Exclusive: Tesla to close a dozen solar facilities in nine states – documents

LOS ANGELES/SAN FRANCISCO (Reuters) – Electric car maker Tesla Inc’s move last week to cut 9 percent of its workforce will sharply downsize the residential solar business it bought two years ago in a controversial $2.6 billion deal, according to three internal company documents and seven current and former Tesla solar employees.

FILE PHOTO: Elon Musk, Chairman of SolarCity and CEO of Tesla Motors, speaks at SolarCity’s Inside Energy Summit in Manhattan, New York October 2, 2015. REUTERS/Rashid Umar Abbasi/File Photo

The latest cuts to the division that was once SolarCity – a sales and installation company founded by two cousins of Tesla CEO Elon Musk – include closing about a dozen installation facilities, according to internal company documents, and ending a retail partnership with Home Depot Inc that the current and former employees said generated about half of its sales.

About 60 installation facilities remain open, according to an internal company list reviewed by Reuters. An internal company email named 14 facilities slated for closure, but the other list included only 13 of those locations.

Tesla declined to comment on which sites it planned to shut down, how many employees would lose their jobs or what percentage of the solar workforce they represent.

The company said that cuts to its overall energy team – including batteries to store power – were in line with the broader 9 percent staff cut.

“We continue to expect that Tesla’s solar and battery business will be the same size as automotive over the long term,” the company said in a statement to Reuters.

The operational closures, which have not been previously reported, raise new questions about the viability of cash-strapped Tesla’s solar business and Musk’s rationale for a merger he once called a “no brainer” – but some investors have panned as a bailout of an affiliated firm at the expense of Tesla shareholders. Before the merger, Musk had served as chairman of SolarCity’s board of directors.

The installation offices that the internal email said were targeted for closure were located in California, Maryland, New Jersey, Texas, New York, New Hampshire, Connecticut, Arizona and Delaware.

The company also fired dozens of solar customer service staffers at call centers in Nevada and Utah, according to the former Tesla employees, some of whom were terminated in last week’s cuts. Those employees spoke on condition of anonymity because making public comments could violate the terms of their severance packages.

“It’s been a difficult few days – no one can deny this,” a Tesla manager wrote in a seperate internal email, sent to customer service employees shortly after the cuts were announced.

Tesla has been burning through cash as it tries to hit a target of producing 5,000 Model 3 electric sedans per week after production delays. The company faces investor pressure to turn a profit without having to tap Wall Street for additional capital.

FILE PHOTO: A SolarCity vehicle is seen on the road in San Diego, California, U.S. June 22, 2016. REUTERS/Mike Blake/File Photo

The total number of cuts to the solar workforce remained unclear. Some personnel at facilities closing down were being transferred to other sites, the current and former employees said. SolarCity employed about 15,000 people at the end of 2015 but has since cut thousands of workers.

Ending the Home Depot partnership, which allowed for solar sales in about 800 stores, is part of Tesla’s larger effort to absorb SolarCity into its high-end brand and sell through 90 of its 109 U.S. retail stores and its website, the company said.

“Tesla stores have some of the highest foot traffic of any retail space in the country,” Tesla said.

Analysts questioned Tesla’s plans for the solar business in light of the latest cuts to staff and retail operations.

“In effect they seem to be saying, ‘We have no strategy for selling solar,’” said Frank Gillett, an analyst at Forrester Research, adding that the SolarCity purchase “looks pretty awful right now.”


In the first quarter of this year, Tesla installed 76 megawatts of solar systems – down from SolarCity’s more than 200 MW a quarter in early 2016, when it was the leading player in the industry. In announcing quarterly results in February, Tesla said growth in solar deployments would resume later this year.

Tesla’s falling solar sales also could jeopardize the future of a joint venture with Panasonic, announced as Tesla moved to acquire SolarCity in 2016, to produce solar modules at a new factory in Buffalo, New York.

Tesla has an agreement with New York state requiring the company to spend $5 billion within 10 years. If Tesla fails to meet that obligation and others, the company may be required to pay tens of millions of dollars in penalties at various milestones, could lose its lease, or be forced to write down the assets, the company told investors in a May filing.

FILE PHOTO: Men gesture next to solar panels set up by Tesla, at the San Juan Children’s Hospital, after the island was hit by Hurricane Maria in September, in San Juan, Puerto Rico October 26, 2017. REUTERS/Alvin Baez/File Photo

In response to questions from Reuters, Tesla said it is meeting its hiring and spending commitments for the factory.

In March, a Delaware judge ruled against a Tesla motion to dismiss a lawsuit by the company’s shareholders over the SolarCity deal. The lawsuit alleged Tesla’s board of directors breached its duties to shareholders by approving the merger.

SolarCity founder Lyndon Rive, who is Musk’s first cousin and left Tesla last year, did not respond to a request for comment.


The move to end the longstanding Home Depot partnership blindsided many staffers because Tesla had announced an expansion of the arrangement as recently as February.

GTM Research analyst Austin Perea estimated the partnership has recently accounted for about half of sales, in part because of previous Tesla moves to cut back on other sales and marketing costs.

Such third-party retail partnerships are among the most expensive means of generating solar sales, according to the clean energy research firm, in part because retailers take a cut of each sale.

The cost of winning a customer through a store like Home Depot can be up to $7,000 per system, according to GTM Research, compared with a national average of $4,000 per installation.

Home Depot spokesman Stephen Holmes said the retailer’s relationship with Tesla would last through the end of the year, adding that Home Depot would continue a partnership with Tesla competitor Sunrun in an undisclosed number of stores.

Over the past year, Tesla has stepped up efforts to sell solar and batteries for energy storage in its retail stores, something Musk said last year was “a much more efficient channel for demand generation.”

At the same time, Tesla stopped door-to-door sales, once among SolarCity’s most successful means of reaching new customers, and salespeople were no longer allowed to hold local events or buy online leads, the former employees said.

Such tactics are standard practice across most of the competitive residential solar industry.

The Home Depot partnership was costly but also integral to Tesla’s solar panel sales, a former employee told Reuters.

“It’s an expensive account,” the former employee said, “but it does bring in all the revenue.”

Reporting by Nichola Groom in Los Angeles and Salvador Rodriquez and Kristina Cooke in San Francisco; Editing by Richard Valdmanis and Brian Thevenot

Visa Wants Fingerprint Sensors on Your Credit Cards. Here's Why It Won't Happen Anytime Soon

Just when Americans were finally getting used to using chips on our credit cards, Visa and Mastercard are looking to introduce another security feature: fingerprint sensors embedded in the cards themselves. 

The Wall Street Journal reports that the two giants of plastic-based purchases are in the early stages of adding biometric security measures to their cards. 

The technology works in the same fashion as fingerprint sensors on smartphones. When you first get a card, you register your fingerprint on it and then each time you make a purchase you place your finger on the sensor and the card will check to make sure the print matches the one it has stored for the card’s owner.

There are a number of issues complicating what might seem like a straightforward feature here, however.

First, there’s the notion that attaching fingerprints to transactions could actually introduce a new security vulnerability into the system, giving hackers and identity thieves a new data point to target, steal and exploit.

So far this hasn’t been much of a problem with fingerprint sensors on phones, at least not yet.

Then there’s the big question of cost. Banks would have to shoulder the cost of re-issuing all new cards with the fancy new sensors right after shelling out to send us all new chip cards.

There’s little motivation for card issuers to make that investment in security when very few customers are clamoring for fingerprint sensors. Mastercard has run a pilot of the cards in South Africa and Visa ran a U.S. fingerprint debit card pilot through Mountain America Credit Union earlier this year. According to WSJ, only 130 people signed up for the American program.

Of course, there is another solution to making transactions more secure. It’s called blockchain, but it’s a whole other can of worms that many banks consider a threat and most consumers don’t yet understand.

At the same time though, big names in finance like American Express and Santander are experimenting with their own blockchain implementations and flirting with existing cryptocurrencies and tokens such as Ripple. 

So it’s possible that our plastic purchases may be secured by blockchain before we ever get fingerprint cards, and most consumers may never even realize it.

A restaurant in China offers an all you can eat plan for $19 a month…and goes bust. Surprised?

Offering free products is a marketing tactic that has been used by businesses big and small ever since there have been businesses big and small. But these tactics certainly have their risks, as the owners of a restaurant in China recently found out.

For the equivalent of only 120 yuan ($19) per month, customers at Jiamener restaurant Chengdu, Sichuan province – a city that boasts more than 14 million residents – were able to eat as much as they wanted for as long as they wanted. The promotion was a hit. In only 10 days, more than 1,700 people signed up for the deal. Unfortunately, the restaurant’s owners got a lot more than they asked for.

Less than two weeks after starting the campaign, the restaurant was out of business and more than $78,000 in debt. The reason isn’t surprising. During that period the restaurant fed more than 500 customers a day – many who shared their “membership cards” with friends and family who then also lined up outside (and then lingered inside) from early morning until late at night. Workers at the restaurant pulled ten hour shifts and the eatery’s owners only managed a few hours of sleep. Not fun. Not profitable.

“We knew we would be losing money [by launching the discount promotion],” one of the owners was quoted as saying to the Chengdu Economic Daily and reported in the South China Morning Post. “We wanted to accumulate more loyal clients through this strategy.” The owners strategized that the additional customer volume would enable them to purchase beer and alcohol at reduced prices which would then offset the cost of the food they were essentially giving away.

All-you-can-eat restaurants are not new. Big chains and hotels in the U.S., from Golden Corral to Pizza Hut to Red Lobster to the higher end buffet spreads in Las Vegas all have similar models to what Jiamener offered. So why did this little restaurant’s all-you-can-eat promotion fail?

For starters, jumping into the “all-you-can-eat” world takes a lot of experience. Take a walk into one of those family style buffet restaurants in the U.S. and you’ll be subject to the tricks of the trade learned over many decades.

Carbs and starches, breads and other filling foods, along with less expensive salads, are presented to customers first and foremost before everything else to fill up their bellies. Food choices not only lean towards much less expensive options (pizza and pasta over steak) but – let’s face it – aren’t exactly made up of the finest quality ingredients. Drinks are aggressively peddled. All of these places are designed to fill you up with cheaper stuff and get you ordering higher margin products that are not included in the all-you-can eat deal. And most of it is self-served to cut down on employment costs. I’m betting these tactics were lost on the new owners of Jiamener.

I’m also betting those same owners didn’t really test out their financial model as much as they should have. Like any start-up, the numbers need to be conservative, tested and questioned. Were the assumptions too aggressive? Did they consider worst case scenarios (like diners giving their membership cards to their entire families?). Did they run their numbers by outside advisors like an accountant or lawyer? Were their estimates too rosy? Too optimistic? Seems so.

Finally, giving away free stuff like this is oftentimes best left to the big boys. Volume and scale is everything, particularly when you’re operating a low margin business like a restaurant. I’m not sure a single Fogo de Chão restaurant could be profitable on its own. But a chain of all-you-can-eat Brazilian meat restaurants where everything from purchases to employee contracts to kitchen equipment that can be negotiated at volume levels and a regimented order of cooking, serving, delivering and cleaning can be implemented across many locations? That’s where a restaurant can generate profits. When you’re big you can afford to give away free stuff. When you’re very small, like Jiamener, you’re taking a big risk and need to be very, very careful.

Unfortunately, Jiamener’s owners made one last, fatal flaw: they bet the farm on their idea. Now the farm, along with everything else – is gone.

I’ll give them credit for one thing though – they didn’t lay the blame on anyone else but themselves. “The uncivilized behavior of the diners was secondary,” one of the owners admitted. The main problem was our poor management.”


Twitter to Score Ultimate World Cup Win

, I’m the CEO of CultureBanx, redefining business news for minorities. Opinions expressed by Forbes Contributors are their own.
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MOSCOW, RUSSIA – JUNE 19: Moussa Wague of Senegal is challenged by Kamil Grosicki of Poland during the 2018 FIFA World Cup Russia group H match between Poland and Senegal at Spartak Stadium on June 19, 2018 in Moscow, Russia. (Photo by Catherine Ivill/Getty Images)

Sports fans often use Twitter to follow and discuss live sporting events. A lot has changed on the platform since the last World Cup. Primarily the addition of video, along with a users ability to discover content that’s relevant to their interests. Will Twitter’s bottom line be the actual World Cup winner?

The Breakdown You Need to Know: The 2014 World Cup boosted Twitter’s second-quarter revenue by $24 million, according to MKM Partners. Some analysts predict this year’s event will be worth more and can affect results for the second and third quarters. Black U.S. adults could play a big role in this since they use Twitter more than any other ethnic group at 26%, according to Pew Research.

Since the last World Cup shares of Twitter are up 24% and currently trading near three-year highs. At this point the company has a more refined platform and strategy, which means the event could deliver an even larger boost this time around.

Twitter has exhibited its ability to shape global events and its head of content Kay Madati is helping make video profitable for the company. Madati recently announced 30 new video content partnerships. The 2018 World Cup is likely to spur even more user engagement which should translate into more ad revenue. Video ad spending at Twitter is set to total $18 billion in 2018, according to eMarketer.

CultureBanx research took a look back at past major live sporting events and their impact on Twitter’s engagement. There were 672 million tweets during the 2014 FIFA World Cup. Also, there were 45 million tweets during Super Bowl 2018 including 4.8 billion impressions. Lastly, the 2017-18 College Football season garnered 33 million tweets along with 4.9 billion impressions.

Through the social media giant’s deal with Fox Sports, the network will provide next to real-time highlights of every goal scored throughout the competition. Also, Fox Sports will produce both pre-game shows along with clips including player interviews. “Video is a major area of strength for Twitter, already driving more than half of the company’s total ad revenue,” wrote JP Morgan analyst Doug Anmuth.

The company now has 69 million monthly users in the U.S. and 267 million abroad. Of course the international nature of the event should help aid further penetration in some overseas markets. International now represents 48% of Twitter’s ad sales versus just 33% four years ago. It’s important to be aware that advertisers typically spend more to reach users in the U.S., compared with international markets particularly in developing areas.

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Fortnite's Stink Bombs Do Some Pretty Serious Damage

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, I write about video games and technology. Opinions expressed by Forbes Contributors are their own.

Credit: Epic Games

Fortnite: Battle Royale’s new stink bombs.

Fortnite got a new weapon today, and while that’s a sentence you can write just about every other week, this week’s feels like it might actually have the potential to change the way the game is played. The stink bomb went live today, and it’s basically a cute name for mustard gas: a brutal, yellowish cloud that forms sulfuric acid in your lungs and melts you from the inside. Despite the aesthetic similarities, Epic want sto be sure that you know the stink bomb is not that. Regardless, it’s just as brutal. Damage was a major question when the stink bomb first released, and I can assure you: the thing hurts.

Like most players, my first experience with the legendary-tier stink bomb was on the receiving end. I was playing squads without teammates because I was getting some challenges done and I find they’re easier in squads. So I was already at a steep disadvantage when I came across three opponents by the indoor soccer stadium. Regardless, I built my little 1X1 fort and took aim, like you do. I was immediately pelted by at least two stink bombs, rendering my fort completely unusable. I did the only thing that I could do and hopped out, where I was immediately shotgunned by the players that had been using the stink as a cover for an approach.

The stink here does 5 damage every half-second for 9 seconds for a total of 9 seconds, which is just under what it takes to kill an opponent at full health. Despite the two grenades, the damage I received did not appear to stack, meaning I still only received the five damage per half second. Regardless, that was enough to make my life very unpleasant. It means that if I were to have stayed put it would only have taken 10 health damage to put me down for good.

I’d expect this to change the game in interesting ways. Right now, explosives and wild firing are the only real area control methods, and neither does so as effectively as the stink bomb. It could really change the way the early moments of an encounter go if one player is able to scare the other out of their fort without losing access to theirs. I’m interested to see what this looks like at the higher levels.

Even After Multiple Cyberattacks, Many Businesses Fail to Bolster Security. Here's What You Need to Do

Small businesses suffered a barrage of computer invasions last year but most took no action to shore up their security afterward, according to a survey by insurer Hiscox.

It found that 47 percent of small businesses reported that they had one attack in 2017, and 44 percent said they had two to four attacks.

The invasions included ransomware, which makes a computer’s files unusable unless the device’s user or owner pays a ransom, and phishing, in which emails that look legitimate are used to steals information. The invasions also include what are called drive-by attacks, which infect websites and in turn the computers that visit them.

Despite the prevalence of the data invasions, only about half of small businesses said they had a clear cybersecurity strategy, the report found. And nearly two-thirds said they didn’t bolster their security after an attack.

Hiscox estimates that seven out of 10 businesses aren’t prepared to handle cyber attacks, although they can cost a company thousands of dollars or more and ransomware can shut down operations. Cybersecurity tends to get pushed to the back burner while owners are busy developing products and services and working with clients and employees. Or owners may see it as an expense they can’t afford right now.

Some basic cybersecurity advice:

–Back up all of a company’s data securely. This means paying for a service that keeps a duplicate of all files on an ongoing basis. The best backups keep creating versions of a company’s files that can be accessed in the event of ransomware — eliminating the need to pay data thieves. Some backups cost just a few hundred dollars a year.

–Install software that searches for and immobilizes viruses, malware and other harmful programs. Also install firewalls and data encryption programs.

–Make sure you have all the updates and patches for your operating systems for all your devices. They often include security programs.

–If you have a website, learn how to protect it from hackers, using software including firewalls. But you might be better off hiring a service that will monitor your site with sophisticated tools that detect and disable intruders.

–Tell your staffers, and keep reminding them, about the dangers of clicking on links or attachments in emails unless they’re completely sure the emails are from a legitimate source. Educate your employees about phishing attacks and the tricks they use. Phishers are becoming increasingly sophisticated and are creating emails that look like they really could have come from your bank or a company you do business with.

–Hire an information technology consultant who will regularly look at your systems to be sure you have the tools you need to keep your data safe.

–The Associated Press

The Surprising Economic Benefits of Clean Energy

It seems to be a common misconception that environmentalism and economic growth are opposed, but nothing could be further from the truth. The economic power of the green movement is most visibly on display in the clean energy industry, which is rapidly growing and innovating daily.

Clean energy impacts residential, commercial, and industrial properties, so how it is supported and implemented is key to how it impacts both the planet and the economy. Here’s a look at programs that support the development and expansion of clean energy, as well as how clean energy is being integrated with our infrastructure today.

How clean energy impacts businesses

Clean energy might not seem, on its surface, like a business issue for anyone outside of the renewables industry. However, on the contrary, it is a powerful cost-cutting measure that carries with it a huge branding opportunity. Not only can businesses save money by harnessing the power of sun, air, or sea, but they can also demonstrate to a consumer base eager for corporate social responsibility that they care about their environmental impact.

Those benefits are driving adoption by more companies. In 2017, companies acquired more than 4 gigawatts of clean energy, the most of any year on record. And already in 2018 companies have acquired nearly three quarters of last year’s total, putting them on pace to easily surpass 2017’s record-breaking acquisitions of clean energy.

Adoption rates also mean that the branding advantage presented by the opportunity to shift to clean energy will soon turn into an imperative. Changing now means companies are responsible kids on the block, but waiting until later means they run the risk of looking like a lackadaisical polluter. As clean energy becomes more ubiquitous, it will be expected, rather than applauded. Large adopters are clearing the way for smaller companies, and clean energy is moving toward something that feels more like mass adoption.

Regulatory support for clean energy

In 2015, the White House established new Property Assessed Clean Energy (PACE) guidelines through the Federal Housing Administration that should help scale up adoption of clean energy. PACE enables low-cost, long-term financing for a variety of energy efficiency, renewable energy, water conservation, storm protection, and seismic improvements. PACE financing is repaid as a special assessment or tax on the property’s regular tax bill and is processed the same way as other local public benefit assessments like sidewalks and sewers.

Depending on where you live, PACE financing can be used for improvements on commercial, residential, nonprofit, light industrial and agricultural properties. PACE is designed to lower utility bills for homeowners, create jobs and help local governments achieve important environmental goals (although it hasn’t been without its opponents).

Real world implementation of clean energy

Technological development and theory are great things, but they are nothing without real action. How we implement clean energy and the market conditions surrounding it are the most important aspects of transforming the way we obtain our energy.

A number of companies use earth-friendly practices and products to provide the homeowner with energy saving solutions, offering qualifiable PACE improvements and upgrades that can be made to a home or business. Many work with financing companies like Renew Financial, a clean-energy finance company led by CEO Cisco DeVries, the innovator of the PACE finance model, to provide solutions that aim to keep the immediate environment clean and reduce energy waste and costs.

Environmental resiliency is certainly an issue across the country. In Florida in particular, homeowners are concerned due to the risks of flooding, hurricanes, and extreme heat.

One company, Evergreen Homes, says it’s seeing an increase in requests for critical property upgrades such as roofing, wind-resistant windows and other energy-efficiency improvements. CEO Ido Stern says it provides customers with a number of options “to make much-needed weatherization and energy improvements that make their properties hurricane safe, and comparable with new construction, while at the same time saving them money and increasing their property values.”

Every dollar saved by the implementation of green solutions and clean, renewable energies is a dollar that can be used in the local economy, boosting growth and improving the business environment. In this way, economic growth and environmental progress go hand in hand. So, the next time someone says you have to degrade the environment to make money, remember that a large sector of the American economy is driven by finding business solutions to critical environmental problems.

SA Interview: Focusing On The Numbers, Not Just The Story, With Peter Kaye

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Peter Kaye is an analyst at an investment advisor with >$1B AUM. He has completed all three levels of the CFA program. He primarily focuses on value and GARP strategies. We emailed with Peter about how to take advantage of a deal break and mispricing when investors write off an entire country as well as how (and why) investors can “shadow” a hedge fund manager’s portfolio.

Seeking Alpha: Can you discuss how (and why) investors can incorporate actual numbers into their investing rather than solely qualitative arguments? Can you give an example?

Peter Kaye: Good question. I find a lot of people get very attached to a story rather than actually looking at the numbers. I like using Microsoft (NASDAQ:MSFT) or Cisco (NASDAQ:CSCO) during the tech bubble as examples. Microsoft, for instance, is one of the best businesses ever: dominant position in software, very high switching costs, very high margins and tons of free cash flow the company can use to either buy back shares or reinvest in the business. It made a great story as well: software was (and is) eating the world, and there was the potential for multiple decades of growth ahead of the company.

That’s all well and good, but look what happened if you’d bought shares in 1999: you wouldn’t have broken even for 16 years (this is why numbers matter)! The simple fact at the time is that the shares were pricing in a perfect future. One can actually perform a fun exercise with some of the companies in the tech bubble where you put yourself in 1999, and run a DCF on the company you’re looking at using the company’s actual free cash flow that they generated over the next 18 years. You can see how far the valuation of many companies strayed from their intrinsic value during that time, and it really makes you think about the high flyers today.

Investing is all about probabilities because the future is inherently uncertain. The reason that value investing works, over time, is that low expectations are just easier to beat. Cheap companies either have management work hard to stop being cheap, or another company comes in and does an acquisition, or the business improves on its own. There are multiple ways to win there, whereas for a company whose intrinsic value is completely reliant on future cash flows that need to grow a lot, there are a lot of ways for that company to disappoint.

As to how investors can incorporate numbers? Always ask for proof of a qualitative claim, and always remember that the price you pay (relative to value) is the greatest determinant of long-run returns. In order to figure out the value, you need to run some numbers.

SA: The phrase “this is priced into the stock” gets thrown around a lot – how do you determine what is (or is not) priced in? Are there specific factors or examples?

PK: My own personal way to check this is to run a simple DCF of the company. The idea is simply that, similar to a bond or any other financial asset, the value of a company is the present value of the free cash flow it generates over time. This is true simply because of math: if you buy a company for $1 and it generates $2 of FCF for a year, your return will mathematically be 100%. You’ll probably never find 100% free cash flow yields anywhere, but the principal is the same (higher free cash flow, now or in the future, means higher returns). This is why looking at free cash flow (and numbers!) matters.

Let’s say a company has sales growth of 5% and generates 10% free cash flow margins. Let’s assume that continues forever, and run a DCF using those assumptions. If that results in a stock price of $100 and the current price is $50, then we can say the market is pricing in significantly worse results, and we can then delve into why that is. The model may well be wrong, and the market might be right, but now at least you have some questions to ask and research to do.

The process works the other way as well: if the stock price is $100 and the DCF gets us to $50, then the market is pricing in either faster sales growth or much better margins, and we can then delve into why that might be and whether those assumptions are realistic.

I’ll walk through a simple example.

I know that analog semiconductor businesses should grow at 1.5x to 2x GDP due to increased technological content in pretty much everything around the world. GDP growth around the world is expected to be between 2 to 3% over the long run, so we know that at the low end, analog businesses should grow sales at 1.5 x 2% = 3%.

I know that analog semiconductor businesses have high barriers to entry and it’s a pretty consolidated industry, so margins tend to be quite high, with Texas Instruments having the highest margins due to scale (semiconductors are basically a manufacturing business so economies of scale are an important part of the business). A company like NXPI has averaged roughly 20% free cash flow margins, and that’s a little lower than some other larger names, and higher than smaller names, so that fits with the scale dynamics I discussed earlier.

So we can put the two together: grow sales at 3%, and slap a 20% free cash flow margin on it, and whatever value that gives us is sort of a floor valuation for a long-term investor. In NXPI’s case, this results in a valuation of about $98 per share using a 9% discount rate.

Now what can go right here? GDP growth could be faster. Analog businesses could grow at 2x GDP instead of 1.5x. Margins could increase as the business grows. So there are multiple sources of upside to this value that I can quantify if I choose to, but I can simply say they’re “free” upside if the stock price is trading below my conservative estimate of fair value.

After going through the above analysis, I can say that what is “priced in” to NXPI is a darker future than what I believe will happen over the long term (say 5 to 10 years).

SA: In your bullish thesis on Workiva (NYSE:WK) you said “A SaaS business is effectively a business where each customer is like a bond” – can you unpack that thought process? How can investors in SaaS companies determine if their “bond” will default or is AAA?

PK: As I said above, the value of any financial asset is the present value of the free cash flow it generates. The same is true of a customer! For most businesses, there is only one cash flow: a single sale. For a SaaS business, with recurring revenues, there is a cash flow stream, and we can value that stream. Each customer brings in revenue, and there are COGS to expense, and the net of the two is the cash flow per customer. If we see that the company has customer retention of say 80%, then we know that the average customer life is 1/(1-0.8) or 5 years.

We can then compare that to the cost to acquire that customer to see whether the business makes sense. In Workiva’s example, the company earns a lot from customers, and it doesn’t cost them too much relative to what they earn, to go acquire them. Thus, it makes sense for Workiva to spend as much as possible acquiring all these customer “bonds” and sitting on them. This dynamic is why it can make a lot of sense for growing SaaS businesses to actually post operating losses as they grow: they’re investing in getting highly profitable customers!

One can look at the customer retention rate to see the likelihood of “default”, but it’s a difficult thing to really measure. Lots of factors weigh on it like switching costs, customer service, competitors’ products etc. One has to just make a best guess as to how happy the customers are and how long they’ll stay with the company. If the company’s customer retention rate has been high historically (and there aren’t a bunch of customers on free or discounted software…) then that should give some confidence that customer life will be decently long.

SA: Can you discuss how an actual or expected deal break can be a potential long idea?

PK: Deals are usually bought by M&A arbitrage funds who attempt to profit from the spread that deals trade at. The problem is that when a deal fails, these funds have to sell the stock. For widely held deals, or illiquid stocks, this can create a huge wave of technically motivated selling that has nothing to do with the fundamentals of the company.

I start licking my lips when I see things like this happen: the best thing to be in the whole world to me is a buyer from a forced seller. When people have to sell, they make dumb emotional decisions, and that’s where an investor with a little patience can profit!

The other advantage of a broken deal is that you can see where, roughly, the private market values the company. If a strategic acquirer was perfectly willing to pay $100, but the deal failed because of regulatory reasons or financial reasons, then you can make a decent guess that the business is probably worth around $100 to a strategic acquirer.

That doesn’t, of course, mean you should rush out and buy the company. The deal might fail for a lot of different reasons, and the case might be that it’s just a bad company with a declining business. You always have to do your homework, and establish what you think the intrinsic value of the business is before you buy it.

I would say that companies like Monsanto (NYSE:MON) or NXP Semiconductors, if their deals fail, would be great examples of businesses that are fundamentally sound, have interesting growth drivers, and would likely trade off severely due to forced selling because there are a lot of arb funds in those names. I do hold NXP, and I bought Monsanto when it traded way off earlier this year to ~$115 which is what I estimate fair value is for the company as a standalone.

I would say as a closing comment that this same “forced seller” dynamic is why spinoffs tend to be fertile grounds to look: large investors might receive some shares in a small company that is too much of a hassle to worry about, so they sell immediately regardless of whether that is a financially prudent decision.

SA: One of your best calls was on Polaris Infrastructure (OTCPK:RAMPF) – can you discuss how opportunities are created when investors write off an entire country as being uninvestable or too complicated to analyze?

PK: Polaris was a company that went bankrupt, and actually had a lot of forced sellers in it. The bondholders got converted into equity, and then had to sell as holding equity was outside the mandate of their funds. This caused the price to decline from about $10 CAD after the restructuring to about $6.50 or so when I started covering it. It was clear that the asset was very good and that the problem had simply been a financing one.

One seemingly big risk of course was that the company’s only producing asset was located in Nicaragua, which is a bit of a scary place for western investors.

My dad was a corporate banker for 27 years without a single loan loss, which is pretty impressive in my view. He lent to some of British Columbia’s biggest corporations, including a number of our large mining companies, and he saw first hand that country risk is real. Investors like to discount politics, but it can play a huge role in everything from changing tax rates to a government effectively nationalizing a project.

Because of this, it’s pretty critical to spend some time evaluating the politics of a country and its history and culture to try and figure out what’s really going on. The nice thing about humans is that no matter where they’re from, they respond to incentives, so it’s really figuring out what their incentives are.

In the case of Nicaragua, the thing that stood out to me was that it was 100% in their national security interest to stop relying on oil, and start generating domestic renewable energy. They don’t have the engineering or the capital to do this, and so it seemed unlikely to me that at this relatively early stage in their development, Nicaragua would choose to shoot itself in the foot and start nationalizing projects (which would then scare off foreign capital).

That being said, Polaris will always (at least until it gets an asset somewhere else) trade at a discount to peers with safer assets. Investors should expect higher returns from a company with assets in Nicaragua vs. a company with assets in the US or Canada. For that reason, Polaris is not my largest position: there is a chance, however small, that they could see 100% of the value of the company wiped out if Nicaragua chooses to nationalize their asset.

Indeed, right now we are seeing the cost of being in Nicaragua for Polaris as the shares have sold off due to extreme levels of political unrest in the country. For the time being, I don’t see how this unrest will impact the company: people still need electricity, and their customer is a large state utility. Where this could get ugly is if the current dictator’s government falls, and the new government embarks on a radical bout of political changes.

I think this selloff in Polaris shares is overdone, but I can certainly empathize with it. I have no concrete answer as to what the country will look like in a year, and that certainly highlights the risks in investing in emerging markets. That being said, long term I expect the company to do just fine.

More broadly, I think that unless investors have some special on the ground knowledge, they should take a dim view of many geographies. 90% of the time, investments in places like Russia or Egypt or Iraq can work out, but 10% of the time, you lose everything or close to it. That risk of permanent capital loss means that a company in a risky geography should probably be weighted in such a way as to allow for the investor to stomach losing 100% of what they put in.

So in summary, I would say that countries don’t necessarily present opportunities; individual companies present the opportunity. It’s more that investors need to pay very close attention to the risks involved, and I would say that as a political science major, most people discount politics a little too much.

SA: How, when, and why can investors “shadow” a hedge fund manager’s portfolio rather than invest directly?

PK: Great question. I think other smart investors are the best source of investment ideas, period. I follow a lot of managers from Bill Ackman (despite his recent terrible performance) to Allan Mecham at Arlington Value. These guys (and I follow maybe 30 to 40 different managers) are my filter. I don’t shadow a single manager’s portfolio, I take what I think are the best ideas from all of them!

If you think about it mathematically, here’s why it saves a ton of time. Each manager has a number of analysts, and each manager might have a universe of 500 stocks they know well. There will be some overlap of course, but even with 50% overlap, that still means a universe of 250 x 40 = 10,000 stocks around the world that they’re looking at. They then do the work and pick the best ideas and stick those in their portfolios.

I then look at those portfolios, and let’s say there’re 30 stocks in each, that means 30 x 40 = 1200 stocks, but often there’s some overlap, so say it’s 600 stocks. 600 stocks are enough to keep me busy for a while, but these managers have gone the extra step and done the screening of the 10,000 names for me, which saves a ton of time. They’re all smart people, so I trust that the stocks in their portfolios are on average pretty good.

I then look at their position sizing and when they added them, and I try and focus on the largest one, or the ones they’re adding to, reason being that I want to look more closely at their higher conviction names or the ones they think are undervalued now. So let’s say that gets you to 100 names, that’s still a lot of due diligence to do to narrow that down to 20 or 30 to stick in your own portfolio.

The reason you don’t shadow blindly is that often managers are wrong. I knew that Bill Ackman going into Valeant was wrong, and I thought he was way too early in Chipotle (NYSE:CMG). Einhorn’s investment in AerCap (NYSE:AER) is not one I would have made, just because I don’t really like that sort of financial/capital intensive business generally. For each name I put in my own portfolio, I conduct my normal due diligence and do my own valuation so that I am fully comfortable with what I own and I can trade it myself rather than relying on other people to think for me.

So as you can see, I would only use other managers as a filter; you still have to do all the work yourself before you actually invest.

I would also point out that there is no shame to looking to others to find ideas. As a great example of this, in The Big Short, many of the investors who foresaw the crisis heard about the short housing trade from Greg Lippman at Deutsche Bank, and then did their own due diligence and entered the trade.

Many others who were not profiled in the book but made money on the theme, likely heard about it from friends or other fund managers in the industry. This is a great case of how one of the best trades of all time didn’t have to be your idea, you just had to be listening to other smart people.

Some of my top ideas right now including NXPI (Elliot Management), TripAdvisor (NASDAQ:TRIP) (GreenWood, Greenhaven Road, PenderFund Capital), Workiva (Pat Dorsey), Polaris (PenderFund Capital), EnviroStar (NYSEMKT:EVI) (Greenhaven Road), Rolls Royce (OTCPK:RYCEF) (ValueAct) and many of my other best ideas in the past were sourced from people I admired in the industry.

SA: What’s one of your highest conviction ideas right now?

PK: Aside from NXPI or Workiva, I have two high conviction ideas.


I have a fairly sizable investment in TripAdvisor, which jumped 20% after earnings (a great example of what happens when expectations are non-existent!). The basic thesis here is pretty simple actually. The company has two businesses, the core hotel review business and a non-hotel attractions business, and the market isn’t really getting what’s actually going on with them.

The hotel business has been declining for a few years, in no small part because people are switching to mobile and mobile monetized at like 20% the rate of desktop. This business is coming close to an inflection point, however, because 1) at some point mathematically mobile dollars start growing faster than desktop dollars shrink and; 2) monetization of mobile is now close to 50% of desktop. The two forces mean that soon, I expect, the hotel business will start posting decent growth numbers again.

There is another advantage to the hotel business’ move to mobile which is that it greatly lessens the power of Google over TRIP. TRIP’s users are very loyal and so if TRIP can keep them on the app it means lower marketing spending and better margins and also a greatly reduced competitive threat.

The non hotel business, which allows you to look up and book attractions and restaurants, is growing gangbusters at 30 to 40% a year, and is rapidly becoming a much larger part of TRIP’s business. We can look at the price that OpenTable was sold to Priceline (now Booking.com) for, and see that this business is quite valuable.

Finally, TRIP has hundreds of visitors and collects huge amounts of data which is valuable to somebody. The company is largely controlled by Liberty Media (LMCB). This creates a very nice floor on the stock’s valuation as if TRIP gets too cheap, it’s likely to be sold at a premium.

So the result is a business whose financials obscure what are actually decent trends within its business (and recall that TRIP is a very high margin business, so additional revenue drops almost entirely to the bottom line). Either the company is sold, or it resumes growth and we should see both improved financials and a good degree of multiple expansion in the stock.

Some of that multiple expansion has already taken place. TrirAdvisor was very heavily shorted and what we’ve seen in recent weeks has likely been driven, at least in part, by short sellers covering. I think over the long term we still have a lot of growth for TripAdvisor as their market is growing strongly and their margins should greatly expand as the business scales. While shares aren’t as cheap as they were at $30, I think for someone with a long term time horizon they still represent attractive value.

I’d note that a lot of people think TRIP and Trivago (NASDAQ:TRVG) are the same thing, and whenever Trivago misses earnings people sell off TRIP. Trivago is a mess (I’ve been short the stock as a hedge for TRIP actually) where they are simply buying customers using expensive TV ads. They don’t have the same market power, user base, customer loyalty, shareholder base, or even the economics of TRIP. Google and Booking.com are likely to crush Trivago and I think it’s a terminal short.


My second high conviction idea is Enbridge (NYSE:ENB), which is the largest energy infrastructure company in North America. The company pays a 6.5%+ dividend (so you get paid for patience) and management has targeted 10% growth in the dividend for the next few years. The company has come under fire recently as interest rates have risen and they’ve faced some political headwinds (a FERC ruling and some opposition to their large Line 3 project), and shares have cratered. There’re also concerns about leverage.

What the market is missing I think is that ENB placed a lot of assets into service last year that haven’t really showed up in the financials yet, and they’re going to do the same this year (of their $22 billion backlog, more than half will be placed in service between last year and this year). The street is also bad at modelling the company as they acquired Spectra Energy and many banks didn’t cover both. What they miss is that Spectra’s Q1 is very strong and last year, ENB hadn’t closed the acquisition until the end of Q1, so you don’t see that strength in Enbridge’s financials.

I think that the market is going to see that the fundamentals of the company are very good, and that they’re going to be able to pay down debt quicker than the market believes (though still more slowly than what ENB was promising after Spectra closed). They are also going to sell some assets to fund their growth, which isn’t a net positive really but it does show that the company has a lot of levers to pull in order to deliver on that growth.

ENB also has a very complex corporate structure, and the plus of the recent FERC ruling is that ENB is more likely to simplify that structure, which should make investors more comfortable with the company.

I think today’s current valuation builds in room for rates to go up to about 4% on the US 10 year, so there’s some margin of safety in the valuation. I think that as debt gets paid down over the next 5 years, you’ll see some multiple expansion as the company de-risks the balance sheet. This sort of setup is a little private equity style: buy something cheap, pay down the debt, and earn good levered IRRs. Because ENB’s assets are regulated, and now with oil at $70, I think there’s very little operational or asset risk here, it’s almost entirely a debt paydown story.

I would caution, though, that pipelines rely on the capital markets to fund growth, and that can create some problems: lower growth means lower valuations, which means growth gets harder to execute because you have fewer financial options. Growth being harder means the potential for further valuation declines, and the cycle continues. Thus, while I have high conviction on ENB, I think investors should size it appropriately in case things continue to go downhill. Every time I’ve had a blow-up, it’s been due to leverage, so I’m very careful to size these sorts of positions carefully.


Thanks to Peter for the interview. If you’d like to check out or follow his work, you can find the profile here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Check with individual articles or authors mentioned for their positions. Peter Kaye is long NXPI, WK, RAMPF, TRIP, MON, ENB, EVI, RYCEF and short TRVG.

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Gold Bullish On Fed Hike 3

Gold weathered the Federal Reserve’s 7th rate hike of this cycle this week. Gold-futures speculators and to a lesser extent gold investors have long feared Fed rate hikes, selling ahead of them. Higher rates are viewed as the nemesis of zero-yielding gold. But contrary to this popular belief, past Fed rate hikes have proven very bullish for gold. This latest hike once again leaves gold set up for a major rally in coming months.

The Fed’s Federal Open Market Committee meets 8 times per year to make monetary-policy decisions. These can really impact the financial markets, and thus are closely watched by gold-futures speculators. These elite traders wield wildly-outsized influence on short-term gold price action due to the truly extreme leverage inherent in gold-futures trading. What they do before and after FOMC decisions really impacts gold.

This week’s latest Fed rate hike was universally expected. Trading in the federal-funds-futures market effectively implies rate-hike odds. Way back in mid-April they shot up to 100% for this week’s meeting, then stayed there for 5 weeks. In the last several weeks they averaged 91%. So everyone knew another Fed rate hike was coming. That’s typical, as the FOMC doesn’t want to surprise the markets and ignite selloffs.

The big unknown going into the every-other FOMC meetings followed by press conferences from the Fed chairman is the future rate-hike outlooks. Top FOMC officials’ individual federal-funds-rate outlooks are summarized in a chart traders call the “dot plot”. That was hawkish this week, with 2018’s total expected rate hikes climbing from 3 to 4. More near-term rate hikes projected have really hammered gold in the past.

But on this week’s Fed Day gold didn’t plunge despite these hawkish dots and 7th rate hike of this cycle. Gold was around $1297 as the FOMC statement and dot plot were released that afternoon, and only fell modestly to $1293 after that. Then it started rallying back a half-hour later during Jerome Powell’s post-decision press conference. Gold closed that day at $1299, actually rallying 0.3% through a hawkish FOMC.

Gold-futures speculators usually sell leading into the every-other “live” FOMC meetings with dot plots and press conferences. Incidentally the first thing the new chairman Powell discussed this week is he is going to begin holding press conferences after all 8 FOMC meetings each year starting in January! So the gold-futures-driven gold volatility surrounding the Fed could very well become more frequent in 2019 and beyond.

All that gold-futures selling before FOMC meetings leaves speculators’ positions too bearish. And the Fed tries hard to never majorly surprise on the hawkish side anyway. So after FOMC decisions the very gold-futures speculators who sold aggressively leading into them often start buying back in. This trading dynamic forces gold lower leading into Fed Days, and then drives big rebound rallies coming out of them.

This week a single gold-futures contract controlling 100 troy ounces of gold worth about $130,000 had a maintenance-margin requirement of just $3100! So futures traders can run up to 41.9x leverage to gold, which is mind-boggling. The legal limit in the stock markets has been 2x for decades. At 40x each dollar deployed in gold futures has 40x the impact on the gold price as another dollar invested in gold outright.

So even if you don’t trade gold futures like the vast majority of gold investors, they are important to watch since they dominate short-term gold action. This first chart looks at gold and speculators’ total long and short positions in gold futures over this Fed-rate-hike cycle. Each of these 7 rate hikes is highlighted, showing how gold sells off into them before rallying out of them mostly driven by speculators’ gold-futures trading.

Back in late 2015, the FOMC hadn’t hiked its FFR for nearly a decade. At its late-October 2015 meeting, the FOMC statement warned the Fed was “determining whether it will be appropriate to raise the target range at its next meeting”. That hawkish signal shocked gold-futures traders and they started dumping long contracts while rapidly ramping short sales. Gold was crushed on that, falling 9.1% over the next 7 weeks.

On the eve of that fateful mid-December FOMC decision to start hiking rates again for the first time in 9.5 years, everyone was convinced that was bad news for gold. Gold yields nothing, so surely higher bond yields would divert investment away from gold. It sounds logical, but history has proven the opposite. So just days before that initial Fed rate hike, I wrote a bullish essay showing how gold thrived in past rate-hike cycles.

Gold surged 1.1% the day of that first hike, but plunged 2.1% to a 6.1-year secular low of $1051 the very next day. Foreign traders had fled overnight following that rate hike. But gold started powering higher right after that. By mid-February 2016 gold had roared back up 18.5% on all that post-FOMC-rebound spec long buying and short covering! Gold formally entered a new bull market at +20% a few weeks later.

The Fed’s second rate hike of this cycle came exactly a year after the first in mid-December 2016. Again the Fed telegraphed another hike, so again gold-futures speculators fled longs and ramped shorts. In the 5 weeks leading into that FOMC meeting, gold plunged 11.2%. That was really exacerbated by the extreme Trumphoria stock-market rally in the wake of Trump’s surprise election victory early in that same span.

While everyone saw that Fed hike coming, the dot-plot rate-hike outlook of top FOMC officials climbed from 2 additional rate hikes in 2017 to 3. So spec gold-futures selling exploded, battering gold 1.4% lower that day and another 1.2% to $1128 the next. That hawkish FOMC surprise of more rate hikes faster was the worst-case Fed-decision scenario for gold. The general gold bearishness was epically high.

But gold didn’t plunge from there like everyone expected. Instead it rebounded dramatically higher with an 11.4% rally over the next 10 weeks or so! When speculators’ gold-futures longs get too low and/or their shorts get too high heading into any FOMC decision, these excessive trades have to be reversed in its wake. Any pre-FOMC gold-futures selling directly translates into symmetrical post-FOMC buying.

Since the FOMC spaced out its initial couple hikes of this cycle by an entire year, there was rightfully a lot of skepticism about when the third would come. So up until just a couple weeks out from the mid-March-2017 FOMC meeting, the FF-futures-implied rate-hike odds were just 22%. But Fed officials jawboned them up to 95% by a couple days before that meeting. Gold was again hit on Fed-rate-hike fears, falling 4.7%.

But right after that third rate hike of this cycle, gold immediately caught a bid and surged 7.6% higher over the next 5 weeks or so. That dot plot kept the 2017 rate-hike outlook at 3 total, not upping it to 4 as the gold-futures speculators expected. So again they were forced to admit their pre-FOMC bearishness was way overdone and buy back in. Fed rate hikes aren’t bearish for gold despite traders’ irrational expectations.

After being wildly wrong for three Fed rate hikes in a row, some of the gold-futures speculators started to pay attention heading into this cycle’s 4th hike in mid-June 2017. But gold still fell 2.1% over several trading days leading into it. That hike too was universally expected like nearly all of them, and the dot plot was neutral staying at 3 total hikes in 2017. But the gold-futures selling broke precedent to continue that time.

In the first week or so after that 4th hike last summer, gold fell 1.9%. Those post-hike losses extended to 4.2% total by early July. That particular rate hike was unique to that point in that it came to pass early in gold’s summer doldrums. In June and early July, gold investment demand wanes so it usually just drifts sideways to lower. Thus this decades-old seasonal lull effectively delayed that post-FOMC gold reaction rally.

Once last year’s summer-doldrums low passed, gold again took off like a rocket as specs scrambled to normalize their excessively-bearish gold-futures bets. So gold surged 11.2% higher between early July and early September on heavy gold-futures buying. This gold reaction to last June’s 4th Fed rate hike may be the best template of what to expect after this June’s 7th one. Summer may again delay gold’s rebound.

But whether gold’s usual post-FOMC rally starts now or a few weeks from now is ultimately irrelevant in the grand scheme. The seasonally-weak summer doldrums don’t change the fact that speculators’ gold-futures bets get too extreme heading into telegraphed Fed rate hikes, so they have to be normalized in the FOMC’s wake. This gold-bullish pattern has held true to varying degrees after all 6 previous hikes of this cycle.

The Fed took a break from hiking in September 2017 to announce its wildly-unprecedented quantitative-tightening campaign to start to unwind long years and trillions of dollars of QE money printing. So the rate hikes resumed at that every-other-FOMC-meeting tempo in mid-December 2017. Again the goofy gold-futures traders started fearing another hawkish dot plot, so gold fell 4.0% in several weeks leading in to it.

But that 5th rate hike of this cycle was accompanied by a neutral dot plot forecasting 3 more rate hikes in 2018 instead of the 4 gold-futures traders expected. So again they had to admit their bearishness was way overdone and buy back in aggressively. So over the next 6 weeks after that FOMC meeting, gold shot 9.2% higher to $1358 nearing a major breakout! How can anyone believe rate hikes are bearish for gold?

The 6th hike of this cycle came right on schedule in late March this year, accompanied by a neutral dot plot still forecasting 3 total rate hikes in 2018. But again the gold-futures traders worried leading into that FOMC decision, pushing gold 3.2% lower over the prior month or so. They started buying back in that very Fed Day, so gold sharply rebounded 3.3% higher to $1353 within 4 trading days of that Fed rate hike.

This gold-futures-driven gold price action surrounding Fed rate hikes is crystal-clear. Gold falls leading into FOMC meetings with expected hikes on fears of hawkish rate-hike forecasts in the dot plots. All that pre-FOMC selling leaves speculators’ collective gold-futures bets way too bearish, with longs too low and/or shorts too high. Then once the Fed acts and specs realize gold isn’t collapsing, they quickly buy back in.

The Fed’s again-universally-expected 7th rate hike of this cycle came this Wednesday. And despite the gold-bullish examples of all the prior 6 hikes, gold-futures traders again sold leading into it. Starting back in mid-April, they embarked on a major long liquidation that pushed gold 4.0% lower by this week’s FOMC eve. In their defense that was mostly in response to a US dollar short squeeze, so maybe they are learning.

Gold-futures data is released weekly in the CFTC’s famous Commitments of Traders reports. These are published late Friday afternoons current to preceding Tuesday closes. So the latest data available when this essay was published is from the CoT week ending June 5th. Even then a week before this 7th Fed rate hike, total spec longs at 235.9k contracts were way down at a 2.3-year low! Speculators were all out.

The Fed indeed hiked as expected, and specs’ hawkish forecast seemed to be confirmed by this newest dot plot. Finally at this week’s FOMC meeting the collective rate-hike outlook rose from 3 total hikes in 2018 to 4. That was the perfect excuse for gold-futures traders irrationally terrified of higher rates to sell gold hard! Yet they couldn’t, with their longs among the lowest levels of this bull the selling was already exhausted.

So gold is once again set up with a very-bullish June-rate-hike scenario like last summer. Once again specs need to normalize their collective gold-futures bets after waxing too bearish leading into another Fed rate hike. That big gold-futures buying is inevitably coming, although it may once again be delayed for a few weeks by the summer doldrums. That would simply add to gold’s powerful seasonal autumn rally.

Gold’s resilience this week in the face of that hawkish dot plot was very impressive. Remember the last time the near-term FFR forecast added another hike in mid-December 2016, gold plunged 2.6% in only 2 trading days. The fact gold didn’t suffer another kneejerk plunge this week on adding another hike this year shows considerable strength! Speculators could’ve aggressively short sold gold futures, but refrained.

Thus gold’s post-rate-hike reaction after this 7th one is likely to mirror the strong rallies after the prior 6. They ranged from 3.3% to 18.5% in the weeks and months after hikes, averaging 10.2%. Given we’re in the heart of the summer doldrums, gold’s post-FOMC rally this summer could mirror last summer’s. It didn’t start until early July, but from there gold blasted 11.2% higher into early September. That’s a big deal.

Gold was trading at $1295 this Tuesday before this week’s FOMC decision. That’s a high base relative to gold’s bull-to-date peak of $1365 from early July 2016. A decisive 1% breakout above that happens at $1379. That would change everything for gold psychology, unleashing a major new wave of global gold investment demand. That critical breakout level for sentiment is only 6.4% above this week’s FOMC-eve close!

So there’s a good chance this coming 7th post-rate-hike rally of this gold bull will push gold’s price into major-breakout territory! As long as gold doesn’t slump too deep in the remaining summer doldrums of the next few weeks, that targets a potential breakout span in this year’s autumn rally. Those tend to peak by late September. With gold relatively high and spec gold-futures longs super-low, gold’s setup is very bullish.

For 7 Fed rate hikes in a row now, most traders have believed and argued that higher rates are bearish for gold. This rate-hike cycle is now 2.5 years old, plenty of time for that popular thesis to play out. Yet between the day before that first hike in mid-December 2015 and this week’s 7th hike, gold still rallied 22.4% higher! The US Dollar Index, which was supposed to soar on rate hikes, slipped 4.7% lower in that span.

Conventional wisdom on Fed rate hikes is obviously very wrong. That’s nothing new, as my extensive research has documented. Throughout all of modern history, gold has thrived during Fed-rate-hike cycles. Today’s cycle is the 12th since 1971. During the exact spans of all previous 11, gold averaged a solid 26.9% gain. During the 6 of these where gold rallied, its average rate-hike-cycle gain was a huge 61.0%!

The Fed’s last rate-hike cycle ran from June 2004 to June 2006, dwarfing today’s. The FOMC hiked in 17 consecutive meetings, totaling 425 basis points which more than quintupled the FFR to 5.25%. If rate hikes and higher rates are bad for gold, it should’ve plummeted at 5%+. But instead gold surged 49.6% higher over that exact span! Fed-rate-hike cycles are bullish for gold, regardless of what futures guys think.

Sadly their irrational and totally-wrong bearish psychology even infects gold investors. This next chart looks at gold and the physical gold bullion held in trust for GLD shareholders. That is the world’s largest and dominant gold ETF (GLD). Its holdings reflect gold investment trends, rising when capital is flowing into gold and falling when investors are leaving. That futures-driven gold action around rate hikes is affecting investment!

Unfortunately this essay would get far too long if I dive deeply into this chart. But I couldn’t exclude it from this discussion either. Because of that goofy gold-futures trading action surrounding Fed rate hikes in this cycle, investors have followed suit to varying degrees. They tend to sell gold leading into Fed rate hikes, and that downside momentum often continues in the weeks after hikes. That really weighs on gold.

But after a couple weeks of strong post-FOMC rallying driven by that gold-futures rebound buying, investors once again start warming to gold. They resume buying GLD shares faster than gold itself is being bought, and start amplifying gold’s post-rate-hike rallies after retarding them initially. It is disappointing that investors too are drinking the psychological tainted Kool-Aid poured by gold-futures speculators.

As a battle-hardened speculator myself and lifelong student of the markets, I don’t care which way they are going. We can trade them up or down and make money. But it’s very frustrating when the traders who dominate gold’s short-term price action continue to cling to a myth, distorting signals and misleading everyone else. History has proven over and over again that Fed-rate-hike cycles are very bullish for gold.

Gold has rallied strongly on average after 6 of the past 6 Fed rate hikes of this cycle! Last summer was the only quasi-exception, when gold’s weak seasonals delayed its post-hike rally for a few weeks. There is literally no reason not to expect gold to power higher again after this week’s 7th hike. And with gold at these levels, that next post-FOMC rally should see a major bull-market breakout that will bring investors back.

The last time investors flooded into gold in early 2016 after that initial December rate hike, gold powered 29.9% higher in 6.7 months. The beaten-down gold miners’ stocks greatly amplified those gains, with the leading HUI gold-stock index soaring 182.2% higher over roughly that same span! Gold stocks are again deeply undervalued relative to gold, a coiled spring ready to explode higher in this gold bull’s next major upleg.

The bottom line is Fed rate hikes are bullish for gold, and this week’s is no exception. Gold has not only powered higher on average in past Fed-rate-hike cycles, but has rallied nicely in this current one. Gold enjoyed big rebound surges after all 6 previous Fed rate hikes of this cycle. Gold-futures speculators who sold too aggressively leading into FOMC meetings had to buy back after to normalize their bearish positions.

And gold looks super-bullish in the coming months after this week’s 7th Fed rate hike of this cycle. Those gold-dominating futures traders sold their longs down to levels not seen since the initial months of this gold bull! So they’re going to have to do huge buying to reestablish normal positioning. While gold’s summer doldrums may delay that a few weeks, the coming gold-futures buying could drive a major upside breakout.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own extensive long positions in gold stocks and silver stocks which have been recommended to our newsletter subscribers.