Twinkie Investing – Sweet but Unhealthy
Source: Photobucket
It’s a sad day indeed in our history when the architect of the Twinkies masterpiece cream-filled sponge cakes (Hostess Brands) has been forced to close operations and begin bankruptcy liquidation proceedings. Food snobs may question the nutritional value of the artery-clogging delights, but there is no mistaking the instant pleasure provided to millions of stomachs over the 80+ years of the Twinkies dynasty. Most consumers understand that a healthy version of an organic Twinkie will not be found on the shelves of a local Whole Foods Market (WFM) store anytime soon. The reason people choose to consume these 150-calorie packages of baker bliss is due to the short-term ingestion joy, not the vitamin content (see Nutritional Facts below). Most people agree the sugar high gained from devouring half a box of Twinkies outweighs the long-term nourishing benefits reaped by eating a steamed serving of alfalfa sprouts.
Much like dieting, investing involves the trade-offs between short-term impulses and long-term choices. Unfortunately, the majority of investors choose to react to and consume short-term news stories, very much like the impulse Twinkie gorging, rather than objectively deciphering durable trends that can lead to outsized gains. Day trading and speculating on the headline du jour are often more exciting than investing, but these emotional decisions usually end up being costlier to investors over the long-run. Politically, we face the same challenges as Washington weighs the simple, short-term decisions of kicking the fiscal debt and deficits down the road, versus facing the more demanding, long-term path of dealing with these challenges.
With controversial subjects like the fiscal cliff, entitlement reform, taxation, defense spending, and gay marriage blasting over our airwaves and blanketing newspapers, no wonder individuals are defaulting to reactionary moves. As you can see from the chart below, the desire for a knee jerk investment response has only increased over the last 70 years. The average holding period for equity mutual funds has gone from about 5 years (20% turnover) in the mid 1960s to significantly less than 1 year (> 100% turnover) in the recent decade. Advancements in technology have lowered the damaging costs of transacting, but the increased frequency, coupled with other costs (impact, spread, emotional, etc.), have been shown to be detrimental over time, according to John Bogle at the Vanguard Group.
Source: John Bogle (Vanguard Group)
During volatile periods, like this post-election period, it is always helpful to turn to the advice of sage investors, who have successfully managed through all types of unpredictable periods. Rather than listening to the talking heads on TV and radio, or reading the headline of the day, investors would be better served by following the advice of great long-term investors like these:
“In the short run the market is a voting machine. In the long run it’s a weighing machine.” -Benjamin Graham (Famed value investor)
“Excessive short-termism results in permanent destruction of wealth, or at least permanent transfer of wealth.” -Jack Gray (Grantham, Mayo, Van Otterloo)
“The stock market serves as a relocation center at which money is moved from the active to the patient.” – Warren Buffett (Berkshire Hathaway)
“It was never my thinking that made big money for me. It always was my sitting.” – Jesse Livermore (Famed trader)
“The farther you can lengthen your time horizon in the investment process, the better off you will be.”- David Nelson (Legg Mason)
“The growth stock theory of investing requires patience, but is less stressful than trading, generally has less risk, and reduces brokerage commissions and income taxes.” T. Rowe Price (Famed Growth Investor)
“Time arbitrage just means exploiting the fact that most investors…tend to have very short-term time horizons.” -Bill Miller (Famed value investor)
“Long term is not a popular time-horizon for today’s hedge fund short-term mentality. Every wiggle is interpreted as a new secular trend.” -Don Hays (Hays Advisory – Investor/Strategist)
A legendary growth investor who had a major impact on how I shaped my investment philosophy is Peter Lynch. Mr. Lynch averaged a +29% return per year from 1977-1990. If you would have invested $10,000 in his Magellan fund on the first day he took the helm, you would have earned $280,000 by the day he retired 13 years later. Here’s what he has to say on the topic of long-term investing:
“Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.”
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
“My best stocks performed in the 3rd year, 4th year, 5th year, not in the 3rd week or 4th week.”
“The key to making money in stocks is not to get scared out of them.”
“Worrying about the stock market 14 minutes per year is 12 minutes too many.”
It is important to remember that we have been through wars, assassinations, banking crises, currency crises, terrorist attacks, mad-cow disease, swine flu, recessions, and more. Through it all, our country and financial markets most have managed to survive in decent shape. Hostess and its iconic Twinkies brand may be gone for now, but removing these indulgent impulse items from your diet may be as beneficial as eliminating detrimental short-term investing urges.
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 SCM had no direct positions in WFM, BRKA/B, LM, TROW or any 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.
Fiscal & Political Chemotherapy
Chemotherapy is a treatment that uses a mixture of toxic drugs designed to destroy cancer cells, so patients can recover to a healthy state. Similarly, our government system combines a mixture of toxic politicians designed to destroy our nation’s problems, so Americans can benefit from a healthy, expanding economy. In the long run, history teaches us that despite painful periods of political battles, beneficial results are eventually achieved.
Unfortunately, in the short run, political side effects relating to our country’s legislative process can result in extremely unpleasant outcomes, just like experienced during chemotherapy treatment (including nausea, vomiting, hair loss, and fatigue). Politically, we are going through a comparably repulsive period. The good news is, regardless of your political persuasion, a major source of contention is now behind us in the rearview mirror (i.e., the presidential elections) and we can temporarily recover from the barrage of venomous super PAC commercials that have temporarily halted.
Regrettably, the looming “Fiscal Cliff” poses larger consequences than election outcomes, if these out-of-control economic issues are not credibly resolved (see Fiscal Cliff: Repeat or Dead Meat?). Most Americans realize a responsible mixture of real spending cuts coupled with limited tax hikes, like proposed by the bipartisan Simpson-Bowles commission is a great starting blueprint to hammer out a deal. For the time being, I’m happy to hear both Republicans and Democrats are playing nicely in the sandbox. Republican Speaker of the House, John Boehner has signaled he is willing “to put (tax) revenue on the table” and President Obama has said he is “open to compromise.” So what’s all the worry then? We already know that $600 billion in tax increases and spending cuts kick in seven weeks from now, which has the real potential of spinning our economy into another recession if Congress doesn’t act.
You don’t need to go far back in history to see what the effects could be from continued gridlock or a lackluster agreement that kicks the can down the curb. For starters, last year’s initially unsuccessful debt ceiling negotiations resulted in a swift kick in the pants for stocks, as investors watched the S&P 500 index crater -18% within three short weeks. If the $600 billion impact of the Fiscal Cliff and sequestration actually occur, many pundits are predicting up to a -4% hit to GDP (Gross Domestic Product), which makes it virtually certain the economy will slip back into recession.
This game of political chicken can last only for so long. Congressional approval ratings are near record lows, and if inaction continues, voters will ultimately take powers into their own hands and vote out apathetic politicians.
Preparing for the Melt-Up
Would I be surprised to see a market pullback in the coming weeks and months? The short answer: NO. While I may be cynical about the short-term probabilities of a bipartisan “grand bargain” because brinksmanship will likely win in the coming weeks, as both sides jockey for negotiating leverage, I am also keenly aware of the melt-up risk that few investors are currently talking about. You don’t have to be a brain surgeon or rocket scientist to see the amount of pessimism that has built up over recent years. If you don’t believe me, you can just look at the following charts to get the gist:
i) A half of a trillion dollars has been pulled out of the equity markets by nervous investors, despite the market more than doubling from its 2009 lows.
Source: Calafia Beach Pundit (Scott Grannis)
ii) Panicked bond buying has caused the yield on the benchmark 10-year Treasury note to evaporate by about -90% since its peak more than 30 years ago.
10-Year Treasury Yield (Source: Yahoo! Finance)
iii) Fear insurance has been gobbled up by worrywarts as witnessed by gold prices sky-rocketing more than 500% in a little more than a decade.
Historical gold prices (Source: InvestmentTools.com)
A grand bargain doesn’t guarantee a return to the stock market circa the 1990s, but in an environment where trillions of dollars have been stuffed under the mattresses of corporations and individuals, earning next to nothing, it won’t take much to ignite the animal spirits of investors. Changing the perception of a market that sees the glass as -90% empty to the view of a glass 10% full, could lead to a happier 2013 for equity investors. However, if no Fiscal Cliff agreement is made, locating me may be a challenge – I suggest you try me in my bunker.
While our fiscal and political health conditions have reached crisis levels in recent years, there are reasons to be optimistic, now that a hotly contested presidential election has concluded and discussions move forward on a Fiscal Cliff solution. Chemotherapy involves a toxic and destructive regiment of harsh medicines, but in certain situations, like the present political environment, investors need to survive the unpleasant side effects before economic health and prosperity can be gained.
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 SCM had no direct positions in any 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.
Conquering the Political & Economic Hurricanes
Article is an excerpt from previously released Sidoxia Capital Management’s complementary November 1, 2012 newsletter. Subscribe on right side of page.
Hurricane Sandy wreaked havoc across the East Coast, negatively impacting an estimated 60 million people and leaving more than 8 million people literally in the dark, without power. The hurricane may have been downgraded to a “superstorm” but the 90+ mile per hour winds and waves reaching up to 40 feet high created devastating economic impacts. How large were these impacts you may ask? This big swirly cloud that slammed into the Atlantic coastline shut down about ¼ of our economy; led to about 15,000 canceled flights; is expected to cut our nation’s
Q4 output by up to -1.5% in GDP (Gross Domestic Product); and closed our financial markets for two days (the longest weather related closure of the New York Stock Exchange since 1888). Although the damage has been distressing for millions, about 5 million kids I think were okay with missing school on Monday (I’m going out on a limb with that guess).
Besides a superstorm-hurricane offered to us by Mother Nature, our country is about to undergo a new political hurricane next week with our nation’s presidential elections. Many polls show a statistical dead heat among the two candidates (Mitt Romney and Barack Obama), but political pundits point to the key battleground state of Ohio as the key determinant of the overall election results (Obama currently appears to have a slight lead in several polls). Some wildcard issues that could throw a wrench in an incumbent victory include a potential apathetic turnout by the Democratic voter base (hurt worse by “Superstorm Sandy”); worsening employment figures reported four days before the election; or perhaps a political gaffe. None of these polls are set in stone, and the situation remains rather fluid (no Sandy pun intended).
Regardless, whatever the political outcome, history shows us that the victor’s political affiliation has little correlation with the results in the financial markets. Ed Yardeni illustrated this point recently with the following chart:
Source: Yardeni.com
What many people seem to overlook is that there are many other variables besides political affiliation that can and will impact future financial market performance including, Congressional control that may be dominated or split by the opposing political party; monetary policy set by the Federal Reserve Bank; or uncontrollable globalization influences. As emerging market countries continue to outpace our economic growth, our country’s power and persuasion will naturally diminish due to the “law of large numbers”. In other words, as the largest, most powerful economic country in the world, the mathematical gravity hinders our country’s ability to grow rapidly.
Despite the economic and political challenges our country faces, we continue to move in the right direction, albeit at a very slow historical pace. As you can see from Ed Yardeni’s chart below, our recovery from the recent recession (bottom red line) is the worst recovery in more than 50 years. On the bright side, the freshly reported Q3 GDP figures came in at a +2.0% GDP rate – uninspiring, but an improvement from Q2, and better than Wall Street consensus forecasts.
Source: Yardeni.com
The growth has been considerably weak, yet the U.S. has still recorded 13 consecutive quarters of positive growth. Not bad considering Europe is in recession and countries like Spain are Greece are suffering unemployment rates of about 25%.
In order to maintain or accelerate economic growth, most Americans understand the Fiscal Cliff (~$700 billion in automatic spending cuts and tax hikes) needs to get resolved immediately. Failure to face this urgent challenge could have dire consequences, so voting for politicians who understand the immediacy of this problem is important.
Moving into Seasonally Strong Period
Selling in May, and going away for six months has not been a profitable strategy this year, as measured by the S&P 500 index. Furthermore, investors have also survived the historically scary performance months of September and October. Nothing is ever guaranteed, but historically the months of November through April tend to be rewarding periods.
Blowing against this positive seasonal trend have been lifeless earnings. In fact, corporate profits and revenue growth have slowed to a trickle in Q3, thanks to lackluster results from companies like Caterpillar (CAT); General Electric (GE); 3M Company (MMM); United Technologies (UTX); McDonalds (MCD); and others. Denying the global slowdown is difficult, but there are signs of stabilization and fortunately financial markets look forward and not backward.
Overshadowing some of that recent slowing growth has been the positive development in the housing market. As one can see in the chart below, housing starts are up significantly at +60% from early last year, but history tells us there is still plenty of room to move higher.
Source: Calafia Beach Report
Year-to-date stock performance has been nothing short of spectacular either. Although stocks were down about -2% in October, the S&P 500 index remains up +12% through October, and that excludes about +2% in dividends. If you look at the overall asset classes in the chart below, real estate is the winning segment this year with U.S. stocks not far behind. Commodities have fared the worst and the fixed income asset class showed modest gains relative to global equities.
Source: Hays Advisory Blog
Within U.S. stocks, the largest of large stocks (“Megacaps”) have enjoyed the best results. This trend is not surprising given the significant uncertainties investors are reviewing (e.g., elections, Fiscal Cliff, Europe, etc.).
Source: Calafia Beach Report
The recent Hurricane Sandy turned superstorm caused enormous damage to our country, and the political and economic hurricanes we have experienced over the last few years have yet to be conquered. The good news, in all these cases (physical and financial), is that the clouds are in the process of lifting; the worst damage should be behind us; our outlook will be more certain; and we can now begin focusing on the rebuilding process.
Like Washington, individual investors cannot afford to ignore their own personal Fiscal Cliffs. In a future entitlement-pressured world, investors need to proactively develop an investment plan, because ignoring your investments by kicking the can down the road only does more harm than good. I’m confident that, regardless of the election results next week, cooler heads will eventually prevail, and Democrats and Republicans can work together to solve our country’s Fiscal Cliff problems. Superstorm Sandy will not be the last natural disaster our country faces, but like investing, the more prepared one is for these unforeseen events, the better you will be equipped to conquer your financial future.
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 SCM had no direct positions in CAT, MMM, GE, UTX, MCD, 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.
Chewing on Some Apple Pie
Apple pie is an unrivaled American dessert that optimally mixes the elements of dough, sugar, cinnamon, and apples. With Thanksgiving just around the corner, I can already taste that Costco (COST) apple pie that is about to snap my belt buckle open as I proceed to eat pie for breakfast, lunch, and dinner. A different dessert of the stock variety, Apple Inc. (AAPL), recently received a sour reception after reporting its 3rd quarter financial results.
Despite reporting +27% year-over-year revenue growth and +23% earnings growth, investors have continued to spew the stock out as the share price has fallen from $700 per share down to $600 per share in about a month. With all this indigestion, is now the time to reach for the Tums or should we serve ourselves up another helping of some tasty Apple pie? Not everybody loves this particular fruity dessert, so let’s cut into the Apple pie stock and see if there is any dough to be made here.
Point #1 (Cash Giant): Apple Inc. is a profit machine with a fortress balance sheet. More specifically, Apple has around $121 billion dollars in cash in its checking account and generated over $42 billion in free cash flow in fiscal 2012. And by free cash flow, I mean the excess cash Apple gets to stuff in its pockets after ALL expenses have been paid AND after spending more than $8 billion in capital expenditures (including spending for their new 2.8 million sq. foot spaceship campus expected to open in 2015 and house 13,000 employees).
Point #2: (Brand): A brand has value that will not show up on a balance sheet, and according to Forbes, Apple’s brand is rated #1 on a global basis, outstripping iconic brands like IBM, McDonald’s (MCD) and Microsoft (MSFT). BrandZ, a division of advertising giant WPP, values Apple’s 2012 brand value at approximately $183 billion.
Point #3 (Product Pipeline): Apple is no one-trick pony. Apple’s iPhone sales account for about half of the company’s sales, but a whole new slate of products positions them well for the critical calendar fourth quarter period. Apple’s iPhone 5, iPad 3 (aka, “New iPad”), and iPad Mini should translate into robust holiday sales for Apple. What’s more, a +39% increase in Apple’s fiscal 2012 R&D (research and development) should mean a continued healthy pipeline of new products, including the ever-rumored new integrated version of Apple TV that could be coming in 2013.
Point #4 (Mobile & Tablets): Apple is at the center of the mobile revolution. There are approximately 5 billion cell phones globally, and about 2 billion new phones are sold each year. Of that 2 billion, Apple sold a paltry 125 million units (tongue firmly in cheek) with the market growing faster in Apple iPhone’s key smart phone market. As the approximately 500 million smart phone market grows to about 5 billion units over the next decade, Apple is uniquely positioned to capitalize on this trend. Beyond cell phones, the table market is bursting as traditional personal computer growth declines. Although Apple has made computers for 36 years, the company impressively generated +40% more revenue from fiscal 2012 iPad tablet sales, relative to Apple desktop and laptop sales.
Point #5 (Valuation): With all these positives, what type of premium would you pay for Apple’s stock? Does a +100% premium sound reasonable? OK, maybe a tad high, so how about a +50% premium? Alright, alright, I know you want a good bargain, so surely a +20% premium is warranted? Well in fact, if you account for Apple’s $121 billion cash hoard, Apple’s stock is currently trading at about a -22% DISCOUNT to the average S&P 500 stock on a P/E basis (Price-Earnings). You heard that correctly, a significant discount. If Apple is trading at a P/E discount, surely mature staple stocks like Procter & Gamble (PG) and Colgate Palmolive (CL), which both reported negative Q3 revenue declines coupled with meager bottom-line growth of 5%, deserve even steeper discounts…right? WRONG. These stocks trade at a 70-80% PREMIUM to Apple and a 35-40% PREMIUM to the overall market. Toilet paper and toothpaste I guess are a lot more popular than consumer electronics these days. Clear as mud to me.
Risks: I understand that Apple is not a risk-free Treasury security. Research in Motion’s (RIMM) rapid collapse over the last two years serves as a fresh reminder that in technology land, competition and obsolescence risks play a much larger role compared to other industries. Apple must still deliver on its product visions, and as the king of the hill Apple will have a big bulls-eye on its back from both competitors and regulators. Hence, we will continue to read overblown headlines about map application glitches and photographic purple haze.
In the end, a significant amount of pessimism is already built into Apple’s stock price (yes, I did say “pessimism” – even with the stock’s share price up +49% this year). If Apple can uphold the quality of its products and maintain modest growth, then I’m confident shareholders will happily eat another slice of Apple pie.
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 AAPL, but at the time of publishing SCM had no direct positions in COST, IBM, MCD, CL, PG, MSFT, WPP, RIMM, 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.
USA Inc.: Buy, Hold or Sell?
If the U.S. was a company, would you buy, hold, or sell the stock? A voluminous report put out last year by Mary Meeker sought to answer that very question. Since we’re in the thick of the presidential elections, why not review the important financial state of our great nation.
For those of you who may not know who she is, Mary Meeker is the well-known partner at Kleiner Perkins Caufield & Byers, who is also affectionately known as the “Queen of Internet.” Apparently, beyond her renowned expertise in analyzing and valuing tech companies and start-ups, she also has the knack of dissecting government statistics and distilling wonky numbers down to understandable terms for the masses. “Distilling” may be a generous term, given the massive size of her 460-page report, USA Inc., but nevertheless, I am going to attempt to synthesize this gargantuan report even further.
As a visual learner, I think some key cherry-picked slides from her report will help put our multi-trillion debts and deficits in context, so here goes…
The Scope of the Problem
If one spends a few hundred billion dollars here, and a few hundred billion dollars there, before you know it, a trillion dollars will have piled up. Currently our government has run $1 trillion+ budget deficits for three years, and the estimated deficit is for another trillion dollar deficit this fiscal year. If you have ever wondered how many football fields it takes to fill with a trillion dollars of cash, then today is your lucky day. The answer: 217 football fields.
Financial Statements: The Health Thermometer
In order to determine the relative health of USA Inc., Meeker created financial statements for our country, starting with the income statement. As you can see from the chart below, unfortunately USA Inc.’s expenses have been significantly larger than its revenues, creating a “discouraging” trend of negative cash flows (deficits). An entity that takes in $2.2 trillion in revenue and spends $3.5 trillion, cannot sustainably continue this trend for long, before significant financial problems arise. The largest contributing factor to our country’s losses (deficits) has been the exploding costs of entitlements, including Medicare, Medicaid, and Social Security.
As the pie chart shows, the major categories of entitlements comprise a whopping 58% of USA Inc.’s 2010 total expenditures.
Trillion dollar deficits have been the norm over the last three years.
Why Entitlement Spending is a Problem
Why are entitlements such a massive problem? The plain and simple answer to why entitlements are a major issue is that government expenditures are growing too fast. You can’t have expenses growing significantly faster than revenues for 45 years and expect to be in happy financial place.
Another reason for the abysmal spending record is due to politicians horrendous forecasting abilities. Future promises are made by politicians to garner votes today, and when they make overly rosy estimates about the costs of those promises, future generations are left holding the underfunded bag. Meeker points out that when Medicare was instituted in 1966, total future spending of $110 billion turned out to be about 10x more expensive (see chart below) than originally planned…ouch!
No Defense for Defense
Trillion dollar deficits and debts can’t be solely blamed on entitlements, but $700 billion in annual defense expenditures is not exactly chump change. The inopportune timing of the financial crisis in 2008-2009 didn’t help either, while two unfunded wars were being fought. Even if you strip out the wars, defense spending is still obscenely high. Given our poor state of financial affairs, we cannot afford to be the globe’s babysitter (see Impoverished Global Babysitter). Legacy Cold War spending on obsolete ground warfare needs to be reprioritized to 21st Century threats (i.e. focus on unmanned drones and coordinated intelligence). When a government spends more than the top 25 countries combined (see chart below), that country can certainly find some defense fat to trim.
Demographic Headwinds
The out-of-control gluttonous government spending is a threat to our national security, and although I wish I could say time alone will heal our fiscal wounds, unfortunately the opposite is true. Time is our enemy because the ticking demographic time bomb is about to explode, unless government acts to solve our spending problems. For starters, Americans are living longer, which means entitlement spending has accelerated faster than revenues collected, and life expectancy consistently continues to rise. As you can see below, life expectancy has outpaced Social Security age adjustments by +23% over a 74 year period.
Another self inflicted problem contributing to our colossal health care costs is the obesity epidemic. Over an 18 year period, the rate of obesity more than doubled to 32%. Individuals can and should shoulder more of the burden for these belt-busting costs, and government should spend more on prevention and education in this area. Bad drivers pay higher premiums for their auto insurance, so why not have bad eaters pay higher premiums? Genetics certainly can play a role in obesity, but so to do eating habits. The same accountability principle should be applied to smokers who overly burden our healthcare system too.
The USA spends more on healthcare than all OECD countries combined and 3x the OECD per capita average, yet as you can see from the chart below, the USA is not getting a life expectancy bang for its buck. The argument that the U.S. has the best healthcare in the world may be true in some instances, but the overall data doesn’t support that assertion.
The Rubber Hits the Road
The problem is easy to identify: Government spending going out the door is running faster than the revenues coming in via taxes. The solution is easy to identify too: Politicians need to cut spending, increase taxes, and/or do a combination of the two options. Like dieting, the solutions are easy to identify but difficult to execute.
Source: Calafia Beach Pundit – Scott Grannis
Almost everyone wants the government to spend less, but at the same time nobody wants their benefits cut. You can’t have your cake and eat it too. Citing two different studies, Meeker shows how 80% of Americans want a balanced budget as a national priority, but only 12% are willing to cut spending on Medicare and Social Security.
The rubber will hit the road in the next few months when politicians in a post-presidential election period will be forced to face these difficult “Fiscal Cliff” choices – $700 billion+ in tax hikes and spending increases that jeopardize the current recovery and our fiscal future.
Source: PIMCO
As market maven Mary Meeker recognizes, our fiscal situation is quite “discouraging”. With that said, although USA Inc. may have earned a current “Sell” rating, Meeker acknowledges that our country can become a positive turnaround situation. If voters actively push politicians to making difficult but necessary financial decisions to lower deficits and debt, investors around the globe will be ready to “Buy” USA Inc.’s stock.
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 SCM had no direct positions 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.
Google Caught Naked: Their Loss, Your Gain?
Google Inc. (GOOG) got caught naked yesterday with the early release of its lackluster numbers and “Pending Larry Quote,” but is Google’s loss your gain? An endless number of bloggers and media outlets were quick to jump on the bandwagon, highlighting the sophomor-ish early dissemination of quarterly results, and then simultaneously headlines were blasted about a -20% drop in profits.
I love these sensationalist headlines that I hear chirped in the local Starbucks (SBUX), on the elevator, or at the grocery store. The Armageddon headlines and cascading minute-by-minute charts make for entertaining viewing, but the gaudy $40 billion in cash piling up on Google’s balance sheet, including the measly $3 billion it added in the quarter, may also be news-worthy. Fear sells more than greed, which may explain why there is little mention of Google’s +45% revenue growth (equally misleading because of the Motorola deal). Let me remind you, the $3 billion of cold hard cash created in a single 90 day period is the equivalent size of many large established companies – companies like Groupon Inc. (GRPN), Tesla Motors Inc. (TSLA), and Weight Watchers International Inc. (WTW).
If people could take off their panic caps for a minute, they would be able to see the explosion in smart phones (now around 1 billion) is on pace to swell to 5 billion over the next decade. What will that mean for a market leader like Google with over ½ billion Android devices that is activating 1.3 million more every day? I don’t know for sure, but I’m willing to venture it is going to mean a lot of dough for Google. What further inspires my confidence? Well, the fact that Google’s mobile related revenues have gone from $2.5 billion run rate last year to over $8 billion today indicates they are on the right track.
Google got caught naked with its press release flub, and the frail Motorola acquisition may cause a little indigestion in the coming quarters, but any short-run Google losses may be your opportunity for long-term gains.
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 GOOG, but at the time of publishing SCM had no direct positions in SBUX, TSLA, GRPN, WTW, 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.
Sleeping Through Bubbles and Decade Long Naps
We have lived through many investment bubbles in our history, and unfortunately most investors sleep through the early wealth-creating inflation stages. Typically, the average investor wakes up later to a hot idea once every man, woman, and child has identified the clear trend…right as the bubble is about burst. Sadly, the masses do a great job of identifying financial bubbles at the end of a cycle, but have a tougher time realizing the catastrophic consequences of exiting a tired winner. Or as strategist Jim Stack states, “Bubbles, for the most part, are invisible to those trapped inside the bubble.” The challenge of recognizing bubbles explains why they are more easily classified as bubbles after a colossal collapse occurs. For those speculators chasing a precise exit point on a bubblicious investment, they may be better served by waiting for the prick of the bubble, then take a decade long nap before revisiting the fallen angel investment idea.
Even for the minority of pundits and investors who are able to accurately identify these financial bubbles in advance, a much smaller number of these professionals are actually able to pinpoint when the bubble will burst. Take for example Alan Greenspan, the ex-Federal Reserve Chairman from 1987 to 2006. He managed to correctly identify the technology bubble in late-1996 when he delivered his infamous “irrational exuberance” speech, which questioned the high valuation of the frothy, tech-driven stock market. The only problem with Greenspan’s speech was his timing was massively off. Stated differently, Greenspan was three years premature in calling out the pricking of the bubble, as the NASDAQ index subsequently proceeded to more than triple from early 1997 to early 2000 (the index exploded from about 1,300 to over 5,000).
One of the reasons bubbles are so difficult to time during their later stages is because the deflation period occurs so quickly. As renowned value investor Howard Marks fittingly notes, “The air always goes out a lot faster than it went in.”
Bubbles, Bubbles, Everywhere
Financial bubbles do not occur every day, but thanks to the psychological forces of investor greed and fear, bubbles do occur more often than one might think. As a matter of fact, famed investor Jeremy Grantham claims to have identified 28 bubbles in various global markets since 1920. Definitions vary, but Webster’s Dictionary defines a financial bubble as the following:
A state of booming economic activity (as in a stock market) that often ends in a sudden collapse.
Although there is no numerical definition of what defines a bubble or collapse, the financial crisis of 2008 – 2009, which was fueled by a housing and real estate bubble, is the freshest example in most people minds. However, bubbles go back much further in time – here are a few memorable ones:
Dutch Tulip-Mania: Fear and greed have been ubiquitous since the dawn of mankind, and those emotions even translate over to the buying and selling of tulips. Believe it or not, some 400 years ago in the 1630s, individual Dutch tulip bulbs were selling for the same prices as homes ($61,700 on an inflation adjusted basis). This bubble ended like all bubbles, as you can see from the chart below.
Source: The Stock Market Crash.net
British Railroad Mania: In the mid-1840s, hundreds of companies applied to build railways in Britain. Like all bubbles, speculators entered the arena, and the majority of companies went under or got gobbled up by larger railway companies.
Roaring 20s: Here in the U.S., the Roaring 1920s eventually led to the great Wall Street Crash of 1929, which finally led to a nearly -90% plunge in the Dow Jones Industrial stock index over a relatively short timeframe. Leverage and speculation were contributors to this bust, which resulted in the Great Depression.
Nifty Fifty: The so-called Nifty Fifty stocks were a concentrated set of glamour stocks or “Blue Chips” that investors and traders piled into. The group of stocks included household names like Avon (AVP), McDonald’s (MCD), Polaroid, Xerox (XRX), IBM and Disney (DIS). At the time, the Nifty Fifty were considered “one-decision” stocks that investors could buy and hold forever. Regrettably, numerous of these hefty priced stocks (many above a 50 P/E) came crashing down about 90% during the1973-74 period.
Japan’s Nikkei: The Japanese Nikkei 225 index traded at an eye popping Price-Earnings (P/E) ratio of about 60x right before the eventual collapse. The value of the Nikkei index increased over 450% in the eight years leading up to the peak in 1989 (from 6,850 in October 1982 to a peak of 38,957 in December 1989).
Source: Thechartstore.com
The Tech Bubble: We all know how the technology bubble of the late 1990s ended, and it wasn’t pretty. PE ratios above 100 for tech stocks was the norm (see table below), as compared to an overall PE of the S&P 500 index today of about 14x.
Source: Wall Street Journal – March 14, 2000
The Next Bubble
What is/are the next investment bubble(s)? Nobody knows for sure, but readers of Investing Caffeine know that long-term bonds are one fertile area. Given the generational low in yields and rates, and the near doubling of long-term Treasury prices over the last twelve years, it can be difficult to justify heavy allocations of inflation losing bonds for long time-horizon investors. Gold, another asset class that has increased massively in price (over 6-fold rise since about 2000) and attracted swaths of speculators, is another target area. However, as we discussed earlier, timing bubble bursts is extremely challenging. Nevertheless, the great thing about long-term investing is that probabilities and valuations ultimately do matter, and therefore a diversified portfolio skewed away from extreme valuations and speculative sectors will pay handsome dividends over the long-run.
Many traders continue to daydream as they chase performance through speculative investment bubbles, looking to squeeze the last ounce of an easily identifiable trend. As the lead investment manager at Sidoxia Capital Management, I spend less time sucking the last puff out of a cigarette, and spend more time opportunistically devoting resources to less popular growth trends. As demonstrated with historical examples, following the trend du jour eventually leads to financial ruin and nightmares. Avoiding bubbles and pursuing fairly priced growth prospects is the way to achieve investment prosperity…and provide sweet dreams.
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 are short TLT, but at the time of publishing SCM had no direct positions in AVP, MCD, XRX, IBM, DIS, 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.
Robotic Chain Saw Replaces Paul Bunyan
The world is rapidly changing and so is the profile of jobs. Technology is advancing at an accelerating pace, and this is having enormous impacts on the look, feel, and shape of global workforce dynamics. If lumberjack Paul Bunyan and his blue ox Babe were alive today, the giant would not be chopping down trees with a plain old steel axe, but more likely Mr. Bunyan would be using a 20 inch, 8 horse-power chain saw with side-mounted tensioner purchased from ChainSawsDirect.com.
But productivity in logging is not the only industry in which output has dramatically increased over the last generation. A recent New York Times article published by John Markoff explores how robots and automation are displacing humans across many different companies and industries around the world.
In China, manufacturers have exploited the value of cheap labor in the name of low-priced exports, but with millions of workers now moving to job-filled cities, workers are now demanding higher wages and better working conditions. Besides rising wages, higher transportation costs have eaten away labor expense advantages too. One way of getting around the issues of labor costs, labor relations, and transportations costs is to integrate robots into your workplace. 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 you for discrimination or sexual harassment. The initial costs of a robot may be costlier than hiring a human being by a factor of five times an annual salary, but that hasn’t stopped companies everywhere from integrating robots into their operations.
The Orange Box on Wheels
One incredible example of robot usage (not covered by Markoff) is epitomized through Amazon.com Inc.’s (AMZN) $750 million acquisition of Kiva Systems Inc. last year. In some cases, Kiva uses hundreds of autonomous mobile robots in a warehouse to create a freeway-like effect of ecommerce fulfillment that can increase worker productivity four-fold. Amazon is a true believer of the technology as evidenced by the use of Kiva robots in two of its major websites, shoe-retailer Zappos.com and baby-products site Diapers.com, but Kiva’s robots have also been used by other major retailers including Crate & Barrel, Staples Inc (SPLS), and Gap Inc (GPS). The orange square robots on wheels, which can cost in the range of $2 – $20 million per system, travel around a warehouse tracking the desired items and bring them back to a warehouse worker, ready to then be packed and shipped to a customer. Larger warehouses can use up to 1,000 of the Kiva robots. To see how this organized chaos works, check out the video below to see the swarm of orange machines dancing around the warehouse floor.
The Next Chapter
The auto and electronics industry have historically been the heaviest users of robots and automation, but those dynamics are changing. Healthcare, food, aviation, and other general industries are jumping on the bandwagon. And these trends are not just happening in developed markets, but rather emerging markets are leading the charge – even if penetration rates are lower there than in the richer countries. The robotic usage growth is rapid in emerging markets, but the penetration of robotic density per 10,000 workers in China, Brazil and India is less than 10% of that in Japan and Germany (< 20% penetration of the U.S.), according to IFR World Robotics. As a matter of fact, IFR is forecasting that China will be the top robot market by 2014.
What does this mean for jobs? Not great news if you are a low-skilled worker. Take Foxconn, the company that manufactures and assembles those nifty Apple iPhones (AAPL) that are selling by the millions and generating billions in profits. The harsh working conditions in these so-called massive sweatshops have resulted in suicides and high profile worker backlashes. Related to these issues, Foxconn dealt with at least 17 suicides over a five year period. What is Foxconn’s response? Well, besides attempting to respond to worker grievances, Foxconn chairman Terry Gou announced plans to produce 1 million robots in three years , which will replace about 500,000 jobs….ouch!
As the New York Times points out, the “Rise of Machines” is not about to result in Terminator-like robots taking over the world anytime soon:
“Even though blue-collar jobs will be lost, more efficient manufacturing will create skilled jobs in designing, operating and servicing the assembly lines, as well as significant numbers of other kinds of jobs in the communities where factories are.”
Many companies see this trend accelerating and are investing aggressively to profit from the robotic automation and productivity benefits. In today’s day and age, Paul Bunyan would have surely taken advantage of these trends, just as I plan to through Sidoxia Capital Management’s opportunistic investments in the robotic sector.
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), AMZN, and AAPL, but at the time of publishing SCM had no direct positions in Foxconn/Hon Hai, Crate & Barrel, SPLS, GPS, 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.
Autumn, Elections and Replacement Refs
Article is an excerpt from previously released Sidoxia Capital Management’s complementary October 1, 2012 newsletter. Subscribe on right side of page.
As September has come to a close, the grand finale of our annual seasons has commenced… autumn. How do we know autumn is here? Well, for starters, the leaves are changing colors; the weather is about to cool; and the NFL replacement referees are watching Sunday football games from their couches.
While 2012 is split into quarters, football games and investment seasons are also divided into four quarters. Right now, the economic fourth quarter has just started and the home team is winning. As we can see from the stock market scoreboard, the S&P 500 index is up +15% this year (+6% in Q3) and the NASDAQ index has catapulted +20% through September (+6% also in Q3). The U.S. home team is winning, but a fumble, blocked kick, or interception could mean the difference between an exciting win and a devastating loss.
Another game divided into four parts is the game of presidential politics. However, presidential elections are divided into four years – not four quarters. Five weeks from now, we’ll find out if our Commander in Chief Obama will get to lead our team for another game lasting four years, or whether backup quarterback Mit Romney will be called into the game. The fans are getting restless due to anemic growth and lingering joblessness, but for now, the coach is keeping the president in the starting lineup. Both President Obama and Governor Romney will take some head-to-head practice snaps against each other in the first of three scheduled presidential debates beginning this week.
Bernanke Changes Rules
The New York Jets have Tim Tebow for their secret weapon (1 for 1 yesterday!), and the United States economy has Ben Bernanke. Although our home team may be winning, it has required some monetary rule-changing policies to be instituted by Federal Reserve Chairman Ben Bernanke to keep our team in the lead. Just a few weeks ago, Mr. Bernake instituted QE3 (3rd round of quantitative easing), which is an open-ended mortgage buying program designed to lower home buying interest rates and stimulate the economy (see Helicopter Ben to QE3 Rescue). The short-term benefits of the $40 billion monthly bond buying binge are relatively clear (lower borrowing costs for homebuyers), but the longer-term costs of inflation are stewing patiently on the backburner.
Source: Calafia Beach Pundit (Scott Grannis)
As you can see from the chart above, August median home prices are up +10% for existing single-family homes over the last year. Housing affordability is at extremely attractive levels, and although the bank loan purse strings are tight, a modest loosening is beginning to unfold.
Economy Playing Injured
Our starters may still be playing, but many are injured, just like the jobless are limping through the employment market. Encouragingly, although unemployment remains stubbornly high, the number of people collecting unemployment checks is a lot lower (-1.25 million fewer than a year ago). Not great news, but at least we are hobbling in the right direction (see chart below).
Source: Calafia Beach Pundit (Scott Grannis)
Time for Fiscal Cliff Hail Mary?
If a team is losing at the end of a game, a “Hail Mary” pass might be necessary. We are quickly nearing this fiscal Armageddon situation as the approximately $700 billion “fiscal cliff” (a painful combo of spending cuts and tax hikes) kicks in at the end of the year (see PIMCO chart below via The Reformed Broker).
Running trillion dollar deficits in perpetuity is not a sustainable strategy, so for most people, a combination of spending cuts and/or tax hikes makes sense to narrow the gap (see chart below). Last year’s recommendations from the bipartisan Simpson-Bowles commission, which were ignored, are not a bad place to start. What happens in the lame-duck session of Congress (after the elections) will dramatically impact the score of the current economic game, and decide who wins and who loses.
Source: Calafia Beach Pundit (Scott Grannis)
Heated debates continue on how the gap between expenses and revenues will be narrowed, but regardless, Democrats will continue to push for capital gains tax hikes on the rich (see tax chart below); and the Republicans will push to cut spending on entitlements, including untenable programs like Medicare and Social Security.
Source: The Wall Street Journal
The game is not quite over, but the fourth quarter promises to be a bloody battle. So while the replacement refs may be back at home, the experienced returning refs have been known to blow calls too. Let’s just hope that autumn, the season of bounteous fecundity, ends up being a continued trend of sweet market success, rather than a political period of botched opportunities.
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 SCM had no direct positions 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.
Fiscal Cliff: Will a 1937 Repeat = 2013 Dead Meat?
Source: StockCharts.com
The presidential election is upon us and markets around the globe are beginning to factor in the results. More importantly, in my view, will be the post-election results of the “fiscal cliff” discussions, which will determine whether $600 billion in automated spending cuts and tax increases will be triggered. Similar dynamics in 1937 existed when President FDR (Franklin Delano Roosevelt) felt pressure to balance the budget after his 1933 New Deal stimulus package began to rack up deficits and lose steam.
What’s Similar Today
Just as there is pressure to cut spending today by Republicans and “Tea-Party” Congressmen, so too there was pressure for FDR and the Federal Reserve in 1937 to unwind fiscal and monetary stimulus. At the time, FDR thought self-sustaining growth had been restored and there was a belief that the deficits would become a drag on expansion and a source of future inflation. What’s more, FDR’s Treasury Secretary, Henry Morgenthau, believed that continued economic growth was dependent on business confidence, which in turn was dependent on creating a balanced budget. History has a way of repeating itself, which explains why the issues faced in 1937 are eerily similar to today’s discussions.
The Results
FDR was successful in dramatically reducing spending and significantly increasing taxes. Specifically, federal spending was reduced by -17% over two years and FDR’s introduction of a Social Security payroll tax contributed to federal revenues increasing by a whopping +72% over a similar timeframe. The good news was the federal deficit fell from -5.5% of GDP to -0.5%. The bad news was the economy went into a tail-spinning recession; the Dow crashed approximately -50%; and the unemployment rate burst higher by about +3.3% to +12.5%.
Source: New York Times
Source: Blue Mass Group
What’s Different This Time?
For starters, one difference between 1937 and 2012 is the level of unemployment. In 1937, unemployment was +14.3%, and today it is +8.1%. Objectively, today there could be higher percentage of the population “under-employed,” but nonetheless the job market was in worse shape back then and labor unions had much more power.
Another major difference is the stance carried by the Fed. Today, Ben Bernanke and the Fed have made it crystal clear they are in no hurry to take away any of the monetary stimulus (see Hekicopter Ben QE3 article), until we have experienced a long-lasting, sustainable recovery. Back in early 1937, the Fed increased banks’ reserve requirements twice, doubling the requirement in less than a year, thereby contracting monetary supply drastically.
Furthermore, we live in a much more globalized world. Today, central banks and governments around the world are doing their part to keep growth alive. Emerging markets are large enough now to move the needle and impact the growth of developed markets. For example, China, the #2 global superpower, continues to cut interest rates and has recently implemented a $158 billion infrastructure spending program.
Net-Net
Whether you’re a Republican or Democrat, everyone generally agrees that job creation is an important common objective, which is consistent with growing our economy. The disagreement between parties stems from the differing opinions on what are the best ways of creating jobs. From my perch, the frame of the debate should be premised on what policies and incentives should be structured to increase competitiveness. Without competitiveness there are no jobs. At the end of the day, money and capital are agnostic. Cold hard cash migrates to the countries in which it is treated best. And where the money goes is where the jobs go.
There is no single silver bullet to solve the competiveness concerns of the United States. Like baseball (since playoffs are quickly approaching), winning is not based solely on hitting, pitching, defense, or base-running. All of these facets and others are required to win. The same principles apply to our country’s competitiveness.
In order to be a competitive leader in the 21st century, here are few necessary areas in which we must excel:
Education: Chicago school unions have been in the news, and I have no problems with unions, if accountability can be structured in. Unfortunately, however, it is clear to me that for now our system is broken (a must see: Waiting for Superman). We cannot compete in the 21st century with an illiterate, uneducated workforce. Our colleges and universities are still top-notch, but as Bill Gates has stated, our elementary schools and high schools are “obsolete”.
Entitlements: Social safety nets like Social Security and Medicare are critical, but unsustainable promises that explode our debt and deficits will not make us more competitive. Politicians may gain votes by making promises in the short-run, but when those promises can’t be delivered in the medium-run or long-run, then those votes will disappear quickly. The sworn guarantees made to the 76 million Baby Boomers now entering retirement are a disaster waiting to happen. Benefits need to be reduced and or criteria need to be adjusted (i.e., means-testing, increase age requirements). The problems are clear as day, so Americans cannot walk away from this sobering reality.
Strategic Government Investment: – Government played a role in building our country’s railways, highways, and our military – a few strategic areas of our economy that have made our nation great. Thoughtful investments into areas like energy infrastructure (e.g., smart grid), internet infrastructure (e.g., higher speed super highway), and healthcare (e.g., human genome research) are a few examples of how jobs can be created while simultaneously increasing our global competitiveness. The great thing about strategic government investments is that government does NOT have to do all the heavy lifting. Rather than write all the checks and do all the job creation from Washington, government can implement these investments and create these jobs by providing incentives for the private sector. Strategic public-private partnerships can generate win-win results for government, businesses, and job seekers. If, however, you’re convinced that our government is more efficient than the private sector, then I highly encourage you to go visit your local DMV, post office, or VA to better appreciate the growth-sucking bureaucracy and inefficiency.
Taxes / Regulations / Laws: Taxes come from profits, and businesses create profits. In order to have a strong and competitive government, we need strong and competitive businesses. Higher taxes, excessive regulations, and burdensome laws will not create stronger and more competitive businesses. I acknowledge that reckless neglect and consumer exploitation will not work either, but reasonable protections for consumers and businesses can be instituted without multi-thousand page regulations. Reducing ridiculous subsidies and loopholes, while tightening tax collection processes and punishing tax dodgers makes perfect sense…so why not do it?
Politics are sharply polarized at both ends of the spectrum, but no matter who wins, our problems are not going away. We may or may not have a new president of the United States this November, but perhaps more important than the elections themselves will be the outcome of the “fiscal cliff” legislation (or lack thereof). If we want to maintain our economic power as the strongest in the world, solving this “fiscal cliff” is the key to improving our competiveness. Avoiding a messy 1937 (and 2011) political repeat will prevent us from becoming dead meat.
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 SCM had no direct positions 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.
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