

As publicly traded companies go, Alteryx is still small. It’s worth $3.7 billion—too small for inclusion in the S&P 500.

Meanwhile, it’s becoming a dominant player in the rapidly growing data analytics market. Leading research firm IDC estimates this market will be worth $81 billion in just three years.

This combination—small firms disrupting large markets—is exactly what we look for at RiskHedge. These are the kinds of stocks that could double or triple quickly and still have lots of room to grow.

Alteryx is on track to rake in around $200 million this year. My research suggests it should double its sales over the coming two years. That would bring its total sales to around $400 million in 2020.

If it achieves this sales growth, the stock should climb 100–200% by 2020.

  • Alteryx stock has already soared 125% this year.

It’s wise to be careful with any stock that’s run up so far so fast. But I’m comfortable taking a stake in Alteryx here.

As you likely know, US stocks are having a rough year. On the Thursday you’ll get this letter, S&P 500 is down for the year and has slipped 12% since its September highs.

Many widely followed stocks are down big, including Apple (-26%) and Netflix (-29%).

Alteryx, meanwhile, is holding strong near its all-time highs. As you can see in the chart below, it’s sailed right through the selloff, as true disruptors often do.

That’s all for today. Are you nervous about the recent stock market selloff? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge reader Elizabeth asks:

“Hello Stephen,

My husband and I both enjoy reading your letters and RiskHedge. We are both teachers and with that comes a limited salary.

We would appreciate if you could write something for your subscribers who are starting out and only have limited funds to invest, such as a few thousand dollars. I know you deal with the big guys and huge funds, and it would be interesting to hear your perspective on what to invest in when you have limited funds.

Sincerely, Elizabeth”

Elizabeth, thanks for your note. I’m glad you and your husband enjoy the RiskHedge Report.

A great thing about “disruption investing” is you can get started with just a few thousand dollars. In the past 10 years truly disruptive companies like Amazon (AMZN) have turned a $1,000 investment into $27,000.

And autopilot stock Adobe Systems (ADBE) has turned $1,000 into $8,500 in that time.

When you’re starting out with a modest-sized portfolio, it’s key to keep your investment in any one stock small. You’ll often hear this referred to as proper “position size management.” It’s one of the most important but overlooked keys to profitable investing.

I can’t give individualized investing advice, but here’s one smart rule of thumb. Limit your investment in any one stock to a maximum of 5% of your portfolio. So, if you have $5,000 to invest, don’t buy more than $250 of any one stock.

Muffins, dogs, and self-driving cars

Muffins, dogs, and self-driving cars

America’s top researchers were stumped.

How do you teach a computer to “see?”

By 2012 technology had advanced a great deal. For 199 bucks you could buy a tiny supercomputer called the iPhone 5.

You could talk to it—and it would talk back. It could hail you a cab or give you driving directions or play a movie. All of which would stun a person living just five years prior.

But computers were still laughably bad at recognizing images.

Take a look at these pictures:

Source: Huffpost.com

A toddler could tell you half of them show a chihuahua dog, and the other half show a blueberry muffin.

But in 2011, researchers showed them to the world’s best image recognition computer and asked it “is there a dog in this picture?” 

The top performer got it wrong 28% of the time.

  • The world’s smartest computers couldn’t tell a muffin from a dog. 

While “seeing” is second nature to humans, it’s extremely difficult for computers. And if the top computer couldn’t even tell a dog from a baked good, there was no hope for a technology like self-driving cars that required computers to see.

But in 2012, after 50+ years of failing, researchers finally cracked it.

Using a technique called “machine learning,” they slashed error rates in the world’s leading image recognition computer to 15%.

Today the best computer gets it right over 95% of the time... which is better than the average human eye.

  • Machine learning gave computers the ability to “see.”

For the first time ever machine learning enables computers to learn without human intervention.

It works by processing massive amounts of data. Show a computer millions of pictures of a stop sign, for example, and it can learn to recognize stop signs on its own in the real world.

Because of machine learning, computers can now learn from their experiences, just like humans. And it’s allowing them to perform tasks once thought impossible…

  • Like operate self-driving cars.

We last discussed self-driving cars in August. I mentioned Google’s (GOOG) subsidiary Waymo was testing its robo-taxis in Arizona.

At the core of Waymo’s self-driving car fleet is a centralized “brain.” It learns from every mile driven by every Waymo car.

It’s taught itself to recognize stop signs, pedestrian crossings, red lights, and all the other obstacles human drivers navigate.

In Waymo’s words, it’s using machine learning to build the “world’s most experienced driver.”

And get this: Waymo officially launched the world’s first self-driving, ride-sharing service last Tuesday! Residents in four Phoenix suburbs can now ride around in its robo-taxis for a small fee.

  • Waymo is one the most disruptive forces in America.

Recently I explained why self-driving cars are going to gut the auto industry like a fish. Phoenix is only the first step in Waymo’s domination of American roads.

Waymo’s cars have driven 11 million miles already. And they’re clocking up roughly 1 million more every month. Based on Department of Motor Vehicles data, its five biggest rivals have only covered about two million miles combined.

Waymo is crushing them, as you can see from this chart:

Right now Waymo is running tests in 25 US cities. And it’s the only company allowed to test fully driverless cars in California because of its first-class safety record. My research suggests Waymo is at least three years ahead of its peers.

  • And it’s going to upend ride-sharing giant Uber.

By far the biggest cost of operating a car today is paying the driver. Roughly 80% of the money Uber takes in through fares goes to the drivers.

Waymo’s self-driving cars slash this to near zero, so it can offer a far cheaper service.

This is Waymo’s BIG opportunity.

According to the Department of Energy, around 60% of all car trips in 2017 were under six miles.

Whether dropping the kids at school, commuting to work, or buying groceries… these short trips are ideal for ride-sharing. But who wants to pay $10 each way for an Uber?

In the not-too-distant future, depending on where you live, you’ll be able to grab a Waymo for a fraction of what Uber costs.

  • It’s important to know that 94% of road crashes are caused by human error. 

40,000 Americans died on the roads last year. Worse yet, 10,000 of those died in alcohol-impaired crashes.

Robo-taxis will save thousands of lives a year at a minimum. Once governments figure this out, they’ll be begging Waymo to come to their city next.

BUT… Waymo understands a single fatality involving its cars could set it back several years.

That’s why it’s put safety front and center. Ahead of last week’s launch, it hired the former chair of the National Transportation Safety Board to become its chief safety officer.

It’s cozying up to local governments too. It’s partnered with Phoenix’s public transport to connect people with the city’s bus and rail services. It’s also bringing retirees to Walmart to buy their groceries.

Making self-driving cars a success isn’t just about the technology. It’s also about gaining public trust. Waymo leads the way in both.

  • Nobody will catch Waymo.

As regular RiskHedge readers know, Waymo is tucked inside Google, the world’s fourth-largest public company.

That’s important because Waymo’s technology comes from Google. It uses Google’s machine-learning tools to teach its centralized “brain” how to drive.

This gives it a gigantic advantage over its rivals. You see Google is the unquestioned leader in machine learning.

Over the past decade it’s spent four times as much in this space as anyone else. Along with teaching computers to drive, it used machine learning to slash costs in its data centers by 30%.

Analysts at Morgan Stanley value Waymo at $175 billion today. But because you can’t buy Waymo stock individually, investors are completely overlooking its potential.

Google trades at 22 times forward earnings today, its lowest valuation in over a year.

That’s a fair price just for its core business, which as you probably know, holds a near-monopoly on the internet search market. 92 out of every 100 internet searches flow through Google.

In other words, buying Google stock at today’s prices is a bit like getting Waymo for free.

I recommended buying Google at $1,070 a few weeks back. It’s trading right around there today, and it’s still a strong buy.

Would you be comfortable getting in a self-driving car? I want to hear from you at stephen@riskhedge.com.

Until next week,

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

 Hi Stephen,

 Just read your article and The Great Disruptors report. It sounds like Fortinet (FTNT) might be offering something that Booz Allen Hamilton (BAH) doesn’t have.  

 I'm reading up on both, since I know little about cybersecurity, but your take on the comparison of the two would be appreciated.

Andrew, you’re correct in saying Fortinet offers something Booz Allen Hamilton doesn’t. But the opposite is also true.

Think of it like this… you can split the cybersecurity market in two: private business and the US government.

Fortinet provides cybersecurity services to private businesses. Its Security Fabric platform is designed to insulate companies from hacks and breaches.

On the other hand, Booz Allen helps the US government solve its toughest cyber problems. The US government knows it can’t afford to fall behind in the cyber arms race. It will continue to pay Booz Allen handsome sums of money to keep its networks secure and its cyber capabilities ahead of America’s enemies.

The secret weapon for getting America 5G ready

The secret weapon for getting America 5G ready

Who sells the basics?

That’s the first question I answer when evaluating an investment trend.

In markets, he who sells the basics gets rich.

James Marshall did not sell the basics... and he left California broke.

He was the first guy to pull a gold nugget out of the mud during the 1848 gold rush.

He literally struck gold and ended up penniless.

You know who got fabulously wealthy though?

The businessmen who sold the basic tools needed to find and extract the gold.

Investing in “who sells the basics” requires you to buy stocks that will never make the front page of The Wall Street Journal.

For example, Google (GOOG) is famous for turning the search engine into a $120-billion-a-year business.

Along the way it handed investors 1,900% gains.

But without keyboards, mice, and screens… the search engine wouldn’t have taken off.

Logitech (LOGI) is a leading maker of this “basic” equipment.

Over the past five years its stock has more than doubled Google’s performance, as you can see here:

  • We’re getting in on the ground floor of companies making the basics that will power superfast 5G… 

We talked about the lightning-fast Fifth Generation Wireless Technology (5G) recently.

In short, 5G is the new wireless network all our phones and computers will soon run on.

It will be superfast—with speeds up to 20 gigabytes per second. That’s 1,000x faster than what we have today.

It’s important to understand that 5G isn’t a small improvement.

It’s a huge leap that will enable world-changing disruptions like self-driving cars and remote surgery.

Launching 5G will require the biggest overhaul of America’s wireless networks EVER. According to the GSM Association, which represents 800 of the world’s largest mobile operators, it’ll cost roughly half a trillion dollars to build out the necessary infrastructure!

  • The first wave of dollars will flow straight into the basics that enable 5G.

Superfast speeds are a key benefit of 5G.

But just as important is the HUGE improvement in the amount of data that can run through a 5G network.

Think about a cell network like a highway. The more lanes it has, the more traffic it can handle.

5G is going to widen the wireless “highway” by around 100x from what we have today.

This is crucial because new technologies will require far more data than current 4G networks can handle.

For example, according to Intel (INTC), a single self-driving car uses roughly 4,000 GB a day.

That’s like downloading 1,000 HD movies a day—per car!

To expand 5G’s “highway” network providers like Sprint (S) and AT&T (T) are using something called Multiple Input, Multiple Output—or MIMO.

Sprint Chief Technology Officer John Saw calls it “our secret weapon to getting 5G built.”

  • MIMO involves packing more antennas onto cell towers­.

Each antenna acts like a new highway lane, allowing the network to handle more traffic.

Using MIMO, Sprint increased 5G’s capacity by 300%.

Demand for MIMO is expected to explode by 1,500% over the next eight years, according to ResearchandMarkets.com.

Here’s a picture of a MIMO box in Seattle. Although it looks basic, each box houses roughly 1,000 antennas. And a large cell tower might house 50 boxes.

  • Computer chip maker Xilinx (XLNX) builds the “brain” of these MIMO boxes.

Computer chips are the “brains” of electronic devices like smartphones and computers.

Xilinx is the leading maker of a type of chip called field-programmable gate array (FPGA). Think of them as powerful blank canvases that can be used for many different tasks.

For example, Amazon (AMZN) and Google use Xilinx’s chips in their giant data centers. The U.S. Air Force uses them for its drones.

The key advantage of Xilinx chips is they are adjustable. You can change them to perform a brand-new task, or optimize an existing one.

Most other chips are built for a specific purpose and aren’t adjustable.

This gives Xilinx a huge competitive advantage for 5G.

Network providers like Sprint, AT&T, and Verizon (VZ) are figuring out how 5G works as they build it. For the most part industry standards haven’t been set. Things are constantly changing… which requires the equipment to change along with it.

Several wireless carriers in America and South Korea are already using Xilinx’s chips in their 5G rollouts.

Using Xilinx chips, one carrier was able to slash the energy use of its MIMO boxes in half. It also reduced the number of chips inside each from 24 to 4.

  • Xilinx is already collecting checks from the 5G buildout.

It charges roughly $40,000 for each chip inside a MIMO box.

Last quarter sales from this business line jumped 33% to $260 million—thanks mostly to the early 5G rollouts in America and South Korea I mentioned.

Xilinx is a profitable, well-run business. Over the past year its profits soared 24% to an all-time high.

And not only are its margins at record highs—they’re 3x better than the industry average.

Disruptive companies must hit a delicate balance between growth and profitability. To achieve record highs in both at the same time is impressive.

Xilinx is trading at $92 today. My research suggests the stock could hit $130 in the next 12 months as it starts collecting bigger checks from the 5G buildout.

I’ve said it before and I’ll say it again: “The Great Upgrade” to 5G is one of the greatest booms in American history.

Best of all, it’s just getting started. We’re in the initial infrastructure buildout phase. Now’s the time to get in early on companies that “build the basics” to bring 5G to all of America.

Wireless carriers have started upgrading to 5G in several American cities. Are you on 5G yet? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

After reading our Great Disruptors special report, RiskHedge reader Spindrift wrote me with a question about 5G.

Mr. McBride...

I thoroughly enjoyed this report which is clearly representative of the areas of current disruption.

My only concern is that your report fails to mention that China is already using 5G and is clearly ahead of the US in this space. I would be grateful for your thoughts.

Spindrift, I’m glad you enjoyed the report. It’s true that China is pouring billions into 5G. According to “Big 4” accounting firm Deloitte, China has outspent the US by $24 billion in 5G infrastructure. So far, it has built roughly 10 times more small cell towers than the US.

China does not plan to launch any 5G services until the second half of 2019. But the key thing to know is 5G is not a winner-take-all game. Both America and China will have it, just like they both have 4G. And because America’s financial markets are more developed, transparent, and trustworthy than China’s, most of the best investment opportunities are in the American businesses pushing 5G forward.

One controversial stock to buy… and one to avoid

One controversial stock to buy… and one to avoid

Today we check back in on two of my most controversial calls…

If you’ve been reading RiskHedge, you know I’ve been warning you to keep your money out of stock market darling Netflix (NFLX).

This was not a popular thing to say when I first wrote it in July.

Back then Netflix was the hottest stock on Wall Street, had surged 107% in six months, and was hitting record highs.

But it turns out that July was the right time to bail out of Netflix.

Since then it has crashed 37%, as you can see in this chart:

  • Netflix’s worst nightmare is coming true… 

You can review my reasoning for why Netflix is set to disappoint here and here.

It comes down to the lifecycle of disruptive businesses.

Netflix pioneered “streaming” video where you watch shows through the internet rather than on cable TV.

For years it was the only streaming game in town. Early investors rode this first-mover advantage to 10,000% gains from 2008 to July of this year.

But the door is slamming shut on Netflix’s Goldilocks era where it enjoyed almost zero competition.

It’s now coming up against powerful rivals like Disney (DIS)—which I recommended you buy in July.

Disney will launch its own streaming service called “Disney+” next year. It’s going to pull all its shows and movies off Netflix and put them on Disney+ instead.

This is a huge problem for Netflix because Disney has the world’s best content by a long shot. It owns household brands like Marvel… Pixar Animations… Star Wars… ESPN… ABC… X-Men… not to mention all the traditional characters like Mickey Mouse and Donald Duck.

When it launches next year, Disney+ will be a no-brainer purchase for most families. I’ll certainly be subscribing for my daughter.

Meanwhile Netflix will lose a lot of its best content… and potentially millions of subscribers who switch to Disney+.

  • If that’s not bad enough, Amazon (AMZN) is carving out a foothold in streaming, too.         

In February, Amazon announced it would spend $5 billion developing original shows and movies this year. In response, Netflix upped its spending by 50%.

Netflix had planned to spend $8 billion on shows and series this year… now it’ll spend roughly $12 billion. It now invests more in content than any other American TV network.

Keep in mind, Amazon is the third-largest publicly traded company on earth. It has much deeper pockets than Netflix or even Disney.

To have any hope of keeping up with its rivals, Netflix must keep ramping up its spending on content.

Problem is, it can’t. Netflix makes only a small profit, so it’s had to borrow gobs of money to fund its show creation. Its debt has exploded 71% in the past year to $8.3 billion.

That’s not sustainable. Netflix has three bad choices: continue borrowing billions and bury itself deeper in debt… dramatically raise its subscription prices… or cut back on making new content.

  • Netflix traded at $400 when I first sounded the warning… 

It has dropped to around $275 today. And as I mentioned last time, my research shows its worth $190–$200 a share, max.

So, Netflix is still a “no-touch.”

Disney, on the other hand has gained 11.5% since July and hit multi-year highs earlier in November. That’s doubly impressive when you consider most stocks have struggled in the last few months.

Disney is still a great buy at today’s price of $116. It’s heading for $170—roughly 45% higher than today.

  • On a separate note, have you been following uranium prices?

We last discussed uranium in August when I wrote it was one of the best moneymaking opportunities I’d seen in years. 

In the last few weeks, uranium has hit its highest price since early 2016. This time last year, the uranium price was sitting at $18 per/lb. It has shot up 55% to $28 per/lb since then.

And my research shows it’s headed A LOT higher.

As you likely know, uranium is used by nuclear power plants to produce electricity. Some readers have written in to express their unhappiness that I’m investing in “dangerous” nuclear power.

But despite its reputation, the fact is nuclear energy is quite safe. And it powers one in every five American homes.

Thanks to a supply-demand imbalance, the uranium price had cratered 85% from 2007–2017. Almost no company on earth can turn a profit selling it at today’s prices.

  • But the catalyst for a BIG surge in uranium prices is fast approaching.

Nuclear power plants are the largest buyers of uranium. Between 2005–2012 they signed contracts for roughly 1.55 billion lbs, giving them enough supply to last years.

But supply is finally running out. On average, nuclear plants have about two-and-a-half years of supply left. They typically keep between 2-3 years in inventory. So, they’ll have to buy more uranium soon.

But it’s not that easy. Producers have said they won’t sign new contracts until the uranium price rises much higher than where it is today. After all, why would they deplete their assets for a loss?

From talking with industry insiders, many producers will hold out for about $70/lb uranium. Or 140% higher than today’s price.

  • I guarantee you the nuclear plants will blink first in this “standoff.” 

Many folks are surprised to learn that uranium only accounts for about 3% of the cost of operating a nuclear plant. So, it doesn’t matter much to their bottom-line profits if they pay $30/lb or $70/lb.

In August I recommended you buy the world’s largest public uranium company, Cameco (CCJ). We’re doing well on this trade, having gained around 11% so far.

But as the price of uranium surges, Cameco will head much higher. Now is an excellent time to buy.

As I’ve explained in the past, uranium stocks are extremely cyclical. Once they enter a bull market, they can rocket higher at warp speed. Keep in mind, Cameco shot up 2,000% in the last uranium bull market.

That’s it for today. As always, you can reach me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge subscriber Doug is unhappy with my midterm election essay:

“In your note about what happens after midterm elections, you claim that Trump has been good for stocks. Don't you look at history? Even recent history? 

Obama took the market from below 7000 to above 18,000. So, while Trump's 28% in two years isn't bad, it doesn't compare to what the market did under Obama. A better representation of the past two years is that Trump continued the market performance begun during the Obama administration. Please try to tell all of the truth next time.”

Doug… thanks for reading. My essay was about the 2018 midterm elections. If I were to write about the 2010 or 2014 midterm elections, I would certainly mention that stocks performed well under Obama.

In reply to my article about the length of the current bull market, RiskHedge subscriber Hiram asks:

“You said that the S&P 500 trades for about 16.5x forward earnings. But the WSJ says the S&P has a price-to-earnings (P/E) ratio of 22. Could you clarify your comments?”

Hiram, the price-to-earnings (P/E) ratio you cite uses trailing earnings. The P/E ratio I cited uses forward earnings, which factors in expected earnings growth over the next year.

When Will the US Get Attacked in Space?

When Will the US Get Attacked in Space?

Stephen McBride’s note: US markets are closed today in observance of Thanksgiving. Instead of my usual essay, I’m sharing some brief but useful research written by RiskHedge Chief Investment Officer Chris Wood. In it, you’ll discover an investment idea stemming from a disruptive trend that less than 1 in 100 investors knows about…

Enjoy the holiday weekend—I’ll be back next week.

*  *  *  *  *

Object 2014-28E gave the US military quite a scare.

It was thought to be a piece of junk floating around outer space… until it came to life and started zipping around.

Former Air Force Major General William Shelton called that “concerning.”

It turned out that Object 2014-28E was actually a Russian satellite “playing dead.”

It was designed to lay dormant to avoid attention. Then, when it woke up, it could get close enough to inspect other satellites or latch onto them.

Or, as the US military feared, potentially sabotage them.

You probably don’t spend much time thinking about what’s happening in outer space. But I can assure you the US military does.

Its network of satellites orbiting earth are crucial to its ability to defend America. Without them, the military couldn’t guide missiles or monitor troop movements.

A loss of its satellites would also short-circuit warning systems, leaving the US military in the dark.

Russia and China Threaten the US in Space

A recent “Threat Assessment” from the US Intelligence Community read:

“Both Russia and China continue to pursue antisatellite (ASAT) weapons as a means to reduce US and allied military effectiveness.”

As you can imagine, the US military takes this threat seriously. Lately, it has plowed more and more money into defending its satellites in space.

This year, the Air Force has asked for an 8% increase in space funding. That’s after securing a big increase in last year’s budget.

Now, I’ve been a professional investor for almost 15 years. In that time, I’ve developed a few a guiding rules.

One of them is to follow government money.

Where there’s a lot of government money being thrown around, there are often great opportunities for investors like us to profit.

The “Holy Grail” of Space Investing

Satellites cost a fortune to manufacture and launch. On average, it costs around $500 million to build a typical weather satellite and put it into orbit. A spy satellite might cost an additional $100 million.

But get this: there’s no reliable way to maintain, repair, or refuel a satellite.

That leaves the US military and private companies that operate satellites in an unusual situation.

They pour more than $250 billion a year into developing, building, launching, and providing services for satellites…

But once a satellite leaves earth, they can’t protect their investment.

The average low Earth orbit (LEO) satellite stays in orbit for about five years. When it runs out of fuel, gets damaged, or becomes obsolete, that’s it.

It’s now a worthless piece of space junk.

As you can imagine, the ability to extend the life of a satellite through refueling or repair is something of a “holy grail” for the satellite industry.

It would save tens of billions of dollars.

And the US military will happily pay a handsome sum for the right solution.

Well, one company is on the cusp of figuring it out…

Making a Deal with the US Military

In June, defense company Northrop Grumman (NOC) bought a rocket-making company called Orbital ATK for $7.8 billion.

Many analysts say Northrop overpaid.

I completely disagree. Northrop is playing the long game.

Orbital ATK builds communication satellites, spacecraft that deliver cargo to the International Space Station, and rockets for NASA.

It also builds missiles for the military.

But what I’m really interested in is its Mission Extension Vehicle (MEV).

The MEV is designed to dock with and take over the operation of another satellite.

“We take it over like a jet pack in orbit,” says Tom Wilson, president of space logistics at Northrop Grumman Innovation Systems.

The goal of the MEV is to dock with a certain type of satellite, then take over the propulsion system so the satellite can remain operational for five more years after it runs out of fuel.

As one of the five major defense contractors, Northup is already a trusted partner to the US military. My research suggests that the US military will make a deal with Northrup to develop and build out a whole fleet of MEV satellites.

In the meantime, Northrup will make money selling its MEV capabilities to private companies.

Beyond their importance to the military, satellites are crucial to everyday life.

Without them, hundreds of millions of internet connections would go dead. Your cell phone and TV would probably stop working. Credit cards and ATMs would go dark.

Even before factoring in the big growth I expect from MEVs, Northrop is already very profitable.  

Over the past year, it earned $2.3 billion, or $14.54 per share, on $27.0 billion in sales.

Its MEV program will help sales and profits grow to new highs.

Now’s a great time to buy Northrop stock. It has pulled back from its recent record high of $360 in April. At under $280 today, it’s now 7% less expensive than the S&P 500.

Meanwhile, its earnings are growing significantly faster than the average S&P 500 company.

Northrop also pays a big dividend of $4.50 per share. And it has an impressive record of raising its dividend for the past 15 years straight – including during the 2008 financial crisis.

Thanks for reading,

Chris Wood
Chief Investment Officer, RiskHedge

Who deserves your trust?

Who deserves your trust?

Obama called it “the worst disaster America has ever faced.”

41 miles off the Louisiana coast, oil giant BP (BP) had completed drilling the deepest oil well in world history.

At six and a half miles deep, it was like a giant needle jabbed into the earth’s veins.

But just before it was set to begin pumping oil, workers made a terrible mistake.

They failed to seal the well properly, which allowed flammable oil and gas to shoot up to the surface and cause a huge explosion.

In all, it killed 11 people… sank the $560 million Deepwater Horizon drill rig to the bottom of the ocean… and released three million barrels of black oil into the Gulf of Mexico.

The US government would fine BP a record $21 billion.

BP’s stock would plunge 55%, wiping out $105 billion in shareholder value.

  • How much do you think BP management would have paid to avoid this catastrophe?

Keep in mind, it was the worst environmental disaster in US history and the worst oil spill in world history.

BP will be associated with it forever.

And beyond the financial costs, BP suffered a total loss of trust with the public. For years it was perhaps the most hated company on the planet.

So how much is too much to pay to avoid all this?

Ten billion?

Fifty?

A hundred billion?

  • I pose this question because CEOs of the world’s most powerful companies are asking it every day.

They aren’t worried about oil spills.

They’re worried about something far more financially devastating.

Something that could ruin their business overnight.

In 2017, The Economist magazine ran a story about how data has surpassed oil as the world’s most valuable resource.

Makes sense, right? The 20th century’s most powerful companies got rich selling oil—like John D. Rockefeller’s Standard Oil, the first ever $1 billion company.

Many of today’s super-firms have gotten rich collecting and selling personal data. Amazon (AMZN), Google (GOOG), and Facebook (FB) all earn a BIG chunk of their profits from leveraging and selling users’ data.

These are the third, fourth, and sixth biggest publicly traded companies on earth.

This year Google will earn over $100 billion from selling online ads. It has mastered the business of collecting data and using it to figure out who you are and what you’re likely to buy.

For example, try doing a Google search for a ski vacation. Chances are ads for skis, mittens, and lift tickets will start following you around to every website you visit.

  • In the data business, trust is everything… 

Look at Facebook to see how a loss of trust can ruin a company.

Since going public in 2012, Facebook stock has shot up 400%. For years it was a Wall Street darling.

In April, the love affair ended with a thud.

Facebook admitted that the personal data of 87 million users had been sold—without users’ explicit permission—to political consulting firm Cambridge Analytica.

This data breach potentially helped Donald Trump win the presidency.

Facebook stock plunged 17% on the day of the news. It marked the biggest single-day wipeout of shareholder value in US stock market history.

Things only got worse from there.

In the past four months, Facebook stock has plunged 35%—erasing $221 billion in wealth. Take a look at this chart of Facebook stock. It is ugly.

The company’s reputation is in shambles. A recent study by Fortune found Facebook is the least trustworthy of all major tech companies when it comes to safeguarding data.

  • Now everything Facebook does is met with skepticism. 

For example, have you heard about its new video-calling device—The Portal?

You probably have not, because the major media have practically ignored it.

A Wall Street Journal review summed it up best: “I couldn’t bring myself to set up Facebook’s camera screen in my family’s home. Can you blame me when you look at the last 16 months?”

Facebook’s data breach has been a total disaster. 98% of its revenue comes from selling online ads, which it can only do effectively if people continue to allow it to collect their personal data.

When nobody trusts Facebook, the company is dead in the water. Its user growth numbers in the past two quarters have been terrible. For the past two years it has added an average of 46 million new users every quarter. That’s now been cut in half to 23 million.

  • How much would Mark Zuckerberg and his management team have paid to avoid this catastrophe? 

Facebook has hired the equivalent of a small city to shore up its cybersecurity. Its cybersecurity headcount has doubled to 20,000 workers… in just 6 months!

It’s too little too late. Once you lose the trust of your customers, almost nothing will get it back.

No cost is too high when it comes to protecting your customers’ data.

This is why I love the booming cybersecurity business.

Smart companies are spending billions to upgrade their digital defenses. According to top IT research firm Gartner, cybersecurity spending will hit $114 billion this year. Demand for cyber services is set to explode by 70% in the next five years.

The best thing about cybersecurity is there’s a bottomless appetite for it. Hackers are constantly finding new ways to exploit vulnerable systems.

So companies must keep pouring money into building their digital defenses.

The largest cybersecurity ETF (HACK) has trounced the S&P 500 close to 5x in the past year, as you can see here:

Every company—big, small, domestic, global—needs reliable cybersecurity today. You can’t run a business without it.

Growth in cybersecurity is one of the top disruptive trends that will define the next decade.

  • How do we make money from it?

I like what cybersecurity firm Fortinet (FTNT) is doing.

My contacts in the cyber industry tell me many companies suffer from one key problem. They use many different cybersecurity products, which leave holes in their defenses that hackers can exploit.

A report from Cisco (CSCO) found that 46% of firms use more than 11 different cybersecurity products.

Fortinet’s Security Fabric platform solves this.

It combines dozens of cyber solutions into a single product. You get network, email, web, cloud, mobile security, and much more… all in one.

Gartner just named Fortinet as a cybersecurity market leader for the ninth time in a row. The company’s revenue has exploded 135% in the past four years. And its stock is up 140% in the past two years.

So… have you been victim of a cyber hack? Had your personal info stolen? Tell me about it at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge 

Mailbag

I received a lot of questions on my article about NVIDIA (NVDA). I’ll answer two of them here:

RiskHedge subscriber Sid asks:

“Are NVDA chips used in Augmented Reality devices?”

Sid, thanks for your question. Yes, but AR makes up a tiny portion of NVIDIA’S revenue. By far the largest driver of NVIDIA’s stock is its gaming business, which accounts for roughly 55% of its sales.

RiskHedge subscriber John writes:

Stephen, thanks for the newsletter. On NVDA, two things: #1 - Some of the large tech firms have started talking about making their own chips. #2 - It seems that self-driving cars will be much more limited in their usage as there are still plenty of problems to be resolved (rain, snow). Hence they'll operate in places like Arizona where weather is generally clear. Given these factors, will NVDA be able to maintain this level of growth?

John, you’re correct in saying companies like Amazon and Google are building their own chips. The thing is… it’ll take them at least five years to get remotely close to making cutting-edge chips like NVIDIA.

On self-driving cars, it’s true that rain and snow can still cause major problems for the sensors and LIDAR systems. However, Waymo is using machine learning to “teach” the cars how to drive in these environments.

In September, it announced it was making good progress. And it’s now testing self-driving cars in 25 cities across America, including snowy Detroit and rainy Seattle. Fully self-driving cars will take a little longer to roll out in places with bad weather. But you can be sure they’re coming.

Will you buy this hated stock with me?

Will you buy this hated stock with me?

Will you listen to me?

Will you buy the stock I recommend in this issue?

I hope so… because we have a realistic shot to make roughly 140% on our money in just a few months.

Stock markets don’t often hand us opportunities like this. I study markets for a living and I see one setup like it a year, max.

But I know there’s a good chance you won’t take advantage of this opportunity. Because to join me in this trade, you’ll have to do something painful…

  • You’ll have to buy the single most hated asset class on the planet today.

Gold.

Since 2011 gold has plunged 35%. Even worse, gold stocks have cratered 70% in the past seven years.

Investors have completely given up on gold and gold miners. The VanEck Gold Miners ETF (GDX), which tracks the performance of gold stocks, recently suffered a losing streak where it closed lower for six weeks in a row.

That almost never happens. If fact, going back to the creation of GDX in 2006, it has only happened twice.

The last time was in late 2015. I’ve marked it in the chart below.

Do you see what happened last time gold stocks plunged six weeks in a row? They bounced around for a few months before ripping to 140% gains in eight months:

  • Today, just like in 2015, GDX has entered a state of exhaustion. 

Finance nerds use the word exhaustion to describe an investment that’s been subject to relentless selling pressure.

You see at some point, all investors interested in selling a stock have sold it. When this happens we say the supply of sellers has been “exhausted.”

Because there’s no one left to sell, exhaustion often signals that a stock has put in a bottom and is ready to march higher.

GDX has entered a state of exhaustion for the first time since 2015. And after months of sharp drops, it’s finally perking up.

It recently jumped 6% in a single week… one of its best stretches since its 140% surge in 2016.

  • Now when I say gold mining stocks are hated, I mean HATED.

Six straight weeks of losses in GDX is just one data point that shows investors want nothing to do with gold stocks.

According to the Commitment of Traders report, last month professional traders were “short” gold more than any time in last 17 years… since 2001!

As you may know, 2001 marked the beginning of the last great gold bull market that saw gold soar 630% in a decade.

The 2001 bottom also kickstarted a 1,350% surge in gold stocks.

Here’s another telling statistic. Since the beginning of 2018 investors have yanked $3.5 billion from gold-related ETFs. That’s the highest level of withdrawals in five years.

To get a sense of what market insiders are seeing right now I called up Adrian Day of Adrian Day Asset Management. Adrian is a professional investor who’s been putting money to work in the resource sector for over 25 years. Here what he told me:

“Gold stocks are more or less at the same level they were in 2001 when gold was a fifth the price it is today. Very few funds hold any gold stocks today, whereas 15, 20, 25 years ago, a lot of them did. But the stocks are now responding to good news—a very positive sign that the market is turning.”

  • It’s no exaggeration to say gold stocks have NEVER been as hated as they are today. 

This extreme hatred tells me buying gold miners now is a smart move.

It’s never easy to go against the crowd and buy a hated asset. You’ll probably feel uneasy hitting the “buy” button.

But as regular RiskHedge readers know, buying hated stocks is one of the lowest risk ways to make big profits in markets.

In fact, the last “hated” stock I recommended to you was 3D printing company Stratasys. It has leapt 25% in the last week thanks to better than expected earnings.

  • Gold may lack the excitement of the disruptive technologies I often write you about... 

Self-driving cars, DNA mapping, and the coming superfast 5G cell phone network are much “sexier” than gold mining stocks.

But please, don’t let that stop you from taking this opportunity seriously.

Gold miners are perhaps the most explosive group of stocks on the planet. Gold stocks have exploded for triple- or quadruple-digit gains seven times in the past 48 years.

Buying gold stocks at the correct time is one of the few legitimate strategies for earning big returns quickly in the stock market.

It’s also a backdoor way to profit from one of the most insidious disruptions to your finances: the slow death of the US dollar.

I won’t get into the whole case for gold here. If you’ve paid a medical or tuition bill recently, you know a dollar doesn’t go far these days.

And if you’re familiar with how our financial system works, you know our money isn’t tied to anything of real value anymore.

Rather, the value of the dollar largely depends on politicians making responsible financial decisions.

By the US government’s own calculations, a dollar is worth 86% less than it was 50 years ago.

Think of gold as the reciprocal of the US dollar. Although it goes through short-term price swings, it has held its value for thousands of years.

Gold miners are a supercharged version of gold. Even a modest move in gold can slingshot gold stocks much higher. As I mentioned earlier, when gold jumped 30% in early 2016, GDX shot up 140%.

I’m buying GDX here. My research shows we could double our money or better in the next few months.

Will you join me and buy GDX? If not, why not? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

In response to my article about the coming superfast 5G cell phone network, reader John writes:

“Stephen, thanks for the disruptor ideas. On QUALCOMM (QCOM) you don't mention its legal troubles with Apple (AAPL)… and more importantly the Federal Trade Commission (FTC). Are they impactful?”

John, Apple owes QUALCOMM around $7 billion in unpaid patent royalty payments. The case is going through the courts right now… and Apple will eventually have to cough up the money.

On the FTC case, I expect QCOM might have to pay a small sub-$1 billion fine sometime next year.

But this won’t change the fact that QUALCOMM is at the center of the coming 5G revolution. In fact, just last week, it made the first-ever public call on a 5G phone at its summit in Hong Kong!

Should You Sell Your Stocks Before Tuesday’s Big Elections?

Should You Sell Your Stocks Before Tuesday’s Big Elections?

Are you prepared for Tuesday?

It’s going to be a crucial day for the stock market.

As you likely know from the lawn signs dotting American neighborhoods, midterm elections take place this Tuesday.

If the polls are correct, President Trump and Republicans are in big trouble…

According to statistical analysis firm FiveThirtyEight, there’s an 85% chance Democrats will seize control of the House of Representatives from Republicans.

This is causing bigtime anxiety for investors who’ve enjoyed the 28% stock market rally since Trump took office.

No matter what you think of Trump, his reign as president has been great for stocks. But as the election has drawn closer, the market has fallen apart.

Yesterday the S&P 500 closed out October for a 7% monthly drop—nearly its worst month since the financial crisis!

  • I’m going to tell you exactly how to be invested ahead of Tuesday’s big elections. 

But before I continue, a warning…

Few topics stir emotion in America like politics. Many perfectly reasonable people lose the ability to think straight when they hear the name “Trump.”

Politics and investing do not mix. Superinvestor Warren Buffet often says “If you mix politics and investing, you’re making a big mistake.” 

So let’s steer clear of opinion and emotion. Instead, I want to focus solely on the facts that are relevant to you as an investor.

As you’ll see, you don’t need to waste even one second worrying about which party will win on Tuesday.

  • My team went back and studied every midterm election since the Second World War.

I was surprised by what we found.

It turns out there’s a shockingly easy way to predict whether stocks will rise or fall after a midterm election. And it has nothing to do with predicting in advance which party will win.

Here’s what we found…

Since 1946, there have been 18 midterm elections.

US stocks have climbed higher in the next 12 months after every single one.

Every single one.

That’s 18 for 18!

I’ll repeat it because this is so important:

For each of the past 18 midterms, stocks have ALWAYS climbed higher a year later.

Always.

We’ve had every possible political combination in the past 72 years. Republican president with Democratic Congress. Democratic president with Republican Congress. Republican president and Congress. Democratic president and Congress.

The market climbed higher every time.

  • And stocks don’t just grind higher after a midterm election. They often surge…

Since 1946, stocks have jumped an average of 17% in the year after a midterm.

And if you measure from the yearly midterm lows, the results are even better. From their lows, stocks jumped an average of 32% over the next 12 months.

For perspective, that’s more than double the average performance for stocks in all years.

We’re also entering the third year of a presidential term, which is historically the strongest year for stocks.

Take a look at this chart. You can see that the performance of stocks in the third year of a presidential term beats all other years by a long shot:

  • The facts are clear… but why do markets behave this way with such remarkable consistency?

Glance up at the chart above once more and you’ll notice the second year of the presidential cycle is typically the worst for stocks.

That’s the year we’re in right now—the year when midterms occur. 

There’s one last important point you should know. Leading up to midterms, US stocks typically perform poorly. From January to October in midterm years, they drop an average of roughly 1%.

In all other years stocks rise roughly 7% in that timeframe.

Think of midterm elections like a thick fog covering markets. They obscure what the political situation will look like in the near future.

Unable to see what’s coming, investors get nervous and act cautiously. Just as they would slow down while driving a car through a thick fog.

Once the election concludes and the fog clears, investors regain confidence and the market gets back on track.

2018 is following this script to a T. For all the market’s gyrations in the past few weeks, the S&P is roughly flat year to date. If we stay on script, we should expect the market to surge in November after the uncertainty of the elections is behind us.

  • Knowing all this, now is your chance to take advantage of the market’s pre-election jitters.

If you’ve been reading the RiskHedge Report, you know I practice “disruption investing.” I identify and invest in companies that are disrupting industries and inventing the future. Often, these stocks can hand us big gains of 3x, 4x, 5x our money or more.

This stock market pullback is our chance to get in on great disruptive businesses at much cheaper prices than we could a few weeks ago.

Today I want to highlight your opportunity to buy Google (GOOG) at a great price. I’ve called Google one of the “ultimate disruptors,” because it’s like an octopus with tentacles in many disruptive sectors.

As you surely know, Google has an effective monopoly on the internet search market. For every 100 searches performed, 92 of them flow through Google. And this year it’ll earn over $100 billion from selling internet ads on its search pages.

But this is only scratching the surface. Google also owns YouTube, which my research shows could be a $150 billion company on its own.

It also owns Waymo, the world’s leading self-driving car company. As I explained recently, it will launch a fully driverless ride-sharing service in Arizona later this year.

Underneath it all, Google is super-profitable. In the latest quarter it increased its net profit margin to 27.2%. Meaning for every $100 in sales, it can reinvest $27 into growing its disruptive businesses.

A few weeks ago, I recommended you wait to buy Google until it pulled back to near $1,050/share. Today we have our chance. As I type it’s trading for about $1,070/share – close enough for me to pull the trigger.

I’m buying Google here and I plan to hold for at least two years.

That’s all for today. What do you think… Are you worried about the stock market pullback? Or do you see it as an opportunity? Write me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge reader Lorenzo writes:

Stephen, on your recent post If I Could Only Buy One Stock for the Next 5 Years, I found your arguments really strong. I did some research and bought the stock at $207. But now I see that the stock has high volatility. And the news about the chip sector going down is also a bit scary to me. I wanted to invest for the long term in NVIDIA but I am considering it a high risk stock right now. 

My question is what do you think now about investing in NVIDIA after these past couple of days?

Lorenzo, thanks for writing in. The recent market selloff has hit chip stocks hard. The VanEck Semiconductor ETF (SMH), which measures the performance of chip stocks, slipped 11% in October.

As I mentioned in last week’s reader mailbag, despite the drop in Nvidia’s share price, its business has never been stronger. I reiterated buying it at last Thursday’s price of $195. Today, it’s trading at $215, and I’m still buying.

Like many top-performing stocks, NVDA can be volatile. It’s not unusual for a stock that has climbed 200% in the past two years, as NVDA has, to give back a chunk of its gains in a broader market swoon. NVDA has incredible long-term disruptive potential. I expect today’s volatility to look like little more than a bump in the rearview mirror as it climbs much higher in the next three to five years.

The Key to Handling a Market Crash Like a Pro

The Key to Handling a Market Crash Like a Pro

“Stocks are plunging… what should I do?”

That’s the #1 question readers are asking me after the S&P 500 plunged 8% in the past two weeks.

From looking at my emails, I can tell folks are nervous.

I understand why. This has been no run-of-the-mill dip for stocks.

By one widely followed measure of market momentum, stocks briefly entered a freefall that was worse than anything we’ve seen since 1990!

  • As usual, journalists and reporters are serving up a big dose of fear… 

CNBC held a special six-hour long Markets in Turmoil segment. All the big networks broke out their scary red BREAKING NEWS banners.

If you’ve been reading RiskHedge, you know why I urge you to ignore these so-called “experts.”

Let me elaborate on why fearmongers in the media are your worst enemy...  

  • As “disruption investors,” we aim to buy great businesses that are inventing the future

We do this because investing in great disruptive companies is where fortunes can be made.

For example Amazon (AMZN) effectively invented the online marketplace. It has handed early investors 22,000% gains and counting.

And Apple’s (AAPL) invention of the iPhone is the main reason why 85% of Americans carry a smartphone. Its stock has rocketed 14,000% since 2004.

These results show you can make life changing gains by investing in the right disruptor… at the right time.

But owning these businesses is NOT a one-way road to riches.

As you likely know, they attract a lot of excitement from investors. Which makes their stocks prone to big moves both UP and DOWN.

  • Take Amazon… the second largest publicly traded company in the world after Apple. 

Amazon took shareholders for a roller coaster ride in 2014. The stock plunged 30%, prompting the media to run stories like… 

“Is Amazon Going Through an Identity Crisis?

“Amazon to $100?”

I met a friend in Ireland around this time who told me he was shorting Amazon.

The stock is up over 400% since then… and trades at $1,750 today.

It’s the same story for big disruptors like Google (GOOG), Microsoft (MSFT), and dozens of others. They all suffer through bad weeks and months. But investors who’ve stayed the course have made 10x gains or bigger.

  • Think of a correction as the market’s way of testing you.

As you may know, I spend 100% of my professional time on the hunt for disruptive businesses with the potential to hand us triple-digit profits.

But identifying these stocks is only half the battle.

Once you buy a disruptor… your biggest challenge is to own it through the bumps and dips which the market will serve up.

It’s not easy to hold on when markets look wobbly like they do right now. You’ll feel like hitting the sell button when you see nothing but red charts on the screen.

But let me tell you something…

  • As I write you on October 25, US stocks haven’t had a losing year since 2008. 

The S&P 500 has surged almost 300% in the past nine years.

But it has NOT been “smooth sailing.” In the past nine years the S&P has dropped 19%, 16%, 13%, and 10% five separate times.

These corrections were nothing to panic over. In fact, pullbacks suggest that investors are acting cautiously.

This is a good thing for the market’s longer-term health. It’s when the market goes straight up every day that you should be worried.

Remember in January when stocks were on a tear? Investors cheered as the S&P soared 8% in the first 26 days.

That euphoria concerns me far more than any correction.

Case in point: The market peaked on January 26. In just a few days it plunged 10%, erasing all its 2018 gains.

  • Let me show you why we’re unlikely to see a 20%+ drop in stocks in the near future. 

Please understand, I don’t make these assertions lightly.

I have tons of research to back them up… because this is how I invest my own money.

A reliable way to check the market’s “pulse” is by examining the economy. The vast majority of crashes in US stocks have happened while the US economy was shrinking.

Since the 1920s there have been ten bear markets in US stocks. Eight of the ten have come inside a recession. 

The ninth was during the Cuban missile crisis. And the tenth was “Black Monday” 1987, when stocks cratered 23% in a single day. You could consider both once-in-a-lifetime events.

On average, these non-recession bear markets lasted less than six months and fell an average of 31%.

The others lasted two and a half years and fell 49%, on average.

Drilling down further: When the S&P 500 falls 10% or more while the economy is growing, stocks rise 24% on average the following year.

  • So, unless the economy tanks… a correction is unlikely to turn into a full-blown crash. 

How is the economy looking today?

In a word, great. Most of the indicators I monitor say the US economy is healthy as an ox. I’ll give you one example: the unemployment rate.

My research shows the unemployment rate began to rise about 12 months before each recession in the past 60 years. Essentially, it has warned us of every single recession for the past six decades… roughly a year in advance.

Unemployment in the US today is 3.7%, which is almost a 50-year low. This indicator, along with several others, continue to give me the "green light" for owning stocks today.

  • Here’s what I recommend you do with this information.

I told you a few weeks ago that if I could only buy one stock for the next five years it would be Nvidia (NVDA).

Nvidia makes high-performance computer chips called graphics processing units (GPUs). They are powering several disruptive megatrends like self-driving cars, artificial intelligence, and video gaming.

Hundreds of billions of dollars are pouring into these trends, sending Nvidia’s profits soaring to near all-time highs. In fact, it is achieving a better net profit margin than known cash-generating machines Google and Microsoft.

In short, Nvidia’s fundamentals have never been better. But its stock has slid 26% in the market’s selloff.

Earlier I said disruption investors like us should buy great businesses that are inventing the future. Nvidia’s cutting-edge computer chips are doing exactly that.

Nvidia has firmly planted itself at the center of disruption. And today you can own it for a 26% discount to what investors paid three weeks ago. That’s exactly what I’m doing.

So… what do you think? Are you worried this correction is the start of something more sinister? 

I want to hear from you… write me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

In response to my letter about the resurgence of “Made in the USA,” Leo asks:

“I love reading your report and love how you write: clear, concise, and to the point. But can’t help but wonder: Why share this knowledge? I always expected people with this level of understanding to hoard it for their own benefit, not that of others.”

Leo, thanks for your kind message.

There’s a lot of investment information out there. I spend more than 12 hours a day wading through research and speaking with experts. But as you alluded to… by far the hardest thing to find is a clear and concise take on what’s really going on.

That’s what I aim to do for RiskHedge readers every week. To help investors like you make sense of the rapid changes taking place and to profit from them. So if you like my work, please forward it to anyone who might be interested in understanding and profiting from disruption.

How We’ll Profit from the Resurgence of “Made in the USA”

How We’ll Profit from the Resurgence of “Made in the USA”

“Made in America.”

Remember when this label was something to be proud of?

Today it sounds like the punchline of a joke.

Any business student will tell you only a sucker makes stuff in America these days.

According to the Bureau of Labor Statistics, the average US factory worker earns around $27/hr.

Meanwhile, factories in Indonesia pay workers about 70 cents an hour.

This cold, hard math has led to the hollowing out of American manufacturing. Between 1990–2007, America lost over four million manufacturing jobs.

  • What if I told you a disruptive technology is set to unleash a resurgence in American manufacturing?

Maybe you’re rolling your eyes right now.

Maybe you think it’s laughable to suggest traditional manufacturing jobs will ever return to America.

If so, you’re right.

Those jobs are likely gone for good.

But a new kind of “Made in the USA” is here.

Because how we make things is totally changing.

A few weeks ago I explained that some of the world’s biggest companies like Airbus (EADSY), Boeing (BA) and Nike (NKE) are pumping billions of dollars into 3D printing.

Think of 3D printing as “manufacturing 2.0.”

A 3D printer builds objects layer by layer. Starting from scratch, it stacks thin slices of material like plastics and metals to build from the bottom up.

You may remember the craze around 3D printing a few years ago. The technology has improved 100-fold since then.

Leading 3D manufacturers can now print jet engines, car parts, and even key pieces in US military submarines.

For example, General Electric (GE) recently 3D printed an entire aircraft engine. This engine used to have 855 different parts. Would you believe that GE’s 3D-printed version has just 12?

  • 3D printing flips manufacturing on its head.

Traditional manufacturing requires a lot of manpower. To make, say, a car, thousands of parts must be made separately and then assembled. Take a look at this picture of an auto assembly line:


Source: Alibaba

That’s a long row of highly-paid workers operating expensive machinery. You can imagine why carmaker Ford (F) employs 202,000 people… and spent over $7 billion on machinery last year.

  • Now take a look at a 3D printing factory.


Source: DIY 3D Printing

Those machines you see cost around $300,000. But as 3D printers can make whole products from scratch… you don’t need nearly as many assembly workers. There is often nothing to assemble, because it can print a finished product.

Fortune 500 companies are pouring hundreds of millions into the technology. Nike, for example, has started 3D printing some of its shoes. It reports that it has cut labor costs by 50%... and cost of materials by 20%.

Adidas (ADDYY) is 3D printing shoes, too. Earlier this year it opened its second 3D printing plant. Not in China, Vietnam, or Mexico… but right here in the USA. The Atlanta-based factory will spin up one million pairs of shoes per year.

Defense contractor Boeing now 3D prints titanium parts for its 787 Dreamliner. It has shaved $3 million off the cost of each one.

And according to General Motors (GM), its new 3D-printed metal seat bracket is 20% stronger and 40% lighter than a conventional one. And it’s made of only one part instead of eight.

Notice the theme. 3D printing makes things stronger… lighter… cheaper… more efficient. All of which boosts profits. This is music to the ears of business executives. Just about every company that makes things stands to benefit by adopting 3D printing.

  • For investors like you and me… it’s crucial to understand that 3D printing is still in the earliest innings.

According to leading research firm Wohlers, the 3D printing market totaled $7.3 billion last year.

That’s roughly 1/100th of the $700 billion US companies spent on traditional manufacturing machinery.

Morgan Stanley estimates the 3D printing market will triple to $21 billion by 2020. I agree… my independent research suggests it’ll expand to a $100-billion market in the next decade. This represents about 13x growth from today.

Sales of metal 3D printers will be a key driver. 3D printers that print in plastic have been available for years. But ones that can print metal components for engine parts have only been rolled out recently.

Sales of these metal printers exploded 80% last year. The latest machines are 100x faster than existing ones… and make parts for 1/20th the cost.

This is like pouring Miracle-Gro on the 3D printing industry. For example, there are 2.3 million parts on a Boeing 787. Less than 5% are made from plastics. Around 45% are metal. We can expect a big chunk of these to be 3D printed in the near future.

In fact, the Federal Aviation Administration (FAA) has already set guidelines for all 3D-printed parts.

As disruption investors, this is exactly the type of rapid progress we like to see.

  • Here’s how we’ll make money in 3D printing…

When we last talked 3D printing I recommended Stratasys (SSYS), a leading maker of 3D printing hardware. Stratasys shares are on sale today after the whole stock market took a nosedive last week. I’m a buyer at today’s price of $21.

Today I want to fill you in on my top 3D printing software pick. Like all hardware, 3D printers run on computer programs. Before an object can be 3D printed, engineers must first design it using creative design software.

Think of it like this. A traditional manufacturer has to create a physical mold of a product before making it. With 3D printing you don’t need a mold, because the model is designed on a computer.

The software behind this is very important. It allows engineers to try out hundreds of different materials… measure weight and performance… and modify an object down to the millimeter… all in virtual reality.

  • My #1 3D printing software pick is Autodesk (ADSK).

Autodesk owns a 29% share of the creative design software market, which makes it a dominant player. Its AutoCAD program is considered the premier 3D printing software. It counts many big, important companies like Airbus and General Motors as happy customers.

Autodesk charges a subscription fee to use its software. Last quarter it boosted its subscriber base by a massive 290,000. It now has just under four million paying customers.

If you’ve been reading the RiskHedge Report you know I like businesses that run on a subscription model. I call them “Autopilot Stocks” because they can generate big, predictable streams of cash. More important, many of these stocks have trounced the market over the past few years.

I see Autodesk doubling over the next two years as 3D printing takes off.

Its stock dropped along with the rest of the market during last week’s selloff. Now you have a chance to buy it at a 10% discount to what folks were paying just two weeks ago.

That’s all for today. As always, you can reach me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge reader Imran writes:

“Hi Stephen, I was curious about your views on Lam Research (LRCX)? I think at $150 this should be a screaming buy!”

Imran, I’ve done a lot of research on Lam Research… and I much prefer its competitor ASML (ASML).

You may remember I recommended ASML in the first ever RiskHedge Report. The company makes machines that produce computer chips that are up to 100-times faster than what we have today. It’s on track to sell 18 of these $145-million machines to chip makers like Intel and Samsung this year.

ASML just released its latest earnings report… and it drove its profits to another all-time high. I expect the stock to go much higher from here.

I Forbid You to Own this Popular Stock

I Forbid You to Own this Popular Stock

Today we're BLACKLISTING an iconic American company.

I'm imploring you not to buy its stock… no matter what the cheerleaders on CNBC say.

Tens of millions of Americans buy this company's products every year. Even more own its stock, both directly and through index funds.

They're going to regret it… because there's almost nothing this doomed company can do to avoid being steamrolled by unstoppable disruption.

After you read this letter, consider forwarding it to your family and friends who invest. Everyone with a 401(k) should know to steer clear of this toxic stock.

To recap, fully driverless cars are driving around American roads today.

Waymo, Google's (GOOG) self-driving car subsidiary, is leading the way. Within three months, it will launch a robo-taxi service outside of Phoenix.

It'll be like Uber, but with no drivers. The cars will drive themselves.

Driverless cars are going to be a wonderful thing for the world. Drunk driving will become a thing of the past. Elderly folks who can no longer drive will regain independence. Moms and dads can work on their commutes and spend more time with the kids when they get home.

Not to mention driverless cars will save us a ton of money. They'll all but eliminate the need to own a car for the 63% of Americans who live in urban areas.

Cars are one of the biggest expenses for American families. A typical two-car household drops about $1,000/month on car payments, insurance, registration, inspections, repairs, parking, oil, and gas.

Driverless cars can make these expenses vanish. Any financially savvy person will have to seriously consider giving up their car when they can instead summon a robocar to pick them up anywhere… anytime.

  • But it's not all good. Plunging car ownership means plunging car sales… which will ravage the auto sector.

The auto industry is very big and very important. According to the Bureau of Labor Statistics, the American auto sector employs about 4.3 million people.

Carmakers, dealerships, repair shops, parts makers, and so on make up 3% of the US economy. Collectively, publicly-traded American auto companies are worth over $300 billion.

Every company is at risk as self-driving robo-taxis put a crater in car ownership.

You see, the whole auto ecosystem depends on Americans buying many millions of new cars every year. For decades, rising car sales have been the norm. Driverless cars are all but guaranteed to kill it.

Now, car sales won't fall off a cliff right away. There are lots of places in the US with icy mountain roads that driverless cars won't be capable of navigating for at least a decade. Folks who live in these places will continue to own cars with old-fashioned steering wheels.

  • But overall car sales will begin to shrink.

A new report from Boston Consulting Group (BCG) predicts car ownership will plunge by 46% by 2030 if robo ride-sharing services takeoff. My research puts the number closer to 30%.

Either way, it represents a rapid "shrinking of the pie" of global car sales. This is key.

Making and selling cars is already a ferociously competitive business with low margins. And that's with an auto market that's generally been growing for the past several decades. As the pie starts to shrink, competitors will have to eat each other alive just to survive.

To be clear, not every auto company will go broke. Those that adapt and partner with self-driving car platforms like Waymo can thrive.

For example, rental firm Avis (CAR) cleans and services Waymo's driverless fleet. Since it signed the agreement Avis shares have climbed over 60%.

But things are about to get very tough for the auto industry. You want to keep your money far, far away from any car stocks with questionable finances or poor management.

  • That's why I'm blacklisting Ford Motors (F).

Ford has plunged 50% in the past five years, to its lowest point since 2009, as you can see here:

Many folks see this as an opportunity to buy Ford at a cheap price. They see an iconic American company selling at 5x its earnings… and think "value stock opportunity."

They're flushing money down the toilet.

Did you know Ford's business has been slowly dying since well before self-driving cars were even on the radar?

In the past three years, Americans bought a record 52 million cars. Ford is the country's second-largest carmaker. So you'd think its sales should be booming.

Its sales are not booming. Last year Ford sales were lower than in 1999! And this year it's on track to sell even less.

Meanwhile, Ford's US market share has plunged to its lowest ever. In the '90s every fourth car sold in America was a Ford. Now it's every seventh car.

Let me drive this point home: Ford is struggling even with auto sales near an all-time high.

What do you think will happen when driverless cars begin to eat into sales?

  • Ford is too financially weak to survive the coming disruption.

In July it announced a restructuring that will cost $11 billion. Ratings agency Moody's downgraded Ford's credit rating to one notch above junk status on the news.

Ford already has 4x more debt than cash. And given it only earned $7.6 billion last year… it can't afford to spend another $11 billion.

Ford's precarious financial position stems from its poorly-run business. Its operating margin is just 3%. Meaning for every $20,000 car it sells, it must spend $19,400 to sell it.

That's bad, even for the auto industry where margins are famously low. General Motors (GM), Ford's closest rival, has a 6% operating margin.

  • As you know, my aim in this letter is to help you profit from disruption.

And just as important, to avoid being caught on the wrong side of it. That's why we're slapping a "BLACKLIST" sticker on Ford. As I said up top, if this stock is in your portfolio, get rid of it now. And forward this letter to your family and friends who might own it.

Will you ditch your car as driverless cars go mainstream? If not, why not? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge reader Kathrine asks:

"Do you follow any gold stocks?"

Yes we do. We follow gold stocks because they're one of the most explosive asset classes on earth, capable of returning 10x in a short period. For example, did you know gold stocks have exploded for triple- or quadruple-digit gains seven times in the past 48 years?

Above all else, the key thing to understand about them is they're cyclical, meaning they go through big booms and busts. These sweeping trends usually take all gold stocks along for the ride. So it's almost always a bad move to go against the primary trend. When gold stocks are in a bust, like they are today, the high-quality gold miners get dragged down right along with the average and poor ones.

GDX, the biggest gold stock ETF, is plumbing 2+-year lows today. I'm interested in buying gold stocks, but I'm waiting until I see some indication that the trend has changed.

Catch Serial Killers. Unlock Secrets. Make 100% Gains.

Catch Serial Killers. Unlock Secrets. Make 100% Gains.

Joseph DeAngelo murdered 12 innocent women.

And for 44 years he got away with it.

Dubbed the Golden State Killer, he terrorized California throughout the ‘70s and ‘80s… and the police never got near him.

Until April of this year when they made a surprising breakthrough.

In short, one of DeAngelo’s distant relatives anonymously submitted DNA to GEDmatch, a family tree website.

Police obtained it and matched it to the killer’s DNA from their database. It helped prove DeAngelo was the Golden State Killer.

Nearly half a century after he first committed murder, the police finally threw him in jail.

  • Good story Stephen… now how does this make us money?

As you read this sentence, a huge breakthrough is happening in DNA “mapping.”

Although it has escaped the notice of most investors, doctors and scientists have been waiting on this breakthrough for decades.

It’s no exaggeration to say it will save millions of lives… and bring tens of billions in profit to the company achieving it.

Let me give you some quick background.…

  • You’ve probably heard of the Human Genome Project… 

It aimed to “crack the code of life” by “mapping” the 3 billion DNA pairs present in humans.

DNA carries your genetic information. Think of it as a set of instructions for your body. Mapping your DNA allows scientists to decipher your body’s unique set of instructions.

Among other things, DNA determines which diseases we’re vulnerable to. Most diseases—cancer, heart disease, diabetes—stem from our DNA.

By learning the secrets hidden within your DNA, doctors can tell what diseases you’re likely to get. This allows them to catch problems earlier… and diagnose them more accurately.

According to leading scientific journal BMJ Quality & Safety, 12 million Americans are misdiagnosed every year. When it comes to a disease like cancer, an accurate and timely diagnosis can literally save your life.

On average, humans have a 90% chance of beating cancer if it’s caught early on in stage 1. But less than a 10% chance if goes undetected until later stages.

  • Scientists have long known that our DNA holds the key to our health.

The problem was… accessing the secrets within our DNA has been prohibitively expensive.

It took scientists 13 years and $3 billion to complete the Human Genome Project.

And just 17 years ago, getting your personal DNA mapped would have set you back $100 million.

Even as recently as 2011, Steve Jobs, co-founder of Apple (AAPL), forked over $100,000 to get his DNA mapped.

But this is all changing…

Today in the fall of 2018, it costs about $1,000 to map a human’s DNA.

And according to leading maker of DNA mapping machines Illumina (ILMN), within a few years, it will cost only $100..

That’s one-millionth of what it cost in 2001!

You can see the staggering plunge in cost right here:

  • Don’t be surprised if your doctor recommends you get your DNA mapped soon.

As the cost plummets, the usage of DNA mapping in healthcare is exploding.

For example, a new prenatal test based on DNA mapping can detect hard-to-find problems with babies inside a mother’s womb. It’s the fastest-growing medical test in American history.

Earlier this year, Medicare and Medicaid announced they will start reimbursing patients for DNA mapping tests.

And medical provider Geisinger Health has started including these DNA tests in its routine care.

  • A company called Illumina (ILMN) is almost single-handedly responsible for driving down the cost of DNA mapping.

Illumina is far and away the world leader in DNA mapping. It commands a 90% market share and dominates all competitors. In fact, Illumina’s technology has completed 9 out of every 10 DNA mappings ever done.

Illumina has flown under the radar, and most investors haven’t heard of it yet. But as DNA mapping becomes routine, it will be a household name. I expect Illumina to be synonymous with DNA testing—just as folks say “Google” for “search” today.

Illumina’s cutting-edge DNA machines are the reason the cost to map a human’s DNA has fallen below $1,000. When Illumina entered the market in 2006, it cost $10 million to map one person’s DNA. Each new Illumina machine has slashed these costs by millions of dollars… and its latest release will give us DNA mapping for $100.

  • Illumina’s competitors lag years behind it.

Roche (RHHBY), the world’s second-largest pharma company, and Thermo Fisher Scientific (TMO) are its closest competition.

Neither can compete with Illumina’s speed of innovation. And neither is a serious challenge to its dominance in DNA mapping. With 800 patents on its DNA mapping machines, Illumina has an iron grip on this market. And it recently teamed up with healthcare giant Bristol-Myers Squibb (BMY) to help introduce DNA mapping into hospitals across America.

  • Illumina has superb management.

Illumina essentially created the DNA mapping market. As you can imagine, this wasn’t cheap. It took billions of dollars and countless man hours to drive mapping costs down to a level where most Americans can benefit from them.

Despite this, Illumina has achieved record profits for 5 years running. And it’s on track to beat its record once again this year.

Illumina’s sales mix is the secret to its success. The company is best known for the DNA mapping machines it sells to hospitals and other medical professionals. These cost up to $10 million each.

But drill down and you’ll find that two-thirds of its revenue comes from a different source.

To conduct a DNA mapping, a doctor will first take a sample of your blood or saliva. Then she’ll apply chemicals to it to extract the DNA. The DNA gets inserted into one of Illumina’s machines, which essentially spits out a computer file that contains your genetic information.

The chemical part is key. These specialized chemicals are consumed with each mapping. So, hospitals and doctors must continually buy more. Illumina’s chemical sales have more than tripled in the past 5 years.

This model gives Illumina a big financial advantage. Its ongoing chemical sales allow Illumina to collect a steady stream of cash every month.

Regular RiskHedge readers know I like disruptive businesses with big, predictable cash flows. As I explained in a recent issue, I call these “Autopilot Stocks” for their ability to generate consistent profits, month after month, as if on autopilot.

  • Illumina’s net profit margin just hit an all-time high.

Even as it drives the costs of DNA mapping into the ground… Illumina is achieving record profitability.

Illumina is truly a disruptive company that’s set to dominate an exploding industry. If it can maintain its 90% market share as I expect, its sales should triple over the next 3 years. This should send its stock soaring to double its current stock price.

I’m buying Illumina today at $359.

Have you or a family member had a DNA mapping test done? Tell me at stephen@riskhedge.com.

To disruptive profits,

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

In response to last week’s essay on the coming lightning-fast cellular network known as 5G, RiskHedge reader Bob writes:

“If a tree or car can interfere with a 5G signal how is it ever going to work? Also, you said it can only reach 1 kilometer. How will they achieve widespread 5G coverage when the range is so limited? 

Bob, there’s no doubt the 5G rollout has some challenges ahead. But right now, network providers are developing cell towers so small they’ll sit on top of traffic lights and lamp posts. So in the not-too-distant future you can expect to see one of them every few blocks.

As for 5G’s fragile signal… the companies leading the 5G rollout are developing something called “beamforming” which will solve this problem. We’ll be talking a lot more about this in future issues of the RiskHedge Report.

The Most Disruptive Event of the Decade Is Here

The Most Disruptive Event of the Decade Is Here

A new tech boom begins this year…

Remember when you couldn’t watch videos on your phone because the internet was so slow?

New infrastructure for cell phones called “4G” solved that problem.

4G stands for “Fourth Generation Wireless Technology.” Most smartphones run on the 4G cell network today. But getting it up and running wasn’t cheap.

The cost of building out the 4G network hit $200 billion in 2015. Around 200,000 cell towers were built to broadcast the 4G signal that blankets most of America today.

A big winner from this spending spree was cell tower operator American Tower Corp (AMT).

The chart below shows the performance of AMT from 2011, when the 4G buildout started. As you can see, it has soared 185%:

  • 4G was huge… but there’s a MUCH bigger investment opportunity in front of us right now.

It’s a $500 billion project called 5G, or Fifth Generation Wireless Technology.

As I mentioned, 4G required around 200,000 new cell towers.

AT&T says 5G will need another 300,000.

And that’s only the start.

No phone, computer, or modem on the market today is 5G “ready.” Which means EVERYTHING needs an upgrade.

I’m going to tell you about the company that’s developed the first 5G chips and antennas for phones. The world’s biggest network providers and device makers like T-Mobile, Verizon, and Apple are already scrambling to secure access to its products so they can participate in the 5G revolution.

  • America’s cell networks started with the 1G (first-generation) network in the 1980s.

You couldn’t access the internet on 1G. You could only make calls. And you had to make them from cell phones the size of a brick.

Roughly every 10 years since then, a new network has gone live. 2G, 3G, 4G…  each brought faster speeds and opened up more uses. The most recent one, 4G, went live around 2011.

We’re moving to 5G starting in 2019.

5G will be lightning fast—with wireless speeds up to 20 gigabytes per second. That’s 1,000x faster than what we have today. It’s even faster than what you can get using physically wired internet connections.

5G will open up a whole new universe of possibilities. It’ll take just seconds to download a full season of your favorite TV series on 5G.

But that’s just scratching the surface. 5G’s nearly instant data transmission will make driverless cars possible. And doctors will be able to perform surgery from 1,000 miles away using robots connected through 5G.

  • There’s a drawback to 5G, though. 

For now, its signal is extremely fragile. Moving cars can interfere with it. Even leaves blowing around on a tree can interfere with it.

And a 5G signal can only reach 1 kilometer… or about 4 city blocks. Compare that to a 4G signal, which can reach up to 70 kilometers.

For this reason, 5G will require the biggest revamp of America’s wireless networks EVER.

4G required tall cell towers to blast signals over long distances. 5G will need hundreds of thousands of smaller towers. These small towers are about the size of a trash can…and soon there will be one on almost every street corner.

5G will run on a new frequency that’s never been used before. This is very important, because it means every phone and computer will need new antennas and chips to connect to 5G.

In other words, we’re all going to have to throw away our phones and buy new ones to get on 5G

This is why the GSM Association, which represents 800 of the world’s largest mobile operators, says companies will have to spend $500 billion in the next two years to get 5G ready.

  • As the 5G buildout begins in America, tens of billions of dollars are set to flow into chipmaker Qualcomm Inc. (QCOM).

Not many people know this, but QCOM owns the cell phone service known as CDMA. It’s the technology underpinning wireless networks that allows your phone to send and receive data. If you’re a customer of Sprint, Verizon, or Virgin Mobile, your phone runs on it.

Around 75% of QCOM’s profits come from its near monopoly on both 3G and 4G network patents. With a portfolio of more than 130,000 patents, QCOM can charge device makers like Apple and Samsung a licensing fee of up to 5% of the price of each phone they sell.

QCOM collected $6.44 billion through its licensing segment last year. This business is ultra-profitable, as its 85% operating margin shows.

QCOM holds 15% of the patents for 5G—the most of any company in the world. Which means it will charge many device makers a fee of 3%–5% on the price of each 5G device sold.

QCOM is best known, though, for selling computer chips. This segment has a much lower operating margin of 17%. But it generates 74% of QCOM’s sales.

This will be its most important segment going forward.

You see, QCOM is the world’s largest “System on Chip” (SoC) maker with a 42% market share. Its closest rival, Apple (APPL), has only 22% of the market.

A SoC is a microchip that has all the components required to power a phone.

Central processing units (CPUs) sold by the likes of Intel (INTC) and AMD (AMD) can’t run a computer or phone on their own. Qualcomm’s SoC, on the other hand, integrates all the components needed to run a device onto single chip.

It’s been a tough four years for this segment. Sales have slipped 15% since peaking in 2014.

That’s because Apple and Samsung stopped using QCOM’s chips in many of their phones.

  • The launch of 5G will change all this. 

When the world switched from 3G to 4G between 2010 and 2013, QCOM’s sales skyrocketed 126%.

During that time, 80% of 4G devices were powered by QCOM chips. In fact, it was the only company making 4G modems and antennas for years. So phone manufacturers like Apple and Samsung had to use them.

I think we’re going to see history repeat itself. Today, Qualcomm is the only company making 5G modems and antennas in America.

As I mentioned, current phone antennas can’t connect to 5G’s high frequency signal. Which means all new devices will have to be fitted with new antennas.

Twenty wireless providers are already planning to use QCOM’s chips and antennas in their 5G trials, including AT&T, Verizon, and Sprint.

And device makers like Sony, LG, and HTC plan to use them in their 5G products.

The first 5G networks and devices will launch next year. With QCOM being the only company to develop 5G chips and antennas, tens billions of dollars are set to flow its way.

I’m buying QCOM here and I expect it to at least double as 5G rolls out across America in the next 3–5 years.

Keep in mind its stock has jumped 48% since April… so it easily take a breather here before it marches higher.

  • 5G is what I call a “core” disruption. 

As I mentioned, its nearly instantaneous speeds will usher in world-changing tech like self-driving cars and remote surgery.

5G is truly going to be one of the most disruptive trends we’ve seen since the late 1990s.

I’ll be writing a lot about profitable 5G opportunities in the RiskHedge Report. As just one example, we’re currently researching under-the-radar companies working to solve 5G’s signal fragility problem.

My colleague Chris Wood, Chief Investment Officer of RiskHedge, is talking with CEOs in this promising space. More on that soon…

That’s all for today. As always, thanks for being a RiskHedge reader. I’m happy to say our community of disruptive investors is growing fast.  

If you know anyone interested in learning about disruption and how to profit from it—please forward them a copy of the RiskHedge Report.

And you can reach me at stephen@riskhedge.com.

Until next week,

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

In response to my article about “Autopilot stocks” and Google, RiskHedge reader Carl writes:

Stephen, my biggest gaffe was when Amazon was selling at $600 per share. I decided it was too expensive and would wait until I could buy at $500.  Whoops. I'm still waiting. It's trading at $2,000/share today. Google is a screaming buy now. For just the reasons you named, it may never dip below $1,000.

Carl, you make a good point. It’s often a mistake to wait for a pullback in disruptive stocks that are changing the world. Sometimes the train pulls out of the station and never slows down. But keep in mind, for the world's fourth-largest company, Google stock is quite volatile. This year alone it has corrected 15%, 13%, and 9%. A dip of this size would take GOOG back down to where it was trading in May. That's where I'll be buying.

Why I’m Buying “Autopilot Stocks”… and You Should Too

Why I’m Buying “Autopilot Stocks”… and You Should Too

I call them “autopilot stocks”...

Do you know many of America’s fastest-growing businesses are built on one key principle?

I’m talking about disruptors like Amazon (AMZN). Thirteen years ago, it launched its Prime delivery service. Today, there are nearly as many Prime subscribers as there are full-time workers in America.

Or the recently IPO’d Spotify (SPOT). Eighty-five million people listen to music on its innovative app.

Or Netflix (NFLX). 45% of all American households now subscribe to its video service.

  • Amazon, Spotify, and Netflix all rake in cash by selling subscriptions.

Selling subscriptions is a wonderful business model. Instead of charging a one-time fee, a subscription business collects constant streams of cash from customers.

Think about this: More than 57 million Americans have agreed to let Netflix take $10.99 directly from their bank accounts every single month.

This is an incredible financial advantage. No other business model can match the big, predictable cash flows that a well-run subscription business can generate.

Netflix’s monthly charge is small enough that many folks barely notice it. Yet since 2013, it has added up to $37 billion in revenue… propelling Netflix to a 2,600% gain.

  • According to consulting firm McKinsey, spending on subscription services has exploded 500% in the past five years.

Of course, subscription services are nothing new. But they’re exploding lately thanks to a disruption “enabler” we discussed a few weeks ago: cloud computing.

As a refresher, “the cloud” gives businesses cheap access to powerful supercomputers. Businesses can now utilize Amazon’s servers, for example, for a fraction of the price of buying their own.

This may not sound like a big deal. But in fact, cloud computing has unleashed a whole new class of subscription-based businesses. I call these autopilot stocks—because they rake in cash month after month, as if on autopilot.

Wait until you see the huge gains they’re achieving...

  • Remember how computer programs used to be sold in shrink-wrapped boxes with a CD inside? 

The cloud has rendered this way of doing things obsolete.

Consider Adobe Systems (ADBE). Its “PDF” files are the standard way to view most documents online. It also makes the image editing software Photoshop.

Practically everyone with a job has used Adobe’s software. Yet from 2007 to 2012, its business stagnated. Sales stopped growing, and its stock was dead money from 2000 to 2012.

Like most other software companies, Adobe sold its computer programs on physical CDs. But in 2012, it made a change.

It decided to stop selling one-off products and began selling subscriptions to its computer programs. Instead of selling CDs, it asked customers for $30 a month to access its programs on the cloud.

Since then, Adobe has exploded for an 830% gain and counting:

Prior to the cloud, Adobe had to persuade customers to buy an updated physical CD every few years. Now customers pay $30/month automatically, every month, unless they cancel their subscription.

Switching to a subscription model was like a shot of adrenaline right into Adobe’s veins. Its net profit has surged 170% in the past five years. And its net profit margin has jumped from 19% to 25%. Adobe’s profits are growing faster than ever today.

  • Intuit (INTU) is raking in the subscription profits, too… 

Ever use TurboTax to file your tax returns? Or QuickBooks to keep your finances straight? Intuit makes both products.

Just like Adobe, Intuit used to sell physical CDs. As you probably know, tax and accounting rules change all the time. So every year, accountants and tax preparers had to buy a whole new set of CDs to keep up with the new laws.

And as you can imagine, this cost Intuit billions of dollars. Every year it had to pay for shelf space… to manufacture CDs… to ship CDs… to design packaging. Not to mention, it had to hope customers wouldn’t switch to a competitor's cheaper software each year.

From 2006–2009, Intuit’s revenue climbed 35%. But because it was dumping so much cash into operating costs, its net profit rose only 14%.

Then in 2014, it launched a cloud-based version of QuickBooks and began offering a subscription option. Since then it has handed investors a 190% gain:

  • Clearly, Wall Street loves these autopilot stocks.

I like them too. But I’m not buying either one today. I’m more interested in pinpointing the business that will be the next to switch to a subscription model.

My research tells me YouTube could be the next mega-hit subscription business.

YouTube, as you may know, is owned by Alphabet (GOOG—formerly known as Google).

YouTube makes most of its money selling ads. But it’s just starting to dip its toe into the subscription waters. It launched YouTube Premium earlier this year, which includes ad-free viewing.

This could be the beginning of something really big. You see, YouTube’s user base is mind-bogglingly huge—1.9 billion people use it every month. That’s more than one in every four people on planet earth! And it’s 15x larger than Netflix’s celebrated subscriber count.

If YouTube can convert just 5% of these users to Premium… at $11.99 per month… it’ll earn $13.7 billion a year. With that kind of revenue YouTube could easily be a $150 billion company on its own.

Yet because YouTube is tucked inside GOOG, investors don’t pay it much attention.

  • Google is like an octopus with tentacles in many disruptive sectors…

A few weeks ago, I explained how its self-driving Waymo cars are light-years ahead of the competition. Longer term, I think Waymo could be a subscription service, too. Ridesharing services Uber and Lyft are already experimenting with this model.

Can you imagine the profits to be made by combining self-driving cars with the superior economics of a subscription model?

If you’ve been reading the RiskHedge Report, you know I want to own Google stock. But it’s still a bit expensive, so I haven’t bought it yet. As I mentioned a few weeks ago, I’m waiting for it to dip to around $1,050/share.

At $1,180/share, I think we’ll get our chance to buy Google for a good price before the end of the year. I’ll let you know when it’s time to pull the trigger.

How much do you spend on subscriptions each year? Tell me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Reader Mailbag

RiskHedge subscriber Mike asks:

Your article on how self-driving cars will kill many car companies was very interesting. I agree with most of your assumptions. But keep in mind, some people like driving. I think vehicles that people like to drive will survive, even if they just get driven on weekends by people who use driverless cars during the week.

Harley Davidson (HOG), for example, seems to have thrived despite its products being overvalued, clumsy & pointless symbols of rebellion for impotent old men. Sorry, just kidding! 

So I think while dull, mass-market models will disappear, classics and fun vehicles will remain. Hopefully, they’ll be even more fun to drive on roads less choked with parked cars…

Mike, I think you’re right. As you know, I expect the self-driving car revolution to rip through the car industry and send many prominent auto stocks to zero. Mass-market carmakers like Ford (F) are in big trouble.

But companies that make small quantities of very high-priced cars—think Ferrari (RACE)—could do just fine. The market seems to agree with your assessment. Since IPO’ing in 2015, Ferrari stock has marched 145% higher. Ford stock, meanwhile, is plumbing seven-year lows.

If I Could Only Buy One Stock for the Next 5 Years…

If I Could Only Buy One Stock for the Next 5 Years…

If I could only buy one stock for the next 5 years… this would be it.

If you’ve been reading the RiskHedge Report, you know about the disruptive megatrends that are powering stocks to huge gains.

We’ve discussed the companies that have shoveled almost $100 billion into developing self-driving cars

That the world’s most powerful companies including Apple (AAPL), Amazon (AMZN), and Google (GOOG) are pouring billions into artificial intelligence

And last week, I explained how video gaming has exploded into a $138 billion monster market.

  •  What if I told you one company is powering all these megatrends?

This company is Nvidia (NVDA).

Take a look at its 720% surge since 2016:

Now I know you might be thinking: Stephen, this stock has already had a heck of a run… why buy it now?

I understand the concern. But when investing in truly disruptive companies, this way of thinking is often a mistake.

From 2009-2013, AMZN stock gained 680%. Most so-called “experts” said the easy money had already been made. In 2013 CNN “reported” that “Amazon is one of the most overvalued stocks.”

Amazon has soared another 700% since 2013.

  • NVDA makes high-performance computer chips called graphics processing units (GPUs).

NVDA developed the first mass-market GPU in 1999. GPUs use what’s called “parallel processing,” which allows the chips to perform millions of calculations at the same time.

That’s different from how other computer chips work. Most computer chips, like the one powering the laptop or phone you’re reading this on, calculate one by one.

At first, GPUs were mostly used to create realistic graphics in video games. Remember the blocky Nintendo graphics from the early ‘90s? The ability of GPUs to process huge amounts of data all at once helped create the movie-like video game graphics you see today.

  • But it turns out that GPUs are also ideal for “training” machines to think like humans.

In other words, artificial intelligence (AI).

I’m sure you’ve seen the Hollywood movies about AI going rogue and attacking humans.

In reality, AI isn’t that glamorous. It all comes down to processing massive amounts of data.

Show a computer millions of pictures of a stop sign, for example, and it will learn to recognize stop signs on its own in the real world.

AI is the driving force behind Google’s self-driving car subsidiary Waymo. As we talked about a few weeks ago, Waymo’s robot cars are cruising around American roads right now.

At the core of Waymo’s self-driving car fleet is a centralized “brain.” It has learned to recognize stop signs, pedestrian crossings, red lights, and all the other obstacles human drivers navigate.

  • The recipe for AI success is simple… 

The faster a computer can process data, the faster it can “learn” by recognizing patterns in the data.

NVDA’s latest chips process 125x faster than traditional computer chips. They can process 125 trillion data points per second… which slashes AI “learn” times from 8 days to 8 hours.

This is why more than 2,000 companies including Amazon, Google and Microsoft use NVDA’s hardware to “train” their AI programs.

Last quarter, the revenue NVDA earned from selling AI chips and hardware jumped 82%. In the last two years, AI-related sales have accounted for over 70% of the surge in NVDA’s revenue. AI sales now make up 24% of its total revenue.

  • NVDA will earn around $600 million from its automotive business this year.

As I mentioned, it supplies self-driving car companies with chips that “train” cars’ brains. It also sells hardware that processes data from the cars’ many cameras and sensors.

For example, NVDA’s self-driving supercomputer, named Pegasus, can tackle 320 trillion operations per second. And it does so using one-third the electricity at just one-fifth the cost of its closest competitor.

Over 370 companies working on self-driving cars now use NVDA’s products. Auto sales make up just 5% of NVDA’s total revenue today; I see this exploding higher over the next few years as true self-driving cars roll out.

I mentioned earlier that $100 billion has been spent on developing self-driving cars so far. With the likes of Google and Apple pouring billions into driverless projects, I see that jumping to $1 trillion over the next 2–3 years.

Thanks to its superior technology, I expect NVDA to capture a large chunk of this.

  • NVDA is considered a “high-flying” tech company… 

But please understand, it’s nothing like many of the profitless tech darlings out there.

While many high-flying tech stocks get by on stories and hype, NVDA is extremely profitable.

It has a net profit margin of 33%. That is, for every $1 in sales, $0.33 becomes pure profit.

That’s better than Google’s 21% margin… and even Microsoft’s 29%.

NVDA’s high margins allow it to continually pour cash into Research & Development (R&D). It reinvests close to 20% of its revenue into R&D every year, which is a key reason why it has blown away its rivals.

NVDA is financially sound, too. It’s sitting on a record $7.95 billion in cash. Which is enough to pay off its total debt four times over.

  • Some may be concerned about NVDA’s price-to-earnings (P/E) ratio of 39.

Can buying a stock at such a high valuation be risky? Sure. But I believe NVDA’s deserves its rich valuation.

NVDA’s earnings are growing at almost six times the rate of the S&P 500. Yet its P/E ratio is not even double the S&P’s.

I think investing in a company like Ford (F), with a P/E of 5, is far riskier than buying NVDA. I can hear the groans coming from the value investors out there. But the fact is, NVDA is leading the self-driving revolution… while Ford is going to get crushed by it.

Because it is powering today’s most disruptive trends, I see NVDA doubling over the next two years. I’m buying it today at $272.

Are you buying NVDA here? Tell me at stephen@riskhedge.com

To disruptive profits,

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge reader Riekele asks:

I’m a 69-year-old retired man who has worked his whole life in a semi-government job. My wife and I live on a pension, and have about $120,000 as a nest egg.

I’ve been invested in precious metals ETFs for about five years now. These have been losing investments – I’m down about 22%. I think we have to change our strategy. From reading your letter, it seems like investing in risky investments, like technology stocks, could be more prudent and profitable. I’m eager to hear your opinion.

Riekele, it sounds like you put a lot of your investable assets in precious metals. No matter how promising an investment seems, you should always spread your bets so you're not overinvested in any one stock or sector. Disruptive stocks can make us big gains in short periods, but they're also prone to big swings. Keep your position sizes manageable so you can hang on through the inevitable volatility. 

Unleashing the Fringe for 375% Gains

Unleashing the Fringe for 375% Gains

Picture 18,000 fans packed into a sold-out Brooklyn arena.

They’re watching the championship game in the world’s fastest-growing sport…

Along with millions of others watching from home on ESPN’s prized prime-time slot.

Are you picturing LeBron James dunking? Tom Brady throwing touchdowns?

No… these crowds are gathered to watch kids play video games.

  • Professional video gaming—also called “e-sports”—is getting wildly popular.

Fifty-seven million people tuned in to watch a recent professional video game match. That’s almost 3x more than the 2018 NBA finals.

Maybe you’re thinking it’s a stretch to call video gaming a “sport.” Call it whatever you want… so long as you understand that massive sums of cash are pouring into this booming sector.

There are now American video gaming leagues modeled after the NBA and NFL. Instead of the Philadelphia Eagles, professional gaming has the Philadelphia Fusion.

And like the NFL, e-sports has millions and millions of hardcore fans who will happily fork over $100 or more for a ticket to watch a big game live.

  • Many investors dismiss e-sports as a silly fad…

They’re wrong, and they’re going to miss out on big stock gains.

Do you know that more than 80 American colleges now offer e-sports scholarships?

Or that last year, some of the world’s biggest companies like Intel, Coca-Cola and T-Mobile spent $700 million to sponsor e-sports?

Or that the average salary in one American professional e-sports league is $320,000?

  • All the evidence says that e-sports is going to be a huge moneymaker…

Yet many investors roll their eyes because it sounds like the punchline of a joke.

Let me tell you a different joke that has investors laughing to the bank with 375% gains.

Chances are you’ve seen at least a few minutes of American professional wrestling.

I’m talking about “Hulk Hogan”-type wrestling. Where muscular guys wearing spandex hit each other in the head with folding chairs.

Juvenile, right?

Well, look at this chart of World Wrestling Entertainment (WWE):

Source: Yahoo Finance

The WWE has turned fake wrestling into a $6.8-billion business. Investors in WWE have made 375% since January 2017. It’s the 12th-best-performing medium-to-large US stock this year.

  • WWE was dead money for 17 years.

It went public in 1999, and its stock fell 25% through 2016.

Everything changed in 2017. As regular readers know from my essays on Netflix and Disney, technology has totally disrupted the business model of TV.

In the past, big cable companies acted as gatekeepers that decided what we watched. Today, we can watch practically anything on streaming services like Netflix and the internet.

WWE took advantage of this to launch a “Netflix-style” streaming service for wrestling. By bypassing cable companies to connect directly with fans, WWE has transformed its business.

Thanks to 1.8 million streaming subscribers, its revenue has jumped to all-time highs. A few years ago, it was at the mercy of cable companies, with half of revenue coming from TV contracts. Today, just one-third of its revenue comes from traditional TV.

  • Professional video gaming has existed on “the fringe” for decades too...

And like WWE, streaming video is unleashing its full moneymaking potential.

As I mentioned, people can now watch whatever they want on the internet. And it turns out hundreds of millions of people like to watch others play video games professionally.

Have you heard of Twitch? It’s a website owned by Amazon (AMZN) that broadcasts video game matches. More people watch it every day than CNN or MSNBC!

And that’s the key to this whole thing: Video gaming has a massive audience of engaged fans.

This is an incredibly valuable asset that is crucial for making money in any content business.

In fact, a massive audience of engaged fans is the source of the financial strength of the NFL and NBA. It’s why the Dallas Cowboys are worth $4.2 billion and the New York Knicks are worth $3.6 billion.

They’ve each got millions of fans not only watching them on TV, but buying tickets, memorabilia, and merchandise year after year.

Based on the stats I shared with you earlier, I’m convinced the global fanbase for e-sports is bigger than the NFL and NBA combined.

This fanbase has been there for decades. But it took the disruptive force of streaming video to bring fans together online in huge numbers. E-sports is shining a light on just how gigantic and enthusiastic the video game audience really is.

I believe this industry is just in its infancy. People are going to be shocked at how fast e-sports grow in the next five years.

  • Okay Stephen, make us some money. How do we profit from this? 

This year, people will spend around $138 billion on video games. That’s a 95% surge from six years ago. Look at this chart of my three favorite gaming stocks vs. the S&P 500:

Source: Yahoo Finance

As you can see, they’ve all trounced the market. I think that’ll continue as the popularity of e-sports explodes.

Here’s a runown of why I like each stock:

  1. NVIDIA Corporation (NVDA)

NVDA makes high-performance computer chips used for gaming. They can cost up to $3,000 a piece.

NVDA’s chips are the gold standard in gaming. 86% of competitive gamers use them, and NVDA has become the official hardware provider for almost every major e-sports league in the world.

Next week, I’m going to tell you more about NVDA and its growing presence driverless cars and artificial intelligence.

  1. Activision Blizzard, Inc. (ATVI)

If you read my other essay on Netflix and Disney, you know I believe producing great content is a bigger competitive advantage today than ever before. ATVI is one of the world’s best video game makers.

It’s owns five franchises that have brought in over $1 billion in revenue. And its games are among the most widely played in the e-sports world.

And get this… ATVI recently struck a deal with Disney to broadcast its popular Overwatch League matches live on primetime ESPN.

  1. Tencent Holdings Limited (TCEHY)

Not many people know this, but Chinese social media giant Tencent is the largest gaming company in the world. Its gaming revenue is 72% higher than second place Sony.

It owns mega-hits like League of Legends, Fortnite and Clash of Clans. If you have teenage sons or nephews, you probably know that millions of kids from here to China play Fortnite.

Tencent’s bread and butter is mobile gaming, like on smartphones. Mobile gaming now makes up 51% of the global gaming market.

That’s all for today. To investing in the profitable fringe,

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

In response to my article about the driverless car revolution, RiskHedge reader Wayne writes:

Stephen, I liked your logic and detail. I have a thought that doesn’t seem to be reflected in the current debate. Was one of your parents required to "give up the keys?"

I remember my dad and that experience so well. Devasting loss of independence. I believe when the Baby Boom generation starts getting the keys taken away—already happening—then self-driving car sales will explode. Grandpa goes out, gets in the car, says "take me to Karen's or Steve's…” And that generation has the resources.

Wayne, thanks for your thoughtful question. I agree. Driverless ride-sharing is going to restore mobility and independence to elderly people who can no longer drive safely. It’ll do the same for teenagers who, statistically, are unsafe drivers. Would you rather buy your 16-year-old son a car, or give him a few bucks to take a Waymo to baseball practice?

This Hated Disruptor Stock Is Coiled for Big Gains

This Hated Disruptor Stock Is Coiled for Big Gains

David Stanley was a convicted felon… and one hell of a salesman.

When Americans were going wild for tech stocks in the late ‘90s, he convinced a group of investors to put $28 million into what they thought was his hot internet startup.

But it was a fraud. Stanley would blow most of the cash on an obscenely lavish “launch party” in Vegas. He paid $16 million to rent out the MGM Grand and hire world-famous bands KISS, The Dixie Chicks, and The Who to perform.

The cops caught up with Stanley and locked him in jail in 2000.

  • Over-the-top tech blowouts were common in the late ‘90s.

Investors got rich and partied as the Nasdaq shot up 380% from 1996-2000. The party stopped when the bubble popped and the Nasdaq cratered 80%+, wiping out millions of retirement accounts:

Source: Yahoo Finance

I’m sure you’ve seen this bubble chart dozens of times. But today I’m going to show you a secret hidden in it that’s key to making big profits in disruptive stocks.

In fact, it’s telling us to buy a specific disruptive stock today, as I’ll show you in a minute.

First, let’s zoom out to get the full picture. Here’s the Nasdaq from 1996 through today:

 Source: Yahoo Finance

  • What does this chart say to you? 

Most folks remember the dot-com bubble for the irrational excitement that gripped markets and drove stocks to absurd levels. And for the stunning sums of cash that poured into silly internet companies like pets.com that were supposed to “change the world” and make investors rich.

But the thing is… the internet really did change the world.

And many internet stocks really did make investors rich.

Do you know that the largest, most powerful companies on earth today are tech firms? Apple, Amazon, Google, Microsoft, Facebook, and Chinese tech giant Tencent are six of the seven biggest publicly traded companies on the planet.

Some of these stocks weren’t around yet during the Nasdaq bubble. But had you bought the ones that were around in the aftermath of the crash, you would’ve made so much money that the gains are almost hard to believe.

Had you bought Apple after the bust around 2001-2004 and held your shares until today, you’d be sitting on a 20,000%+ gain right now.

Amazon would’ve handed you a 30,000%+ gain.

It would’ve been really, really hard to hold these stocks through their big ups and downs over the last 15 years. But if you managed to do it, your $5,000 investment could’ve ballooned into $1.5 million.

  • I’m telling you this because we have a similar set-up today.

It’s important to understand that the late ‘90s Nasdaq runup was not unusual. It followed a script that disruptive stocks follow over and over and over again.

Keep in mind, disruptive companies literally invent the future. Amazon created the online marketplace. Netflix pioneered video streaming. Apple is the reason 85% of Americans have a smartphone.

Because they set out to accomplish things that have never been done before, disruptive stocks are prone to hype and wild exaggeration. Investors get carried away with dreams of riches. Their imaginations run wild and they bid disruptive stocks up to the moon.

This often happens when a new technology is immature and not ready for “prime time.” Reality eventually sets in, the sector crashes, and overeager investors get wiped out.

  • Do you remember the Super-Bowl level hype in 3D printing stocks around six years ago? 

In 2012, The Economist dubbed 3D printing the “third industrial revolution.” Promoters claimed that every American would soon have a 3D printer in his house, just like we have paper printers today. These magical devices would “print” anything we wanted, on demand.

Investors ate it up and plowed billions into 3D printing stocks. 3D Systems (DDD), the largest 3D printing company, exploded to a 900% gain in two years.

Then reality set in:

Source: Yahoo Finance

Looks a lot like the Nasdaq from ‘96–‘00, right?

  • It turned out this version of 3D printing was a gimmick.

Early 3D printers were a huge disappointment. They could make only flimsy plastic trinkets that had little use. When this dawned on investors, the two largest 3D printing stocks plunged 92% and 86%.

BUT—3D printing itself is no gimmick. Set aside the fantasy about a 3D printer in every household, and you’ll realize the technology really is revolutionary.

  • Unlike when promoters were fawning over 3D printing in 2014, some of the world’s largest companies use it today.

Airbus (EADSY), one of the two biggest plane makers, is 3D printing thousands of parts for its planes. Management says these parts are around 50% cheaper to 3D print rather than manufacture the conventional way.

Rival Boeing (BA) 3D prints over 50,000 parts for its planes. Management says it saves $3 million per 787 Dreamliner because these parts are cheaper to make.

Here’s the key to understanding why 3D printing is so important. Conventional manufacturing usually involves stamping, molding, or carving away existing material to create what you want. 3D printing, on the other hand, starts from nothing and layers on material to create an object from scratch.

For this reason, 3D-printed parts are often lighter, more efficient, less expensive, and more precise than anything humans could create before.

Take jet engine maker GE (GE) for example. It has replaced more than 850 parts of a normal aircraft engine with only 12 3D-printed components.

This reduced the engine’s weight by 5%, which saves 20% on fuel costs. The average airline spends 25% of its expenses on fuel, so you can imagine how huge a deal this is.

  • Nike (NKE), car maker Audi (AUDVF), UPS (UPS), and even the US Navy are slashing costs with 3D printing.

Leading research firm Wohlers Associates found the 3D printing market grew to $7.33 billion last year, which is a near doubling from 2014. Yet 3D printing stocks remain 80% below their 2014 highs.

Boston Consulting Group estimates 3D printing will explode to $15 billion by 2020, which is in line with my estimates. I think buying the right 3D printing stocks now is like buying Microsoft or Apple in 2002.

  • My top 3D printing pick is Stratasys (SSYS).

SSYS is one of the largest and oldest companies in the 3D printing space. It has over 18,000 customers around the world including Airbus, Boeing, Lockheed Martin (LMT), NASA, Ford (F) and Volvo (VLVLY).

I like SSYS best for two reasons. One, it holds a 25% market share in industrial 3D printing. Its main competitor 3D Systems only has an 8% market share.

Two, SSYS is on sale. Its price-to-book (P/B) ratio is just 1.2. You rarely see stocks with such huge growth potential trading for so low a price. DDD’s P/B ratio is 4.

SSYS had been stuck in a crushing bear market for most of the last four years. This year, its stock has climbed 27%. I think it has broken out of its downtrend and I expect it to climb much higher in the next 12–18 months.

That’s all for today. I’ll have a lot more to tell you about 3D printing in future issues. Talk to you next week.

Stephen McBride
Chief Analyst, RiskHedge

READER MAILBAG

RiskHedge subscriber Luca writes:

Great article about the trade war and its implications for Airbus. But I wonder: can we be sure that the trade war will go on?

Luca, I expect trade tensions to get worse before they get better. Airbus (EADSY) should do well either way though, as it has been stealing market share from rival Boeing for years now. By the way… Airbus stock just hit an all-time high.

RiskHedge subscriber Harvey asks:

Following on your thesis on DIS, what’s are the odds of AAPL taking out DIS to literally TAKE OVER the services businesses?

I expect the likes of Apple, Amazon, and Facebook to push into the content space over the next few years. It wouldn’t shock me if a bigger company makes a play for Disney which, as you know, is the undisputed king of content.

Oldest Bull Market Ever? Disruption Investors Should Do This Next

Oldest Bull Market Ever? Disruption Investors Should Do This Next

It’s official…

This is now the longest bull market in US stocks ever.

As of yesterday’s close, we’ve been in a bull market for 3,453 straight days.

Which breaks the all-time record formerly held by the 1990–2000 rally.

As I’m sure you remember, that one ended with a historic 80% crash in the Nasdaq that wiped out millions of overeager investors.

  • If you’re troubled by this, you’ll want to read the rest of this letter carefully.

I’m going to give you my blueprint for investing in today’s uncharted waters.

But first… have you been following The Trade Desk (TTD)?

I alerted you to this opportunity in late June. The Trade Desk is a small online advertising company that’s stealing big chunks of business from Facebook (FB) and Google (GOOG).

It just closed a phenomenal quarter, reporting a 54% jump in revenue that sent its stock leaping 37% in one day.


Source: Yahoo Finance

Recall that the online ad industry is an $80-billion-a-year pot of gold. Facebook and Google grew from nothing into two of the most powerful companies on earth by dominating it.

But advertisers are fed up with Facebook and Google’s lack of transparency. You can’t track the performance of individual ads on either platform. This leaves advertisers in the dark about what worked and what didn’t.

The Trade Desk has stepped up to offer a better way, and advertisers are loving it. On the latest earnings call, CEO Jeff Green said spending by the world’s 50 largest advertisers on TTD’s platform soared almost 100% in the past year.

Even better, TTD’s customer retention is world-class. Nineteen out of 20 companies that try it stick with it.

TTD has shot up 188% year-to-date, so I wouldn’t be surprised if it takes a breather soon. But I expect it to soar much higher in the next 2–3 years as it takes more and more revenue from Facebook and Google.

  • Now let’s shift gears and talk about the stock market.

The media is having a field day with “The Longest Bull Market Ever” narrative. It’s front-page news on CNBC, CNN, MSNBC, WSJ, Fox, and every other big American network.

There are dozens of ways to measure a bull market, but let’s play along with the “official” definition, which states that a bull market continues until it is killed by a 20% decline. The S&P 500 hasn’t declined 20% since bottoming in March 2009, roughly 9 ½ years ago.

But here’s something you may not know. In 2011, around the time of the “debt ceiling” crisis, the S&P declined 19.4%. If it had dipped another 0.6%, the bull market would’ve ended there and we wouldn’t be having this conversation.

Or did you know that from May 2015–February 2016 the median US stock fell 25%? Meanwhile the Russell 2000 slipped 26% and popular stocks Amazon and Apple lost 30% of their value.

But because the S&P 500 dipped only 14.2%, this didn’t interrupt the “official” bull market.

  • Do you see how useless the bull market label is? 

“We’re now in the longest bull market ever” sounds important. And it is factually accurate. This makes it perfect to fill airtime for TV networks.

But it is totally irrelevant to making money in the markets.

And you’ve surely heard the claim that, because we’ve never seen a bull market this long before, we’re “due” for a scary bear market that’s right around the corner.

Please don’t listen to this nonsense.

There is zero evidence to support it, and taking it seriously will cost you money. I’ve watched several people in my life sit out the whole bull market since 2009 thanks to scary-sounding but meaningless stories just like this. They’ve missed out on dozens of profitable opportunities because they’re always too nervous to invest.

One of the great investing lessons I’ve learned is there’s always something to be scared of in markets. It’s a false alarm 99.9% of the time. The overwhelming odds are that the “longest bull market ever” will merely be the latest entry on a long list of things that were supposed to topple the market but never did.

Off the top of my head, this list includes:

Obama, Trump, Zika Virus, the Arab Spring, high oil prices, crashing oil prices, rising interest rates, negative interest rates, America’s credit downgrade, the flattening yield curve, Greece, trade wars, and most recently Turkey.

Yet here we are. US markets touched all-time highs this week.

  • I’ll probably get hate mail for this next part, but here goes…

Look at this chart of the S&P index going back to 1900:

Source: JPMorgan Asset Management

A heck of a lot of disruptive events have happened since 1900. Two world wars and dozens of smaller ones. The Great Depression, the 2008 financial crisis, and 18 recessions.

Yet the S&P has risen 100x. And according to Credit Suisse, US stocks have risen an average of 6.5% a year since 1900.

Do you want to bet with the 118-year trend, or against it?

Look, things go horribly wrong in markets from time to time. You must avoid getting caught up in dangerous bubbles like the Nasdaq in 1999 or Japanese stocks in 1989.

But the US stock market is nowhere near a bubble today. Despite what you hear, stocks aren’t even all that expensive. The S&P trades for about 16.5x forward earnings, which is right in line with its 25-year average.

So be smart. Be cautious. Practice proper position sizing and risk management. But don’t obsess over when the next bear market will hit.

For most of the last 118 years US stocks have gone up. Meanwhile great disruptive businesses like Apple (AAPL) and Microsoft (MSFT) and Google (GOOG) and literally hundreds of others have handed investors 10x gains over and over and over again.

With profitable opportunities like this all around us today, it’s illogical to obsess about the tiny slivers in the chart above when stocks go down. The average bear market lasts 10 months and stocks drop 32%. Meanwhile, a great disruptive stock like The Trade Desk can hand us a profit of 37% in a single day, as I showed you earlier.

Are you a stock market bear who hated this issue? Direct your anger to stephen@riskhedge.com.

Reader Mailbag

RiskHedge subscriber Ronald writes:

I am very intrigued about your short write-up on TTD. It is hard for me to believe a small company could compete with those two giants and survive. I also like your story on ASML, now that looks like a fantastic company to invest in.

Thanks Ronald. ASML makes the machines that make next generation computer chips. It recently closed its best quarter ever, with net profit surging 75% since last year. I’m still a buyer at today’s prices.

In response to my article about coal and uranium, (former) RiskHedge subscriber Maureen wrote:

This is awful. I am shocked that you and your company only care about making money. Don’t you have ANY idea what coal does to our planet???? And you’re touting the “benefits” of coal AND uranium?? Please never send me any of this bullsh*t again.

Maureen… this is an investing letter. If you had read my whole essay, you would have known I wasn’t touting coal. Coal is dirty and is being phased out, but it’ll take decades until it is totally replaced. That’s a fact, whether we like it or not.

RiskHedge subscriber Bill writes:

What are your thoughts on using cryptocurrencies as a store of value? Will they replace gold as the go-to non-government currency? 

My colleague Olivier Garret recently wrote a thoughtful article about this. Go here to read it.

That’s all for today. Talk to you next week.

Stephen McBride
Chief Analyst, RiskHedge

Are Cryptocurrencies a Real Threat to Gold?

Are Cryptocurrencies a Real Threat to Gold?

A gold investor recently asked me: Are cryptocurrencies (like bitcoin) a threat to replace gold as a store of value?

As cofounder of disruption research firm RiskHedge and CEO of precious metals storage company the Hard Assets Alliance, I like to think I can offer a unique perspective on this.

Let me start by stating that I am a very strong believer in the blockchain technology that has made most cryptocurrencies possible. Blockchain will transform many industries. And the disruptions it will bring could be as profound as the inception of the World Wide Web.

Investing in blockchain companies that will lead this coming disruption will be very profitable, although picking the winners won’t be easy. However, in my opinion, cryptocurrencies are an entirely different play than gold.

A Monopoly on Money

I believe that cryptocurrencies will eventually replace fiat currencies and become the main way we buy and sell things. But I do not think they will ever become a store of value or an asset like gold. Of course, no one knows for sure at this point. The best we can do is think through possible outcomes.

The reason why I would be very cautious about investing in Bitcoin or any other cryptocurrency is that governments won’t allow decentralized currencies to threaten their own sovereign currencies. Cryptocurrencies are still marginal, so governments stay idle. But if any crypto seriously threatened, say, the USD, its days would be numbered.

Every major government in the world is contemplating the introduction of its own cryptocurrency. So there’s a real chance that all cryptocurrencies, except those issued by a government, will be banned. That will allow governments to harness the blockchain technology while retaining control of money.

The same thing happened with bank notes issued by private bank—they eventually became sovereign currencies.

When governments realized that having a monetary monopoly allowed them to create money out of thin air, they introduced a sovereign fiat currency and outlawed private bank notes.

Get Ready for the Crypto Dollar

The case for sovereign cryptocurrencies is even more compelling. As soon as we have a “crypto dollar,” “crypto renminbi,” or another sovereign currency, governments will be able to get rid of money laundering, tax evasion, and avoid a lot of other problems that come with cash.

Major governments will work together to ensure that they have control over money issuance and tax collection.

Many crypto bugs tell me that governments are already late in the game so they can’t control Bitcoin anymore. I disagree. All the US government has to do is to impose heavy sanctions on any business that uses or accepts bitcoins. No serious company will touch it.

This is exactly how the US successfully imposed FACTA, a US law, on all of the world’s financial institutions.

Cryptocurrencies’ Effect on the Gold Price

Could cryptocurrencies hurt precious metals prices?

Cryptocurrencies have definitely attracted a lot of capital that would have otherwise flowed into other asset classes. A number of precious metals investors have been lured into buying cryptocurrencies—many of them, unfortunately, bought at the worst possible time (late last year).

That said, the relationship between cryptocurrencies and precious metals prices is far from obvious. Late last year, Bitcoin hit all-time highs, but gold also had a reasonably good year, gaining about 11%. So far this year, bitcoin has plunged 54%, while gold has slipped 9%. So it’s hard to tell what impact the crypto craze has had on gold’s price.

What’s more obvious is gold’s close correlation to the US dollar. The recent strength of the USD has hurt precious metals prices. Higher interest rates are also partially to blame. However, no one can predict where both are headed.

One thing I can say for sure is that precious metals are now very cheap as an asset class. Gold is selling for its lowest price in 18-months. And silver hasn't been this cheap since early 2016. For this reason, I’m personally increasing my allocation to both gold and silver. If precious metals prices happen to drop further, I will buy more. Every asset class goes through cycles. Gold is historically cheap right now. It will eventually get more expensive.

In 1980, nobody owned stocks and everybody owned gold. Yet stocks were historically cheap at the time. It didn’t work out well for folks who were obsessed with gold. Now the opposite is true. Everyone is obsessed with overvalued stocks or volatile cryptocurrencies, and nobody wants gold.

One last thing to note: I now have a very large allocation to cash because I expect many asset classes to become cheaper within the next couple of years.

I hope this is helpful and thank you for reading.

The End of the Steering Wheel

The End of the Steering Wheel

Do you know what the biggest car company in America is today?

Its no longer General Motors (GM), which lost $3.8 billion last year.

And it sure as hell isn’t Ford (F), whose stock is crumbling to seven-year lows as you read this:

Source: Yahoo Finance

Electric-car maker Tesla (TSLA) has zoomed past both of these stumbling giants to become America’s most valuable car company.

But Tesla has barely sold any cars. Its colossal $60 billion valuation is based purely on hope and potential.

In 2017 GM sold 10 million cars, 100 times more than Tesla... but the market values GM at only $52 billion.

  • I’ve never seen the media fall in love with a stock like it has with Tesla, which has soared 1,000%+ since 2014.  

Flip on CNBC and there’s a good chance they’re talking about Tesla right now. The financial media is obsessed with founder Elon Musk.

Now picture this headline broadcast all over TV and the internet:

Elon Musk’s Tesla to Launch Fully Driverless Robotic Car Service This Year

Can you imagine the hysteria that would erupt if fully functional, self-driving Teslas were rolled out? The stock would go bananas.

Well, this headline is accurate, except for the Tesla part.

Right now—in August 2018—self-driving cars are driving around Arizona. On the Thursday you receive this letter, a self-driving car will drive a kid to soccer practice.

And before yearend, the company that operates these cars will launch a self-driving rideshare service to the public in Arizona. It’ll operate just like Uber. You press a button on your phone and a robot taxi comes to pick you up.

There will be no driver in the car. It will be driving itself.

  • I’ll repeat: self-driving cars are here right now

The company achieving all this is called Waymo. As I explained in June , it’s a subsidiary of Alphabet (formerly known as Google).

If Waymo were a standalone company, it would be the hottest stock on Wall Street. But because its tucked away inside the world’s third-biggest publicly traded company, the financial media ignores it.

Waymo’s driverless fleet has already covered 8 million miles and continues to amass 1 million miles per month today. As you can see in the chart below, Waymo has been testing driverless cars since 2009. This year, its progress has gone parabolic:


Source: Waymo 

This is key because Waymo cars run on a centralized computer “brain” that learns from every mile driven.

Waymo is absolutely dominating all rivals in self-driving technology. Tesla, Uber, and many others are years behind it.

  • Driverless cars are an existential threat to the car industry as we know it.

I’ve focused a lot of my time and research lately on understanding how self-driving cars will change the world. I’m convinced they’re going to hollow out the car-ownership culture in America and elsewhere.

Think back to when ridesharing services like Uber and Lyft were new. Many experts predicted these services would kill car ownership. That didn’t happen, mostly because of the cost.

Right now I’m living in Dublin, Ireland, and I don’t own a car. When I’m going for meetings, I take several Ubers a day, and the cost often adds up to over $75 a week. When I was living in Auckland, New Zealand, a far more sprawling city, the cost ballooned even higher.

By far the biggest cost of operating any car today is paying the driver. Last year, Uber took in $37 billion in fares. $30 billion—or 81%—went to the drivers. Self-driving cars slash this to zero.

A recent estimate from investment bank UBS arrived at a similar number. It suggests driverless ride-sharing services will be 70% cheaper than Uber.

That’s right in line with what my research shows—after factoring in regulatory costs, which will likely be substantial. Governments will surely wet their beaks by imposing taxes, fees, and regulations. For our own safety, of course.

  • Tens of millions of Americans will ditch their cars in the next few years.

Why pay for car loans, insurance, registration, inspections, repairs, parking, oil, and gas when you can summon a safe, inexpensive driverless car to pick you up anytime you want?

According to the US Census Bureau, 63% of Americans live in urban areas. I think it’s safe to assume at least half the folks who own cars in cities today will ditch them in the coming years.

Did you know that 2017 marked the first year auto sales fell since the financial crisis? I think it’s the beginning of the end of the American car industry as we know it.

Plunging car sales are obviously terrible for automaker stocks. But the disruptive effect of self-driving cars will ripple out to other, less obvious corners of the market.

For example, self-driving cars will cut down on car accidents big time. Today, over 6 million car accidents happen in the US each year. Self-driving cars should ultimately reduce this by around 90%.

This will eat into car sales, as we won’t need to replace totaled cars often. Fewer accidents also means plunging revenue for companies that sell car insurance. Less wear and tear will eat into the revenue of companies that sell auto parts.

Not to mention, fewer speeding tickets means less revenue for local governments.

  • Politics will be an important battleground for Waymo. 

The auto industry is responsible for 4% of US GDP and millions of jobs. In fact, “truck driver” is the most common job in America. Self-driving vehicles put all 4 million American truck-driving jobs in jeopardy.

Its easy to see how this could go bad politically. I can already see the headlines in the Huffington Post: “Greedy Tech Giant Google Puts Profits Before Workers…”

Waymo has smartly gotten out ahead of this by building partnerships that enhance its image. For example, it has partnered with the City Council in Phoenix to provide cheap bus and rail connections to underserved communities and the elderly. It has entered a similar partnership to drive folks to and from Walmart to buy groceries.

This is a genius move by Waymo. Instead of a job killer, it will be seen as the friendly service that takes Grandma to Walmart.

  • Okay Stephen, how do we make money from this? 

At 52 times earnings, Alphabet (Google) is too expensive for us to buy today.

I expect Waymo to achieve rocket ship growth. But Google is a colossal company worth $865 billion.

Analysts at Morgan Stanley value Waymo at $175 billion today. That sounds way too generous to me. My calculations show Waymo is worth around $100 billion. But even if we play along with Morgan Stanley’s big number, Waymo makes up only 20% of Google’s value.

I’d consider buying Google if it dips about 15% to around $1,050/share. This would push its valuation down into a more reasonable range. And it would shrink Google’s market cap enough so big growth in Waymo can move the needle.

  • As you know, my aim in this letter is to help you profit from disruption. 

And just as important, avoid being caught on the wrong side of it.

I’m working a “blacklist” of auto stocks in danger of getting demolished by the self-driving car trend. I’ll share it with you soon.

For now, I can tell you these three sitting ducks will definitely be on the “DO NOT BUY” list:

Ford Motor Co (F), online car seller CarMax Inc (KMX), and insurance company Ally Financial (ALLY).

That’s it for today. Next Thursday, we debut the mailbag. If there’s anything you want to ask about self-driving cars, send me a note at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Introducing the World’s Most Powerful Stock Picker

Introducing the World’s Most Powerful Stock Picker

I’d like you to meet the most powerful stock picker in the world.

His influential words will often crash a stock… or cause it to soar.

In April, he dropped the hammer on Philip Morris (PM), the world’s largest tobacco company. It plunged 25%, as you can see right here:


Source: Yahoo Finance

And back in 2013, his endorsement led to a 114% gain in an index that tracks the stock market of the United Arab Emirates.

He recently made a new disruptive announcement that’s causing billions to flood into an under-the-radar investment. I’ll tell you about that in a moment.

  • First, you should know the world’s most powerful stock picker is not a human. It’s a company called “MSCI.”

MSCI creates and tracks indexes. A stock index, as I’m sure you know, is simply a group of stocks. The S&P 500, the Dow Jones, and the Japanese Nikkei are all indexes.

MSCI dominates the index game. It controls over 190,000 indexes, many of them so ingrained in the markets that we often refer to them without realizing it.

Consider the statement "emerging market stocks gained 1% today.” We’ve all heard this dozens of times. But stop and think what it actually means. There are thousands of emerging market stocks. Which ones in which countries are we talking about?

This statement refers to the MSCI Emerging Markets Index. It’s so ingrained as the accepted benchmark that it’s synonymous with “emerging market stocks.”

  • 12.4 trillion investment dollars worldwide track MSCI indexes.

Many giant pools of money like university endowments, ETFs, and pension funds must own the stocks included in the MSCI index they track. And often, they are prohibited from owning stocks that are not in the index.

As you can imagine, this gives MSCI a lot of power. Earlier, I mentioned how Philip Morris stock plunged in April. This happened when MSCI announced that it will be kicking all tobacco stocks out of its indexes. That’s all it took for poor Philip Morris shareholders to get steamrolled for a 25% loss.

I’ll give you another recent example of MSCI’s stock-picking power. In 2013 the company said it would start including stocks from the countries of the UAE and Qatar in its Emerging Markets (EM) Index. Over 1.9 trillion investment dollars track it.

It didn’t take long for big Wall Street money to start flowing into these small markets. Within 12 months the Qatari stock market had soared 48%... and the UAE skyrocketed 114%.

As you can see, MSCI decisions literally move markets.

  • On June 20, MSCI announced it will add Saudi Arabian stocks to its EM Index starting in May 2019. 

MSCI will allocate 2.6% of its EM index to Saudi Arabian stocks. As I mentioned, $1.9 trillion tracks this index. Which means this decision will cause at least $49.4 billion to flood into the Saudi market in 2019 alone.

The Saudi stock market is tiny. Its total value is about $500 billion. Apple (AAPL) is 2x the size of every publicly traded firm in Saudi Arabia combined. 

  • $50 billion flooding into Saudi Arabia’s market is the equivalent of $780 billion gushing into US stocks. 

All the data tells me this will spark a boom in Saudi stocks. Since 1994, MSCI has promoted 20 countries to its Emerging Market index. The average return leading up to the year of inclusion was 55%.

That italicized part is very important. MSCI made this announcement on June 20. But it won't add Saudi stocks to the index until May 2019, which means the big money that tracks MSCI indexes are starting to pump in billions now.

  • Saudi Arabia is a wealthy country…

It’s the world’s 15th-largest economy, bigger than Canada and even Australia.

It owns 22% of the world’s oil reserves, which is worth an estimated $1.3 trillion. It has $500 billion in foreign currency reserves—more than Germany, France, and the US combinedAnd it controls a massive $230 billion sovereign wealth fund.

In other words, Saudi Arabia is not your typical “emerging” market. Most emerging markets, like China and India, are emerging from poverty. Saudi Arabia is emerging from self-imposed religious seclusion.

After 40 years of keeping its doors mostly shut to out the outside world, Saudi Arabia is finally opening up. It officially opened its stock market to foreign investors three years ago, which paved the way for MSCI’s landmark decision.

  • We’re buying the Saudi Arabia ETF KSA today.

Blackrock created this ETF (KSA) in 2015. KSA is the best performing country ETF this year. It shot up over 19% while US stocks are up 6%.

KSA owns large Saudi companies, including the world’s fourth-largest industrial company and the Middle East’s two largest banks.

There’s currently $275 million invested in KSA. The amount of dollars invested in the fund has shot up 1,700% this year alone. I expect this trend to continue leading up to Saudi Arabia’s MSCI inclusion in May 2019.

KSA pays a decent dividend of 2.02%. It has an expense ratio of 0.74%, which is about average for “country” ETFs. The 75 Saudi stocks it owns are fairly valued; some even tilt toward bargain status. The price-to-earnings ratio of the fund is 17, lower than the S&P 500’s 24.

We’re buying the Saudi Arabia ETF KSA at today's price of $31.

KSA is up 2.7% since the initial announcement on June 20. We haven’t missed anything yet. I’m convinced the big gains are ahead of us. Remember, the 20 countries promoted to MSCI’s Emerging Market Index since 1994 had average returns of 55% in the year leading up to inclusion.

I believe it’s a wise move to get into KSA before tens of billions of investment dollars flood into Saudi Arabia over the next 10 months.

That’s all for today. As a heads up, I’m working on an essay about the death of an important American industry. Few see this coming, but my research shows its going to disrupt up to 3% of American GDP and at least a dozen stocks that many investors wrongly believe to be “safe.” Look for it in your inbox next Thursday afternoon.

Talk soon,

Stephen McBride
stephen@riskhedge.com
Chief Analyst, RiskHedge

How We’ll Flip a Bloodbath into 3x Gains

How We’ll Flip a Bloodbath into 3x Gains

Moneymaking opportunities like this one don’t come around often.

The last time we got this set-up in 2016, it led to 240% gains…

In 2016, America’s coal industry faced devastation. The four largest coal producers had gone bankrupt. The biggest coal ETF (KOL) had plunged 90%.

Regulations enacted by the Obama administration were choking the industry. The market HATED coal, which is the dirtiest of all fossil fuels. Investors dumped coal stocks as if coal would be phased out as an energy source in the near future.

But anyone familiar with the data knew this was an emotionally-driven fantasy. You see, three in 10 American homes and four in 10 global homes are powered by coal.

Cleaner energy like solar and wind will surely eat into this over time. But smart investors knew it would take decades to re-work global power grids to replace coal. Until then, global power plants will continue burning coal by the railcar load.

This reality dawned on the market in early 2016. Coal stocks bottomed and the KOL ETF leapt 242% over the next two years.


Source: Yahoo Finance

  • Today, I want to tell you about a similar but greater opportunity…

It’s in uranium, which you probably know is what fuels nuclear power plants.

Like coal, uranium is an “emotionally charged” resource. Bring it up in conversation and many folks will get all worked up about Chernobyl or Fukushima.

Never mind that nuclear is the safest energy source, according to the World Health Organization. Right now, investing in uranium is one of the best opportunities I’ve seen in my career. We have a realistic shot to make 3-5x our money or more in a few years on the uranium company I’m going to tell you about.

I don’t make this prediction lightly. Between 2003–2007, the price of uranium shot up from $10/lb to $136/lb. Many uranium stocks climbed over 2,000%.

  • But the price of uranium has cratered 85% since 2007…

This has gutted the uranium industry like a fish. Today it costs between $50–$60 for most companies to mine a pound of uranium. But uranium sells for around $25/lb, and it’s been below $50 for over six years.

This has put all but the lowest-cost producers out of business. Ten years ago there were more than 500 uranium companies. Today there are about 40. And many of the survivors are barely hanging on, having lost 90% of their value since 2011.

It’s a complete bloodbath. Just like coal in 2016.

  • But nuclear energy powers one in every five American homes.

It provides 56% of America’s “clean” power. And according to the World Nuclear Association, demand for uranium around the world is steadily growing.

Since 1980, annual demand has climbed 119%. And with 57 new nuclear reactors currently being built, demand is expected to grow by another 23% by 2025.

In other words, not only is nuclear power not going away. It’s growing.

Nuclear use is growing… yet the uranium ETF URA has cratered 90% since 2011.

Nuclear use is growing… yet no company on earth can turn a profit selling uranium at today’s spot market price.

This simply cannot continue. Either 20% of American households will have to shut their lights off, or the price of uranium must rise A LOT.

Like coal in 2016, the market is pricing uranium investments as if nuclear power is going away. I expect this to resolve in a big bull market for uranium.

And a starting gun just fired to kick it off…

  • Imagine turning on the TV and seeing the headline, “Saudi Arabia shuts down all oil production.

Saudi Arabia produces 13% of the world’s oil. Needless to say, this news would be extremely bullish for the price of oil.

Well, the equivalent just happened in the uranium market. The world’s largest uranium producer, Cameco (CCJ), just announced it will keep its flagship McArthur River/Key Lake mine closed down indefinitely.

This isn’t some rinky-dink operation. When it’s up and running, McArthur River/Key Lake supplies around 13% of the world’s uranium. It’s the world’s largest high-grade uranium mine. The quality of the uranium there is 100x better than the global average.

Since the announcement, uranium prices have jumped 12%.

  • I believe Cameco management made a wise decision in shutting down McArthur River.

Why deplete the world’s highest-grade uranium mine for a loss?

By halting production, CCJ is not only stemming its losses. It’s removing 1/8th of the world’s uranium production from the market, which should push up the uranium price.

And CCJ isn’t the only company cutting uranium production. According to leading uranium analysis firm TradeTech, major producers will reduce their output by around 15,000 tons this year.

That’s a giant 25% reduction based on last year’s production. To put it into perspective, it would be like Russia and Saudi Arabia shutting down oil production.

  • According to the Ux Consulting Company, uranium demand will be 87,000 tons this year.

With only around 44,000 tons of new production coming into the market this year, this will create a huge deficit. And eat into utility companies’ stockpiles.

And here’s another important detail. Cameco plans to become an active buyer of uranium. On its quarterly call last week, CEO Tim Gitzel said the company plans to buy around 10 million pounds in the market this year. And 20 million next year.

That’s significant as the amount of available uranium to buy on the spot market each year is only about 25–30 million pounds.

  • I think the uranium price bottomed in November when it hit a 13-year low of $18.

It has edged up 43% since then. Meanwhile, Cameco’s stock is up 38% in less than two years.

Cameco has huge leverage to the uranium price. According to the company, for every $5 rise in the uranium price, its revenue jumps $37 million.

Cameco is the gold standard of the uranium industry. It produced 16% of the world’s uranium last year, and is one of the world’s lowest-cost uranium producers.

As I mentioned, most companies produce uranium for $50–$60 per pound. CCJ does it for around $35 per pound. Its two largest mines are McArthur River/Key Lake and Cigar Lake. Both are located in Canada’s Athabasca Basin, home to the highest-quality uranium in the world.

  • Despite a seven-year depression in uranium, Cameco has a healthy balance sheet.

As you’d expect, CCJ’s revenue and profits have fallen along with the uranium price. But the company has plenty of cash to fund operations until the true bull market in uranium begins.

It has $470 million in the bank, a 190% increase since last year. And it hasn’t taken on debt to survive the uranium downturn. In fact, it has paid down debt since 2013.

To sum up, Cameco has weathered the bloodbath in uranium exceptionally well. It is set up perfectly to cash in as the price of uranium rises. Keep in mind, CCJ shot up over 2,000% in the last uranium bull market.

I’m looking for Cameco to leap 3x–5x in the next few years.

I’ll be in touch next Thursday. As always, feel free to write me at stephen@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

Please Don’t “Buy the Dip” in Netflix

Please Don’t “Buy the Dip” in Netflix

Netflix bulls are living in fantasyland.

As you may have heard, Netflix (NFLX) bombed on earnings results last week. Its stock plunged 14% on news that it fell short of its growth target by one million subscriptions.

In early July I wrote you explaining why Netflix was in big trouble. If you sold NFLX after reading that essay, nice call—you sold on the highs and avoided the bloodbath.

If you still own Netflix… or you’re tempted to “buy the dip”… please don’t.

  • NFLX is a beloved stock market darling… 

It has exploded 8,100%+ in the past 10 years, outperforming even mighty Amazon (AMZN) by more than 3x.

Everyone, including me, thinks Netflix’s video service is great. I’ll happily admit that Netflix is a great business.

But it’s a lousy stock.

The problems start with valuation. Even after plummeting 14%, Netflix is dangerously overpriced. It has a price/earnings (P/E) ratio of 165, compared to the S&P 500’s of 24.

Why have investors bid it up to this absurd price? The argument goes something like this…

Netflix has gained 90 million subscribers in the past four years and will continue adding millions every quarter for years to come. Revenue will skyrocket, which will turn the company into a cash-generating machine, and its stock will “grow into its valuation.”

Using simple math, I’m going to show you why anyone who believes this is living in fantasyland.

  • NFLX has 130 million subscribers today…

57 million of these are in the US, with the other 73 million scattered around the world.

According to the US Census Bureau, there are 126 million households in America. Which means around 45% of US households already have a NFLX subscription.

Big Four accounting firm Deloitte found that 55%, or 70 million, US households subscribe to a streaming service. So even if every streaming household were to subscribe to Netflix, that’s only another 13 million “potential” customers.

That’s a pretty low ceiling from where Netflix currently stands.

  • NFLX is already struggling to acquire new subscribers…

In the first six months of this year, the company spent $456 million on marketing in the US—double what it spent last year. It acquired 2.66 million new subscribers, which works out to a cost of just over $170 per new user.

That’s a huge 160% jump from the $65 cost per new user it enjoyed just two years ago.

Netflix’s standard package costs $10.99/month. At a customer acquisition cost of $170, it takes almost 16 months to break even on a new user. And keep in mind its acquisition costs are rising rapidly.

  • Can international subscriber growth save Netflix?

In the past year, NFLX has added 4x as many international subscribers as US ones. The company expects around 75% of growth to come from international markets. So this is by far the most important segment to watch.

NFLX’s subscriber growth rate has risen at around 17% per year. To continue growing this fast, it must add over 30 million new users next year… 35 million in 2020… and 40 million in 2021.

My research shows it will probably struggle to add even three million new subscribers/year in the saturated US market. Which means nearly all of this growth must come from international markets.

  • As I’ve said before, it all comes down to content.

Remember, Netflix has achieved its incredible growth by blowing up the TV distribution model. It ate the lunch of cable companies that used to be the gatekeepers of what people watch.

But as I’ve explained, distribution isn’t all that important anymore. Thanks to the internet, we can watch practically anything we want anytime we want. Great content is what really matters today.

NFLX has proven it can make good content for a US audience. But to achieve international success, it needs to do so in countries as diverse as France, India, Mexico, and Brazil.

For the most part, TV is a “local” thing. Americans like to watch American shows. Brazilians like to watch Brazilian shows. Which means NFLX must make “local hits” to attract the masses in these countries.

So far, it has failed at this. Frankly I don’t know if it’s even possible for one company to become a content expert across a dozen different countries with a dozen different languages.

But even if it is possible, NFLX doesn’t have the cash to pull it off.

  • NFLX is making around 700 original TV shows this year…

It has spent a jaw-dropping $5.36 billion on content in just the last six months. Its spending on content has grown at an annual rate of 50% in the past five years. Which is significantly faster than the rate at which its sales have grown.

This new content has helped bring in 20 million international subscribers in the past year. But it has come at massive cost. The $5.4 billion it spent developing content in just the past six months dwarfs the $1.3 billion in profit it’ll earn this year.

NFLX has been borrowing to make up the difference. Its debt has exploded from $2.37 billion in 2016 to $8.34 billion today.

  • To be clear, I admire NFLX.

It’s a great company and a (marginally) profitable business. CEO Reed Hastings has made all the right moves in building it into a media juggernaut. I expect he’ll continue to guide the business to growth and profitability.

It’s not his fault that investors have bid NFLX stock to the moon. But that’s the reality.

Today, NFLX trades for $363. Based on its profit forecast of $1.3 billion this year, and the average valuation in its industry, its “fair value” is around $119. The average valuation in its industry, by the way, is 40x earnings. So valuing it this way isn’t exactly conservative.

Still… I’ll entertain the idea that NFLX stock deserves a nice premium. It does have a stellar management team, explosive growth, and has pulled off some incredible accomplishments.

If we’re generous, Netflix is worth maybe… MAYBE… $190–$200 a share.

Problem is, that’s still almost 50% below its current price.

  • When I warned you about NFLX three weeks ago, I also recommended you buy Walt Disney Company (DIS).

Last August, DIS announced it will launch its own streaming service. I’m convinced Disney will crush NFLX to become the #1 streaming service within a few years.

Since we last discussed DIS, it has grown even stronger. On July 19, it closed a deal to buy 21st Century Fox (FOXA). Disney, which already has the world’s best content, now owns even more of America’s favorite programming.

With this deal DIS acquires:

  • Fox’s film studio which has made Oscar winners like Avatar, Titanic and Slumdog Millionaire.
  • The X-Men franchise, Modern Family, National Geographic channel, and The Simpsons.
  • And perhaps most importantly, a 60% controlling stake in America’s second-largest streaming service, Hulu.

Keep in mind, DIS already owns household names like Marvel… Pixar Animations… Star Wars… ESPN… ABC. It has produced the world’s top-selling movie in six of the past seven years.

When “Disneyflix” debuts, it’ll be a no-brainer purchase for most families. And remember, DIS will be pulling all this popular content off NFLX.

DIS is up a bit since I recommended it, but it’s still a great buy at today’s price of $113. I expect it will be a long-term holding for us.

One more thing before I sign off…

  • If I could stamp a warning label on this issue, I would.

Lots of people will read this essay and conclude that Netflix is a good short.

Don’t do it. Don’t short Netflix.

As you can plainly see from its 165 P/E ratio, Netflix stock isn’t driven by fundamentals. It’s driven by the enthusiasm of investors, which is totally unpredictable.

There are much easier and smarter ways to make money in the markets than shorting a stock powered by the lofty dreams of investors. Like owning Disney.

That’s it for today. I’ll be in touch next Thursday. As always, feel free to write me at theriskhedgereport@riskhedge.com.

Stephen McBride
Chief Analyst, RiskHedge

How We’ll “Get Rich Slowly” from the China Trade War

How We’ll “Get Rich Slowly” from the China Trade War

Today’s investment recommendation might surprise you.

If you’ve been reading the RiskHedge Report, you know the world is changing faster and faster.

New industries like crypto have sprung up from nowhere. While iconic American companies like General Electric (GE) have seen their stock prices crater by 60% in the past two years.

My aim in this letter is to help you profit from disruption. And just as important, avoid being caught on the wrong side of it.

  • However, some industries are what I call “undisruptible.”

Take airplane manufacturing, for example. The established players have an iron grip on the market. It’s all but impossible for others to seriously compete with them.

As you might expect, the regulatory hurdles alone are absurdly high. To get a new airplane approved, you have to pass the Federal Aviation Administration's certification process. This takes several years, requires compliance with thousands of regulations, and involves completing about 4,000 documents.

Then there’s the cost and time of developing the aircraft. America’s biggest aircraft maker, Boeing, is developing a new plane right now. It’s not projected to take its first flight until 2025… seven years away.

Upstart companies just don’t have the money, manpower, or time to seriously threaten the entrenched players.

  • “Undisruptible” stocks can be very profitable…

Unlike many of the disruptors I focus on in this letter, these companies won’t typically soar 2x, 3x, or 4x in a short time. Their stocks tend to rise more slowly. But we can still make stacks of cash on them. I call these “get rich slowly” investments.

There’s no better example of this than the two firms which dominate aircraft manufacturing: America’s Boeing (BA) and Europe’s Airbus (EADSY). Between them, they control over 95% of the commercial aircraft market. This duopoly makes more than 19 out of every 20 planes in the sky.

In the last 15 years, Airbus stock has soared 1,735% and Boeing has climbed 1,780%, which crushes the S&P 500’s 240% gain in that time. You can see this outperformance in the below chart.

  • You’ve surely heard about the ongoing trade tensions between America and China…

The US slapped a 25% tax on $34 billion worth of Chinese-made goods. China retaliated with the same penalties on US-made goods, including airplanes.

You see, airplanes are America’s #1 export to China… totaling $16.3 billion last year.

Boeing’s sales to China account for $12 billion of that, which amounts to 13% of the company’s total revenue last year. If China really wants to stick a knife in the US, Boeing is an obvious place to start.

And unlike the US where individual companies like JetBlue or American Airlines decide which planes to buy, in China, a central agency is responsible for airplane purchases. That means any company that falls out of favor with Chinese “authorities” is in big trouble.

Besides Boeing, Airbus is the only other company that can make the planes China needs… and China needs A LOT of planes.

  • China is about to leap ahead of the US to become the world’s most lucrative airplane market.

The International Air Transport Association expects China to surpass America to become the world’s biggest aviation market within three years.

This has been a long time coming. In 1996, 17 of the 20 busiest airports were in America or Europe. Today, that number has slipped to eight. And China now claims four spots in the top 20.

According to Boeing, China will order $1.1 trillion worth of aircraft in the next two decades. And 25% of new airplane orders worldwide will come from Chinese airlines.

  • I expect the Trade War to give Europe’s Airbus a huge boost…

Right now, Boeing and Airbus share a 50/50 split of the Chinese market.

My prediction is the spat between China and the US is the beginning of something much more damaging and much more global.

President Trump is picking trade fights all around the world. He has placed tariffs on imports of timber from Canada. He’s called the European Union a “foe.” All of this tells me we’re entering a new era of protectionism that will hinder trade—especially between big US companies and China.

The Asia-Pacific region is already Airbus’s biggest market, with 40% of new orders coming from there. As trade tensions worsen, I expect Chinese airlines will order the majority of the $1.1 trillion in planes they need from Airbus, not Boeing.

  • Even without the Trade War effect, Airbus is great company to own…

It has consistently pried away market share from the once dominant Boeing. In 1995, Boeing had an 82% market share of the global airplane market. Today it’s 50/50, and the trend favors Airbus. In 9 of the past 11 years, Airbus has received more orders than Boeing.

And here’s an incredible fact. All of these orders have created a backlog for Airbus of around 7,200 aircraft… worth $1.17 trillion. This is the largest backlog of any company in any industry in the world.

Boeing’s $490 billion backlog doesn’t come close.

Airbus’s gigantic backlog represents about 10 years of deliveries, which allows us to see deep into the company’s future sales.

You see, airlines are reluctant to cancel orders they’ve placed with a manufacturer. It’s customary in the industry to put a down payment of 1%–2% up front. If a buyer cancels an order, it loses its down payment. As you can imagine, airplanes aren’t cheap. Even during the financial crisis, cancelations in the industry hit only 3.4%.

So even when a recession hits, EADSY should keep earning cash.

  • Airbus delivered 718 aircraft last year, its best year ever.

This marked 15 straight years of increasing deliveries.

It also achieved its biggest ever profit last year, $3.24 billion. It hit this milestone thanks to rising sales and expanding margins.

Airbus’s 4.3% net profit margin was its highest since 2005. I expect its margins to grow in the coming years as research & development (R&D) costs continue to fall… and production of its newest A350 and A320 aircraft increases.

The company spent $22 billion between 2010 and 2016 on R&D for these aircraft. But those costs are now falling as Airbus shifts from development to production mode. And this gives it a double cost-saving benefit. The more planes it makes, the more the cost of making each one falls. You probably know this phenomenon as the “economics of scale.”

Finally, Airbus has a very healthy cash position of $17.4 billion. It could pay off its debt tomorrow if it wanted to.

I’m buying Airbus at $31 today. It’s a long-term, “get rich slowly” holding for me.

What are your thoughts on Airbus and the trade war?

Let me know at riskhedgereport@riskhedge.com. Your reply could be featured in our new “mailbag” feature that’s coming soon...

Until next Thursday,

Stephen McBride
Chief Analyst – RiskHedge

It’s Time to Buy This Super Profitable “Monopoly Stock”

It’s Time to Buy This Super Profitable “Monopoly Stock”

It’s one of the most profitable businesses in history…

And it’s making gobs and gobs of money right now.

The Central Intelligence Agency is a happy customer of this business. A CIA director said switching to its services is “the best decision we’ve ever made.”

This business generates all of Amazon’s (AMZN) profits. AMZN has soared 3,900% in the past 10 years.

Let me give you one more example before I tell you what this business is. Have you looked at a chart of Microsoft (MSFT) lately? It went practically nowhere for 14 years leading up to 2014.

Then, in 2014, MSFT re-geared to focus on this extremely profitable business. Its stock took off and roared to a 175% gain.

To be clear, I’m NOT recommending you buy AMZN or MSFT today.

Instead, I’m going to tell you about an under-the-radar tech giant that’s fueling AMZN and MSFT's huge stock gains.

  • The super-profitable business I’m talking about is the cloud

“The cloud” is a fuzzy term that everyone’s heard of… yet few know what it really means.

In short, the cloud gives businesses cheap access to powerful supercomputers.

This might sound simple, but it’s actually pretty revolutionary. 

Before the cloud, buying expensive computers was a daunting challenge for any business.

For example, a server that can handle website traffic for a small business costs about $5,000. A site that welcomes millions of visitors might need 50 of them.

That’s $250,000, and we’ve barely scratched the surface.

Where will a business put all these servers? That’s going to cost a couple thousand dollars in rent every month. Plus, you’ll pay a big electricity bill to keep the servers humming 24/7. And then you have to pay employees to maintain them.

As you can imagine, these expenses can cripple a business, especially a smaller one.

  • The cloud can slash these costs by around 30%...

But the real key is this: the cloud allows your average laptop to tap into the superior power of big, centralized computers.

Remember when we used to spend hundreds of dollars buying “memory” for our computers? Or upgrading storage so we had more room to store files?

The cloud effectively makes this way of doing things obsolete. You can now flip on your laptop, connect it to a more powerful computer over the internet… and use its resources instead.

  • Netflix and Airbnb could not have achieved their incredible growth without the cloud…

Netflix had 9.4 million subscribers in 2008. Now it has over 125 million.

Airbnb, an online network that connects property owners with paying guests, has grown even faster. In 2011 it had 1 million “stays.” Last year, it hit 100 million.

That’s 100x growth in seven years.

Both Netflix and Airbnb built their businesses on Amazon’s cloud, called Amazon Web Services (AWS). This helped them sidestep many of the biggest costs rapidly growing tech startups face.

Using AWS, they didn’t need to buy faster computers, or build server centers, or pay employees to keep them up and running.

AWS handles all this. Which means Airbnb can focus most of its time and money on what matters—disrupting the hospitality industry.

Mike Curtis, head of engineering at Airbnb, said, “Why AWS? All of our growth … and we did it with a five-person operations team.” 

Airbnb is worth $31 billion today.

  • More and more companies are switching to the cloud… 

Ride-sharing service Lyft runs 100% on AWS. So does real-estate platform Zillow. Other AWS customers include Kellogg’s, Comcast, and 3M. Even giant firms like Boeing now use Microsoft Azure’s cloud.

I believe most American companies will move to the cloud over the next five years. Leading tech research firm Gartner expects spending on the cloud to grow to $411 billion a year by 2021.

And as money floods into the sector, earnings will shoot up for the companies that provide cloud services. This has already begun: AMZN’s cloud sales grew 43% last year, MSFT’s grew 93%, and IBM’s grew 30%.

These are known as the “Big 3” cloud providers. Combined, their cloud revenues reached $53 billion last year.

  • But I’m not buying their stocks right now.

Don’t get me wrong: I like AMZN and MSFT. They’re great companies, and they’re leaders in the cloud, which is one of the world’s most profitable businesses.

The problem is, their stock prices reflect this. We’d have to pay dearly to own them.

AMZN’s price/earnings ratio is a sky-high 240. MSFT’s is 90. They must execute to perfection to justify these ridiculously expensive valuations.

Maybe they’ll manage to do it, but I’m not willing to bet on it. Instead, I’m buying a different company that has a 98% market share in a crucial part of the cloud business. In fact, anybody who gets involved with the cloud has to buy this company’s products.

  • I’m buying the world’s biggest computer chip maker, Intel (INTC).

Earlier, I mentioned AMZN, MSFT and IBM earned $53 billion in revenue from the cloud revenue last year. Well, INTC supplies the computers and data centers these companies need to power their own clouds.

You see, “the cloud” is just a term for the giant centralized data centers run by these firms. They’ll spend $60 billion on data centers this year alone.

AMZN already has over 400 centers around the world. Each houses up to 80,000 servers. All these servers need computer chips.

As we discussed a few weeks ago, chips are the “brain” that enables computers to “think.” INTC makes almost all the chips inside the servers… including AMZN’s and Google’s. INTC’s Xeon chips are installed in 98% of data centers across the world. The company has almost a complete monopoly on this crucial part of the cloud.

  • INTC’s profits are skyrocketing along with cloud spending…

The company made 30% of its revenue from its data center business last year. That’s $19.1 billion, an increase of 20% in the past two years.

INTC’s shift toward the cloud is deliberate. It has stated that it is “transforming from a PC company to a company that powers the cloud.”

While a separate area of Intel’s business called “client computing” still accounts for 50% of its sales, its data center group generates almost as much profit. In INTC’s latest quarter, the client segment generated a profit of $2.79 billion. Its profit on data centers was $2.6 billion.

INTC’s shift toward the cloud is making it far more profitable. Its net profit margin has climbed from 20% two years ago to 27% today.

  • INTC has an effective monopoly on the computer chips needed to power cloud data centers… 

I expect INTC to capture billions more in profits as money continues pouring into the cloud.

If you’ve been reading The RiskHedge Report, you know that’s not the only reason why I like INTC.

As we talked about a few weeks ago, it also makes the “brain” and “eyes” for Waymo’s self-driving cars. They are zipping around the streets of Phoenix as you read this.

INTC has gained 9% year-to-date (YTD). It sells for just 21x earnings, which is less expensive than the S&P’s average of 24.

INTC is currently trading at $52, which is an excellent entry price. With cloud spending set to explode to over $400 billion a year by 2021, I’m looking for INTC to double over the next two years.

What do you think? Are you ready to buy Intel?

Let me know at riskhedgereport@riskhedge.com. Your reply could be featured in our new “mailbag” feature that’s coming soon...

See you next Thursday,

Stephen McBride
Chief Analyst, RiskHedge

The Market Is Dead Wrong on Netflix

The Market Is Dead Wrong on Netflix

Do you still watch cable TV?

If so, you’re a dying breed.

Last year, half of Americans ages 22–45 watched ZERO hours of cable TV.

And 7.5 million households have cancelled their cable service in the past five years.

Instead of cable, people are switching to services like Netflix that deliver shows over an internet connection.

Today, more than half of American households subscribe to a “streaming” service such as Netflix or Hulu.

  • The media calls this “cord cutting.”

I’m going to tell you why this trend is FAR more disruptive than most people understand.

Cord cutting isn’t just about switching from one way of watching TV to another.

It’s about smashing the near-monopoly cable companies used to have on American programming.

Comcast (CMCSA), for example, is one of the biggest cable companies in the U.S. From 1990–2018, its share price soared over 5,000%. For most of that time, it enjoyed the big profits that come from operating in an industry with few real competitors.

The internet has totally blown up the cable business model. It took a long time; remember how frustrating it was to watch video in the early days of the internet? The blocky videos, the constant buffering.

Today, the internet is fast and reliable enough to deliver high quality video almost everywhere. There’s really no good reason to pay $100/month for cable anymore when Netflix costs $15/month.

In the last few months, investors have been dumping cable stocks. Since January, Comcast has plunged as much as 30%. Charter Communications (CHTR), another big cable company, has dropped 37%.

  • The downfall of cable is releasing billions in stock market wealth… 

And it’s all up for grabs right now.

Most investors assume Netflix will claim the bulk of profits that cable leaves behind.

So far, they’ve been right. Have you seen Netflix’s stock price? Holy cow. It has rocketed 10,000% since 2008, leaving even Amazon in the dust.

Netflix’s accomplishments are impressive. Accumulating 125 million subscribers worldwide is an amazing achievement.

But don’t let its past success fool you.

Netflix is not the future of TV.

It’s about to enter a battle with a powerful rival you know by name.

And I’m convinced Netflix is going to get crushed.

  • Netflix changed how we watch TV, but it didn’t really change what we watch…

You see, Netflix has achieved its incredible growth by wrangling distribution away from cable companies. Instead of watching The Office on cable, people now watch The Office on Netflix.

I don’t believe this edge is sustainable. In a world where you can watch practically anything whenever you want, dominance in distribution is extremely fragile. Just ask cable company management.

Because the internet has opened up a whole world of choice, featuring great content is now far more important than distribution.

Netflix management knows this. They will spend $8 billion developing original shows this year.

That’s more than any other “streamer.” And more than many traditional media firms such as Viacom and Time Warner.

To fund its new shows, Netflix is borrowing huge sums of debt. It currently owes creditors $6.5 billion, which is 93% more than it owed this time last year.

But the fact is, only one of the top 10 most-watched series in America last year was produced by Netflix. Does that sound like a stock that should be trading for 262 times earnings?

  • In August last year, The Walt Disney Company (DIS) announced it will launch its own streaming service…

And it will pull all its content off of Netflix.

This is a big deal.

Disney is the undisputed king of content. It owns Marvel… Pixar Animations… Star Wars… ESPN… ABC.

In six of the past seven years, Disney has produced the world’s top-selling movie.

And here’s a list of the six highest-earning movies so far this year. The green ones in caps are DISNEY PRODUCTIONS:

  1. BLACK PANTHER
  2. AVENGERS INIFINITY WAR
  3. INCREDIBLES 2
  4. Deadpool 2
  5. Jumaji 2
  6. SOLO: A STAR WARS STORY

Disney owns four of the top six movies this year. And it looks like it’s going to acquire 21st Century Fox’s movie assets, too, which include the rights to Deadpool.

  • Picture this: DIS puts a blockbuster like Star Wars or Black Panther on its platform the same day it opens in theaters…

And after a few weeks it’s no longer in theaters. You can’t buy it. You can’t rent it. The only way to watch is to subscribe to “Disney-flix.”

For example, the only place your children or grandchildren will be able to see Toy Story 4 and Frozen 2 may be on the “Disney-flix” app.

Can you imagine how many parents will sign up for this?

Disney has demonstrated an incredible ability to produce movies and shows people want to watch. No competitor comes within 1,000 miles of Disney’s world of content.

Disney’s ownership of iconic franchises like Star Wars and Spider-Man give it something Netflix couldn’t buy even if it had $100 billion to spend on content.

While Netflix is spending billions of dollars to “try out” new shows… DIS already has the best of the best in its arsenal.

This is why I think Netflix has no chance against Disney long-term.

  • DIS’ shift into streaming will make it a lot more profitable…

For example, theaters showing DIS films keep about 40% of the ticket price. Cable companies take a similar cut.

By streaming content directly to the consumer, DIS will cut out the middleman for the first time ever. Which will boost its profits and should push the stock higher.

  • DIS stock is trading at $104 today… 

At a price/earnings (P/E) ratio of just 14, I think it is absurdly underpriced. The S&P 500’s P/E is 25.

It’s hard to find any “cheap” US stocks these days. And even harder to find a stock that’s cheaper than it was five years ago. DIS ticks both boxes.

Compare that to Netflix which, as I said, has a P/E of 262. Investors are pricing Netflix to perfection… while pricing DIS like a company with a dim future.

  • I’m convinced the market has this completely wrong.

I think DIS will crush Netflix to become the #1 streaming service within a few years.

I expect DIS stock to climb much higher. Which is why I’m personally buying it at $104 today. This is a long-term holding for me.

What do you think? Does Disney have what it takes to beat Netflix?

Let me know at riskhedgereport@riskhedge.com.

Until next Thursday,

Stephen McBride
Chief Analyst – RiskHedge

This Little Company Is Stealing Business from Google and Facebook

This Little Company Is Stealing Business from Google and Facebook

Ever get the feeling someone is stalking you on the internet?

Monitoring every word you type... recording each mouse click… and following you around?

  • That’s because you’re being “targeted.” 

You write an email to your golfing buddies. Next thing you know, an ad for a new set of golf clubs is following you around to every website you visit.

This is called targeted advertising. And it’s a HUGE business.

Traditional advertising, like on billboards, is aimed at anyone who happens to see it. Targeted advertising, on the other hand, seeks to zero in on folks who are most likely to buy what you’re selling. In other words, your “target market.”

How do advertisers know what you’re likely to be interested in buying? There’s a whole industry dedicated to monitoring everything you do online.

Companies are constantly gathering data on you. They watch the websites you visit, the podcasts you listen to, and everything you do on social media.

  • This data fuels online advertising…

And last year for the first time ever, advertisers spent more on internet ads than TV ads.

Online advertising has exploded 4X since 2009. The American internet ad industry now rakes in $80 billion a year… as much as the global toy industry.

American internet giants Google (GOOG) and Facebook (FB) dominate online advertising. In fact, they earn almost all their revenue from internet ads: 98% of Facebook’s revenue and 87% of Google’s comes from selling online ads.

Through targeted online advertising, GOOG and FB have grown into two of the largest, most powerful businesses in the world. Google is now the second-biggest publicly traded company in America, behind only Apple. Facebook ranks 8th.

  • Targeted advertising is an extremely profitable business…

For example, FB has a net profit margin of 45%. That means it turned every $1 of sales into $0.45 straight profit. That’s off-the-charts incredible. It’s one of the highest margins I’ve ever seen for a business of Facebook’s size.

GOOG also has a healthy 20% margin. It runs a lot of nonprofitable projects that drag its margins down, like its self-driving car subsidiary Waymo. Still, a 20% net margin is double the average for America’s 500 largest companies.

This is a big reason why both firms trounced the S&P 500 over the past five years. FB soared 705% and GOOG climbed 155%... while the Index has risen 66%.

  • Google and Facebook have disrupted traditional advertising…

Together, they swallowed up 63% of all digital ad spending in America last year. And because they dominate the industry… they set the rules for advertisers.

The digital ad duopoly has banned any “outside” measurement on their platforms. When you buy an ad with FB or GOOG, you can’t track its performance. You can only track the “average” performance across all the ads you buy. So, if you buy 50 ads, you have no way of knowing if 49 of them flopped and one accounted for all the sales.

And you won’t even know how much you paid for each ad. Advertisers are left totally in the dark about what worked and what didn’t.

Big customers are growing tired of this.

The chief marketing officer of Procter & Gamble, America’s biggest ad buyer, said this recently about Google & Facebook:

“We’re wasting too much money on a media supply chain with poor standards… [and] too many players grading their own homework.”

Procter & Gamble cut $200 million of spending with GOOG and FB last year.

  • Advertisers are turning to a company that’s transforming the industry… 

It’s called The Trade Desk (TTD). And its stock has soared 89% since January.

TTD’s goal is to transform the ad industry… so ads can be bought just like stocks.”

The key thing to understand about online advertising is that it is ferociously competitive. Seven million ad “auctions” are held every second. At these auctions, business owners and advertisers buy space on the internet to display their ads.

Buying the right ad space is absolutely crucial. Get it right and your ad will thrive, generating many multiples of what you paid. Get it wrong and your ad will flop and your money goes down the drain.

TTD provides special tools and data to help advertisers make the right ad-buying decisions. Around two-thirds of its clients are American ad agencies.

Unlike on FB and GOOG, TTD’s clients can use their own in-house metrics to track ad performance. The end result is clients buy more effective ads. They get a higher return on investment and avoid blowing money on ads that don’t generate sales.

The most important stat is that TTD has a 95% customer retention rate over four years. This means 19 out of 20 companies that use The Trade Desk stick with it.

That’s outstanding; it even beats Apple’s 92% retention rate.

  • More and more advertisers are switching to TTD…

On the latest investor call, CEO Jeff Green said in the last year new clients spent around $200 million on their platform. Its net profit or “bottom line” also surged by 148% last year.

Aside from its superb customer retention rate, what impresses me most about TTD is its 17% net profit margin. As I alluded to earlier, high margins are the sign of a great business.

And a 17% margin is great for a company that’s only nine years old… and operating in a ferociously competitive industry against none other than GOOG and FB.

  • I’m not recommending TTD today. I don’t want you to “chase” it.

After TTD announced stellar earnings in May, the stock jumped 44% in a single day. And since then it’s up another 19%.

I want to own TTD. And I expect it to continue eating into the GOOG/FB duopoly. The internet ad industry is a giant $80 billion pot of gold, and I expect TTD to claim a larger and larger share of it.

But I’d like to see a pullback of around 15% to $75 per share before buying.

  • I’ll let you know when it’s time to pull the trigger on TTD in the RiskHedge Report.

The RiskHedge Report is this free weekly essay you’re reading right now. Each week I’ll send you research, updates, and specific stock picks so you can profit from my top investment ideas.

If you have any questions, please write me anytime at riskhedgereport@riskhedge.com. I personally read every note that comes in.

Until next Thursday,

Stephen McBride
Chief Analyst – RiskHedge

Here’s Why I Bought Gold this Morning

Here’s Why I Bought Gold this Morning

Editor’s Note: Welcome to issue #2 of the RiskHedge Report, a weekly advisory dedicated to helping you profit from today’s disruptive trends.

Every Thursday you’ll receive a valuable essay from Chief Analyst Stephen McBride. Although this is a free subscription, he won’t hold anything back. You’ll get Stephen’s top investment ideas and find out the exact stocks he’s buying with his own money. If you missed issue #1, you can read it right here.

Below, Stephen explains why he just bought a slug of gold… and you’ll find out about something incredible happening in Arizona…

**************

This morning, I placed an order to buy gold with my broker at $1,275/oz.

As I explained last week, my goal in this letter is to help you profit AND protect yourself from disruption.

Buying gold is in the “protect yourself” category.

Because there are few things more disruptive to your finances than the government stealing your hard-earned savings…

  • This year the U.S government will spend $4.4 trillion.

And as you likely know, the government spends far more dollars than it “earns” by extracting taxes from you. This year it’ll borrow $835 billion to cover the shortfall.

When you add that to its existing debt pile, it owes a staggering $21.5 trillion… making the US by far the most indebted entity in history.

  • Here’s why this matters for me and you right now…

This pile of debt is more than 7x what the government takes in each year. It will never, ever be repaid.

So, instead of repaying its debts, the US government inflates away its obligations by quietly killing the US dollar.

Let’s say it borrows $835 billion this year and promises to pay it back in 10 years. If inflation runs at 2% per year, it only has to pay back the equivalent of $682.2 billion.

While this is a sweet deal for the government, it is bad for you and me. It means our savings are being eaten away. With 2% inflation, $50,000 in the bank will only be worth $45,200 in 5 years.

Which leads us to an important question: If you know your hard-earned savings are decaying every year… why would you hold it all in dollars?

  • This is why I store some of my savings in gold.

Unlike the US dollar, gold is an excellent store of wealth.

In his 1977 study The Golden Constant (updated 2009), Roy Jastram showed just how good gold is at protecting wealth. Jastram looked at inflation records and the gold price going back to 1560 for the UK. And back to 1800 for the US, France, and Germany.

The study found gold held its value not just over decades, but centuries. It protected the value of people’s savings during times when the value of their currencies fell to zero or near zero.

This is because no central banker or politician can “print” gold like they can paper currency.

  • We can separate money into two categories.

There’s money you spend, and money you save.

You should put some of your savings in gold. This is money that would otherwise sit in your bank account and get eaten away by inflation.

Then there are dollars you need for spending… to pay your mortgage and buy groceries. Like it or not, we need US dollars for spending money. You’ll get nothing but a confused look if you try to hand a gold coin to the cashier at your local grocery store.

We need dollars for everyday use, but they’re a terrible place to put your hard-earned savings.

The bottom line is, if you keep all your savings in dollars, you’re trusting your financial future to politicians. That’s like trusting a drunk with your whiskey.

By the government’s own numbers, the value of the dollar has declined by 86% in the past 50 years. This chart from the St. Louis Federal Reserve Bank shows its decline.

Source: St. Louis Fed

Would you own that if it were a stock?

  • This is why I believe you must keep some of your savings in gold…

By holding some of your savings in gold, you’re taking back control of your finances. Politicians can’t “inflate” away the value of gold.

That’s why gold has held its value for thousands of years… while most paper “monies” since the Roman Empire have gone to zero.

In this weekly letter we’re going to cover lots of breakthrough technologies with the potential to make us a lot of money. There are incredible things happening in crypto money, self-driving cars, virtual reality, and clean energy, to name a few.

But to profit from these disruptive trends, first we must protect what we have. We need a reliable store of savings that’ll hold its value before we deploy it into disruptive opportunities. This is why I own gold.

  • Switching gears, something incredible is happening in Arizona… 

Imagine standing on the curb and your taxi pulls up… but there’s no driver inside.

You climb in the back and press the “start ride” button.

The car begins moving.

Sounds futuristic, right?

Well, fully self-driving cars are on US roads today.

  • And it’s because of Waymo… 

Waymo is the self-driving car subsidiary of Alphabet, Google’s parent company.

Their robo-taxis are driving people around Phoenix, Arizona. Bringing kids to soccer practice. And their parents to work.

As Abby, a Waymo user said in an interview: “You hear about how one day cars will drive themselves. Oh, it’s today, right now.” Here’s a picture of Abby and her family with a Waymo car.

Source: Waymo

  • Waymo has been testing its driverless cars for 9 years…

It has travelled 6 million driverless miles on US roads. It would take the average American 300 years to drive that much.

All Waymo’s robo-taxis run on one central “brain.” It learns from every mile driven, and every Waymo car learns from the experiences of every other Waymo car.

Which means Waymo’s driverless cars are already far more experienced on the roads than any human driver could ever be.

Later this year, Waymo will launch the world’s first driverless ride-sharing service. At first, its robot cars will only operate in Arizona where the roads are straight and there’s not much nasty weather.

Pause and take that in. Driverless cars will be hauling Americans around later this year. This is a huge breakthrough that not many people are talking about.

  • To get ready for the launch, Waymo bought 62,000 driverless cars…

The company tested its service with 600 Chrysler Pacifica minivans like the one in the above picture. To support the full launch of their ride-sharing service, they ordered 62,000 cars.

This is a massive investment. For perspective, there are around 14,000 New York City yellow cabs. In the next year, Waymo will have a fleet of robo-taxis that’s 4x bigger.

  • Driverless cars were a fantasy 5 years ago… so how are they on the roads now?

It comes back to what we were talking about last week… computer chips.

To get around safely, a driverless car must see, understand, and react at least as fast as a human can. There can be no delay in its “thinking” whatsoever. Seeing a cyclist an instant too late could be fatal.

This means the car’s computer, its “brain,” must process millions of pieces of information every second.

  • Intel is one of the companies making this possible…

Intel is the world’s largest computer chip maker. It supplies many of the high-powered chips in the “brains” of today’s driverless cars. Waymo has been using Intel chips since 2009.

Last August, Intel went all-in on driverless cars when they bought Mobileye for $15.3 billion. Mobileye makes the cameras, sensors, and software that enable driverless cars to detect what’s around them.

Think of it like this: Intel makes the car’s “brain.” While Mobileye provides the “eyes.”

  • And when Intel combined its technology with Mobileye’s the results were special…

Their new EyeQ5 chip makes the “brain” in every Waymo car 210% more powerful.

With this chip, the robo-taxis will have the power to think and process what’s going on around them as fast as a human driver. And that’s why EyeQ5 is one of only a handful of chips to be awarded the highest classification of auto safety.

Which means cars running on this chip can be on the roads without a human in the driver’s seat as backup. A “fully driverless” car.

Intel is now partnering with Waymo to build the entire system for their new driverless fleet.

While this accounts for only a fraction of Intel sales today, I expect it to grow quickly.

Because right now, self-driving cars make up 0% of the $285-billion-a-year US auto market. But if we fast-forward 10 years, I expect there will be tens of thousands of driverless cars on American roads.

If you think that’s far-fetched, remember Uber didn’t exist 10 years ago. Now there are 4x as many Uber drivers in New York as there are yellow cabs.

Uber, by the way, wants most of its cars to be driverless in a few years.

  • We’re going to talk a lot about self-driving cars in this letter…

And that’s because there’s a lot of money to be made with them.

Today, self-driving cars are where the internet was in the early 1990s. The first websites had just been launched but only a fraction of Americans had internet in their homes.

Investors made truckloads of money over the next 5… 10… 20 years as the internet spread like wildfire.

What do you think about self-driving cars? Would you ride in one? Are you investing in them?

Tell me at riskhedgereport@riskhedge.com.

Until next Thursday,

Stephen McBride
Chief Analyst – RiskHedge

Why I’m Buying a Piece of this $145 Million Machine

Why I’m Buying a Piece of this $145 Million Machine

Editor’s Note: Welcome to issue #1 of the RiskHedge Report, a weekly advisory dedicated to helping you profit from today’s disruptive trends.

Every Thursday you’ll receive a valuable essay from Chief Analyst Stephen McBride. Although this is a free subscription, he won’t hold anything back. You’ll get Stephen’s top investment ideas and find out the exact stocks he’s buying with his own money.

Below you’ll find out about a little-known stock that’s making driverless cars and artificial intelligence possible…

Why I’m Buying a Piece of this $145 Million Machine

Can I let you in on a well-kept secret in tech?

You’ve probably heard how scientists are on the cusp of huge breakthroughs that will transform our world.

For example, soon robot cars will be so safe that you can sleep while they drive you to work.

But the thing is… it’s impossible to build a car this advanced today.

And the reason why is surprisingly simple.

  • We need faster computers…

To get around safely, a driverless car must see, understand, and react as fast as a human. There can be no delay in its “thinking” whatsoever. Seeing a cyclist an instant too late could be fatal.

This means the computers in the car must process millions of pieces of information every second. And that’s something current computers just can’t do.

But the company I’m going to tell you about has the solution…

  • It’s a $145-million system that will build a faster “brain” for new technologies.

After 12 years in development, it’s ready. And the biggest computer chip makers like Intel and Samsung have already ordered 30 of these $145-million machines.

You should see this monster machine. It weighs 220,000 lbs. and takes 6 fully-loaded Boeing planes to haul.

And here’s the thing… only one company in the world can make it.

Let me explain exactly why this machine holds the key to the future…

  • Did you know your phone is more powerful than the NASA computer that sent Neil Armstrong to the moon? 

The computer chip in your phone is 3,500 faster than what NASA had. Computer chips are the “brains” of electronic devices.

Your brain contains 100 billion cells called neurons. They’re tiny switches that allow you to think and remember. Computers also contain billions of “brain cells” called transistors. The more transistors in your computer, the faster it is.

The chips inside NASA’s computer had 2,000 transistors. The chips inside the newest Apple iPhone have 4.3 billion.

Think about that: 4.3 billion on an area the size of your thumbnail. These transistors are so small that they’re just 87 nanometers apart. That’s 87 billionths of a meter.

For decades, engineers have been making faster computers by cramming more and more transistors onto chips. The problem is, current technology has reached its limit.

With the old way of doing things, we can’t fit any more transistors on a chip. Which means computers can’t get any faster.

  • The $145-million machine I mentioned has the only technology proven to make far faster computer chips than we have today.

It’s called an Extreme Ultra Violet (EUV) lithography machine.

Computer chips are made through a process called photolithography. It’s Greek and means “to print with light.”

In short, a powerful light etches patterns into a silicon wafer. That’s what creates transistors. Here’s an image that shows how the EUV light etches the pattern into the silicon.


Source: biomechanicalregulation-lab.org

Current machines can print a “brain cell” into the silicon wafer every 87 nanometers. To give you some perspective, a strand of human hair is about 75,000-nanometers wide.

The EUV machine can print a transistor every 10 nanometers. That means it can put 7,500 on the width of a single strand of hair.

The EUV’s light beam is so precise that it’s equivalent to shining a laser from the earth and hitting a quarter… on the moon. How incredible is that?

Most important, this machine will be able to produce chips that are up to 100-times faster than what we have today.

And that’s going to make driverless cars a reality. Not to mention networks so fast that you’ll be able to download a whole movie in 3 seconds.

  • The company that makes this feat of science is called ASML (ASML).

It’s the only company in the world that’s been able to build the EUV machine.

After years of trying, competitors Nikon and Cannon weren’t able to build their own versions. They failed to develop the EUV light beam needed to etch transistors into the chips every 10 nanometers.

The fact that ASML’s scientists and engineers built a machine that nobody else in the world can speaks to the quality of their team.

  • ASML sold $1.1 billion worth of EUV machines in 2017…

That’s around 10% of their total sales. And they plan to deliver 50 EUV machines in the next two years.

That would add $6 billion to their revenue and account for one third of their sales.

  • And ASML runs a great business…

ASML’s average net profit margin over the past 5 years is 24%. That means for every $1 of sales, $0.24 in profits was available to reinvest in the business.

This is phenomenal, and it even beats some of America’s best businesses like Google… which has a 21.5% margin.

  • The key thing is: ASML has a monopoly on the one machine that’s crucial to continued technological progress.

Self-driving cars are just one of dozens of world-changing technologies that ASML’s chips will enable. I expect ASML’s chips to run the supercomputers that help scientists cure disease… to make true artificial intelligence possible... to bring us more “real” virtual reality.

As I mentioned earlier, companies like Intel and Samsung have ordered 30 machines already. This gives ASML an order backlog that gives us a pretty good idea of its future strong revenue growth.

And as more driverless cars begin to hit the road (they’re already driving around Arizona), this backlog should only grow.

I’m personally buying ASML today and plan to hold it for at least 2 years. The stock is trading at $196 per share and is up 10% this year.

  • I’ll update you on ASML in the RiskHedge Report.

The RiskHedge Report is this free weekly essay you’re reading right now. Each week I’ll send you research and updates on our top investment ideas.

If you’re not yet a subscriber and you’d like to be, please scroll down and enter your email address in the green box below.

And please write me anytime at riskhedgereport@riskhedge.com. I personally read every note that comes in.

I’ll be in touch next week.

Stephen McBride
Chief Analyst, RiskHedge

2018’s Number One Risk

2018’s Number One Risk

To find the market’s biggest weakness, a good place to look is at the most crowded movie theater with the smallest exit.

European bonds.

You’ve probably seen the charts of European high yield floating around, so I won’t reproduce it here. Yields in the low 2s for BB credits. There was also a European corporate issuer that managed to issue BBB bonds at negative yields a few weeks ago. I think that might have been the top.

No shortage of stupid things these days:

  • Bitcoin
  • Litecoin
  • Pizzacoin
  • Canadian real estate
  • Swedish real estate
  • Australian real estate
  • FANG
  • Venture capital

But European bonds are potentially the stupidest. Maybe even stupider than bitcoin!

Although there is nothing stupid about it—the ECB has been buying every bond in sight, and there’s lots of money to be made frontrunning central banks.

Still, it’s possible that we’ve reached the logical limit of emergency monetary policy, and the ECB is going to have to exit sometime in the near future. The question is: how are they going to exit without blowing up the bond market?

And it’s not just the European bond market. The effects have been transmitted to other bond markets as well, like our own. If the ECB exits, or, heaven forbid, the BOJ tries to exit as the same time—and screws it up—there is a potential for a real meltdown.

What would a meltdown look like? Fact: any time ten year yields have backed up 200 basis points, there has been a crisis. You have to go back to 1994 for the last one. And we even had a mini-crisis in 2013, which we called the taper tantrum.

If tens backed up from 2.3% to 4.3%, it would be a crisis of gargantuan proportions.

What is the probability that it will happen?

Disorderlies

It’s tough to think of these things in terms of probabilities. For example, it’s very probable that the ECB will begin its exit next year. But what is the probability that they screw it up?

It’s literally impossible to handicap. You can’t quantify it. But again: crowded theater, small exit, so you know the unwind has the potential to be disorderly if the ECB is careless about how they exit.

Anyone who has seen markets in action (at least, for a decade or more) knows that selling can lead to more selling, which can lead to more selling, otherwise known as a cascading effect. Nobody under 30 knows what this looks like. I actually had a very funny conversation with some high yield guys a few weeks ago. They were laughing at one of their junior traders, who was getting a bit panicked as he watched the index sell off… a point. “This is getting out of control,” he said.

I am not much interested in the bond market until you get tens to 4, investment grade to 7, and high yield to 12. I will turn into High Yield Harry if you get yields out to 12%.

Those sound like impossible levels, but you just have to dream a little bigger, dear readers. Remember: cash is an option to buy something cheaper in the future. If yields do get out to 12%, and you don’t have the cash to take advantage of it, you are going to be kicking your own butt all the way down the street.

How to Play the Rally

It is waaaaay too early to be thinking about this, but if you are going to try and pick a bottom in the throes of a bear market, it is a lot smarter to do it in the high yield market than the stock market.

It’s hard to get hurt too badly when you’re getting paid 12-14% to wait for a bottom. Stocks are a different story. Stocks can go down forever. In 2009, it really seemed like they were going down forever. That is too scary for me.

But I really like buying credit in bear markets and I also like buying converts. Go back and look at high yield and convert mutual funds coming out of bear markets. You’re talking about 30-40% returns, especially on the lower-quality stuff. On a risk-adjusted basis, it’s a lot better than stocks.

In the meantime, there is nothing to do. I am trying to get as close to all cash as I can. As I’ve said a million times before, for the first time in a long time, you are getting paid to hold cash.

It has been a really long freaking time since there was a stock or a bond that looked attractive on a valuation basis. Just because something is going up doesn’t mean it is attractive. The old-timers know: there is a cycle. It may not seem like it, but there is.

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Here’s the Thing About Financial Literacy…

Here’s the Thing About Financial Literacy…

Some people are better with money than others. Is it nature or nurture?

What I mean is: can investing be taught, or does it come naturally?

I’m going to make a very controversial statement. Financial acumen is almost entirely nature. You are born with it.

You were born with your tolerance for risk. It is in your DNA. I would not be surprised if 23andMe found a gene for it someday.

Let me explain.

The Mush

Everyone has heard of “the mush.” This is a person who is wrong about everything. This person bought the highs in Internet stocks in 2000, bought the highs of homebuilders in 2006, bought the highs in gold in 2011, and perhaps is buying the highs in bitcoin now.

This person is very useful. The person who is wrong all the time is just as useful as the person who is right all the time! You simply do the opposite of what he is doing. I know people who subscribe to bad newsletter writers just because they are reliably wrong.

Funny thing about them—they are present in every walk of life, including Chicago MBAs and derivatives traders. Just because you have the credentials, doesn’t mean you are good with money. I have seen my share of traders who are wrong all the time. They do manage to stick around. Wall Street can be a lot more forgiving than you think.

Given that mushes come from all over the place, the only conclusion I can draw is that financial ability is not a learned trait. If it were, you would think all the mushes would be found in financially illiterate places like Norwich, Connecticut. But they are found in equal proportions in Greenwich, Connecticut as Norwich, Connecticut. Financial literacy seems to be no help at all.

Financial Literacy

I am a big proponent of teaching financial literacy in schools. But you have to be realistic—even with all the education in the world, lots of people are going to be bad with money. They will be the ones to buy the timeshares. There is nothing you can do about it.

“Bad with money” seems to imply the tolerance of a higher level of financial risk. There is plenty of that going around these days. Millennials are too scared to invest in the 6-vol S&P 500 but will readily fork over their cash for 150-vol bitcoin. And for sure, there are some people who just need a volatility fix—all these leveraged ETFs exist for a reason.

But there is also such a thing as taking too little financial risk. If you missed out on this whole food fight, shame on you. The peak of financial conservatism is money under the mattress. Some people go there.

Financial literacy should be about:

  • Teaching how the banking system works
  • Teaching how mortgages work
  • Teaching how car loans and credit cards work
  • Teaching the basics of how financial markets work
  • Etc.

Financial literacy should not be about:

  • Giving people a healthy appetite for risk

Traders are born, not made.

Speaking of Financial Risk

As someone who spent part of a career on Wall Street, the one lesson I took from working on a trading desk was just how unsuitable most financial instruments are for average folks.

Even something as plain-vanilla as IWM, the Russell 2000 ETF. I have seen people do things with IWM that you would not believe. And this is a liquid index with 2000 names. The financial markets are for big boys. For everyone else, there is cash in the bank.

I’m going to say something so far out of consensus, someone will punch me in the teeth. Cash in the bank is not the worst thing in the world. Yes, it pays no interest. But for a lot of people, making 0% is superior to losing 10%. It’s not just the mush—lots of people make suboptimal financial decisions.

When you see the 1, 3, and 5 year returns of the Vanguard 500 Index Fund, do you know how many people actually achieve those returns? Very few. Because they buy on the highs and sell on the lows.

The number of investors who hold a fund in good times and bad, dollar cost averaging on the way down as well as on the way up, is very small. For a lot of people, cash sitting in the bank is good.

But that’s a difficult discussion to have, because people want to have their money “working for them.” They think that if it’s in the bank, it’s not “working for them.” This may be true, but most of these people should be a lot more pessimistic about what their returns will be.

The last few years have not made people pessimistic. They think they can get 20% a year out of the stock market, but that is peanuts compared to what they might get out of bitcoin, which is up about 1000% in the last year. This has given people very unrealistic expectations.

You know what I am excited about? I am super excited about 1.66% on 1yr T-bills.

Almost 2% for taking no risk at all. That number keeps going up, as the Fed is almost certainly going to hike next week, and is poised to hike a bunch of times next year.

At the top of the dot-com bubble you could have had 6.5% in a money market mutual fund. Nobody was interested.

 Nobody, except for the folks who were born with it.

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How to Protect All of Your Assets (Including Gold) from Government Seizure

How to Protect All of Your Assets (Including Gold) from Government Seizure

On April 5, 1933, President Franklin D. Roosevelt issued an executive order making private ownership of gold bars and gold coins illegal. The order forced Americans to sell their gold bullion to the Treasury at the then legal price of $20.32.

Gold ownership remained illegal in the US until 1974.

Failure to tender your gold could get you a maximum fine of $10,000 (492 ounces of gold or approximately $625,000 at today’s gold prices) and up to 10 years’ imprisonment.

Franklin’s order was followed by the Gold Reserve Act of 1934. The act lifted the nominal price of gold from $20.67 to $35.

The penalties were exceptionally high to ensure compliance with what was a disguised 42% tax on savers.

Is it possible that our indebted government could force similar measures on gold owners today? We can’t rule it out, but it’s less likely to happen today than it was in the 1930s.

Why the US Is Not Likely to Confiscate Gold Today

Desperate times call for desperate measures. Franklin’s order was justified as a measure to overcome the Great Depression.

Nobody knows how severe the next recession will be and what measures it may call for. However, gold will be less of a target for a few obvious reasons.

First, the US dollar is no longer backed by gold reserves. Second, gold represents a tiny portion of today’s financial assets. For this reason, it’s unlikely to be the prime target for taxation or seizure.

All the gold ever mined is worth about $7.5 trillion as of this writing. Meanwhile, total financial assets make up $294 trillion globally. Why would government focus on gold ownership when gold is a mere 2.5% of total assets today?

There is much larger fish to fry.

However, in times like these, nobody is safe. And there’s no guarantee that gold owners won’t become the targets of desperate governments. When things go sour, anyone who owns tangible assets is a potential target for any form of taxation or confiscation.

Why You Should Use Gold as a Hedge

What can investors do to protect all of their assets from the risk of government seizure?

First, you have to understand how government seizes assets from citizens—and what actions may not be politically acceptable even in desperate times.

Outright default on insolvent pension funds would be political suicide. No sane politician would ever campaign for that. However, a progressive default through debt monetization (e.g. quantitative easing) would be more likely.

This means that the dollar is almost certain to lose its value against hard assets like gold.

There are more reasons why investing in precious metals is safer than hoarding cash.

Cash is convenient and essential, but holding large sums in cash exposes you to a bigger risk of seizure and devaluation.

Bail-ins of bank accounts with savings that exceed the FDIC insurance level ($250,000) will be more politically legitimate than taxing those who have no savings. Most voters simply won’t feel sorry for the rich.

That’s why gold is a much safer store of value in the long run despite the risk of seizure.

How to Minimize the Gold Seizure Risk

This risk can be minimized, too.

If it ever happens again, it will likely be focused on domestic holdings—as it was in 1933.

The untouchable billionaires and politicians have their assets tucked away in foreign trusts and will make sure they are kept safe there. The US government will save itself the trouble and chase domestic holdings instead.

The middle class and small entrepreneurs will once again be the prime targets of government seizure and taxation.

To avoid this, I’d recommend investors storing their metals in a safe foreign jurisdiction like Switzerland or Singapore. In international vaults, you can store physical gold bullion, such as gold bars, Gold American Eagle coins, and Canadian Maple Leaf coins.

With your gold stored abroad, you may have some time to react.

If you feel the threat is product specific, you can liquidate those products and diversify into other precious metals products. Another option would be to take delivery before such a legislation comes into effect.

However, no risk can be fully eliminated. There is no perfect solution. Nonetheless, diversification can be an essential element of an overall protection strategy against an increasingly uncertain future.

Why I Founded the Hard Assets Alliance

This is the reason I founded the Hard Assets Alliance. I wanted to offer my customers a transparent and secure platform to buy, store, and sell physical precious metals globally with minimum hassle.

What was once a mere idea in my head has now become the most convenient and innovative precious metals platform for private investors on the market.

Our customers have permanent access to the most liquid market when they want to buy or sell. They can request delivery of their allocated metals at any time.

We offer global vaulting options, which some clients choose to diversify, and provide an added layer of protection in the event of government failure or confiscation.

Hard Assets Alliance is not a bank, and your metals are not on our balance sheet. The metals are yours and yours alone.

Free ebook: Investing in Precious Metals 101: How to Buy and Store Physical Gold Bullion or Silver

Learn how to make asset correlation work for you, how to buy gold (plus how much you need), and which type of gold makes for the safest investment. You’ll also get tips for finding a dealer you can trust and discover what professional storage offers that the banking system can’t.

It’s the definitive guide for investors new to the precious metals market. Get it now.

All the Reasons Cryptocurrencies Will Never Replace Gold as Your Financial Hedge

All the Reasons Cryptocurrencies Will Never Replace Gold as Your Financial Hedge

The cryptocurrency craze continues.

Having seen the astounding rise in Bitcoin’s value, those who remained on the sidelines are now kicking themselves for not buying it when it was first released. Surely, they’d be millionaires by now.

But is the meteoric rise of Bitcoin and other cryptocurrencies really an indication of true value?

It seems that more and more people justify investing in cryptocurrencies—even at current record prices—by claiming that they’re an effective hedge against the instability of fiat currencies.

But is it true?

Sure, a fiat money system where central banks can and do literally print money at will has its weaknesses. That’s why hard assets like gold are so popular among smart investors: as real stores of value, they provide a safety net against currency depreciation and economic collapse.

However, it’s doubtful that the same applies to cryptocurrencies. Despite what the crypto-evangelists will tell you, digital tokens will never and can never replace physical gold bullion as your financial hedge.

Here are six reasons why.

#1: Cryptocurrencies Are More Similar to a Fiat Money System Than You Think.

The definition of “fiat money” is a currency that is legal tender but not backed by a physical commodity.

Since the United States abandoned the gold standard in the 1970s, this has been the case with all major currencies, including the US dollar.

Ever since then, US money supply has kept increasing, and so has the national debt. In contrast, the dollar’s purchasing power has been on the decline.

 Take a look at this historical gold price chart.

The huge spike in gold prices started right around the time when the Bretton Woods agreement collapsed in 1971 and US paper dollars couldn’t be converted to gold anymore. A clear sign of the decline in the dollar’s purchasing power since the move into a pure fiat money system.

It’s clear that cryptocurrencies partially fit the definition of fiat money. They may not be legal tender yet, but they’re also not backed by any sort of physical commodity. And while total supply is artificially constrained, that constraint is just... well, artificial.

You can’t compare that to the physical constraint on gold’s supply.

Some countries are also exploring the idea of introducing government-backed cryptocurrencies, which would take them one step closer toward fiat-currency status.

As Russia, India, and Estonia are considering their own digital money, Dubai has already taken it one step further. In September, the kingdom announced that it has signed a deal to launch its own blockchain-based currency known as emCash.

So ask yourself, how can you effectively hedge against a fiat money system with another type of fiat money?

#2: Gold Has Always Had and Will Always Have an Accessible Liquid Market.

An asset is only valuable if other people are willing to trade it in return for goods, services, or other assets.

Gold is one of the most liquid assets in existence. You can convert it into cash on the spot, and its value is not bound by national borders. Gold is gold—anywhere you travel in the world, you can exchange gold for whatever the local currency is.

The same cannot be said about cryptocurrencies. While they’re being accepted in more and more places, broad, mainstream acceptance is still a long way off.

What makes gold so valuable and liquid is the immense size of its market. The larger the market for an asset, the more liquid it is. According to the World Gold Council, the total value of all gold ever mined is about $7.8 trillion.

By comparison, the total size of the cryptocurrency market stands at about $161 billion as of this writing—and that market cap is split among 1,170 different cryptocurrencies.

That’s a long shot from becoming as liquid and widely accepted as gold.

#3: The Majority of Cryptocurrencies Will Be Wiped Out.

Many Wall Street veterans compare the current rise of cryptocurrencies to the Internet in the early 1990s.

Most stocks that had risen in the first wave of the Internet craze were wiped out after the burst of the dot-com bubble in 2000. The crash, in turn, gave rise to more sustainable Internet companies like Google and Amazon, which thrive to this day.

The same will probably happen with cryptocurrencies. Most of them will get wiped out in the first serious correction. Only a few will become the standard, and nobody knows which ones at this point.

And if major countries like the US jump in and create their own digital currency, they will likely make competing “private” currencies illegal. This is no different from how privately issued banknotes are illegal (although they were legal during the Free Banking Era of 1837–1863).

So while it’s likely that cryptocurrencies will still be around years from now, the question is, which ones? There is no need for such guesswork when it comes to gold.

#4: Lack of Security Undermines Cryptocurrencies’ Effectiveness.

Security is a major drawback facing the cryptocurrency community. It seems that every other month, there is some news of a major hack involving a Bitcoin exchange.

In the past few months, the relatively new cryptocurrency Ether has been a target for hackers. The combined total amount stolen has almost reached $82 million.

Bitcoin, of course, has been the largest target. Based on current prices, just one robbery that took place in 2011 resulted in the hackers taking hold of over $3.7 billion worth of bitcoin—a staggering figure. With security issues surrounding cryptocurrencies still not fully rectified, their capability as an effective hedge is compromised.

When was the last time you heard of a gold depository being robbed? Not to mention the fact that most depositories have full insurance coverage.

#5: Hype and Speculation Continue to Drive Cryptocurrencies’ Value.

Since the beginning of the year, the value of Bitcoin has more than quadrupled—a tremendous spike in value that has sent investors rushing to invest in cryptocurrencies. But could this be nothing more than a market bubble?

One of the world’s most successful hedge fund managers, Ray Dalio of Bridgewater Associates, certainly seems to think so.

In September 2017, he told CNBC, “It's not an effective storehold of wealth because it has volatility to it, unlike gold. Bitcoin is a highly speculative market. Bitcoin is a bubble.”

The spike in Bitcoin prices seems to only lend credence to this view. With such an extreme degree of volatility, cryptocurrencies’ value as a hedge is questionable. Most people buy them for the sole reason of selling them later at higher prices.

This is pure speculation, not hedging.

#6: Cryptocurrencies Do Not Have Gold’s History as a Store of Value.

Cryptocurrencies have been around for less than a decade, whereas gold has been a store of value for thousands of years. Because of this long history, we know for a fact that stocks and bonds have low or negative correlations with gold, particularly during periods of economic recession. This makes gold a powerful hedge.

What little data we have on cryptocurrencies does not show the same. Consider this year alone: while the US stock market continues to run record highs, the same goes for Bitcoin.

It’s true that gold has also gone up, but the correlation has been very low and, during times of recessions, tends to swing to the negative side, as you can see in the graph below.

Since 2010, there have been 15 times where the S&P 500 has seen drops of 5% or more. Out of those 15 stock market downturns, Bitcoin has been down for 10 of them.

How is that a good hedge?

Free ebook: Investing in Precious Metals 101: How to Buy and Store Physical Gold and Silver

Learn how to make asset correlation work for you, how to buy metal  (plus how much you need), and which type of gold makes for the safest  investment. You’ll also get tips for finding a dealer you can trust and  discover what professional storage offers that the banking system can’t.

It’s the definitive guide for investors new to the precious metals market. Get it now.

Is Indexing Wrecking the Markets?

Is Indexing Wrecking the Markets?

On the grand scene of financial innovations, the exchange-traded fund was fairly innocuous at first. It took a good 15 years of slow realization for people to figure out how disruptive they would ultimately be. “Exchange-traded fund” isn’t even a very good name, since closed-end funds were also exchange-traded.

And the ETF wrapper still isn’t the ideal investment vehicle, at least for the purposes of traditional active management. For active strategies, the open-end fund structure is still superior.

I’d argue that the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

After spending a career in indexes in some capacity, I am no longer much of a stock-picker. All my ideas are top-down. I like oil. I like France. Instead of finding an oil stock or a French stock I buy all oil stocks or all French stocks. Seems easier—what if I bought the wrong oil stock or the wrong French stock? I’m happy to take the average.

Finance is funny. There are a lot of things in the capital markets that make sense when a few people do it, but not when everybody does it. The thing about buying all oil companies is that you are buying the bad ones as well as the good ones—and driving all of their valuations higher.

Back in 2004 at Lehman, we observed that correlations among stocks in the same sector were increasing, at least on an intraday basis. Think about it: if oil goes up, companies like Chevron, ExxonMobil, and ConocoPhillips should all go up—on a micro, minute-by-minute basis. So, you could still make money in the long term by picking the best integrated oil major, but day trading them against each other became useless.

Fast forward to 2017, and the stock market is a sea of baskets trading against baskets. A lot of people have learned their lesson—the only thing that works is buy and hold. Which I think is a good thing!

But a lot of people still find it hard to stick to buy and hold.

Anyway, there are now more indices than stocks. Some people say this is a bit ridiculous. Well, back in the mutual fund boom, there were more mutual funds than stocks, and everything turned out fine. Is indexing causing distortions? Is it wrecking the markets?

Maybe a little. But even then, the argument is very nuanced.

Commodity Indexing

A few months ago, I wrote a rather controversial piece at Bloomberg View talking about the last time people got really excited about indexing.

It was the mid-2000s. People stopped looking at gold, oil, and corn idiosyncratically, and started looking at them as a blob—as part of an asset class. In some respects, commodities do respond to the same macro factors. If the dollar goes down, most commodities will go up. And so, commodity indexing was born.

Commodity indexes had been around for some time (like the GSCI, or Goldman Sachs Commodity Index), but few people allocated money to them. What changed?

The major investment banks began to offer swaps and structured products that mimicked the price of the GSCI, and other commodity indexes. Money plowed into these strategies, and the prices of commodities rose in unison. Not too dissimilar to what has been going on in stocks—with the S&P 500.

But people failed to consider that hot money can flow out as well as in. One of the less-talked about aspects of the financial crisis is that the commodity bubble unwind was especially vicious. Almost nobody talks about commodity index swaps anymore—the whole strategy has been discredited.

Will stock indexing someday be discredited?

The Philosophy of Indexing

The whole point of an ETF or index is that you can buy a bunch of stocks or bonds which are more or less alike, or share similar characteristics. You don’t have to go to the trouble of picking individual stocks or bonds, which can be time-consuming.

So let me ask you a question: do all US stocks share similar characteristics?

Well, they are all in the US (duh), and are subject to the same political and economic forces. But that’s where it ends. You can’t get more different companies than Amazon and Newmont Mining. Or Goldman Sachs and US Steel.

So why put them all in the same basket?

I’m driving at something here—My theory is that indexing is most useful on narrowly-defined groups of stocks and less useful on the really big blobs.

The worst offenders are total market indices, EAFE, and of course, the world index. Why would anyone get long the planet? I happen to be very bearish on the planet. Cybersecurity stocks, on the other hand, make more sense.

Plowing a bunch of money into “the market” simply because it is “going up” is not smart.

Once more, with feeling—putting all of your money in SPY is not going to cut it. Because someday, everyone will want all of their money out of SPY… at the same time.

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Infographic: The Everything Bubble Is Ready to Pop

Infographic: The Everything Bubble Is Ready to Pop

It wasn’t always this way. We never used to get a giant, speculative bubble every 7–8 years. We really didn’t.

In 2000, we had the dot-com bubble.

In 2007, we had the housing bubble.

In 2017, we have the everything bubble.

I did not coin the term “the everything bubble.” I do not know who did. Apologies (and much respect) to the person I stole it from.

Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously.

And the infographic below that my colleagues at Mauldin Economics created paints the picture best.

I don’t usually predict downturns, but this time I bet my reputation that a downturn is coming. And soon.

When there’s nothing left but systemic risk, everyone’s portfolio is on the line. To that end, I’ve put together a FREE actionable special, Investing in the Age of the Everything Bubble, in which I discuss ways to prepare for the coming bloodbath (download here).


Grab Jared Dillian’s Exclusive Special Report, Investing in the Age of the Everything Bubble

As a Wall Street veteran and former Lehman Brothers head of ETF trading, Jared Dillian has traded through two bear markets.

Now, he’s staking his reputation on a call that a downturn is coming. And soon.

In this special report, you will learn how to properly position your portfolio for the coming bloodbath. Claim your FREE copy now.

Hackers, Bitcoins & Fleas

Hackers, Bitcoins & Fleas

Right before I sat down to write this 10th Man, I read a New York Times article about how people are getting their identities stolen via their phone number.

The one thing all these people had in common? They were vocal on social media about investing in bitcoin. They got hacked—and their bitcoins disappeared. In some cases, seven figures’ worth.

That seems less secure than having gold or cash in your safe at home, buried in your backyard, or in a safe deposit box. It seems less secure than buying an expensive watch and insuring it.

I thought the whole point of bitcoin was security, right?

There are a lot of facets to bitcoin.

Capital Controls

I tweeted out The New York Times article, and then somebody quote-tweeted me:

Yes, if you are living in Venezuela and you have all your money in bolivars, you are pretty unhappy. And if you were living in Cyprus and had your money in banks during the bail-in, you are pretty unhappy.

Would bitcoin have solved your problems? Possibly.

Certainly in Cyprus’ case, other things would have solved your problems, too—like gold!

Admittedly, gold may be no help in Venezuela because the rule of law has broken down and there is no way to defend it. So yes, in Venezuela, bitcoin may have helped.

You know what else would have helped? Getting out of the country! If you are sitting in Venezuela with all your bitcoin, you are still pretty unhappy. It sucks there.

People spend a lot of time trying to figure out how to protect their wealth from inflation, expropriation, and so on. There are a million ways to skin this cat… piles of cash, gold, diamonds, jewelry, other hard assets, and now bitcoin.

Each of these ways has advantages and disadvantages. (But never tell a bitcoin promoter that bitcoin has disadvantages.)

The main advantage of bitcoin is that you can easily move money across national borders. Try doing that with cash. Bitcoin just sits in your digital wallet, and when you settle in your new country, you sell it and convert it into currency. Theoretically, you could move your entire liquid net worth in this fashion.

It’s an open secret that Chinese people have been busy smurfing as much wealth as they can out of the country with bitcoin. I bet that if China could figure out a way to stop it, they would.

But let’s talk about the disadvantages.

Uber Shady

I am not a technophobe, but I am not a technophile, either. Bitcoin seems hard. I certainly don’t claim to know enough about technology to guarantee the security of my bitcoin.

So far in bitcoin’s short history, we’ve had an exchange get hacked, and widespread hacking of digital wallets. You could protect your bitcoin by having a “hardware wallet,” an external hard drive that’s not connected to the web, but that kind of defeats the purpose. You’re then no better off than you were with gold.

Not to mention the fact that bitcoin is used for a lot of shady stuff, like trafficking of all manner of contraband on the dark web. Hey, I’m all for personal liberty and anonymous financial transactions, but as my grandmother used to say, “you lay down with dogs, you get fleas.”

You might remember discussions from a year or two ago about how Larry Summers (and others) want to eliminate cash, because cash facilitates criminal activity. Yes, it does—but nowhere near to the extent of bitcoin!

If I were to guess, I’d say that the volume of criminal activity facilitated by bitcoin could be orders of magnitude bigger than the criminal activity facilitated by cash.

Which is why, one day, bitcoin will be made illegal.

A bitcoin enthusiast will say making it illegal doesn’t really do anything. The government can’t stop bitcoin.

This is true with lots of things, like drugs. Drugs are everywhere, but they are still illegal. Once you make something illegal, you drive it underground, and you delegitimize it.

So while it would be exceedingly rare for anyone to be caught and prosecuted for using illegal bitcoin, dreams of it becoming an “alternate currency” would be shattered. Then it really would only be for criminals.

None of this sounds like anything I want to be a part of. The government can ban gold, but I can’t see the federal government going door-to-door and searching for gold like they did in the 1930s.

And besides… before it even got to that point, you should have left the country!

Run!

The foolproof way to protect your wealth is to leave for a jurisdiction that will treat it with more respect. There were reports that the number of people renouncing their citizenship increased under Obama. It will be interesting to see what happens under Trump.

The point is to get out before the walls go up. That’s unlikely to happen in the United States, with its stable democracy and strong institutions. But it never hurts to be a little paranoid—Venezuela only took a couple of decades to go from stable democracy to communist basket case.

It’s good to have a plan. It’s no fun coming up with a plan when everyone else is trying to come up with a plan at the same time.

Back in the 2000s, I had a thing for Greece. I watched The Bourne Identity, and at the end of the movie, Matt Damon finds Franka Potente renting bicycles on some remote Greek island, completely off the grid.

That sounded pretty attractive to me. I even remember looking up some Greek real estate at my desk at Lehman Brothers. It was 2003. Bear markets make you think of some crazy stuff.

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The Everything Bubble

The Everything Bubble

It wasn’t always this way. We never used to get a giant, speculative bubble every 7-8 years. We really didn’t.

In 2000, we had the dot-com bubble.

In 2007, we had the housing bubble.

In 2017, we have the everything bubble.

I did not coin the term “the everything bubble.” I do not know who did. Apologies (and much respect) to the person I stole it from.

Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously, like:

  1. Real estate in Canada, Australia, and Sweden
  2. Real estate in California
  3. Cryptocurrencies
  4. FANG, plus Tesla and a few others
  5. Corporate credit
  6. EM sovereign credit
  7. Autos
  8. Indexing
  9. Dramatic television series
  10. Sports
  11. Animated movies

For the last few, I am just screwing around… though they are also bubbles.

I don’t like going around and calling things bubbles. It’s a good way to lose credibility (especially if you started in 2013).

I haven’t been exactly bullish over the last year. But I have refrained from calling it stupid, because it could always get stupider.

But now, I’m not sure how much more stupid things will get.

Initial Coin Offerings

I think what pushed me over the edge was bitcoin.

First, let’s define what a bubble is. A bubble is not simply a matter of overvaluation. It has to be accompanied by an obsession or preoccupation with an asset class.

When you see people making haystacks of cash all out of proportion to their intelligence or work ethic?

Bubble!

That is kind of what is happening right now in cryptocurrencies.

Am I some kind of Luddite? No.

Do I see the potential of blockchain? Yes.

But when I see people behaving this way—literally throwing money at each other—you’re probably closer to the end than the beginning.

People are comparing bitcoin to tulip bulbs. I think those comparisons are apt. But at least with tulips, you had something tangible—a plant.

Someone asked me last week how I thought bitcoin and the others would perform in a bear market. Would they go up, like gold?

I think the opposite would happen. Regardless of bitcoin’s supposedly safe-haven status, right now it’s acting like a risk asset—a risk asset with a lot more beta.

If we get a bear market in stocks, we get a bear market in bitcoin (or vice versa).

And if we get a bear market in stocks or bitcoin, we are probably getting a bear market in credit.

And if we get a bear market in credit, we are probably getting a bear market in real estate.

It is all connected.

Basically, in the age of peak indexing, the only thing left is systematic risk.

Wax On, Wax Off

A market that is just systematic (non-diversifiable) risk is impossible to trade. You can be risk-on (long stocks), or risk-off (short stocks), but there are virtually no benefits to diversification.

Look at S&P 500 index funds. In the old days, you would say you were diversified if you owned one—you owned 500 stocks! 

Does anybody really think that they are diversified by owning an index fund today?

No. You own the same 500 stocks that everyone else owns. Again, there is nothing left but systematic risk.

And this is borne out by experience—professional stock-pickers are getting schooled. You are either long FANG, or you aren’t. This has compelled a lot of people to say that active managers are stupid.

But do you think it’s more likely that:

a) a bunch of smart people became stupid, or
b) that the environment suddenly changed?

If you’re one of those smart people, do you completely abandon your process and just buy FANG?

Or do you stick with what has worked your entire career in the likelihood that it will one day work again?

This time is (probably) not different.

Bear Markets

A lot of bears get sweaty palms about the possibility of a bear market. Hey, you can’t have capitalism without downturns. You have to purge the speculative excesses. The longer you go without a purge, the bigger it is going to be.

As much as I think a bear market would be fun to trade, I do not wish it on anyone. Most people are no good at trading a bear market.

A wise man once told me that bear markets don’t just destroy the bulls’ capital… they don’t just destroy the bears’ capital… they destroy everyone’s capital.

I have been through this a couple of times. Even when I think I am perfectly positioned for it, I still seem to find a way to lose money.

Also, nowadays, we have no idea what kind of malignant political forces will be unleashed if we have a real, hard-landing recession…

Does it all get pinned on Trump? Probably.

Does it push the left further left? Probably.

Does it increase the chance of real instability in 2020? Yup.

And people underestimate the ferocity of bear markets, because they can’t see second and third-order effects. The stock market doesn’t go down 20% in a vacuum. We have no idea what is going to happen when stocks go down 20%. Nothing good, I imagine.

So you should not be wishing for a bear market. You should be wishing that this goes on forever.

I have been making bearish noises for a while, but I haven’t been willing to stake my reputation on it.

I am now willing to stake my reputation on it.

I think we’re very close to a downturn. I will be surprised if this doesn’t come to pass within 6-12 months. If it doesn’t, I suppose you can call me out, if you like doing that sort of thing.

One more comment: it will probably be the fastest downturn in history, owing to the degree of leverage and speculation. Proper preparation prevents poor performance.

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The Greatest Threat to Property and Due Process in America Today

The Greatest Threat to Property and Due Process in America Today

As long as you obey the law, the law should respect your liberty and property. Well, that’s what common sense would have you believe. In America today, this is not the case. Every year, law enforcement agencies take billions in cash and assets from citizens who haven’t been convicted of a crime.

This is possible because of the civil asset forfeiture law.

Forfeiture was started in the 1980s to assist law enforcement’s efforts in the “War on Drugs.” Since 1986, revenue realized from forfeiture by the Department of Justice (DOJ) has grown by 4,700%. In 2014 alone, the DOJ took in $4.5 billion. That’s not counting revenue from the states.

Unlike criminal forfeiture, civil forfeiture lets law enforcement seize property from citizens who have neither been charged nor convicted of a crime. Due to a lower standard of proof, 87% of forfeitures are now civil.

To understand this threat, let’s look at how it works.

Guilty Until Proven Innocent

To seize your property under civil forfeiture, law enforcement needs only probable cause that your property was somehow involved in illegal activity. Millions of dollars in cash and assets have been taken from citizens without arrest for even minor reasons.

Unlike criminal forfeiture, in civil forfeiture, the burden of proof is on the owner—not the government. In reality, this law carries the presumption of guilt until proven innocent. The law is stacked against owners, and most cases never go to court.

Civil forfeiture rests on the idea that the property itself, not the owner, has violated the law. As a result, when forfeiture cases go to court, they have strange titles like United States v. One Pearl Necklace.

As the accused is an item of property, not a person, the property owner has no right to legal counsel and becomes a third-party claimant. If the owner cannot afford the legal costs to plead their property is innocent, too bad. The plot thickens when we look at how the law is applied.

In Philadelphia, half of civil forfeitures were for less than $200. It’s a similar story in other states. This is a far-cry from the law’s basic intent of tackling wealthy criminals. As above, low forfeiture amounts and high legal costs means that 88% of cases don't go to court.

For cases of $20,000 or more, many people are forced to settle out of court due to high legal costs.

While the law itself is open to abuse, it gets worse when we track how the money is used.

Conflict of Interest

Use of civil forfeiture has been taken way beyond its power to seize assets. It also showers the very agencies that use it with financial perks.

Half of US states share up to 100% of forfeited assets with the local agencies who seize them. A 2015 report by the Washington Post found that 500 local departments and task forces got 20% or more of their annual budgets from civil forfeiture gains.

At the state level, revenues are up by 136% in the past few years. From 2001–2014, the DOJ and Treasury together took in $29 billion from civil forfeitures.

These perverse incentives are magnified by a program called equitable sharing. It allows States with tight forfeiture laws to bypass them by using federal seizure laws. The local agencies reward their federal friends with a share of the spoils.

Between 2000–2013, the DOJ paid local agencies $4.7 billion under the equitable sharing program. Twenty-five percent of these funds were used to pay salaries, with over 55% going toward “other” unnamed spending.

While state and local agencies can physically seize your property, federal agencies have far greater reach.

Flash-Freeze

Under the umbrella of civil forfeiture, the IRS has frozen the accounts of many small business owners.

From 2005–2012, the IRS seized $242 million from “structuring” violations. Bank deposits of $10,000 or more must be reported. If a person makes several deposits below that amount with the intent to avoid reporting, that is structuring.

Rather than review a case of suspected structuring, the IRS uses a “freeze first, ask later” policy. There have been several cases where the IRS seizes the bank account of a business without warning. This leaves the business unable to pay staff and suppliers.

Many businesses have valid, decades-long patterns of multiple deposits under $10,000. Yet, more than 100 multi-agency task forces now trawl through bank reports for signs of “suspicious activity.” In 2014 alone, banks filed more than 700,000 suspicious activity reports to comply with the Bank Secrecy Act.

Today, the IRS can freeze or seize a bank account if it finds what they deem “suspicious patterns.”

Civil forfeiture abuse is a growing risk to ordinary Americans, especially those with assets. The good news is there are steps you can take to protect your wealth against potential seizure.

How to Mitigate This Risk

These steps involve using legal structures like trusts and life insurance policies to shield your assets. If set up correctly, these instruments can also be used to legally minimize income and estate taxes.

Stephen McBride
Chief Analyst, RiskHedge

America’s Lawyers Want Your Money—Here’s What to Do

America’s Lawyers Want Your Money—Here’s What to Do

There are now over 1.2 million lawyers in America. That’s one practicing lawyer for every 266 people, and triple the number in the 1970s. The US is home to 70% of the world’s lawyers, and has three times as many per capita as the UK. An onerous consequence of hyper-minting law degrees is the litigious culture we have incubated.

Litigation costs account for 1.7% of US GDP—that’s 2.6 times higher than the EU average. A 2015 study by Clements & Co. found that 55% of US respondents said their firm was the target of at least five lawsuits in the previous 12 months. Most US companies spend between one and five million dollars on litigation per year, excluding settlements. In the majority of developed nations, that figure is $500,000 or less.

Another reason for the litigious culture is the use of contingency-fee lawyers. The practice is banned in Spain, France, Australia, and parts of Canada, but alive and well in the US. This acts as a huge motivation for excessive litigation, often leading to absurd lawsuits.

Crazy lawsuits, like these filed against Subway and Starbucks, can make for a head-shaking read and a good laugh. However, given the number of foolish legal claims that are thrown at small businesses, it’s not funny.

In 2008, the tort liability cost for small businesses totaled $105 billion, around 11% of their total revenue. Of this amount, one-third wasn’t covered by insurance and was paid out-of-pocket. So, why are lawyers honing in on small businesses?

Legal Extortion

Firms with annual revenue under one million dollars are hit with 57% of all lawsuits. Lawyers know that many of the cases are petty and will fail in court. They also know that many small businesses will be forced to settle due to high legal and opportunity costs.

The National Federation of Independent Business estimates that the average cost to fight a lawsuit is $100,000 (versus $5,000 to settle). An out-of-court deal can run to about 10% of the average small business owner’s earnings. Still, it is often an easier and cheaper option with less emotional stress and wasted time.

Lawyers use a legal loophole to game the system with silly lawsuits in the hope of reaping settlements. The loophole lets a claim be filed for up to 21 days and then withdrawn without any financial penalties to the lawyers. This is just another version of the “throwing mud at the wall to see what sticks” ploy.

While lawyers are tossing mud for fun, the impact on the victims is anything but.

This lawsuit against a small restaurant in Portland, Oregon is a good example. A woman filed a lawsuit for $100,000 against Enzo’s restaurant for “humiliation.” The case was settled for an undisclosed amount.

Perhaps the best example of the ruinous effects of empty claims hails from Washington, DC. In 2005, Roy Pearson, an administrative law judge, filed a $54 million claim against a dry cleaner for losing his pants. The owners, the Chungs, decided to fight the case. They won, but the damage was already done. The Chungs were forced to close two of their three stores due to the financial and emotional toll of the case.

Even where no fault is found, frivolous claims can ruin the livelihoods of those tangled in the mess. Not content with targeting small businesses, lawyers have also marked high net worth individuals (HNWIs) as easy prey.

Prime Targets

A survey by ACE Private Risk Services found that 82% of HNWIs that responded thought their wealth made them attractive targets for lawsuits.

Jeffrey O’Hara—a partner at Clyde & Co.—said, “If the defendant is wealthy, this increases the potential for being hit with a suit. A situation that otherwise might have been viewed as a ‘nuisance event’ by the victim is now seen as offering a potential windfall.”

Kevin Dunne, a partner at Sedgwick LLP, cited this case where a HNWI was singled out: Five male teens were horsing around when four of them got in a car and drove off. The last boy jumped on the car fender, fell off, and suffered a brain injury.

“Although all of them were essentially culpable for the accident, the plaintiff’s attorney only went after the rich father of one teenager.” The family’s insurance provided only $2 million in personal injury protection. Adds Mr. Dunne, “We settled for many millions of dollars more than the insurance they had.”

The survey also showed that HNWIs were aware of the threat but misjudged the litigation risks. Over half believed their liability was capped at about $5 million. Yet, the survey showed that recent personal injury settlements have been 3–10 times that amount.

The steep numbers are due to excessive punitive damages awarded in the US. Under Federal law, punitive damages must not exceed 10 times that of compensatory damages. However, in practice, they are often much higher. Punitive damages are non-existent in Europe; in Japan, the practice is banned.

Without a radical overhaul, the legal system looks ripe for ongoing abuse by lawyers. Here are some steps you can take to blunt the risk of frivolous lawsuits.

Asset Protection

There is no surefire way to erase the risk of being the target of a frivolous lawsuit. However, there are steps you can take to lower your risk profile.

These steps involve using vehicles like trusts and life insurance policies, which can help provide asset protection from overreaching lawyers and courts. If structured correctly, these tools can also be used to legally minimize income and estate taxes.

For readers interested in reducing their taxes and protecting their assets, Riskhedge has just published a new special report by estate planning and tax expert Terry Coxon. Our free report contains a step-by-step guide on several options you can take to mitigate litigation risk.

To close, I will let Jeffery O’Hara sum up the importance of lowering your risk profile. “I can’t tell you how many people after a financially devastating lawsuit say to me, ‘I wish someone had talked to me beforehand about the risks I was facing and what it might cost.’”

Stephen McBride
Chief Analyst, RiskHedge

Three Reasons Why Your Asset Protection and Estate Plans Aren’t Good Enough

Three Reasons Why Your Asset Protection and Estate Plans Aren’t Good Enough

Over our working lives, many of us have paid well over 40% of our earnings in various taxes. We believe we have shouldered our fair share. The rest should be ours to enjoy with our family.

We should think again. Savers in the US still face three very serious threats to their wealth.

For the past decade, I’ve studied the legal methods used by successful Americans to protect what they’ve earned. The goals are always the same. To guard their life savings from being taxed away, confiscated, or trapped in the legal system.

In reality, the US has become a very unfriendly place for successful people. Not just the uber wealthy, but entrepreneurs, professionals, and the family next door. Anyone with even a modest net worth is a potential target.

Today, our country has just 5% of the world’s population but is home to 80% of its lawyers. The US spends 2.2% of its GDP on legal costs. That is an 8-fold jump per capita (inflation adjusted) since the 1950s.

There’s Nothing Civil About Being Sued

There are 15 million civil cases filed annually in the US. Most of them are attempts to sue companies and individuals with assets. If you have accumulated assets and have not yet been sued, consider yourself lucky.

But it will take more than luck to keep what you’ve earned. Do not make the mistake of thinking that doing things right and being a good citizen will protect you. It won’t.

US courts generally award damages based on the defendant’s ability to pay and not on the actual cost to the plaintiff. The US legal system is unique in another way. It allows attorneys to advertise and receive contingency fees for taking on cases. The original intent was to provide access to lawyers when the plaintiff had no means to pay for representation.  Unfortunately, large, successful class-action suits and excessive punitive damages awarded by juries have attracted lawyers looking for their next payday. 

It is normal practice for “contingency lawyers” to target the deepest pockets rather than the most likely culprit. Some attorneys even launch frivolous lawsuits with the sole intent of negotiating a quick and fat settlement out of a wealthy defendant. Average defense costs now exceed $100,000 per case brought to court. No surprise that many defendants will settle to avoid legal fees, stress, and wasted time. 

In a world where financial privacy is dead, wealthy individuals, families, and enterprises are seen as easy targets.

The risk to our financial assets does not stop with aggressive lawyers that want a share of our wealth. The other common threat comes from our own government. 

Authority Without Limits: Civil Asset Forfeiture and Taxes

More and more federal or state agencies use asset seizures as a way to plug widening holes in their budgets. Their power is alarmingly broad and they can often seize assets without warning. The target of such a seizure is deemed guilty until proven otherwise. They must take these agencies to court and prove their innocence to recover seized assets. Unfortunately, many victims are unprepared or lack the means to recover what is rightfully theirs.

A far more stealth way of seizing assets is through higher taxation and various forms of government confiscation. Although many Americans scoff at the notion, confiscation has happened many times in the US. Here are just a few examples:

  • In 1933, during the Great Depression, President Roosevelt issued Executive Order 6102. It declared that the private ownership of gold was illegal. He forced small and large investors to surrender their gold holdings at a bank. They were paid at the then official rate of $20.67/oz. Non-compliance could result in a prison sentence of up to 10 years and a fine of up to $10,000 ($600,000 in today’s money). Less than a year later, the Gold Reserve Act changed the official value of gold to $35. The gold confiscation was thus a disguised tax of 69% on those who had owned gold bullion. It remained illegal to own gold in the US until 1974. 
  • The US government imposed capital controls during the Great Depression and again during the 1960s. Once wealth is trapped inside the US, it is pretty much at the mercy of the taxing authorities.
  • Between 1941 and 1976, the maximum death tax in the US reached 77%. From 1944 until 1963, the highest personal income tax bracket exceeded 90%.

Desperate governments often take desperate measures against their own citizens. They can include gold confiscation, exchange controls, aggressive taxation, exorbitant death taxes, or asset seizures. Such actions often happen during times of war, financial crisis, or economic hardship.

History shows that government money grabs are not new. They have happened with all-too-frequent regularity in countries around the globe. It’s a safe bet that politicians will again “legally” steal the assets of American citizens. And when this happens, hard-working people who have steadily accumulated wealth to support and protect their families will be the targets. 

When the going once again gets tough, the mobs—also known as voters—will support taking from the “rich.” All it will take is a crisis serious enough for astute politicians to justify the grabbing.

How far are we from conditions that could warrant such extreme measures? It could be closer than any of us would like. The recent demonstrations and riots seen across the US  are sad proof of that.  

There Are No Solutions, Only Losers, Don’t Be One of Them

Federal debt will hit $20 trillion very soon. Many states are quasi-bankrupt. Unfunded government liabilities (mostly pensions) are estimated to be more than $100 trillion. That is about 100% of the total value of our national assets. To put that in perspective, federal debt and unfunded liabilities exceed $1 million per taxpayer.

The current demographic trend—too many seniors, too few workers—means we aren’t going to grow our way out of this mess. The only solution is to cut all benefits and pensions dramatically. In 2011, Forbes reported that according to the US Census, 49% of our population received government benefits. The bureaucrats know that benefit cuts would be political suicide. 

Career politicians will opt to target and tax an unpopular minority—the so-called “rich.” There is no way they will take benefits away from half the population. We’ve clearly heard that type of rhetoric from several politicians lately, including former President Obama. Candidate Hillary Clinton began to sound increasingly like her socialist rival Bernie Sanders during the election campaign.

Whether or not we like President Trump, his election may have handed us a short-term reprieve from the collectivist movement in the US. Long term, though, I believe the US is on an inevitable path toward more socialism. To fill its empty coffers, state and federal governments must take assets from savers, entrepreneurs, and hard-working professionals. 

There is some good news. It looks like we may not see higher tax rates for the next four years. We could even get some sizeable tax breaks. 

But make no mistake; before long, the pendulum will reverse and Washington will be coming after your money using very aggressive tactics. Why?

Because the US lacks the political will to reduce its debt burden and make meaningful cuts to programs or benefits.

Anyone who has accumulated a bit of wealth has a very short window—probably no more than four years—to implement well-structured asset protection and estate plans. There are many solutions that can be tailored to your needs; among them are foreign trusts, international life insurance policies, and variable annuities.

5 Industries That Blockchain Will Likely Disrupt by 2020

5 Industries That Blockchain Will Likely Disrupt by 2020

Today, around 80% of banks are developing their own blockchain technology.

In September 2016, Barclays carried out the world’s first trade transaction using blockchain. They cut a process that normally takes 7–10 days down to less than four hours.

IBM is working with the government of Dubai to develop smart contracts that can facilitate all trade that passes through its port. This is huge, given $344 billion worth of goods passed through the port in 2016. Dubai’s government said it plans to shift all transactions to blockchain by 2020.

Nasdaq is also in on the action.

The real value of blockchain is that it renders intermediaries obsolete. They make a living off being a third party that establishes “trust” between parties unknown to each other. Blockchain replaces these middlemen.

This is the reason the world’s biggest firms are investing in blockchain. They are trying to become the disruptor, not the disrupted.

Blockchain is a foundational technology like the Internet—a big system on top of which you can build applications.

To give you a better sense of the thing, here’s just a smattering of existing businesses that could find themselves on the wrong side of the proverbial ledger.

What Industries Could Blockchain Disrupt?

Financial Services

Banks are essentially secure storehouses and transfer hubs for money.

Blockchain’s secure, decentralized, and tamper-proof ledger addresses this function—at a fraction of the cost. A company called Thought Machine has already created a “blockchain bank.”

Clearinghouses and stock brokers are also in the firing line, for the same reason.

Voting

In future elections, votes could be cast through a blockchain. Blockchain’s audit trail would authenticate voters’ identity and keep track of votes while allowing anyone to verify no votes were altered.

This would make fraud virtually impossible and ensure there is no question of electoral foul play.

Music Streaming

Music streaming is great—well, maybe not for the musicians. It’s estimated that artists lose up to 86% of the proceeds from their music because of illegal downloading. Blockchain is making it possible for artists to earn royalties on their music without going through a record label.

Grammy-winning artist Imogen Heap has created a blockchain-based streaming platform called MYCELIA that is facilitating this.

Real Estate

When most people think of buying and selling property, they think copious amounts of paperwork, a long, drawn-out process, and high agent fees.

Using blockchain, anyone can manage, track, and transfer land titles and property deeds—no need for intermediaries. A firm called Ubitquity is providing this service right now.

Supply Chain Management

The transfer of goods requires a lot of middlemen. Middlemen take time, add costs, and every now and then, make mistakes. The creation of smart contracts means there is little need for these intermediaries.

Smart contracts basically function as a traceability system—recording, managing, and enforcing contracts in a secure and transparent manner. UK company Provenance, which facilitates “transparent and traceable” trade, has been one of the most successful blockchain-based companies so far.

The Next Tech Disruption Is Closer Than We Think

These uses are just scratching the surface of the many areas in which blockchain technology will upset apple carts.

With the world’s most successful companies pouring millions into blockchain, big breakthroughs are likely near. While it took more than 30 years for the Internet to transform the economy, today more than 50% of the world’s most valuable firms are Internet-driven.

Given the fast pace of technology, a blockchain-based economy could be closer than we think.

How to Simplify Your Portfolio Before the Next Downturn Hits

How to Simplify Your Portfolio Before the Next Downturn Hits

It seems like human nature to be intrigued by the difficult and complex—and that also goes for investment strategies. If you can describe it with a bunch of Greek letters or “quantify” it through extensive technical analysis, it must be good.

But as is the case so often in life, the simple things are often the best. As we move through a year filled with market uncertainty, “simple” may be exactly what your portfolio needs to survive the next downturn in good shape.

In 1981, prolific financial author and investment advisor Harry Browne and my good friend, fund specialist Terry Coxon, partnered up to introduce one of the most powerful yet straightforward investment concepts I’ve ever come across.

It’s called Permanent PortfolioAs the name suggests, it’s designed to yield inflation-beating returns and persevere in almost any investing environment: expansion, crisis, deflation, or inflation.

Yet, despite its remarkable track record, few investors seem to adopt it today.

It may be too elementary for institutional investors and hedge fund managers who have to somehow justify their immense salaries and bonuses. But for the retail investor, Permanent Portfolio is an easy-to-implement, long-term strategy that yields solid returns with minimal risk.

You don’t even need an investment advisor to help you. No wonder the financial community doesn’t want anything to do with it.

The Permanent Portfolio Concept

The core of this concept is the proper asset allocation, which looks like this:

  • Put 25% of your money into a broad US stock index (S&P 500 or Russell 3000)
  • Put 25% into long-term Treasury bonds
  • Put 25% into cash or short-term Treasury bills
  • Put 25% into gold

Yes, it’s that simple.

Then, once a year, you rebalance your portfolio by selling appreciated assets and reinvesting the proceeds in depreciated asset classes.

Note that the concept aims to remove emotion from decision making. There’s a set date every year on which Permanent Portfolio investors buy and sell positions based on this single rule. That way, they systematically sell high and buy low.

The strategy is simple, low-cost, and can be applied to any portfolio.

Extremely Low Risk—and an Average Return of 8.53%

Over a 45-year period from 1964 to 2009, the Permanent Portfolio earned an average return of 8.53%, with a standard deviation of 7.67%. In the same time frame, a typical 60/40 stock-bond portfolio yielded a slightly higher return of 8.83%—but with a 46% increase in deviation!

The Permanent Portfolio beats the 60/40 allocation in shorter periods, too. From 2000 to 2016, it would have grown at 6.1% per year—despite the dot-com crash and the 2008 financial crisis.

Compare that to a 5.1% annual rate of growth for the typical 60/40 allocation.

During this period, a $10,000 investment in a Permanent Portfolio would have grown to $27,478, compared to $23,457 in the 60/40 portfolio.

Above all, the maximum loss a Permanent Portfolio would have experienced would have been 15.8%. Meanwhile, 60/40 investors would have experienced a haircut of 30.4%.

Peace of Mind in Times of Volatility

In periods of prosperity, stocks outperform. In periods of deflation, bonds do well. In periods of inflation, gold shines. During a recession or a liquidity crisis, cash is king.

However, the Permanent Portfolio weathers all types of market conditions… that’s the whole point of it.

This is a time-tested strategy that has yielded solid returns for the past 50 years. Granted, its long-term gains might be a bit below the stock market’s average return, but it will let you sleep peacefully in volatile times like these.

Obviously, the trick here is that you invest in four almost uncorrelated asset classes. Stocks and bonds have not seen a significant correction in years, so hedging against one is smart. After a five-year correction, gold still appears to be a relative bargain, and cash will always protect you in a liquidity crisis as we saw in 2008.

To take advantage of all these trends, all you have to do is adopt the Permanent Portfolio strategy.

One last important note: While I recommend investing in index ETFs, bonds, and stocks, I strongly prefer physical gold to a gold ETF. Your gold bullion gives you something no other financial asset provides: It’s not someone else’s liability and thus has no counterparty risk.

For your gold investment, I recommend looking for full-service organizations that offer easy ways to buy, store, and sell physical gold with all the convenience of gold ETFs.

Before you buy the physical gold to make up 25% of your portfolio, make sure to do your homework first. Find out everything you need to know about which type of gold to buy and which to stay away from at all costs… how to safely store your gold… and much more… in the revealing e-book, Investing in Precious Metals 101. Click here to get your free copy now.

How China’s Domestic Problems Could Destroy The American Middle Class

How China’s Domestic Problems Could Destroy The American Middle Class

Trump’s tune toward China has softened since his election, but the two still look set to collide. The latest muscle-flexing of the dollar has helped to inflame the problems that Trump promised to fix… like offshoring. If Trump wants to keep his promises, he will need to take action on the trade front.

Along with the dollar’s ascent, China’s domestic woes have raised the odds of a Sino-American head-on collision in 2017.

Domestic Difficulties

China has enjoyed remarkable GDP growth since opening up in 1979. But the nation now faces strong headwinds to future expansion.

China managed to dodge a recession after the financial crisis due to massive injections of capital by the state. Much of that money wound up funding unproductive projects (like the building of "ghost cities"). But now, that bill has come due, and it’s going to cause a lot of problems.

The Chinese know this and have been pulling their money out of China at an alarming rate. To stem the exodus, the state has imposed increasingly restrictive capital controls.

These issues have caused the yuan to fall rapidly against the dollar. To halt its decline, China has sold huge amounts of its foreign reserves. Since August 2015, when China unpegged the yuan from the dollar, it has burned through over $500 billion in reserves.

Analysts estimate that China needs around $2.7 trillion in reserves to meet the IMF’s foreign exchange reserve adequacy measures. With reserves down to $3 trillion, how long will China stay in this fight before it lets the yuan float?

These problems are coming to a head just as Chinese President Xi Jinping seeks his second five-year term at this year’s party congress. Xi cannot show any signs of weakness—like caving in to American demands—if he wants to retain his position and power. This has led the Eurasia Group to list potential overreactions by Xi to foreign policy threats as a top geopolitical risk for 2017.

If Xi opts to let the yuan float, it would likely weaken even further against the dollar. That would hit US exporters hard. Given Trump’s rhetoric toward China, it would force him to impose trade sanctions. If such actions were taken, how would it affect the US?

Implications for the US

All of America’s $660 billion in trade with China would be affected if barriers are enacted. Tariffs would push up the price of imported goods and hit US consumers hard. In 2013 alone, Walmart imported over $49 billion worth of goods from China.

As a result, major importers like Walmart and Target would likely see their revenues take a big hit. The fact that 69% of Americans have less than $1,000 in savings shows that consumers can ill-afford price hikes on everyday goods.

Exporters like Apple and Boeing that have large exposure to China could also be in trouble. Since China would be likely to respond in-kind to any US sanctions, such action would increase the cost of US goods for Chinese consumers. Also, US firms that manufacture in China would be in the firing line.

These actions would be negative for the US economy. Industries like retail and machinery are particularly vulnerable. Since these industries create a lot of jobs in the US, the fallout could have a big ripple effect.

While China has already enforced capital controls on outflows, the US could slap controls on inflows.

Given that the Chinese poured $110 billion into US real estate from 2010–2015, any controls on foreign inflows into the sector would be bad for future growth. In addition, Chinese direct investment into the US totaled $53.9 billion in 2016. If this demand disappeared, it could cause assets that rely on these inflows to crash.

Bonds are another likely battleground. China currently holds $1.1 trillion worth of Treasuries—17.6% of all foreign-held Treasuries. China’s Treasury holdings have fallen $200 billion since last summer and now sit at an eight-year low. If China continues to shed US debt, it could force yields to rise faster than Uncle Sam wants.

As you can see, the fallout from potential trade sanctions is wide-ranging and would impact US businesses and consumers greatly. Given that 2017 is ripe for such a scenario, how can we profit from it?

Patriotic Portfolio

If trade barriers are erected, investors should avoid firms that have large exposure to China (like Apple and Walmart). If such an event occurs, some sectors will be hit harder than others. This Deutsche Bank study that looked at sectors most at risk from sanctions and a Goldman Sachs report on S&P sectors with exposure to China are good starting guides.

On the flip side, the telecom and utilities sectors could be a good bet. Consider US-centric firms that have the majority of their production and demand in the US. These companies are least exposed and could benefit from trade restrictions.

The US-centric theme for the food, beverage, and tobacco sectors is also interesting. Keep in mind that these criteria are just a screening tool. To invest in a company, it must also have healthy fundamentals.

While an all-out trade war is unlikely, if Trump wants to keep his promises, he must reduce the huge Sino-US imbalances. This will entail significant disruptions in the economy, but for astute investors, it presents many opportunities.

On that note, I'll remove my writing cap for now. I hope you all have an excellent and productive week.

Stephen McBride
Chief Analyst, RiskHedge

Hazards Ahead: What America’s Failing Healthcare System Means for You

Hazards Ahead: What America’s Failing Healthcare System Means for You

Globalization and immigration drummed up lots of interest during the presidential election, but healthcare may be the bigger issue facing America. In 2016, healthcare spending totaled $3.35 trillion. That’s over $10,000 per capita. Of the total spending, government accounted for 29%, households for 28%. and businesses for 20%.

Since 2001, health insurance costs have shot up 114%. The average premium for a family now exceeds $18k per year. That’s up $1,300 since 2014. For most people, an employer covers a large share of plan costs. Still, the burden for households is growing.

The rise of deductibles (or the amount the insured must pay before coverage kicks-in) has outpaced that of health care itself. Today, 51% of Americans have deductibles above $1,000—a 49% surge since 2014. No wonder medical bills are the top cause of bankruptcy.

From 2007–2014, middle-income households’ spending on health care increased by 25%. In the same period, spending on all other basic needs (like food and clothing) fell. With an uptick in economic growth expected in 2017, the fever in healthcare costs looks likely to pick up pace. However, this is just a symptom of larger problems facing America.

Medical Complications

For almost four decades, healthcare costs have grown faster than wages. A major culprit behind wage stagnation has been the ballooning cost of non-wage compensation, which includes benefits like health care. Since 1979, real wages have grown a measly 2.7%, while health care rocketed 10-fold and total employee compensation rose 63%.

Healthcare costs have inflated, in part, from a lack of competition… and it’s set to get worse. The Affordable Care Act (ACA) forces insurers to accept patients regardless of medical history or risk profile, and that is a big reason insurers are pulling out of markets. In 2017, one-third of all US counties will have only one insurer. Which leads us to the next issue… excessive regulation.

The Code of Federal Regulations—the codex of all Federal rules and regulations—has bloated eight-fold over the past 55 years. The fallout? Since 1970, the number of doctors has barely doubled while the ranks of “administrative employees” have shot up 3000%.

Excessive regulation has also caused increased costs for insurers. Currently, just 10% of patients account for two-thirds of insurers costs while 50% of patients account for only 3%. Yet, the ACA limits the variance insurers can charge riskier patients. To offset the cap, everyone’s premiums have spiked.

Another problem is America’s aging population. In 2000, the number of Americans over the age of 65 was 35 million. In 2030, it will be around 72 million. Generally, the older you are, the bigger the health risk you carry. With more elderly people entering the system and inflating premiums, young people are less willing to sign up because of the expense.

With these trends in motion, the risk pool will soon be filled with costly patients. Clearly, an insurance system cannot function when this happens. With quick fixes unlikely, what risks does this pose to ordinary Americans?

Higher Costs, Lower Coverage

A recent survey from The Kaiser Foundation found that 63% of respondents had used most or all their savings just to pay medical bills. The average family now spends 35% of its disposable income on health care. Here’s a real-life example taken from a Health Affairs study.

A family of four living in Roanoke, Virginia, with an income of $60,000 in 2016 would have a premium payment of $4,980 for the year for the second lowest-cost silver plan. That plan has a $5,000 deductible. That means the family could spend almost one-sixth of their pre-tax income on health costs before they received any insurance payment.

This family has another option. They can opt out of coverage and pay a penalty tax of around $725. In 2015, about 7.5 million Americans took this option… a telling number. The rising costs of coverage have hit the middle-class hard. Most Americans earn too much money to qualify for subsidies, but not enough to absorb the higher premiums.

With insurance premiums set to rise another 22% in 2017, even more people will be forced to opt out. Ascending healthcare costs have eroded the finances of many Americans, but opting out is a risky move. Given that 52% of families have less than $1,000 in savings, a minor injury can mean serious trouble for a family.

While you might think $1,000 will go far, if you have to go to the ER today,  a single stitch costs around $500.

For those in the system, appointment waiting times are growing, while the scope of coverage shrinks. Long lines at the supermarket are annoying, but in healthcare, they can be fatal.

While private costs are growing, public spending has headed skyward. Currently, health care accounts for 17% of GDP and is expected to hit 25% by 2030. Clearly, something has to give… either services will be cut, or taxes will rise.

Soaring costs are also affecting the labor market. Affordable Care Act mandates that are due to take effect in 2017 will force firms with over 50 employees to provide all full-time staff with health care. This will discourage firms from hiring staff and expanding operations.

All of us will pass through the healthcare net at some stage in our life, so how can we lessen some of the risks?

Risk Assurance

President-elect Trump said he would reform healthcare laws to allow insurers to provide interstate coverage, which would increase competition. He also said he will rid the system of excessive regulation.

Both actions should lower costs and boost quality. However, passing structural reforms (like repealing the Affordable Care Act) will be much harder. Although the ACA hasn’t been a success, it has handed 20 million people health insurance. Its repeal will be a huge challenge.

As a result of the failing system, medical tourism has become a popular alternative for Americans over the past decade. Yet, not everyone can afford to pay for major procedures up-front—even in low-cost countries. That’s why international health insurance policies have also become an attractive way to pay for such care.

At Riskhedge, we understand that the healthcare system has become a grave threat to all Americans. That’s why we will be providing you with in-depth information on how to best manage it in the near future.

On that note, I’ll leave it there for this week. I hope all of you are having an excellent start to 2017.

Stephen McBride
Chief Analyst, RiskHedge

How Will the Rise of Artificial Intelligence Affect You?

How Will the Rise of Artificial Intelligence Affect You?

I am glad that the festive time of year has once again drawn to a close. The bounty of turkey and mugs of Irish coffee got to be a bit much for me. The time with friends and family did, however, gift me some interesting ideas.

One idea came from my uncle who holds a senior position in IBM. He told me about their machine called Watson, described as “a cognitive technology that can think like a human.” It can understand and, most importantly, learn from human emotion and language.

Watson’s abilities got me thinking—what is the current state of Artificial Intelligence (AI)?

Intelligent Advances

The field of AI research was founded at Dartmouth College in 1956 by a group of cognitive scientists. Plenty of advances in technology have happened since, but most progress in AI was made in the last decade.

Today, Microsoft, IBM, Google, and Amazon are pouring billions of dollars into AI. We are now seeing the payoff in big advances in frontiers like machine learning.

Machines like those in factories are programmed by the user to perform a unique task, nothing else. With learning machines, there’s no need for exact instructions. Instead, the user defines an end goal, and the machine learns how to achieve the goal through trial and error.

Machine learning is behind advances like driverless cars, image recognition, and unbeatable Go players. With some of the world’s most successful companies now focused on AI, how might its progress affect us?

Humans Need Not Apply

A 2016 report by McKinsey looked at the ability of machines to replace human labor. The report found that 59% of all manufacturing tasks could be automated using current technology. The most exposed sector is food service/accommodation, 73% of which could be replaced. The least exposed was “managing others,” where only 9% of tasks could be automated.

The financial sector also has cause for concern. McKinsey found that financial workers spent 50% of their time collecting and processing data—easily automated. For proof, just look at the floor of the NYSE to see how machines can control a space once alive with activity.

Machines have slowly replaced factory workers over the last century. In today’s new era, AI could rapidly replace human labor across several industries. A 2013 research paper from the University of Oxford found that 47% of US jobs could be automated over the next 20 years.

Ford wants to have driverless trucks on the road by 2021, and Uber already has autonomous taxis. Drones also look set to affect the transport industry and replace security jobs. And prepare for lattes served by robot baristas in coffee houses across America.

Many of the most vulnerable jobs are filled by low-income and middle-class workers. The changes will hit them hard.

This would create major headaches for policymakers. How could millions of people be quickly retrained with new skills? The retraining programs themselves could become obsolete given the rapid rate of change. Skills being taught in universities today may be useless within a few years.

While the rise of AI will certainly create challenges, it will open up a captivating future.

Memorizing Machines

Automation will be both disruptive and liberating. It will free up humans to do more productive, advanced tasks that could lead to great prosperity. Think America in the early 20th century, on steroids.

Along with productivity gains, AI has the potential to revolutionize sectors like education and healthcare.

AI systems have just begun to grasp human language. In time, this could make personalized education feasible. For a struggling student, AI could slow down the lessons or change teaching style. If the student excels, AI could raise the difficulty. All things being equal, this would enhance human learning.

In healthcare, IBM’s Watson is being used in an oncology program at a cancer center in New York. Watson was tasked with diagnosing 1,000 oncology cases that had been handled by field experts to see its potential. The results were promising. In 99% of cases, Watson drew the same conclusions as the experts. In 30% of cases, it found something new that the experts missed.

Watson recently helped a woman with leukemia who had been misdiagnosed. By analyzing her genomic sequence, Watson was able to tell doctors that they had missed a second strain of the disease. Treatment was adjusted, and the patient recovered.

Google and Microsoft have both recently made discoveries that could change the field of speech technology. IBM is working on bringing AI to the blockchain—a core component of Bitcoin. In 2016, Barclays carried out the first trade transaction using the technology.

While progress thus far is encouraging, we have only started to see what is possible. With Peter Diamandis’ and IBM’s XPRIZE partnership and Elon Musk’s non-profit OpenAI, resources will flow into AI.

With as many hopes as fears, what can we take away from AI’s rise?

Atomic 2.0

Splitting atoms can create huge amounts of energy, but also destructive weapons. AI shares this same good/bad paradigm. There is no doubt that AI can be highly disruptive to social and economic structures, and potentially lethal. It also has the potential to transform the world as we know it.

Anxiety about vast replacement of human labor across industries is a serious issue. Millions of workers rendered obsolete over a short time span is a recipe for mass social unrest. No doubt there will be great need for upskilling in the years ahead.

There are further concerns about AI becoming so smart that it goes rogue and carries out destructive acts. Andrew Ng, a leading computer scientist, says such fears are like worrying about the overpopulation of Mars. AI advances so far have been narrow AI. The development of general AI, a super-machine if you will, is a while away. We don’t have to worry about Hal 9000 anytime soon.

Some of the world’s greatest minds are working on AI, and we should be optimistic about its future. AI could be the biggest game-changer in history. Its development brings possibilities that we cannot yet imagine.

The potential for AI to better humanity seems infinite. For the human vs. robot debate, I think partnership, not replacement, is the likely outcome. After all, who would bet against human ingenuity?

Once again, thank you for tuning into this week’s The New Abnormal. If you have any questions, or topic suggestions you can connect with me on Twitter.

 And with that, I’ll sign off for this week.

Stephen McBride
Chief Analyst, RiskHedge

The Greatest Threat to Property and Due Process in America Today

The Greatest Threat to Property and Due Process in America Today

As long as you obey the law, the law should respect your liberty and property. Well, that’s what common sense would have you believe. In America today, this is not the case. Every year, law enforcement agencies take billions in cash and assets from citizens who haven’t been convicted of a crime.

This is possible because of the civil asset forfeiture law.

Forfeiture was started in the 1980s to assist law enforcement’s efforts in the “War on Drugs.” Since 1986, revenue realized from forfeiture by the Department of Justice (DOJ) has grown by 4,700%. In 2014 alone, the DOJ took in $4.5 billion. That’s not counting revenue from the states.

Unlike criminal forfeiture, civil forfeiture allows law enforcement to take property from citizens who have neither been charged nor convicted of a crime. Due to a lower standard of proof, 87% of forfeitures are now civil.

To understand this threat, let’s look at how it works.

Guilty Until Proven Innocent

To seize your property under civil forfeiture, law enforcement needs only probable cause that your property was somehow involved in illegal activity. Millions of dollars in cash and assets have been taken from citizens without arrest for even minor reasons.

Unlike criminal forfeiture, in civil forfeiture, the burden of proof is on the owner—not the government. In reality, this law carries the presumption of guilt until proven innocent. However, forfeiture laws are stacked against owners, and most cases never go to court.

Civil forfeiture rests on the idea that the property itself, not the owner, has violated the law. As a result, when forfeiture cases go to court, they have strange titles like United States v. One Pearl Necklace.

As the accused is an item of property, not a person, the property owner has no right to legal counsel and becomes a third-party claimant. If the owner cannot afford the legal costs to plead their property is innocent, too bad. However, the plot thickens when we look at how the law is applied.

In Philadelphia, half of civil forfeitures were for less than $200. It’s a similar story in other states. This is a far-cry from the law’s intended purpose of tackling wealthy criminals. As above, low forfeiture amounts and high legal costs means that 88% of cases don't go to court.

For cases of $20,000 or more, many people are forced to settle out of court due to high legal costs.

While the law itself is open to abuse, it gets worse when we track where the money goes.

Conflict of Interest

Civil forfeiture is an easy way for law enforcement to seize assets. It also showers them with financial perks.

Half of US states share up to 100% of forfeited assets with the local agencies who seize them. A 2015 report by the Washington Post found that 500 local departments and task forces got 20% or more of their annual budgets from civil forfeiture gains.

At the state level, revenues are up by 136% in the past few years. From 2001–2014, the DOJ and Treasury together took in $29 billion from civil forfeitures.

These perverse incentives are magnified by a program called equitable sharing. It allows States with tight forfeiture laws to bypass them by using federal seizure laws. The local agencies reward their federal friends with a share of the spoils.

Between 2000–2013, the DOJ paid local agencies $4.7 billion under the equitable sharing program. 25% of these funds were used to pay salaries, with over 55% going toward “other” unnamed items.

While state and local agencies can physically seize your property, federal agencies have far greater reach.

Flash-Freeze

Under the umbrella of civil forfeiture, the IRS has frozen the accounts of many small business owners and their families.

From 2005–2012, the IRS seized $242 million from “structuring” violations. Bank deposits of $10,000 or more must be reported. If a person makes several deposits below that amount with the intent to avoid reporting, that is structuring.

Rather than review a case of suspected structuring, the IRS uses a “freeze first, ask later” policy. There have been several cases where the IRS seizes the bank account of a business without warning. This leaves the business unable to pay staff and suppliers.

Many businesses have valid, decades-long patterns of multiple deposits under $10,000. Yet, more than 100 multi-agency task forces now trawl through bank reports for signs of “suspicious activity.” In 2014 alone, banks filed more than 700,000 suspicious activity reports to comply with the Bank Secrecy Act.

Today, the IRS can freeze or seize a bank account if it finds what they deem “suspicious patterns.” Randy Sowers is one such victim of civil forfeiture abuse. After the IRS seized his accounts, he said, “[they said] they could throw my wife in jail for depositing cash in a bank. It was just unbelievable.”

The machine that is civil forfeiture seems to destroy everything in its path. Recently, though, there has been cause for optimism.

Civil Reformation

Civil forfeiture abuse has been in the spotlight recently due to reports from the Washington Post and the Institute for Justice (IJ). As a result, many states have passed laws which restrict the use of civil forfeiture.

Following the Washington Post’s report on forfeiture abuse, the then attorney general Eric Holder passed legislation to curb the use of equitable sharing.

Many states have since eliminated direct financial incentives for law enforcement under civil forfeiture. They have also raised the burden of proof from probable cause, to beyond reasonable doubt.

The rise of groups like IJ have also been positive. It has helped many forfeiture abuse victims recover their assets by filing lawsuits against the abusing agencies.

Although there is cause for greater optimism, civil forfeiture is still a huge threat to every American. That private property can be randomly seized without due process remains an alarming reality in the USA.

Until next time…

Stephen McBride
Chief Analyst, RiskHedge

Is the Collapse of the European Union Imminent?

Is the Collapse of the European Union Imminent?

The cracks first appeared with the Greek debt crisis in 2010. Since then, the European Union (EU) has been put through the mill—and then some.

The latest fault line to rattle Europe is the insolvent Italian banking system. But Italy’s broke banks are just the latest in a long slate of budding systematic risks that Europe hasn’t dealt with. The checklist includes things like Greece’s financial woes, the migrant crisis, sky-high sovereign debt/GDP ratios, and the stability of Deutsche Bank—just to name a few.

As Europe’s problems begin to compound, the question becomes: Is the collapse of the EU imminent?

Turbulence on the Western Front

The continent-wide populist uprising in 2016—as I detailed a few weeks ago—poses a major threat to the survival of the EU ideal. Following the latest populist victory in the Italian referendum, attention quickly turned to next year’s crucial elections across Europe.

First up is the Dutch, who will head to the polls in March.

With just three months to go, things are looking promising for the populists. The right-wing Party for Freedom, led by Geert Wilders, is currently leading in the polls.

Next in the queue are the French, with elections set for April.

France has a history of radical leaders and revolt. Louis XIV, Robespierre, and Napoleon would top that roster. So, what are the odds that Marine Le Pen, leader of the Front National, can win the presidency? The latest polls have Republican François Fillon leading Le Pen by a slim 4 points.

We note that France’s two-round election process erects a high bar that Le Pen must clear. Without a first-round victory, it will be very hard for the National Front to win in the second round. The Republicans and Socialists have so far united to stop the Front National.

Last in line are the Germans and a fall election.

Incumbent chancellor Angela Merkel is going for an unprecedented fourth term. Baring a migrant crisis blowup or some unforeseen scandal, it looks like she will get it. The rise of the populist Alternative for Germany party has been well publicized, but it trails Merkel’s CDU party by around 20 points in the polls.

So, the populists have a chance to grab power in two major European countries over the next 12 months. Still, should we see those upsets, it doesn’t seem likely that the EU is in danger of an imminent collapse into populism. Look how long the Brexit negotiations are taking.

So, what about those Italian banks then?

The Boot’s Broke Banks

Currently, around 18% of Italian bank loans are nonperforming. For some context, nonperforming loans (NPL) in the US only reached 7% at the height of the 2008 financial crisis. The same level of bad loans in the US banking system would be the equivalent of $3.8 trillion—staggering.

And it gets worse. Italy’s banks have less than half the capital needed to cover these loans. They will require around a $40 billion cash injection just to remain solvent. With a tsunami of bad loans on their books, something must be done with the banks sooner rather than later.

So, what about a good old-fashioned bailout?

Given the debt/GDP ratio of “The Boot”—so called thanks to the country’s resemblance to cowboy footwear—just hit a record high of 135%, they are in no position to extend a helping hand. With a government bailout unlikely, the only option left is the European Central Bank. European financial institutions hold a lot of Italian bonds, so they can’t really decline the invitation.

If Italy’s banking system does collapse, which seems inevitable, the EU would be able to absorb the shock. However, it would certainty have major knock-on effects in global financial markets, just as the Greek bailouts did.

And there’s my segue to the start of the EU’s problems… Greece.

Perennial Peril at the Parthenon

There has been scant respite for Greece since its financial woes began in 2010. Thirteen austerity packages and three bailouts later—worth a combined €366 billion—have only made matters worse.

Greece’s debt/GDP ratio now stands at 177%. At 23% (47% for youth), it has the worst unemployment rates in Europe save Bosnia. And bank NPLs are 45%—around €119 billion— equal to over 60% of Greek GDP. Again, truly staggering.

Clearly, something has to be done with Greece, too.

German Finance minister Wolfgang Schäuble staunchly opposes further debt relief for Greece. This is the trap for the Germans and other creditor nations. A debt default would have severe negative consequences and is exactly why the Greeks have already been bailed out three times. Given previous bailouts, and the implications of not helping, it could be more “extend and pretend” in the case of Greece.

Greece’s economic woes have been exacerbated by the migrant crisis. Millions of third-world refugees have landed on its shores en route to the more prosperous North.

So, could the EU collapse under the weight of all its problems?

Conclusions on the Continent

None of these dilemmas will pass without significant pain caused to those involved. Yet, using responses to past crises as a guide, the collapse of the EU is not imminent.

However, the problems facing the continent are severe. It is hard to see how things can continue “as is” for another generation. If the EU doesn’t collapse outright, and it can’t “extend and pretend” forever, how will the future look?

The EU could integrate further into a full fiscal and political Union—the United States of Europe, if you will. But given how unfavorably the EU is viewed in Europe, that would be a hard sell.

A more likely outcome is that the EU remains intact but radically alters the way it operates. To start, nation-states must be allowed to put their interests ahead of those of the Union at the negotiating table. This is already happening—as Geopolitical Futures Chairman George Friedman details in this interview with my colleague Ed D'Agostino.

To end, I quote Winston Churchill:

The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place, we are entering a period of consequences.

That was Churchill speaking three years before the outbreak of WWII.

Scenarios take a little longer to play out these days. The doomsday predictions for the EU may not be as accurate as those Churchill made 80 years ago.

Stephen McBride
Chief Analyst, RiskHedge


The Pension Crisis—Coming Soon to a Retirement near You

The Pension Crisis—Coming Soon to a Retirement near You

Having jumped from one job to another early in life… and with those jobs being across many continents, I haven’t really given much thought to my pension. Looking at the numbers, it seems I’m not the only one. Over 50% of Americans aged 25–34 have no retirement savings. Then again, given the current state of the pension system, it may be a prudent move.

A 2015 study from the National Association of State Retirement Administrators estimated that public pension funds are around $1 trillion in the red—but the problem gets worse.

These estimates are based on funds earning average annual returns of 7.6%. The actual 2015 returns for pension funds came in at 3.2%... a 58% miss. In the same year, America’s largest pension fund, the California Public Employee’s Retirement System, earned a measly 0.6%.

If public funds used the same projection method that their private counterparts must, their deficit would be around $3.4 trillion—19% of US GDP.

At the turn of the millennia, these funds actually had a surplus. So what happened?

Collateral Damage

By design, pension funds should be conservative, low-risk funds, and fund managers should deploy capital into instruments that match these exact criteria (such as AAA-rated sovereign debt).

Historically, pension funds hold around one-third of their capital in high-grade sovereign debt, like Treasuries. Up until recently, Treasuries ticked all the boxes for pension funds—a low-risk, high-grade instrument, which carries a yield that matches estimated returns.

However, the 35-year bull market in high-grade sovereign debt is causing severe problems for pension funds. If we take the bellwether 10-year Treasury, its yield has fallen from 16% in 1981, to 2.5% today.

To put that into perspective—to earn the same returns, a fund investing in the 10-year Treasury today has to put in 11 times the amount that it would have had to in 1981. This equates to investing $100 million vs $1.1 billion—a substantial difference.

Although dwindling yields are a major problem, they’re not the whole story.

While America’s demographics aren’t in as dire shape as those of Europe, they are still a big problem. Due to the increase in life expectancies and the decline in birth rates, around 14% of the population is now aged 65 or over… a 35% increase in 50 years. In the same time, the old-age dependency ratio has increased by around 50%.

As a result of these trends, outflows from funds are increasing rapidly. But it’s not just the number of retirees that’s the problem, it’s the length of time they are living. On average, Americans born in 2010 live nine years longer than those born in 1960. With retirees now collecting their pensions for almost 20 yearsBismarck will be turning in his grave.

While outflows are increasing, inflows are plummeting—around 45% of households have no retirement savings whatsoever. This trend has caused many retirees to rely on Social Security, which now makes up around 90% of the bottom quartile’s retirement income.

With conditions set to deteriorate, what will be the implications of a failing pension system?

Inevitable Intervention

Even by government estimates, which suggests public funds are $1 trillion in the red, they are clearly insolvent. We have already witnessed bankruptcies in Detroit and San Bernardino—in which the respective taxpayers of Michigan and California had to come to the rescue. But now the problems are even larger.

Illinois’ state pension fund, which has liabilities of around $18 billion per annum, is only 38% funded and looks set to run out of assets in a few years. Whether this happens in 2017 or 2020, arithmetic tells us something has to give.

Given that millions of public sector pensions are on the line, you can be sure the federal government will intervene when the problem can no longer be ignored.

Although this will equate to a massive wealth transfer from Millennials to Baby Boomers, this bail-out precedent was set following the financial crisis. The pension system cannot go under for obvious economic reasons.

While the federal government will almost certainly step in and save the day, those with skin in the game won’t escape unscathed.

There Will Be Blood

The federal government must intervene and restructure the public pension system(because it would be political suicide not to). As the current defined benefit (final salary) schemes are completely unfeasible, public funds will have to follow their private counterparts and switch to more sustainable, but less lucrative, defined contribution schemes.

Under the new system, public employees will be contributing more and receiving less than they currently do. Of course, this will cause considerable tensions with unions valiantly defending their members’ “right” to what they were promised under the old system. But given the circumstances, there is not much they can really do about it.

Along with cuts to direct fund outflows, other cost-savings measures will have to be introduced. The retirement age will have to be raised at a rate faster than the current trajectory. That means a longer working life for Americans. Also, taxes will have to increase to offset the billions in liabilities that have been undertaken.

Although this scenario may sound severe, it’s about the best one can hope for given that most funds are simply insolvent and will never be able to meet their obligations.

So, what steps can you take to protect yourself from the looming crisis?

Take the Bull by the Horns

If you are in a public pension scheme, the chances of getting what you have been promised don’t look great—and with little chance of a bailout, the same applies for private schemes. The average funding rate for US corporate pensions is a mere 75%... with private funds having a collective deficit of $500 billion. Also, relying on the average monthly $1,348 social security check is risky business.

With underlying conditions for pensions only set to deteriorate, now could be a good time to cut your losses and take your retirement plans into your own hands. So, how do you do it?

Although future returns across all asset-classes are expected to be lower than what we experienced in the last three decades, for astute investors, there are still opportunities to earn decent returns. A 2016 McKinsey study estimated that returns in US equities over the next two decades will range from 4%–6.5%.

All the cash currently sitting on the sidelines will have to be deployed somewhere over the next few years, and given the favorable macroeconomic conditions, US equities could be the destination. So, what trends should we pay attention to, to give our retirement funds the best possible chance?

Given how politicized the economy is, analyzing sectors which could benefit from President-elect Trump’s policies may prove useful. Also, since interest rates cannot be raised back to “normal” levels—past could be prologue, with low interest rate friendly sectors continuing to do well.

Getting to the heart of this issue: whether you decide to follow macro-trends or invest in US equities is beside the point. Given the dire state of both public and private pensions, now could be the time for you to take control of your retirement plans.

Well, that’s all for this week from The New Abnormal. I hope you are all having an excellent week and are enjoying the run-up to Christmas. Until next time, ciao.

Stephen McBride
Chief Analyst, RiskHedge

How to Avoid Populism’s Hidden Risks and Profit from Its Contrarian Opportunities

How to Avoid Populism’s Hidden Risks and Profit from Its Contrarian Opportunities

Britain voted to “Brexit,” Donald Trump won the White House, and Italy shot down their pro-EU government, voting “no” to constitutional reform—2016 witnessed a populist revolt.

The upsurge in support for anti-establishment populists from all ends of the political spectrum has come at the expense of the political center, who have been in power across most of the West since the end of WWII.

So, what conditions have catalyzed this rapid surge in support for populism?

A Zero-Sum Game

Nine years from the 2008 financial crisis, the populi from the American Republic to Le Republic no longer feel the political status quo is serving their best interests.

A consequence of the generous immigration policies enacted across the West over the past half-century is that in certain areas of developed nations, natives are becoming a minority. The changing demographics are now creating animosity between natives and non-natives.

The backlash can be witnessed by how much emphasis was placed on immigration during June’s Brexit vote. It was also a central component of Donald Trump’s winning platform, with repeated chants of ‘’Build the Wall’’ showing his message resonated with large swaths of Americans.

However, changing demographics have been ongoing for decades, so why are we only now witnessing a backlash?

Cultural shifts have been brought to the forefront by the lingering post-financial-crisis economic woes, with a scarcity in employment creating a "zero-sum game" mentality. Populists have pounced on the anger directed toward anemic economic growth and real wages, using them to gain political victories.

Along with changing domestic landscapes, globalization has also contributed toward populist support.

As developed nations have signed up to free-trade agreements, many blue-collar manufacturing jobs have been offshored by corporations looking to cut costs. This has led to the loss of millions of such jobs in the last half-century, with the trend now being used by populists as proof globalization has failed developed nations.

With real momentum behind this populist uprising, what consequences could their policies have?

Unintended Economics

Populists have highlighted how globalization and free trade have decimated native industries in developed nations. There is no debating these trends have moved millions of jobs from West to East. However, the same trends have allowed consumers to purchase goods at lower prices and businesses to lower costs—a positive for economic activity.

Globalization has also freed up citizens in developed nations to find more productive employment, which is one of the main ways a country can increase its GDP.

Given how interconnected the world is today, tearing up trade deals and enacting protectionist legislation would severely disrupt global economic activity. Even in the 1930s, when it was much easier for countries to go it alone, protectionism was an economic disaster.

Corporations that have outsourced operations would be forced to either repatriate and raise prices, or face disruptions to their supply chains—a messy situation indeed. Also, I doubt the average American consumer, whom 69% of whom have less than $1,000 in savings, could afford a hike in prices.

Protectionist policies would also hit developing economies hard. China and other developing nations have benefitted greatly from globalization, gaining millions of jobs as a result. If corporations were to repatriate production, it would have a severe economic impact in these nations.

These policies also have the potential to cause a sovereign debt crisis. Given how much money has found its way into developing market debt in recent years, and how intertwined markets today are, it’s a concern for investors.

Populists have also been in favor of increasing fiscal spending. Whilst fiscal stimulus would boost economic activity in the short term, the debt must be paid back sooner or later. With debt/GDP ratios already elevated—with the average ratio over 90% in Europe—governments don’t have much capacity to increase limits.

Protectionist policies in Europe would also surely signal the end of the EU, since the "free movement of goods" is a founding principle of the common market. As you can imagine, the dissolution of the EU—and all that goes with it—would create a whole entanglement of problems.

Having explored the potential implications of populist policies, there is one hidden theme among the rhetoric that I do not see mentioned often.

A Wolf in Sheep’s Clothing

Although the populist movement is viewed as anti-establishment that puts forth people-first policies, they have promised more, not less government interference in many areas.

The introduction of protectionist policies and trade barriers would create a major compliance burden for businesses that have foreign operations. Even for those that are savvy enough to navigate the new hurdles, costs could be significantly raised by tariffs, thus impacting sales.

Calls for tighter controls on immigration and the need to monitor current illegals also carry a sinister side. Legislation similar to the Patriot Act, which intruded on many freedoms, could be passed in response to the current migrant crisis, or future acts of terrorism.

The “Nation First” mandate that populists carry also has consequences. Just like in George Orwell’s dystopian novel 1984, any “anti-nation” activities such as offshoring production or taking money out of the country could be strongly regulated or outlawed.

It’s also possible we could see introduction of more legislation like the Buy American Act, which although introduced to protect American jobs, actually ended up costing jobs.

Whilst the populist movement is certainly not a small-government one, there are some positives to arise from it.

Positive Pullback

Populists have shifted the emphasis from foreign to domestic policy. A secession of wars and years of foreign military intervention have cost developed nations big. This has created many unintended consequences, such as the current mess in the Middle East, in the meantime.

Instead of trying to act as policemen of the world, the populists are focused on getting domestic affairs in order. This is a major policy change from what has come in the last half-century and an extremely positive one.

Populists are also leading a wholesale rejection of political correctness, which has taken over Western media and education. I think most of us would enjoy not hearing about safe spaces and privilege anymore.

Having explored the possible implications of populism, how can we manage the risks and profit from the potential opportunities?

Ready for Takeoff

Whilst populist policies have many downsides, the evidence thus far suggests that markets have been positive about the change in policy. As we previously mentioned, there is now over $50 trillion in cash sitting on the sidelines, and we think it won’t take much for the market to “take off.”

Although there have been numerous apocalyptic predictions following populist victories this year, looking back over 2016, investors who didn’t participate lost out.

After the recent election, many perceive the US as being in a more precarious position than Europe. However, Europe faces many serious problems—with major elections next year, failing banks, and a lingering migrant crisis, to name but a few.

Given this set of circumstances, and with an uptick in growth and inflation expected stateside, a large portion of that $50 trillion could flow into US markets. Even as I write in early December, the Trump rally continues. If investors are careful with their stock selection, focusing on quality, undervalued companies in sectors that look set to benefit from Trump policies, 2017 could be an excellent year.

Whilst we believe US markets look set to take off in 2017, given the legitimate concerns over the future of Europe—and the potential for financial repression coming from populist policies—it is prudent to proceed with some caution.

Positive post-election sentiment has caused hard assets, such as gold, to fall. However, the structural problems that exist in the economy are still present. Given the sharp pullback, now could be an e