Posts tagged ‘technology’

Tariff, Fed, & Facebook Fears but No Easter Bunny Tears

After an explosive 2017 (+19.4%) and first month of 2018 (+5.6%), the Easter Bunny came out and laid an egg last month (-2.7%). It is normal for financial markets to take a breather, especially after an Energizer Bunny bull market, which is now expanding into its 10th year of cumulative gains (up +296% since the lows of March 2009). Investors, like rabbits, can be skittish when frightened by uncertainty or unexpected events, and over the last two months, that’s exactly what we have seen.

Fears of Tariffs/Trade War: On March 8th, President Trump officially announced his 25% tariffs on steel and 10% on aluminum. The backlash was swift, not only in Washington, but also from international trading partners. In response, Trump and his economic team attempted to diffuse the situation by providing temporary tariff exemptions to allied trading partners, including Canada, Mexico, the European Union, and Australia. Adding fuel to the fire, Trump subsequently announced another $50-$60 billion in tariffs placed on Chinese imports. To place these numbers in context, let’s first understand that the trade value of steel (roughly $300 billion – see chart below), aluminum, and $60 billion in Chinese products represent a small fraction of our country’s $19 trillion economy (Gross Domestic Product). Nevertheless, financial markets sold off swiftly this month in unison with these announcements. The selloff did not necessarily occur because of the narrow scope of these specific announcements, but rather out of fear that this trade skirmish may result in large retaliatory tariffs on American exports, and ultimately these actions could blow up into a full-out trade war and trigger a spate of inflation.

Source: Bloomberg

These trade concerns are valid, but at this point, I am not buying the conspiracy theories quite yet. President Trump has been known to use fiery rhetoric in the past, whether talking about building “The Wall” or threats to defense contractors regarding the pricing of a legacy Air Force One contract. Often, the heated language is solely used as a first foray into more favorable negotiations. President Trump’s tough tariff talk is likely another example of this strategy.

Interest Rate/Inflation Phobia: Beginning in early February, anxiety in the equity markets intensified as interest rates on the benchmark 10-year Treasury note have now risen from a September-low yield of 2.40% to a 2018-high of 2.94%. Since that short-term high this year, rates have moderated to +2.74%. Adding to this month’s worries, Fed Chairman Jerome Powell hiked interest rates on the Federal Funds interest rate target by +0.25% to a range of 1.50% to 1.75%. While the direction of rate increases may be unnerving to some, both the absolute level of interest rates and the level of inflation remain relatively low, historically speaking (see 2008-2018 inflation chart below). Inflation of 1.5% is nowhere near the double digit inflation experienced in the late-1970s and early 1980s .

Source: Dr. Ed’s Blog

It is true that rates on mortgages, car loans, and credit cards might have crept up a little, but from a longer-term perspective rates still remain significantly below historical averages. Even if the Federal Reserve increases their interest rate target range another two to three times in 2018 as currently forecasted, we will still be at below-average levels, which should still invigorate economic growth (all else equal). In car terms, if the current strategy continues, the Fed will be moving from a strategy in which they are flooring the economic pedal to the medal, to a point where they will only be going 10 miles per hour over the speed limit. The strategy is still stimulative, but just not as stimulative as before. At some point, rising interest rates will slow down (or choke off) growth in the economy, but I believe we are still a long way from that happening.

Why am I not worried about runaway interest rates or inflation? For starters, I believe it is very important for investors to remove the myopic blinders, so they can open their eyes to what’s occurring with global interest rate trends. Although, U.S. rates have more than doubled from July 2016 to 2.74%, as long as interest rates in developed markets like Japan, the European Union, and Canada, remain near historically low levels (see chart below), the probabilities of runaway higher interest rates and inflation are unlikely to transpire.

Source: Ed Yardeni

With the Japanese 10-year government bond yielding 0.04% (near-zero percent), the German 10-year bond yielding 0.50%, and the U.K. 10-year bond yielding 1.35%, one of two scenarios is likely to occur: 1) global interest rates rise while U.S. rates decline or remain stable; or 2) U.S. interest rates decline while global rates decline or remain stable. While either scenario is possible, given the lack of rising inflation and the slack in our employment market, I believe scenario #2 is more likely to occur than scenario #1.

Privacy, Politics, and Facebook: A lot has recently been made of the 50 million user profiles that became exposed and potentially exploited for political uses in the 2016 presidential elections. How did this happen, and what was the involvement of Facebook Inc. (FB)? If you have ever logged into an internet website and been given the option to sign in with your Facebook password, then you have been exposed to third-party applications that are likely mining both your personal and Facebook “friend” data. The genesis of this particular situation began when Aleksandr Kogan, a Russian American who worked at the University of Cambridge created a Facebook quiz app that not only collected personal information from approximately 270,000 quiz-takers, but also extracted information from about 50 million Facebook friends of the quiz takers (data scandal explained here).

Mr. Kogan (believed to be in his early 30s) allegedly sold the Facebook data to a company called Cambridge Analytica, which employed Steve Bannon as a vice president. This is the same Steve Bannon who eventually became a senior adviser for the Trump Administration. Facebook has defended itself by blaming Aleksandr Kogan and Cambridge Analytica for violating Facebook’s commercial data sharing policies. Objectively, regardless of the culpability of Kogan, Cambridge Analytica, and/or Facebook, most observers, including Congress, believe that Facebook should have more closely monitored the data collected from third party app providers, and also done more to prevent such large amounts of data to be sold commercially. Now, the CEO (Chief Executive Officer) of Facebook, Mark Zuckerberg, faces an appointment in Washington DC, where he will receive tongue lashings and be raked over the coals, so politicians can better understand the breakdown of this data breach.

It is certainly possible that a large amount of data was compromised for political purposes relating to the 2016 presidential election. There has been some backlash as evidenced by a few high profile users threatening to leave the Facebook platform like actor/comedian Will Ferrell, Tesla CEO Elon Musk, and singer Cher, but since the data scandal was unearthed, there has been little evidence of mass defections. Even considering all the Facebook criticism, the stickiness and growth of Facebook’s 1.4 billion (with a “b”) monthly active users, coupled with the vast targeting capabilities available for a wide swath of advertisers, likely means any negative impact will be short-lived. Even if there are defectors, where will all these renegades go, Instagram? Well, if that were the case, Instagram is owned by Facebook. Snapchat, is another Facebook alternative, however this platform is skewed toward younger demographics, and few people who have invested years of sharing/saving memories on the Facebook cloud, are unlikely to delete these memories and migrate that data to a lesser-known platform.

Financial markets move up and financial markets down. The first quarter of 2018 reminded us that no matter how long a bull market may last, nothing money-related moves in a straight line forever. The fear du jour constantly changes, and last month, investors were fretting over tariffs, the Federal Reserve’s monetary policy, and a Facebook data scandal. Suffice it to say, next month will likely introduce new concerns, but one thing I do not need to worry about is an empty Easter basket. It will take me much longer than a month to work through all the jelly beans, chocolate bunnies, and marshmallow Peeps.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 2, 2018). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in FB, AMZN, TSLA, and 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.

April 2, 2018 at 3:10 pm Leave a comment

Investors Slowly Waking to Technology Tailwinds

In recent years, investors have been overwhelmingly been distracted by geopolitical headlines and risk aversion caused by the worst financial crisis in a generation. In the background, the tailwinds of technological innovation have been silently gaining momentum. Although this topic is nothing new for Investing Caffeine followers, the outperformance of technology stocks has been pretty stunning in 2017 (see chart below), with the S&P 500 Technology sector rising almost +20% versus the Non-Tech sector eking out a little more than +1% return. Peered through the style lenses of Growth versus Value, technology’s contribution is also evident by the Russell 1000 Growth index’s 2017 outperformance over the Russell 1000 Value index by +11% (approximately +14% vs +3%, respectively).

Source: Bloomberg via The Financial Times

More specifically, what’s driving a significant portion of this outperformance? Robin Wigglesworth from The Financial Times highlighted a key contributing trend here:

“Facebook, Apple, Amazon and Netflix have all gained over 30 per cent this year, and Google is up 24 per cent. Their total market capitalisation now stands at $2.4 trillion. That makes them bigger than the French CAC 40 or Germany’s Dax, and nearly as large as the FTSE 100.”

 

Technology’s domination has been even more impressive since the cycle bottom of stock prices in 2009, if one contrasts the stark difference in the performance of the tech-heavy NASDAQ versus the more sector-balanced S&P 500. Over this timeframe, the NASDAQ has more than quadrupled in value and beaten the S&P 500 by more than +120%.

While the mass media likes to talk about technology bubbles, artificial money printing by global central banks, and imminent recessions, for years I have been highlighting the importance of the technology revolution and its beneficial impact on stock prices. Here are a few examples:

Technology Does Not Sleep in a Recession (2009)

Technology Revolution Raises Tide (2010)

NASDAQ and the R&D Tech Revolution (2014)

NASDAQ 5,000…Irrational Exuberance Déjà Vu? (2014)

The Traitorous 8 and Birth of Silicon Valley (2016)

As I have explained in many of my previous writings, the important factors of technology, globalization, and demographics have been the key driving forces behind the stock bull market and multi-decade decline in interest rates – not Quantitative Easing (QE) and/or rising debt levels.

Eventually, undoubtedly, euphoria and over-investment will lead to a cyclically-driven recession caused by excess capacity (supply exceeding demand). Regardless of the timing of future economic cycles, the continued multi-generational advance in new technological innovations will continue to drive economic growth, disinflation, improved standards of living, and higher stock prices. Until the animal spirits of the masses fully embrace this technological trend, Sidoxia and its clients will enjoy the tailwind of innovation as I continue to discover attractive investment opportunities.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own FB, AAPL, AMZN, GOOG/L, certain exchange traded funds, and short position in NFLX, but at the time of publishing SCM 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.

May 27, 2017 at 11:55 am 1 comment

The Fed: Myths vs. Reality

Crystal Ball

Traders, bloggers, media talking heads, and pundits of all stripes went into a feverish sweat as they anticipated the comments of Federal Reserve Chairman Janet Yellen at the annual economic summit held in Jackson Hole, Wyoming. When Yellen, arguably the most dovish Fed Chairman in history, uttered, “I believe the case for an increase in the federal funds rate has strengthened in recent months,” an endless stream of commentators used this opportunity to spout out a never-ending stream of predictions describing the looming consequences of such a potential rate increase.

As I’ve stated before, the Fed receives both too much blame and too much credit for basically doing nothing except moving short-term interest rates up or down (and most of the time they do nothing). However, until the next Fed meeting in September (or later), we all will be placed in purgatory with non-stop speculation regarding the timing of the next rate increase.

The ludicrous and myopic analysis can be encapsulated by the recent article written by Pulitzer Prize-winning Fed writer Jon Hilsenrath, in his piece titled, The Great Unraveling: Fed Missteps Fueled 2016 Populist Revolt. Somehow, Hilsenrath is making the case that a group of 12 older, white people that meet eight times per year in Washington to discuss interest rate policy based on inflation and employment trends has singlehandedly created income inequality, and a populist movement leading to the rise of Donald Trump and Bernie Sanders.

While this Fed scapegoat explanation is quite convenient for the doom-and-gloomers (see The Fed Ate My Homework), it is way off base. I hate to break it to Mr. Hilsenrath, or other conspiracy theorists and perma-bears, but blaming a small group of boring bankers is an overly-simplistic “straw man” argument that does not address the infinite number of other factors contributing to our nation’s social and economic problems.

Ever since the bull market began in 2009, a pervasive skepticism and mistrust have kept the bull market climbing a wall of worry to all-time record levels. In the process, Hilsenrath et. al. have proliferated an inexhaustible list of myths about the Fed and its powers. Here are some of them:

Myth #1: The printing of money by the Fed has led to an artificially inflated stock market bubble and Ponzi Scheme.

  • As stock prices have more than tripled over the last eight years to record levels, I’ve reveled in the hypocrisy of the “money printers” contention. First of all, the money printing derived from Quantitative Easing (QE) was originally cited as the sole reason for low, declining interest rates and the rising stock market. The money printing community vociferously predicted once QE ended, as it eventually did in 2014, interest rates would explode higher and stock market prices would collapse. What happened? The exact opposite occurred. Interest rates have gone to record low levels, and stock prices have advanced to all-time record highs.

Myth #2: The Fed controls all interest rates.

  • Yes, the Fed can influence short-term interest rates through bond purchases and the targeting of the Federal Funds rate. However, the Fed has little-to-no influence on longer-term interest rates. The massive global bond market dwarfs the size of the Fed and U.S. stock market, and as such, large global financial institutions, pensions, hedge funds, and millions of other investors around the world have more influence on longer-term interest rates. The relationship between the 10-Year Treasury Note yield and the Fed’s monetary policy is loose at best.

Myth #3: The stock market will crash when the Fed raises interest rates.

  • Well, we can see that logic is already wrong because the stock market is up significantly since the Fed raised interest rates in mid-December 2015. It is true that additional interest rate hikes are likely to occur in our future, but that does not necessarily mean stock prices are going to plummet. Commentators and bloggers are already panicking about a potential rate hike in September. Before you go jump out a window, let’s put this potential rate hike into context. For starters, let’s not forget the “dove of all doves,” Janet Yellen, is in charge and there has only been one rate increase 0f 0.25% over the last decade. As I point out in one of my previous articles (see Fed Fatigue), stock prices increased during the last rate hike cycle (2004 – 2006) when the Fed raised  interest rates from 1.0% to 5.25% (the equivalent of another 16 rate hikes of 0.25%). The world didn’t end in 1994 either, when the Fed Funds rate increased from 3% to 6% over a short time frame, and stocks finished roughly flat for the period. Inflation levels remain at relatively low levels, and the Fed has moved less than 10% of recent hike cycles, so now is not the time to panic. Regardless of what the fear mongers say, the Fed and the bull market fairy godmother (Janet Yellen) will be measured and deliberate in its policies and will verify that any policy action is made into a healthy, strengthening economy.

Myth #4: Stimulative monetary policies instituted by the Fed and other central banks will lead to hyperinflation.

  • Japan has done QE for decades, and QE efforts in the U.S. and Europe have also disproved the hyperinflation myth. While commentators, pundits, and journalists like to all point and blame Janet Yellen and the Fed for today’s so-called artificially low interest rates, one does not need to be a genius to realize there are other factors contributing to low rates and inflation. Declining interest rates and inflation are nothing new…this has been going on for over 35 years! (see chart below) As I have discussed previously the larger contributors to declining interest rates and disinflation are technology, globalization, and emerging markets (see Why 0% Interest Rates?). By next year, over one-third of the world’s population is expected to own a smartphone (2.6 billion people), the equivalent of a supercomputer in the palm of their hands. Mobile communication, robotics, self-driving cars, virtual & augmented reality, drones, artificial intelligence, drones, biotechnology, and other technologies are dramatically impacting productivity (i.e., downward pressure on prices and interest rates). These advancements, combined with the billions of low-priced workers in emerging markets, who are lifting themselves out of poverty, are contributing to the declining rate/inflation trend.
Source: Calafia Beach Pundit

Source: Calafia Beach Pundit

As the next Fed meeting approaches, there is no doubt the airwaves and internet will be filled with alarmist calls from the likes of Jon Hilsenrath and other Fed-haters. Fortunately, more informed financial market observers will be able to filter out this noise and be able to separate out the many Fed and interest rate myths from the reality.

investment-questions-border

Wade W. Slome, CFA, CFP®

www.Sidoxia.com

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.

August 27, 2016 at 8:15 pm 11 comments

Dying Unicorns

Unicorn Free Image

Historically, when people speak about unicorns they are referring to those magical white horses with long horns sprouting from their foreheads. Today, in Silicon Valley and on Wall Street, “unicorns” refer to those private companies valued at more than $1 billion. The current list of unicorns is extensive, including household names like money-losing Uber ($51.0 billion valuation), Airbnb ($25.5 billion), SnapChat ($15.3 billion), and about 150 other money-losing companies with a combined valuation of approximately a half trillion dollars (see list here). Just like the mythical unicorns we imagine and read about in fairy tales, Silicon Valley unicorns are at risk of dying off and becoming a myth as well.

Square at the Heart of the Problem

Following young technology start-ups with names like, Box, Dropbox, and Square can become quite confusing, but investors are becoming less confused about their desire for profits and fair valuations. The recent –33% discount in the planned pre-IPO offering price of Square shares to $11 – $13 ($4 billion) from the last private funding valuation of $15.46 ($6 billion) is signaling the deteriorating health of money-losing unicorns.

Adding insult to injury, money-losing Square provided recent private investors with a controversial “ratchet” clause, which essentially gives privileged investors additional shares, if the IPO (Initial Public Offering) price does not occur at a minimum set price. The net result is a fraction of advantaged investors receive a disproportionate percentage of the company’s value, while a majority of the other investors see their ownership value diluted. According to Forbes, approximately 30% of unicorns carry some contentious ratchet provisions, which may make IPO exits for these companies that much more difficult.

The recent Square news comes on the heels of other unicorns like Dropbox seeing its pre-IPO value being reduced by -24% from industry giant BlackRock Inc (BLK), an early Dropbox investor. According to the Wall Street Journal¸ bankers close to the company admitted achieving a pre-IPO valuation of $10 billion will be challenging. Subsequently, mutual fund behemoth Fidelity wrote down the value of social media, photo disappearing, mobile application company, Snapchat, by -25%.

Unfortunately, the problems for unicorn companies don’t stop after the IPO. Take for example, Fitbit Inc (FIT), the newly minted $6 billion IPO, which took place in June. Even though the wearable technology company may no longer be a unicorn, the -31% decline in its share price during the first half of November is evidence there are consequences to insiders dumping additional over-priced (or high-priced) shares on investors. Of the planned 17 million secondary share sale, the vast majority of the proceeds (14 million shares) are going to insiders who are taking the money and running, thereby leaving the company itself with a much smaller portion of the offering dollars.

Veteran investors have seen this movie before during the late 1990s tech bubble, and investors know that this type of movie ends very badly. As in any bubble, if you are able to participate early enough during the inflation process, it can be a spectacular ride before the bubble bursts. Unicorn companies can sell a dream for a while, but profitless prosperity cannot last forever. Eventually, profits and cash flows do become important for investors. And for some unicorn companies, the day of reckoning appears to have arrived now. It has been a fun, fairy tale ride for unicorn investors up until now, but with a half trillion dollars in unicorn investments beginning to die off, these early stage companies will need a steadier diet of profits to stay alive.

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, SCM had no direct position in Uber, Airbnb, SnapChat, Box, Dropbox, Square, BLK, FIT and  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.

November 15, 2015 at 7:34 pm 3 comments

NASDAQ Redux

Twin Babies

The NASDAQ Composite index once again crossed the psychologically, all-important 5,000 threshold this week for the first time since the infamous tech-bubble burst in the year 2000. Of course, naturally, the media jumped on a non-stop, multi-day offensive comparing and contrasting today’s NASDAQ vs. the NASDAQ twin of yesteryear. Rather than rehash the discussion once again, I have decided to post three articles I published in recent years on the topic covering the outperformance of the spotlighted, tech-heavy index.

NASDAQ 5,000 Irrational Exuberance Déjà Vu?

All Right!

Investors love round numbers and with the Dow Jones Industrial index recently piercing 17,000 and the S&P 500 index having broken 2,000 , even novice investors have something to talk about around the office water cooler. While new all-time records are being set for the major indices during September, the unsung, tech-laden NASDAQ index has yet to surpass its all-time high of 5,132 achieved 14 and ½ years ago during March of 2000.

Click Here to Read the Rest of the Article

NASDAQ and the R&D Tech Revolution

Technology

It’s been a bumpy start for stocks so far in 2014, but the fact of the matter is the NASDAQ Composite Index is up this year and hit a 14-year high in the latest trading session (highest level since 2000). The same cannot be said for the Dow Jones Industrial and S&P 500 indices, which are both lagging and down for the year. Not only did the NASDAQ outperform the Dow by almost +12% in 2013, but the NASDAQ has also trounced the Dow by over +70% over the last five years.

Click Here to Read the Rest of the Article

NASDAQ: The Ugly Stepchild

NASDAQ Stepchild

All the recent media focus has been fixated on whether the Dow Jones Industrial Average index (“The Dow”) will close above the 13,000 level. In the whole scheme of things, this specific value doesn’t mean a whole lot, but it does make for a great topic of conversation at a cocktail party. Today, the Dow is trading at 12,983, a level not achieved in more than three and a half years. Not a bad accomplishment, given the historic financial crisis on our shores and the debacle going on overseas, but I’m still not so convinced a miniscule +0.1% move in the Dow means much. While the Dow and the S&P 500 indexes garner the hearts and minds of journalists and TV reporters, the ugly stepchild index, the NASDAQ, gets about as much respect as Rodney Dangerfield (see also No Respect in the Investment World).

Click Here to Read the Rest of the Article

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, SCM 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.

March 7, 2015 at 3:27 pm Leave a comment

Why 0% Rates? Tech, Globalization & EM (Not QE)

Globalization

Recently I have written about the head-scratching, never-ending, multi-decade decline in long-term interest rates (see chart below). Who should care? Well, just about anybody, if you bear in mind the structure of interests rates impacts the cost of borrowing on mortgages, credit cards, automobiles, corporate bonds, savings accounts, and practically every other financial instrument you can possibly think of. Simplistic conventional thinking explains the race to 0% global interest rates by the loose monetary Quantitative Easing (QE) policies of the Federal Reserve. But validating that line of thinking becomes more challenging once you consider QE ended months ago. What’s more, contrary to common belief, rates declined further rather than climb higher after QE’s completion.

10-Year Treasury Yields - Calafia 12-14

Source: Calafia Beach Pundit 

More specifically, if you look at rates during this same time last year, the yield on the 10-Year Treasury Note had more than doubled in the preceding 18 months to a level above 3.0%. The consensus view then was that the eventual wind-down of QE would only add gasoline to the fire, causing bond prices to decline and rates to extend an indefinite upwards march. Outside of bond guru Jeff Gundlach, and a small minority of prognosticators, the herd was largely wrong – as is usually the case. As we sit here today, the 10-Year Note currently yields a paltry 2.26%, which has led to the long-bond iShares 20-Year Treasury ETF (TLT)  jumping +22% year-to-date (contrary to most expectations).

The American Ostrich

Like an ostrich sticking its head in the sand, us egocentric Americans tend to ignore details relating to others, especially if the analyzed data is occurring outside the borders of our own soil. Unbeknownst to many, here are some key country interest rates below U.S. yields:

  • Switzerland: 0.33%
  • Japan: 0.34%
  • Germany: 0.60%
  • Finland: 0.70%
  • Austria: 0.75%
  • France: 0.88%
  • Denmark: 0.89%
  • Sweden: 0.98%
  • Ireland: 1.29%
  • Spain: 1.69%
  • Canada 1.80%
  • U.K: 1.85%
  • Italy: 1.93%
  • U.S.: 2.26% (are our rates really that low?)

Outside of Japan, these listed countries are not implementing QE (i.e., “Quantitative Easing”) as did the United States. Rather than QE being the main driver behind the multi-decade secular decline in interest rates, there are other more important disinflationary forces at work driving interest rates lower.

Technology, Globalization, and Emerging Market Competition (T.G.E.M.)

While tracking the endless monthly inflation statistics is a useful exercise to understand the tangible underlying pricing components of various industry segments (e.g., see 20 pages of CPI statistics), the larger and more important factors can be attributed to  the somewhat more invisible elements of technology, globalization, and emerging market competition (T.G.E.M).

CPI Components

Starting with technology, to put these dynamics into perspective, consider the number of transistors, or the effective horsepower, on a semiconductor (a.k.a. computer “chip”) today. The overall impact on global standards of living is nothing short of astounding. Take an Intel chip for example – it had approximately 2,000 transistors in 1971. Today, semiconductors can cram over 10,000,000,000 (yes billions – 5 million times more) transistors onto a single semiconductor. Any individual can look no further than their smartphone to understand the profound implications this has not only on pricing in general, but society overall. To illustrate this point, I would direct you to a post highlighted by Professor Mark J. Perry, who observed the cost to duplicate an iPhone during 1991 would have been more than $3,500,000!

There are an infinite number of examples depicting how technology has accelerated the adoption of globalization. More recently, events such as the Arab Spring point out how Twitter (TWTR) displaced costly military engagement alternatives. The latest mega-Chinese IPO of Alibaba (BABA) was also emblematic of the hunger experienced in emerging markets to join the highly effective economic system of global capitalism.

I think New York Times journalist Tom Friedman said it best in his book, The World is Flat, when he made the following observations about the dynamics occurring in emerging markets:

“My mom told me to eat my dinner because there are starving children in China and India – I tell my kids to do their homework because Chinese and Indians are starving for their jobs”.

“France wants a 35 hour work week, India wants a 35 hour work day.”

There may be a widening gap between rich and poor in the United States, but technology and globalization is narrowing the gap across the rest of the world. Consider nearly half of the world’s population (3 billion+ people) live in poverty, earning less than $2.50 a day (see chart below). Technology and globalization is allowing this emerging middle class climb the global economic ladder.

Poverty

These impoverished individuals may not be imminently stealing our current jobs and driving general prices lower, but their children, and the countless educated millions in other international markets are striving for the same economic security and prosperity we have. The educated individuals in the emerging markets that have tasted capitalism are giving new meaning to the word “urgency”, which is only accelerating competition and global pricing pressures. It comes as no surprise to me that this generational migration from the poor to the middle class is putting a lid on inflation and interest rates around the world.

Declining costs of human labor from emerging markets however is not the only issue putting a ceiling on general prices. Robotics, an area in which Sidoxia holds significant investments, continues to be an area of fascination for me. With human labor accounting for the majority of business costs, it’s no wonder the C-suite is devoting more investment dollars towards automation. Rather than hire and train expensive workers, why not just buy a robot? This is not just happening in the U.S. – in fact the Chinese purchased more robots than Americans last year. And why not? An employer does not have to pay a robot overtime compensation; a robot never shows up late; robots never sue for discrimination or harassment; robots receive no healthcare or retirement benefits; and robots work 24 hours/day, 7 days/week, and 365 days/year.

While newspapers, bloggers, and talking heads like to point to the simplistic explanation of loose, irresponsible monetary policies of global central banks as the reason behind a four decade drop in interest rates that is only a small part of the story. Investors and policy makers alike should be paying closer attention to the factors of technology, globalization, and emerging market competition as the more impactful dynamics systematically driving down long term interest rates and inflation.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own a range of positions, including long positions in certain exchange traded fund positions and INTC (short position in TLT), but at the time of publishing SCM had no direct position in BABA, TWTR 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.

December 26, 2014 at 11:04 am 1 comment

NASDAQ 5,000…Irrational Exuberance Déjà Vu?

Investors love round numbers and with the Dow Jones Industrial index recently piercing 17,000 and the S&P 500 index having broken 2,000 , even novice investors have something to talk about around the office water cooler. While new all-time records are being set for the major indices during September, the unsung, tech-laden NASDAQ index has yet to surpass its all-time high of 5,132 achieved 14 and ½ years ago during March of 2000.

A lot has changed since then. Leading up to the pricking of the technology bubble, talks of an overhyped market started as early as December 5, 1996, when then Federal Reserve Chairman Alan Greenspan made his infamous “irrational exuberance” speech.

“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”    
 -Alan Greenspan (Federal Reserve Chairman 1987 – 2006)

 

On that date, the NASDAQ closed at 1,300. A little over three years later, before values cratered by -78%, the index almost quadrupled higher to 5,132. Looked at from a slightly different lens, here is how the major indexes have fared since Greenspan’s widely referenced speech almost 18 years ago:

Slide1

Despite the world’s most powerful banker calling stock prices irrational, the Dow & S&P have almost tripled in value (+164% & +167%, respectively) and the NASDAQ has almost quadrupled (+251%). The 80%+ outperformance (excluding dividends) is impressive, but reasonable if you consider this increase amounts to about a +7.2% compounded annual appreciation value. Investors have experienced a lot of heartburn over that long timeframe, but for any buy-and-holders, these returns would have trounced returns realized in alternative safe haven vehicles like CDs, savings accounts, or bonds.

Price: The Almighty Metric

There are many valuation metrics to evaluate but the most universal one is the Price/Earnings ratio (P/E). Just as in the process of assessing the value of a car, house, or stock, the price you pay is usually the most important factor of the purchase. The same principle applies to stock indexes. The cheaper the price paid, the greater probability of earning superior returns in the future. Unfortunately for investors in technology stocks, there was not much value in the NASDAQ index during late-1999, early-2000. Historical P/E data for the NASDAQ index is tough to come by, but some estimates pegged the index value at 200x’s its earnings at the peak of the 2000 technology mania. In other words, for every $1 in profit the average NASDAQ company earned, investors were willing to pay $200…yikes.

Today, the NASDAQ 100 index (the largest 100 non-financial companies in the NASDAQ index), which can serve as a proxy for the overll NASDAQ index, carries a reasonable P/E ratio of approximately 20x on a forward basis (24x on a trailing basis) – about 90% lower than the peak extremes of the NASDAQ index in the year 2000.

Although NASDAQ valuations are much lower today than during the bursting 2000 tech bubble, P/E ratios for the NASDAQ 100 still remain about +20% higher than the S&P 500, which begs the question, “Is the premium multiple deserved?”

As I wrote about in the NASDAQ Tech Revolution, you get what you pay for. If you pay a peanut multiple, many times you get a monkey stock. In the technology world, there is often acute obsolescence risk (remember Blackberry – BBRY?) that can lead to massive losses, but there also exists a winner-takes-all dynamic. Just think of the dominance of Google (GOOG/L) in search advertising, Microsoft (MSFT) in the PC, or Amazon (AMZN) in e-commerce.  It’s a tricky game, but following the direction of cash, investments, and product innovation are key in my mind if you plan on finding the long-term winners. For example, the average revenue growth for the top 10 companies in the NASDAQ 100 averaged more than +100% annually from the end of 1999 to the end of 2013. Identifying the “Old Tech Guard” winners is not overly challenging, but discovering the “New Tech Guard” is a much more demanding proposition.

In the winner-takes-all hunt, one need not go any further than looking at the massive role technology plays in our daily lives. Twenty years ago, cell phones, GPS, DVRs (Digital Video Recorders), e-Readers, tablets, electric cars, iPods/MP3s, WiFi mobility, on-demand digital media, video-conferencing, and cloud storage either did not exist or were nowhere near mainstream. Many of these technologies manifest themselves into a whole host of different applications that we cannot live without. One can compile a list of these life-critical applications by thumbing through your smartphone or PC bookmarks. The list is ever-expanding, but companies like Twitter (TWTR), Facebook (FB), Amazon (AMZN), Uber, Netflix (NFLX), Priceline (PCLN), Yelp, Zillow (Z), and a bevy of other “New Tech Guard” companies have built multi-billion franchises that have become irreplaceable applications in our day-to-day lives.

Underlying all the arbitrary index value milestones (e.g., Dow 17,000 and S&P 2,000) since the 1990s has a persistent and unstoppable proliferation of technology adoption across virtually every aspect of our lives. NASDAQ 5,000 may not be here quite yet, but getting there over the next year or two may not be much of a stretch. Speculative tendencies could get us there sooner, and macro/geopolitical concerns could push the milestone out, but when we do get there the feeling of NASDAQ 5,000 déjà vu will have a much stronger foundation than the fleeting euphoric emotions felt when investors tackled the same level in year 2000.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own AAPL, GOOG/L, AMZN, NFLX bonds (short the equity), FB (non-discretionary), MSFT (non-discretionary), PCLN (non-discretionary) and a range of positions in certain exchange traded fund positions, but at the time of publishing SCM had no direct position in TWTR, Uber, YELP, Z, 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.

September 13, 2014 at 10:21 am 4 comments

NASDAQ and the R&D-Tech Revolution

Technology

It’s been a bumpy start for stocks so far in 2014, but the fact of the matter is the NASDAQ Composite Index is up this year and hit a 14-year high in the latest trading session (highest level since 2000). The same cannot be said for the Dow Jones Industrial and S&P 500 indices, which are both lagging and down for the year. Not only did the NASDAQ outperform the Dow by almost +12% in 2013, but the NASDAQ has also trounced the Dow by over +70% over the last five years.

Is this outperformance a fluke or random coincidence? I’d beg to differ, and we will explore the reasons behind the NASDAQ being treated like the Rodney Dangerfield of indices. Or in other words, why the NASDAQ gets “no respect!” (see also NASDAQ Ugly Step Child).

Compared to the “bubble” days of the nineties, today’s discussions more rationally revolve around profits, cash flows, and valuations. Many of us old crusty veterans remember all the crazy talk of the “New Economy,” “clicks,” and “eyeballs” that took place in the mid-to-late 1990s. Those metrics and hyperbole are used less today, but if NASDAQ’s dominance extends significantly, I’m sure some new and old descriptive euphemisms will float to the conversational surface.

The technology bubble may have burst in 2000, and scarred memories of the -78% collapse in the NASDAQ (5,100 to 1,100) from 2000-2002 have not been forgotten.  Despite that carnage, technology has relentlessly advanced through Moore’s Law, while internet connectivity has proliferated in concert with globalization. FedEx’s (FDX) Chief Information Officer Rob Carter summed it up nicely when he noted, The sound we heard wasn’t the [tech] bubble bursting; it was the big bang.”

Even with the large advance in the NASDAQ index in recent years, valuations of the tech-heavy index remain within reasonable ranges. Accurate gauges of the NASDAQ Composite price-earnings ratio (P/E) are scarce, but just a few months ago, strategist Ned Davis pegged the index P/E at 21, well below the peak of 49 at the end of 1999. For now, the scars and painful memories of the 2000 crash have limited the amount of frothiness, although pockets of it certainly still exist (greed will never be fully eradicated).

Why NASDAQ & Technology Continue to Flourish

Regardless of how one analyzes the stock market, ultimately long-term stock prices follow the direction of profits and cash flows. Profits and cash flows don’t however grow out of thin air. Sustainable growth requires competitiveness. For most industries, a long-term competitive advantage requires a culture of innovation and technology adoption. As you can see from the NASDAQ listed companies BELOW, there is no shortage of innovation.

CLICK TO ENLARGE

Sources: ADVFN, SEC, Other

Sources: ADVFN, SEC, Other

I’ve divided the largest technology companies in the NASDAQ 100 index that survived the bursting of the 2000 technology bubble into “The Old Tech Guard.” This group of eight stocks represents a total market value of about $1.5 trillion – equivalent to almost 10% of our country’s Gross Domestic Product (GDP). Incredibly, this select collection of companies achieved an average sales growth rate of +19%; income growth of +22%; and research & development growth of +18% over a 14-year period (1999-2013).

The second group of younger stocks (a.k.a., The New Tech Guard) that launched their IPOs post-2000 have accomplished equally impressive results. Together, these handful of companies have earned a market value of over $625 billion. There’s a reason investors are gobbling up these stocks. Over the last five years, The New Tech Guard companies have averaged an unbelievable +77% sales growth rate, coupled with a remarkable +43% expansion in average annual R&D expenditures.

Innovation Dead?

Who said innovation is dead? Not me. Combined, these 13 companies (Old Guard + New Guard) are spending about $55,000,000,000 on research and development…annually! If you consider the hundreds and thousands of other technology companies that are also investing aggressively for the future, it should come as no surprise that the pace of innovation is only accelerating.

While newscasters, bloggers, and newspapers will continue to myopically focus on the Dow and S&P 500 indices, do your investment portfolio a favor by not forgetting about the relentless R&D and tech revolution taking place within the innovative and often overlooked NASDAQ index.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds (ETFs), AAPL, GOOG, AMZN, FDX, QCOM, and a short position in NFLX, but at the time of publishing SCM had no direct discretionary position in MSFT, INTC, CSCO, EBAY, PCLN, FB, TSLA,  Z, 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.

February 16, 2014 at 1:21 am Leave a comment

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.

www.Sidoxia.com

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.

October 27, 2012 at 10:19 pm Leave a comment

U.S. – Best House in Bad Global Neighborhood

Article below represents a portion of free December 1, 2011 Sidoxia monthly newsletter (Subscribe on right-side of page)

There is no shortage of issues to worry about in our troubled global neighborhood, but then again, anybody older than 25 years old knows the world is always an uncertain place. Whether we are talking about wars (Vietnam, Cold War, Iraq); presidential calamities (Kennedy assassination, Nixon resignation/impeachment proceedings); international turmoil (dissolution of Soviet Union, 9/11 attacks, Arab Spring); investment bubbles (technology, real estate); or financial crises (S&L crisis, Long Term Capital, Lehman Brothers bankruptcy), investors always have a large menu of concerns from which they can order.

Despite the doom and gloom dominating the media airwaves, and the lackluster performance of equities experienced over the last decade, the Dow Jones Industrial Average and the S&P 500 index are both up more than 20-fold since the 1970s (those gains also exclude the positive impact of dividends).

Times Have Changed

Just a few decades ago, nobody would have talked or cared about small economies like Iceland, Dubai, and Greece. Today, technology has accelerated the forces of globalization, resulting in information travelling thousands of miles at the click of a mouse, often creating scary financial mountains out of meaningless molehills. As a result of these trends, news of Italian bond auctions, which normally would be glossed over on the evening news, instantaneously clogs our smart phones, computers, radios, and televisions. The implications of all these developments mean investing has become much more difficult, just as its importance has never been more crucial. 

How has investing become more critical? For starters, interest rates are near 60-year lows and Treasury bond prices are at record highs, while inflation (food, energy, healthcare, leisure, etc.) is shrinking the value of people’s savings. Next, entitlement and pension reliability are decreasing by the minute – fiscal imbalances and unrealistic promises have contributed to a less certain retirement outlook. Layer on hyper-manic volatility of daily, multi-hundred point swings in the Dow Jones Industrial index and a less experienced investor quickly realizes investing can become an overwhelming game. Case in point is the VIX volatility index (a.k.a., the “Fear Gauge”), which has registered a whopping +57% increase in 2011.

December to Remember?

After an explosive +23% return in the S&P 500 index for 2009 (excluding dividends) and another +13% return in 2010, equity investors have taken a breather thus far in 2011 – the Dow Jones Industrial Average is up modestly (+4%) and the S&P 500 index is down fractionally (-1%). We still have the month of December to log, but in the short-run the European tail has definitely been wagging the rest of the global dog.

Although the United States knows a thing or two about lack of political leadership and coordination, herding the 17 eurozone countries to resolve the European debt financial crisis has proved even more challenging.  As you can see below in the performance figures of the major global equity markets, the U.S. remains the best house in a bad neighborhood:

Our fiscal house undeniably needs some work (i.e., unsustainable deficits and bloated debt), but record corporate profits, record levels of cash, voracious consumer spending, improving employment data, and attractive valuations are all contributing to a domestic house that makes opportunities in our backyard look a lot more appealing to investors than prospects elsewhere in the global neighborhood.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and VGK, but at the time of publishing SCM 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.

December 3, 2011 at 9:39 am 1 comment

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