Posts filed under ‘Stocks’

Technical Analysis – Astrology or Lob Wedge?

Investing comes in many shapes and sizes. And like religion (see Investing Religion article), most investment strategies are built on the essential belief that following certain rules and conventions will eventually lead to profit enlightenment. When it comes to technical analysis (TA), a discipline used with the principal aim of predicting future prices from past patterns, some consider it a necessity for making money in the market. Others, regard the practice of TA as a pseudoscience, much like astrology.

I feel  there is a proper place for TA on selective basis, which I will describe later, but for the most part I agree with some of the legendary investors  who have chimed in on the subject:

Warren Buffett: “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.”

Peter Lynch: “Charts are great for predicting the past.”

Technical Analysis Linguistics

Fundamental analysis, the antithesis of technical analysis, strives to predict future price direction by analyzing facts and data surrounding a company, industry, and/or economy. It too comes with its own syntax and versions, for example: value, growth, top-down, bottom-up, quantitative, etc.

I do not claim to be a TA expert, however in my many years of investing I have come across a smorgasbord of terms and flavors surrounding the discipline. Describing and explaining the density of material surrounding TA would encompass too large of a scope for this article, but here are some prevalent terms one should come to grips with if you want to become a technical analysis guru:

Technical Analysis Approaches

  • Elliot Wave
  • Relative strength / Momentum (see Momentum Investing article)
  • MACD (Moving Average Convergence / Divergence)
  • Fibonacci retracement
  • Dow Theory
  • Stochastics
  • Bollinger bands

Price Patterns

  • Head and shoulders
  • Double bottom
  • Cup and handle
  • Channels
  • Breakouts
  • Pivot points
  • Candlesticks
  • Resistance/Support
  • Dead cat bounce (my personal favorite)

Each of these patterns are supposes to provide insight into the future direction of price. At best, I would say the academic research surrounding the subject is “inconclusive,” and at worst I’d say it’s considered a complete “sham.”

The Lob Wedge

As I’ve stated earlier, I fall in the skeptical camp when it comes to TA, since fundamental analysis is the main engine I use for generating and tracking my investment ideas. For illustrative purposes, you may consider fundamental analysis as my group of drivers and irons. I do, however,  utilize selective facets of TA much like I use a lob wedge in golf for a limited number of specific situations (e.g., shots over high trees, downhill lies, and fast greens). When it comes to trading, I do believe there is some value in tracking the relationship of extreme trading volume (high or low), especially when it is coupled with extreme price movement (high or low). The economic laws of supply and demand hold true for stock trades just as they do for guns and butter, and sharp moves in these components can provide insights into the psychological mindset of investors with respect to a security (or broader market). Beyond trading volume, there are a few other indicators that I utilize as part of my trading strategies, but these tactics play a relatively minor role, since most of my core positions are held on a multi-year time horizon.

Overall, there is a stream of wasteful noise, volatility, and misinformation that permeates the financial markets on a daily basis. A major problem with technical analysis is the many false triggered signals, which in many cases lead to excessive trading, transaction costs, and ultimately subpar investment returns.  Although I remain a skeptic on the subject of technical analysis and I may not read my horoscope today, I will continue to keep a lob wedge in my golf bag with the hopes of finding new, creative ways of using it to my advantage.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own exchange traded funds and various securities, including BRK.B, but at time of publishing had no direct position in BRK.A or any company mentioned in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

July 9, 2016 at 9:45 am 1 comment

EU Marriage Ends in Messy Brexit Divorce

divorce

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 1, 2016). Subscribe on the right side of the page for the complete text.

What Just Happened?

Breakups are never easy, especially when they come as a surprise. That’s exactly what happened with last week’s “Brexit” (British exit) referendum results. History was made when 51.9% of the United Kingdom (U.K.) voters from England, Scotland, Wales and Northern Ireland cast their vote to divorce (“Leave”) their country from the European Union (EU). In the end, the 48.1% of U.K. voters could not generate enough support to “Remain” in the EU (see chart below). Despite torrential downpours in southern Britain, voter turnout was extraordinarily high, as 72% of the 46.5 million registered voters came out in full force to have their voices heard.

Divorce is never cheap, and UK Prime Minister David Cameron paid the ultimate price with his defeat in the Brexit referendum…the loss of his job. Immediately following the release of the referendum results, Cameron, the British Prime Minister since 2010 and leader of the Conservative Party, immediately announced his resignation, effective no later than October 2016 after the selection of his successor.

brexit votes

Source: Bloomberg

One of the reasons behind the shock of the Brexit Leave decision is the longstanding relationship the U.K. has had with the EU. European Union membership first began in 1957 with Belgium, France, Germany, Italy, Luxembourg, and Netherlands being the founding countries of this new political-economic union.

A few decades later, the U.K. officially joined the EU in 1973 with Ireland and the Denmark, shortly before Margaret Thatcher came into power. If you fast forward to today, some 43 years after U.K. originally joined the EU, the Brexit decision represents the largest turning point in European political history. Not since the 1989 falling of the Berlin Wall and the subsequent demise of the Cold War in the Soviet Union has such a large, earth-moving political shift occurred.

Today, there are 28 member countries in the EU with Croatia being the newest member in 2013. Despite the Brexit outcome, there still is a backlog of countries wanting to join the EU club, including Turkey, Serbia, Albania, and Montenegro (and this excludes Scotland, which has voiced an interest in leaving the U.K. for the EU).

What Were Investors’ Reactions?

Financial markets around the world were caught off guard, given many pre-referendum polls were showing the Remain camp with a slight edge, along with British betting parlors that were handicapping an overwhelming victory for the Remain camp. Here’s a summary of stock market reactions around the globe from June 23rd to June 30th:

U.S. (S&P 500): -0.7%

U.K. (FTSE 100): +2.6%

Japan (Nikkei): -4.1%

Germany (DAX): -5.6%

Hong Kong (Hang Seng): +0.4%

China (Shanghai): +1.3%

India (BSE): -0.0%

Surprisingly, modest monthly gains achieved in the S&P 500 prior to the Brexit vote (up +0.8%) were quickly pared after the results came in but remained positive for the entire month (up +0.1%). For the year, U.S. stocks are up a limited +2.7%, which isn’t too bad considering investors’ current mood.

Stocks were not the only financial market disrupted after the Brexit announcement, foreign exchange currency rates were unstable as well. The British pound dived to a 30-year low shortly after the vote to a level of approximately $1.33/£, and was down more than -10% on the day of the announcement (see chart below). UK banks like Barclays PLC (BCS) and Lloyds Banking Group PLC (LYG) also saw their share prices significantly pressured as EU regulatory risks of losing access to European customers and negative global interest rates further squeeze the banks’ profit margins.

To put the currency picture into perspective, the value of the British pound ($2.64/£) peaked in March 1972 at a rate about double the U.S. dollar today. On the positive side of the ledger, a weaker British pound could help boost exports and vacation time to Stonehenge or London, but there is also a risk for a spike of inflation (or stagflation) on the country’s roughly $740 billion in imports (e.g., food, energy, and raw materials).

currency v ppp

Source: Calafia Beach Pundit

Why Did it Happen?

While economically prosperous regions like London and Scotland voted heavily for Remain, the message for change of the Leave camp resonated well with working class towns and rural areas of England (seen here). Besides a geographic split, there was also a demographic divide between voters. As you can see from the YouGov poll below, the majority of younger citizens overwhelmingly voted for Remain, and vice versa for older citizens as it relates to the Leave vote.

18-24: 75% Remain

25-49: 56% Remain

50-64: 44% Remain

65+: 39% Remain

While geography and demographics certainly played a key role in the outcome of the EU Leave referendum result, at the core of the movement also was a populist discontent with immigration and the negative economic consequences created by globalization. There are many reasons behind the sluggish economic global recovery, even if the U.S. is doing best out of the developed countries, but rightly or wrongly, immigration policies and protectionism played a prominent part in the Brexit.

At the heart of the populist sentiment of lost control to Brussels (EU) and immigration is the question of whether the benefits of globalization have outweighed the costs. The spread of globalization and expanded EU immigration has disenfranchised many lower skill level workers displaced by eastern European immigrants, Syrian refugees and innovative solutions like automated machinery, software, and electronic equipment. Economic history clearly shows the answer to the effectiveness of globalization is a resounding “yes”, but the post-financial crisis recovery has been disappointingly sluggish, so a component of the populist movement has felt an urgency to find a scapegoat. The benefits of globalization can be seen in the chart below, as evidenced by the increases in per capita GDP of the UK relative to Germany and France, after joining the EU in 1973. Many observers are quick to identify the visible consequences of globalization (i.e., lower-paying job losses), but fail to identify the invisible benefits (i.e., productivity, lower prices, investment in higher-paying job gains).

UK GDP Ratio

Source: The Wall Street Journal

What happens next?

While some EU leaders want to accelerate the Brexit transition, in actuality, this will require a long, drawn-out negotiation process between the still-unnamed new UK Prime Minister and EU officials. The complete EU-Brexit deal will take upwards of two-years to complete, once Article 50 of the EU Lisbon Treaty has been triggered – likely in October.

In light of the unchartered nature of the Brexit Leave vote, nobody truly knows if this decision will ultimately compromise the existential reality of the EU. Time will tell whether Brexit will merely be a small bump on the long EU road, or the beginning of a scary European domino effect that causes the 28 EU country bloc to topple. If the U.K. is successful in negotiating EU trade agreements with separate European countries, the Brexit even has a longer-term potential of benefiting economic activity.  Regardless of the EU outcome, the long-term proliferation of capitalism and democracy is likely to prevail because citizens vote with their wallets and capital goes where it is treated best.

What does Brexit Mean for Global Markets?

The short answer is not much economically, however there have been plenty of less substantial events that have roiled financial markets for relatively short periods of time. There are two basic questions to ask when looking at the economic impact of Brexit:

1) What is the Brexit impact on the U.S. economy?

If you objectively analyze the statistics, U.S. companies sold approximately $56 billion of goods to the U.K. last year   (our #7 trading partner). Even if you believe in the unlikely scenario of a severe U.K. economic meltdown, the U.K. trade figure is a rounding error in the whole global economic scheme of things. More specifically, $56 billion in trade with the U.K. equates to about .003 of the United States’ $18+ trillion GDP (Gross Domestic Product).

2) What is the Brexit impact on the global economy?

The U.K.’s GDP amounts to about $3 trillion dollars. Of that total, U.K. exports to the EU account for a reasonably insignificant $300 billion. As you can see from the chart below, $300 billion in UK exports to the EU are virtually meaningless and coincidentally equate to about .003 of the world’s $78 trillion estimated GDP.

global gdp

Source: The National Archives

What to Do Next?

Like many divorces, the U.K. Brexit may be messy and drawn out, until all the details are finalized over the next couple years. It’s important that you establish a strong foundation with your investments and do not divorce the sound, fundamental principles needed to grow and preserve your portfolio. As is usually the case, panicking or making an emotional decision relating to your investments during the heat of some geopolitical crisis rarely translates into an optimal decision over the long-run. As I repeatedly have advised over the years, these periods of volatility are nothing new (see also Series of Unfortunate Events).

If you catch your anxiety or blood pressure rising, do yourself a favor and turn off your TV, radio, or electronic device. A more productive use of time is to calmly review your asset allocation and follow a financial plan, with or without the assistance of a financial professional, so that you are able to achieve your long-term financial goals. This strategy will help you establish a more durable, long-lasting, and successful marriage with your investments.

investment-questions-border

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 2, 2016 at 9:00 am Leave a comment

Rise of the Robots

Battery Operated Toy Robot

We’re losing our jobs to robots, and they will destroy our economy. It makes for a great news soundbite, but has no factual basis in reality, if you look at the actual trajectory of automation and technology innovations throughout history. The global economy did not collapse when the steam engine replaced the oar; the automobile supplanted the horse; the computer became a substitute for the abacus; and the combine killed off the farmer. The same notion holds true today as robots become more ubiquitous in our daily commercial and personal lives.

From the early, post-revolutionary birth of our country in the 18th century, the agrarian economy accounted for upwards of 90% of jobs and financial activity…until farming technology evolved (see chart below). As new agricultural advancements were introduced, like the cotton gin, plow, scythe, chemical fertilizers, tractors, combine harvesters, and genetically engineered seeds, human capital (jobs) were redeployed into other growth sectors of the economy (e.g., factories, aerospace, semiconductors, medicine, etc.).

Source: Carpe Diem

Source: Carpe Diem

Given that human labor accounts for about 2/3 of an average company’s expense structure, it should come as no surprise that corporations are looking to reduce costs by introducing more robotics and automation into their processes. The advantages to robotics adoption are numerous and I describe many of the reasons in my article, Chainsaw Replaces Paul Bunyan:

A robot won’t ask for a raise; it always shows up on time; you don’t have to pay for its healthcare; it can work 24/7/365 days per year; it doesn’t belong to a union; dependable quality consistency is a given; it produces products near your customers; and it won’t sue for discrimination or sexual harassment.

 

At Sidoxia Capital Management we opportunistically identified this growing trend quite early as evidenced by our initial 2012 investment in KUKA AG (Ticker: KUKAF), a German manufacturer of industrial robots. KUKA has recently made headlines due to a bid received from Chinese home-appliance company (Midea Group: Ticker – 000333.SZ) that values the dominant German robotics leader at $5 billion. Despite KUKA’s +273% share price appreciation from the end of 2012, not many people have heard of the company. While KUKA may not have caught the attention of many U.S. investors, the company has captured a bevy of blue-chip global customers, including Daimler, Airbus Group, Volkswagen, Fiat, Boeing, and Tesla.

Rather than sitting on its hands, KUKA has done its part to develop a higher profile. In fact, President Barack Obama and German Chancellor Angela Merkel recently received a robotics demonstration from KUKA’s CEO Till Reuter at the world’s largest industrial technology trade fair in Hannover, Germany this April (picture below)

Source: Bloomberg

Source: Bloomberg

The recent multi-billion dollar bid by Midea Group has turned some onlookers’ heads, but what the potential deal really signals is the vast opportunity for robotics expansion in Asia. Rising labor costs in China, coupled with the enormous efficiency benefits of automation, have pushed China to become the largest purchasing country of robots in the world, ahead of the U.S., Japan, Korea and Germany (see chart below). However, according to the International Federation of Robotics (IFR), in 2015, Japan remained the country with the largest number of installed robots. IFR does not expect Japan to remain the “king” of the installed robotics hill forever. Actually, IFR estimates China will leapfrog Japan over the next few years to become both the largest purchaser of robots, along with maintaining the largest installed base of robots.

Source: Financial Times

Source: Financial Times

In the coming months and years, there will be a steady stream of sensationalist headlines talking about the rise of the robots, and the destruction of jobs. We’ve repeatedly seen this movie before throughout history. Rather than a scary bloodbath ending, over the long-run we’ll likely see another happy ending. Any potential job losses will likely be outweighed by productivity gains, coupled with the benefits associated with more efficiently deployed labor to new growth sectors of the economy.

Even KUKA realizes the automation dynamics of the 21st century  will serve as a net labor enhancer not detractor. If you don’t believe me, just ask Timo Boll, world champion table tennis player, who tested this theory vs. a KUKA robot (see video below). Ultimately, the rise of robots will lead to the rise of global growth and productivity.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), KUKAF, BA, and TSLA, but at the time of publishing had no direct position in Daimler, Airbus Group, Volkswagen, Fiat Chrysler, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 11, 2016 at 10:36 am Leave a comment

Cleaning Out Your Investment Fridge

moldy cheese

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2016). Subscribe on the right side of the page for the complete text.

Summer is quickly approaching, but it’s not too late to do some spring cleaning. This principle not only applies to your cluttered refrigerator with stale foods but also your investment portfolio with moldy investments. In both cases, you want to get rid of the spoiled goods. It’s never fun discovering a science experiment growing in your fridge.

Over the last three months, the stock market has been replenished after a rotten first two months of the year (S&P 500 index was down -5.5% January through February). The +1.5% increase in May added to a +6.6% and +0.3% increase in March and April (respectively), resulting in a three month total advance in stock prices of +8.5%. Not surprisingly, the advance in the stock market is mirroring the recovery we have seen in recent economic data.

After digesting a foul 1st quarter economic Gross Domestic Product (GDP) reading of only +0.8%, activity has been smelling better in the 2nd quarter. A recent wholesome +3.4% increase in April durable goods orders, among other data points, has caused the Atlanta Federal Reserve Bank to raise its 2nd quarter GDP estimate to a healthier +2.9% growth rate (from its prior +2.5% forecast).

Consumer spending, which accounts for roughly 70% of our country’s economic activity, has been on the rise as well. The improving employment picture (5.0% unemployment rate last month) means consumers are increasingly opening their wallets and purses. In addition to spending more on cars, clothing, movies, and vacations, consumers are also doling out a growing portion of their income on housing. Housing developers have cautiously kept a lid on expansion, which has translated into limited supply and higher home prices, as evidenced by the Case-Shiller indices charted below.

case shiller 2016

Source: Bespoke

Spoiling the Fun?

While the fridge may look like it’s fully stocked with fresh produce, meat, and dairy, it doesn’t take long for the strawberries to get moldy and the milk to sour. Investor moods can sour quickly too, especially as they fret over the impending “Brexit” (British Exit) referendum on June 23rd when British voters will decide whether they want to leave the European Union. A “yes” exit vote has the potential of roiling the financial markets and causing lots of upset stomachs.

Another financial area to monitor relates to the Federal Reserve’s monetary policy and its decision when to further increase the Federal Funds interest rate target at its June 14th – 15th meeting. With the target currently set at an almost insignificantly small level of 0.25% – 0.50%, it really should not matter whether Chair Janet Yellen decides to increase rates in June, July, September and/or November. Considering interest rates are at/near generational lows (see chart below), a ¼ point or ½ point percentage increase in short-term interest rates should have no meaningfully negative impact on the economy. If your fridge was at record freezing levels, increasing the temperature by a ¼ or ½ degree wouldn’t have a major effect either. If and when short-term interest rates increase by 2.0%, 3.0%, or 4.0% in a relatively short period will be the time to be concerned.

10 yr

Source: Scott Grannis

Keep a Fresh Financial Plan

As mentioned earlier, your investments can get stale too. Excess cash sitting idly earning next-to-nothing in checking, savings, CDs, or in traditional low-yielding bonds is only going to spoil rapidly to inflation as your savings get eaten away. In the short-run, stock prices will move up and down based on frightening but insignificant headlines. However, in the long-run, the more important issues are determining how you are going to reach your retirement goals and whether you are going to outlive your savings. This mindset requires you to properly assess your time horizon, risk tolerance, income needs, tax situation, estate plan, and other unique circumstances. Like a balanced diet of various food groups in your refrigerator, your key personal financial planning factors are dependent upon you maintaining a properly diversified asset allocation that is periodically rebalanced to meet your long-term financial goals.

Whether you are managing your life savings, or your life-sustaining food supply, it’s always best to act now and not be a couch potato. The consequences of sitting idle and letting your investments spoil away are a lot worse than letting the food in your refrigerator rot away.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 4, 2016 at 8:00 am Leave a comment

Flat Pancakes & Dividends

pancakes-1320121

Over the last 18 months, stock prices have been flat as a pancake. Absent a few brief China and recessionary scares, the Dow Jones Industrial Average index has spent most of 2015 and 2016 trading between the relatively tight levels of 17,000 – 18,000. Record corporate profits and faster growth than other developed and developing markets have created a tug-of-war with countervailing factors. A strong dollar, reversal in monetary policy, geopolitical turmoil, and volatile commodity markets have produced a neutralizing struggle among corporate executives with deep financial pockets and short arms. In this environment, share buybacks, stable profit margins, and growing dividends have taken precedence over accelerated capital investments and expensive new-hires.

With flat stock prices and interest rates at unprecedented low levels, it’s during times like these that stock investors really appreciate the appetizing flavor of stable, growing dividends. To this day, I still find it almost impossible to fathom how investors are burning money by irrationally speculating in $7 trillion in negative interest rate bonds (see Retire at Age 90).

Historically there are very few periods in which stock dividend yields have exceeded bond yields (2.1% S&P yield vs. 1.8% 10-Year Treasury yield). As I showed in my Dividend Floodgates article, for roughly 50 years (1960 – 2010), the yield on the 10-Year Treasury Notes have exceeded the dividend yield on stocks (S&P 500) – that longstanding trend does not hold today.

In the face of the competitive stock market, several trends are contributing to the upward trajectory in dividend payments (see chart below).

#1.) Corporate profits (ex-Energy) are growing and at/near record levels. Earnings are critical in providing fertile ground for dividend growth.

#2.) Demographics, plain and simple. As 76 million Baby Boomers transition into retirement, their income needs escalate. These shareholders whine and complain to corporate executives to share the spoils and increase dividends.

#3.) Low interest rates and disinflation are shrinking the available pool of income generating assets. As I pointed out above, when trillions of dollars are getting thrown into negative yielding investments, many investors are flocking to alternative income-generating assets…like dividend paying stocks.

Source: FactSet

Source: FactSet

The Power of Dividends (Case Studies)

Most people don’t realize it, but over the last 100 years, dividends have accounted for approximately 40% of stocks’ total return as measured by the S&P 500. In other words, using history as a guide, if you initially invested in a stock XYZ at $100 that appreciated in value to $160 (+60%) 10 years later, that stock on average would have supplied an incremental $40 in dividends (40%) over that period, creating a total return of 100%.

Rather than using a hypothetical example, here are a few stock specific illustrations that highlight the amazing power of compounding dividend growth rates. Here are two “Dividend Aristocrats” (stocks that have increased dividends for at least 25 consecutive years):

  • PepsiCo Inc (PEP): PepsiCo has increased its dividend for an astonishing 44 consecutive years. Today, the dividend yield is 2.9% based on the current share price. But had you purchased the stock in June 1972 for $1.60 per share (split-adjusted), you would currently be earning a +188% dividend yield ($3.01 dividend / $1.60 purchase price), which doesn’t even account for the +6,460% increase in the share price ($104.96 per share today from $1.60 in 1972). Over that 44 year period, the split-adjusted dividend has increased from about $0.02 per share to an annualized $3.01 dividend per share today, which equates to a mind-blowing +16,153% increase. On top of the $103 price appreciation, assuming a conservative 5% dividend reinvestment rate, my estimates show investors would have received more than $60 in reinvested dividends, making the total return that much more gargantuan.

 

  • Emerson Electric Co (EMR): Emerson Electric too has had an even more incredible streak of dividend increases, which has now extended for 59 consecutive years. Emerson currently yields a respectable 3.6% rate, but if you purchased the stock in June 1972 for $3.73 per share (split-adjusted), you would currently be earning a +51% dividend yield ($1.92 dividend / $3.73 purchase price), which doesn’t even consider the +1,423% increase in the share price ($53.31 per share today from $3.73 in 1972).

There is never a shortage of FUD (Fear, Uncertainty, and Doubt), which has kept stock prices flat as a pancake over the last couple of years, but market leading franchise companies with stable/increasing dividends do not disappear during challenging times. Record profits (ex-energy), demographics, and a scarcity of income-generating investment alternatives are all contributing factors to the increased appetite for dividends. If you want to sweeten those flat pancakes, do yourself a favor and pour some quality dividend syrup over your investment portfolio.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and PEP, but at the time of publishing had no direct position in EMR or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

 

May 7, 2016 at 3:45 pm Leave a comment

The Traitorous 8 and Birth of Silicon Valley

Traitorous 8 Group

Over my 25 year investment career, I’ve made quite a few technology investments and visited dozens of Silicon Valley companies. I heard bits and pieces about the story of the Traitorous 8, but I never fully comprehended the technology revolution they started. Out of intellectual curiosity, I decided to delve a little deeper into the topic.

At the heart of this topic is a small device about the size of a fingernail. This object has several different names and can be quite confusing. The official name is an integrated circuit or IC, but usually it’s referred to as a chip, microchip, or semiconductor. These chips have become ubiquitous, scattered invisibly throughout our daily lives in our cars, computers, TVs, cell phones, appliances, and remote controls (an average household is home to about 1,000 of these semiconductors). Despite most people taking the microchip for granted, this diminutive piece of silicon created from our beach’s sand have contributed the largest burst of wealth creation in human history.

Before gaining a true understanding into the birth of Silicon Valley, we have to better understand the historical context in which the global technology capital was created – this takes us back to the early twentieth century when the vacuum tube was invented in 1904. Before Al Gore invented the Internet, we needed computers, and before we had personal computers, we needed integrated circuits, and before we had integrated circuits we had vacuum tubes (see chart below). Vacuum tubes were the electronic circuitry components required to make telephones, radios and televisions work in the early 1900s.

Tech History & the Vacuum Tube

Tech History

The vacuum tube was invented in 1904 by an English physicist named John Ambrose Fleming. Like semiconductors, the main function of a Vacuum tube is to control the flow of electric current. More specifically, a vacuum tube controls the current transferred between cathode and anode to make a circuit. Vacuum tubes were used for amazing applications, but in modern society this technology has been largely replaced by semiconductors, primarily because of cost, scalability and reliability factors.

The first all-electronic digital computer title is usually awarded to the ENIAC computer, which stood for Electronic Numerical Integrator and Calculator. ENIAC was built at the University of Pennsylvania between 1943 and 1945 by two professors, John Mauchly and J. Presper Eckert. World War II, the Soviet Union Cold War, and the space race kicked off by the Sputnik launch all pushed the vacuum tube technology to its limits. To give you an idea of how costly and inefficient vacuum tubes were relative to today’s microchips consider some of the ENIAC statistics. ENIAC filled a 20 x 40 foot room; weighed 30 tons; used more than 18,000 vacuum tubes; and only operated 50% of the time because operators were continuously replacing burned out vacuum tubes.  In fact, the ENIAC vacuum tubes generated so much heat, the temperature in the computer room often reached 120 degrees.

Shockley – The Godfather of the Transistor

William Shockley

Something had to change to improve vacuum tube technology, and it did…thanks in large part to a physicist named William Shockley, the so-called “Godfather of the Transistor.” Shockley received his Bachelor of Science degree from Caltech in 1932 and earned his Ph.D. degree from MIT in 1936. After graduation, Shockley left the famous Bell Labs research center, which was a research division of AT&T at the time (now owned by Nokia). As part of Shockley’s work at Bell Labs in the late 1940s, he contributed to the invention of the transistor with experimentalist Walter Brattain and quantum theorist John Bardeen. Fundamentally, the transistor is a switch, which over time has shrunk down to the size of a virus. The transistor is what ultimately replaced the vacuum tubes because it is smaller, more efficient, more reliable, more durable, and cheaper than vacuum tubes. Transistors switch and amplify the flow of electronic signals to create digital ones and zeros that instruct electronic applications. Without the benefits of shrinking transistors, today’s computer servers would be three stories high.

How small have transistors become? Take the iPhone 6 for example – it uses the A8 chip, which is made up of a whopping two billion transistors. To accomplish this feat, engineers are now creating transistors at the atomic level. Large semiconductor manufacturers like Intel Corp (INTC) are now developing transistors at the 10 nanometer level. To put this scale into perspective, consider a sheet of paper is approximately 100,000 nanometers thick. So in order to create a 10 nanometer sheet of paper, one would have to slice a single sheet 10,000 times thinner to reach 10 nanometers…mind-boggling.

Building atomic sized transistor technology is very cool, but also very expensive. Only a handful of semiconductor manufacturers have enough capital to build these new state-of-the art facilities. Case in point is Intel’s D1X fabrication facility in Hillsboro, Oregon, which is estimated to have cost $6 billion. Like seeing the pyramids – it’s difficult to understand the enormity of the structure without visiting it, which I was fortunate to do in 2014. It’s very ironic that in order to build these microscopic transistors and integrated circuits, multi-billion dollar manufacturing facilities the size of 38 football fields (~2.2 million square feet) are required. Another example of a next-generation manufacturing facility is Taiwan Semiconductor’s – Fab 15 (TSM), which was estimated to cost $9.3 billion.

These mega-transistor manufacturing facilities would not have been possible without Shockley’s contributions. Having helped invent the transistor largely replace the dominant computing technology of the last half century (i.e., vacuum tube), Shockley mustered up the courage to leave Bell Labs and start his own company, but he needed some cash to make it happen. He contacted Arnold Beckman, CEO of Beckman Coulter and his old professor at Caltech. Over a boat ride in Newport Beach, California, Shockley asked Beckman for $1 million to start his own lab. Silicon Valley potentially could have started in Southern California, but Shockley explained his aging mother lived in Palo Alto and convinced Beckman to start Shockley Semiconductor Laboratory in Mountain View, California during 1956.

After Shockley Semiconductor began operations, everything appeared to be going according to plan. Shortly after opening shop and recruiting the best and brightest engineers across the country, Shockley and his former Bell Labs colleagues Walter Brattain and John Bardeen were notified they all had won the Nobel Prize in physics (see photo below).

Nobel Shockley Celebration

After the Nobel Prize celebrations, everything went downhill quickly. Shockley was known as a brilliant engineer but a horrific manager. He put his employees through a battery of tests including psychological tests, intelligence tests, and even lie detector tests. Shockley also posted employee salaries publicly and recorded phone calls. He was a paranoid individual who believed his workers were stealing trade secrets and sabotaging projects, so therefore he wouldn’t share findings with his research staff. Adding insult to injury, Shockley was a racist, who believed blacks were genetically inferior with subpar IQs, so they shouldn’t have kids.

Here is a video link summarizing William Shockley’s leadership:

CLICK HERE

The Traitorous 8 Surface

In 1957, the year after Shockley Semiconductor Labs started up, the division reached 30 employees. Eight of the employees, Sheldon Roberts, Eugene Kleiner, Victor Grinich, Jay Last, Julius Blank, Jean Hoerni, Robert Noyce, and Gordon Moore finally said, enough-is-enough and decided mutiny was their best option.

Traitorous 8 Individuals

The disgruntled group ended up contacting a 30-year-old, snot-nosed, Harvard MBA graduate named Arthur Rock, the individual who eventually coined the phrase “venture capitalist.” In 1957, Rock was a New York banker working at Hayden Stone & Co. Rock believed the group of eight engineers (six of which had Ph.Ds) deserved attention, given their experience working with a Nobel Prize winner. The Traitorous 8 simply wanted to find an employer that would hire them as a group, but Rock advised them to start their own company – a novel idea during the 1950s.

After making a list and calling about 40 blue chip companies from the Wall Street Journal for funding, Rock almost gave up until they received a lead to contact Sherman Fairchild. Fairchild was a wealthy entrepreneur and playboy who hung out at the El Morocco in New York with Howard Hughes. Rock convinced Fairchild, the CEO of Fairchild Camera & Instrument, to invest $1.5 million into a Traitorous 8 startup.

The rest is history. The Traitorous 8 set up shop as Fairchild Semiconductor (FCS) in Mountain View, about twelve blocks from Shockley’s operations. Over the next 10 years, Fairchild Semiconductor grew from twelve employees to twelve thousand employees, and raked in some $130 million in annual revenues. Of the original Traitorous 8, two have become historical figures – Robert “Bob” Noyce and Gordon Moore. All good things come to an end, and Noyce and Moore increasingly got frustrated with Fairchild’s mismanagement of the semiconductor division.

After Fairchild passed over Noyce for a CEO promotion in 1968, Noyce told Moore, “I’m going to leave, are you interested?” Moore agreed, so he and Noyce contacted Arthur Rock again for his assistance. Rock quickly helped them raise $2.5 million, and Intel Corporation (short for “Integrated Electronics”) was born. Three years later in 1971, Intel launched its IPO at $23.50 per share ($.02 split-adjusted). An investment of $10,000 back then would be worth about $12,000,000 today –about a +120,000% return.

Here’s a video summarizing the creation of Intel:

 

Thomas Edison of Silicon Valley

Nowadays, Noyce is hailed by many as the “Thomas Edison of Silicon Valley.” Noyce received his Ph.D.  from MIT and is most known for his invention of the integrated circuit. During the late 1950s, other engineers also worked on the IC, including Jack Kilby at Texas Instruments, but Noyce received the first patent in 1961. Unlike Kilby, who created his IC from germanium, Noyce created his IC from silicon, the semiconductor of choice still today. After a decade of litigation, Noyce and Kilby settled their differences and decided to cross-license their patents. Unfortunately, the Nobel Foundation doesn’t issue Nobel Prizes posthumously, so when the Nobel Prize was issued for the invention of the integrated circuit in the year 2000 (10 years after Noyce’s death), only Kilby was recognized. To Kilby’s credit, he acknowledged the contributions of Noyce and others in his Nobel speech with a story of a rabbit and beaver looking up at the Hoover Dam, “No, I didn’t build it myself. But it’s based on an idea of mine!”

Moore’s Law Established

Arguably, Moore was just as influential as Noyce, but due to his quiet leadership style, Moore is often overlooked. Moore was a year younger than Noyce and earned his chemistry degree from Berkeley and Ph.D.  from Caltech. Unlike Noyce, who grew up in the Midwest (Iowa), Moore was raised near Palo Alto, which made recruiting Moore by William Shockley quite easy. Moore’s largest contribution is considered to “Moore’s Law,” which generally states the number of transistors (i.e., a chip’s computing power) will double every 1-2 years. During the 1980s, Noyce described the implications of Moore’s Law by comparing Moore’s Law to the airline industry. If the airline industry progressed at the trajectory of the semiconductor industry over the last 20 years, then the 767 airplane would cost $500 and travel around the world in 20 minutes on five gallons of gas. Regrettably, not many industries advance at the pace of semiconductors.

Moore came up with “Moore’s Law” when her wrote a seminal article for Electronics magazine in 1965 and in the article he properly predicted that the number of transistors that could be squeezed onto a microchip (around 60 at the time) would increase 1,000-fold to 60,000 transistors by 1975. It would take decades for his projections to come true, but Moore very presciently predicted the explosion of home computers, cell phones (which he called “portable communications equipment”), electronic wrist-watches, digital cars, and a host of other electronic devices and applications. A half century later, Moore’s Law holds true, but the pace of transistor growth admittedly is slowing. The physics behind semiconductor manufacturing is running into serious limitations of quantum mechanics, cost, and heat. Microchips are becoming so dense and fast that the internal components in many cases are melting the chips in research labs.

Here is a video link summarizing Moore’s Law:

CLICK HERE

While Moore’s Law is approaching diminishing returns, the costs of microchips keep declining, power keeps increasing, and efficiency keeps improving. Despite the slowing in Moore’s Law, as you can see below, the adoption of transistors via microchips is not plateauing. According to Intel, we are now consuming an estimated sextillion transistors!

Source: Intel Corporation

Source: Intel Corporation

Politics, economics, terrorism, and social issues may dominate the daily headlines, but behind the scenes there are daily miracles occurring due to technology advancements. Driving much of that innovation is the microchip, and without the Traitorous 8, the world would look a lot different and there would be no Silicon Valley as we know it today. Had Robert Noyce and Gordon Moore miserably resigned themselves to remain at Shockley Semiconductor, perhaps mankind would not have achieved the giant strides in global standards of living (see chart below). Thankfully, their contributions live on today and ensure a bright future for our kids, grandchildren, and the world at large.

Source: FRED

Source: FRED

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and in INTC (non-discretionary), TXN (non-discretionary),  T (non-discretionary), but at the time of publishing had no direct position in TSM, NOK, FCS, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 13, 2016 at 12:52 am Leave a comment

Financial Markets Recharge with a Nap…Zzzzzz

sleep baby

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (January 4, 2016). Subscribe on the right side of the page for the complete text.

Did you enjoy your New Year’s festivities? If you were like me and ate excessively and drank too much egg nog, you may have decided along the line to take a nap. It’s not a bad idea to recharge those batteries before implementing those New Year’s resolutions and jumping on the treadmill.  That’s exactly what happened in the financial markets this year. After six consecutive years of positive returns in the Dow Jones Industrial Average (2009 – 2014), stock markets took a snooze in 2015, as measured by the S&P 500 and Dow, which were each down -0.7% and -2.2%, respectively. And bonds didn’t fare any better, evidenced by the -1.9% decline in the Aggregate Bond ETF (AGG), over the same time period. Given the deep-seated fears about the Federal Reserve potentially catapulting interest rates higher in 2015, investors effectively took a big yawn by barely nudging the 10-year Treasury Note yield higher by +0.1% from 2.2% to 2.3%.

Even though 2015 ended up being a quiet year overall, there were plenty of sweet dreams mixed in with scary nightmares during the year-long nap:

INVESTMENT SWEET DREAMS

Diamonds in the Rough: While 2015 stock prices were generally flat to down around the globe (Vanguard Total Word -4.2%), there was some sunshine and rainbows gleaming for a number of segments in the market. For example, handsome gains were achieved in the NASDAQ index (+5.7%); Biotech Index – BTK (+10.9%); Consumer Discretionary ETF – XLY (+8.3%); Health Care ETF – VHT (+5.8%); Information Technology ETF – VGT (+4.6%); along with numerous other investment areas.

Fuel Fantasy Driven by Low Gas Prices: Gas prices averaged $2.01 per gallon nationally in December (see chart below), marking the lowest prices seen since 2009. Each penny in lower gas prices roughly equates to $1 billion in savings, which has strengthened consumers’ balance sheets and contributed to the multi-year economic expansion. Although these savings have partially gone to pay down personal debt, these gas reserves have also provided a financial tailwind for record auto sales (estimated 17.5million in 2015)  and a slow but steady recovery in the housing market. The outlook for “lower-for-longer” oil prices is further supported by an expanding oil glut from new, upcoming Iranian supplies. Due to the lifting of economic sanctions related to the global nuclear deal, Iran is expected to deliver crude oil to an already over-supplied world energy market during the first quarter of 2016. Additionally, the removal of the 40-year ban on U.S. oil exports -could provide a near-term ceiling on energy prices as well.

gas comp

Counting Cash Cows

Catching some shut-eye after reading frightening 2015 headlines on the China slowdown, $96 billion Greek bailout/elections, and Paris/San Bernardino terrorist attacks forced some nervous investors to count sheep to fall asleep. However, long-term investors understand that underpinning this long-lived bull market are record revenues, profits, and cash flows. The record $4.7 trillion dollars in 2015 estimated mergers along with approximately $1 trillion in dividends and share buybacks (see chart below) is strong confirmation that investors should be concentrating on counting more cash cows than sheep, if they want to sleep comfortably.

American investors have been getting lots of cash back this year. Dividends and stock buybacks are on track to hit a new high this year and could top $1 trillion for the first time, says Michael Thompson, managing director of S&P Capital IQ Global Markets Intelligence. Companies have been increasing their buybacks and dividends to please investors for years. Total payouts from S&P 500 companies surged 84% in the past decade to $934 billion in 2014, from $507 billion in 2005, according to a report by S&P Capital IQ.

INVESTMENT NIGHTMARES

Creepy Commodities: Putting aside the -30% collapse in WTI crude oil prices last year, commodity investors overall were exhausted in 2015. The -24% decline in the CRB Commodity Index and the -11% weakening in the Gold Index (GLD) was further proof that a strong U.S. dollar, coupled with stagnant global growth, caused investors a lot of tossing and turning. While bad for commodity exporting countries, the collapse in commodity prices will ultimately keep a lid on inflation and eventually become stimulative for those consumers suffering from lower standards of living.

Dollar Dread: The +25% spike in the value of the U.S. dollar over the last 18 months has made life tough for multinational companies. If your business received approximately 35-40% of their profits overseas and suddenly your goods cost 25% more than international competitors, you might grind your teeth in your sleep too. Monetary policies around the globe, including the European Union, will have an impact on the direction of future foreign exchange rates, but after a spike in the value of the dollar in early 2015, there are signs this scary move may now be stabilizing. Although multinationals are getting squeezed, now is the time for consumers to load up on cheap imports and take that bargain foreign vacation they have long been waiting for.

January has been a challenging month the last couple years, and inevitably there will be additional unknown turbulence ahead – the opening day of 2016 not being an exception (i.e., China slowdown concerns and Mideast tensions). However, given near record-low interest rates, record corporate profits, and accommodative central bank policies, the 2015 nap taken by global stock markets should supply the necessary energy to provide a lift to financial markets in the year ahead.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions VHT, AGG, and in certain exchange traded funds (ETFs), but at the time of publishing had no direct position VT, BTK, XLY, VGT, GLD, or in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

January 4, 2016 at 11:53 am Leave a comment

Older Posts


Subscribe to Blog

Meet Wade Slome, CFA, CFP®

More on Sidoxia Services

Recognition

Top Financial Advisor Blogs And Bloggers – Rankings From Nerd’s Eye View | Kitces.com

Wade on Twitter…

Like us on Facebook

Share this blog

Bookmark and Share

Monthly Archives


Follow

Get every new post delivered to your Inbox.

Join 1,330 other followers