Dan on August 23rd, 2016

I have been watching Gold lately as an asset class – Gold has always been a curiosity of mine as to why people would invest in gold.  Over the last few years as I have been watching how momentum impacts markets, I feel I understand a little better about the hows and whys of how gold prices move.

As of this writing gold is up 26% YTD, and the gold miners index is up 136%:
goldytd

So you might think you are an idiot for not investing in gold this year – except if you thought that 5 years ago, people would call you an idiot because gold had been steadily declining for the last 5 years:

gold5year

 

Obviously Gold is a tricky investment, and lots of people stay are recommended to stay away from it.  However, it seems that as interest rates approach zero – people are wondering the downside of holding gold?  I think there is an increase in people’s nervousness that with all this sovereign debt floating about the world, some event will explode on the scene and inflation will kick in.  If that happens, bonds yielding 1% is not the place to be.

The argument against gold would be a deflationary scenario – in which prices fall – gold will follow.  Apparently markets don’t see that as a significant risk.

Jim Grant, who has consistently been a gold bull, and points to worldwide monetary shenanigans as the reason for golds new found popularity.

In a recent radio interview, former Fed chief Alan Greenspan suggested if we returned to the Gold Standard, ‘we’d be fine’.  Returning to the gold standard has long been talked about as a kooky idea by economists, and it may well be an antiquated idea.

However, something is driving the new found interest in gold, and I think the worldwide decoupling of printed money from government assets is leading the world to wonder about the value of currency.  So whether or not a formal move to the gold standard ever gets momentum, it appears investors are wanting their assets backed by tangible goods.

 

Dan on August 7th, 2016

It’s been awhile since I have had a US foreign policy rant, so I figured it was probably time.  While the US populace has been distracted by the US Election Show, the administration took the opportunity to expand our militaristic role in the Middle East.

The US started bombing ISIS in Libya last week, apparently because our litany of bombing other countries has been so successful – or perhaps we are running out of targets in those countries.  This time there is a twist, as we are bombing targets at behest of the interim government – so we are acting as hired guns to officially do the worlds dirty work.

Why is this story so under-reported?   Are Americans numb to the mess that is American Middle East foreign policy?  According to Pentagon spokesman Peter Cook, the strikes did not have “an end point at this particular moment in time”.

So this is a new front against the ever expanding battle against ISIS.  And there is no end in sight.  And don’t look for anything to change under a new Democratic or Republican administration.

But wait a minute – I have to cut this post short – Donald Trump just tweeted something that has all the news networks giving him 7×24 coverage… so I gotta go and watch whats really important.

Dan on July 23rd, 2016

Anybody who has invested in emerging markets over the last few years will tell you they have been killed.    Investing in emerging markets has been a small part of my diversification strategy, so while it has not been a winner I see it as a cost of diversification.

So I was interested to see this article discuss the BRICs (acryonym for Brazil, Russia, India, China) – and how they have been turning around – and this chart tells an interesting story:

 

OECD Brick Leading economic indexes

Nomura Research

 

While the point of this article is that India is the winner so far in emerging markets investments, the recent uptick in the other BRICs was what interested me.  Yes I think India is an interesting investment opportunity – but so does everybody else and thus its pretty high priced compared to other companies.

One of the other sites I check in periodically is this Star Capital page showing worldwide market valuations.

 

wvaluation

 

Note Russia, China and Brazil are the 3 cheapest equity markets in the world using this sites scoring system (which seems fair).  India is not shown – as it appear at #32 right ahead of the US at #33.

Yes Russia, China, and Brazil all have their warts and reasons not to invest in those markets – but the valuations when compared to India are intriguing.   For contrarians who believe the uptick of emerging markets is not just a blip but a trend, one would have to think there is an opportunity here.

Dan on July 7th, 2016

This interview with Mohamed El-Erien has a great quote in it which got me to realize why I find economics so interesting:

In the mid-’80s the IMF made an attempt to understand financial markets. And I was sent to talk to asset managers in New York. The question was asked to them: “What was the first thing you did when you heard Mexico wouldn’t be able to meet its debt repayments?” — which happened in 1982. And the asset manager said, “I sold Chile.” To an economist, this made no sense. Chile was a very well-managed economy; it never had to restructure. So the economist in me thought, “Wow, this is a difficult, irrational market participant.” But he explained, “Look, I manage Latin American funds, I believed, and it turned out to be the case, that some of my investors, when they read about Mexico, would take their money out of the fund. I didn’t want to be left with an over-concentrated position so I got ahead of that trend by selling Chile and some other winners.” And I remember being amazed that there was this whole other dimension out there that goes beyond economics and policy, and it goes back to the idea that how you think about things is very important.

Like the game of chess – economists have to think a few moves ahead to visualize the future.  Predicting the future is fraught with error, which is why so many smart economists see a wide variety of futures.

So when I hear about how the world is overleveraged in a declining growth environment, and this portends bad news for the future,  I have been trying to make sense of who the world winners and losers will be.  One of my favorite sites for this is tradingeconomics.com where you can easily see world economics to try to understand bond valuations.

Lets first look at how world interest rates appear to be determined.  By looking at this chart below, it appears to be highly correlated to the countries inflation rate:

bondvsinflation

Source: tradingeconomics.com

 

But if you want to look at the potential for government debt default, wouldn’t you think that countries with high debt to GDP would have higher interest rates as a reflection of the debt default?  Not so:

 

worldeconomics

Source: tradingeconomics.com

 

Japan, with the highest debt to GDP, and lowest GDP Growth, has the lowest interest rate.  Looking at this chart, why would anybody own Japanese debt instruments?  While its sad to see the US in the top 10 of this list, arguably it is the safest bet – highest GDP growth, highest interest rate, and (relatively) high inflation rate – which is important for highly leveraged companies to inflate their way out of debt.

I think current world bond pricing is ignoring soverign debt default risk, and I can’t explain it.  If fact, when the Brexit results came in, Japanese Yields went down as investors switch to Japan in a flight to safety.   So I don’t get it, but I do think markets will correct and debt quality will become a factor in bond pricing.  And when this happens, world markets will be in turmoil.

Dan on June 23rd, 2016

I have been thinking about how I feel about Microsoft’s recent purchase of LinkedIn – and whether or not  I feel good about it.   I am neither a shareholder in Microsoft or LinkedIn, so I am a casual observer, but I was trying to decide if this gets me interested in becoming a holder of Microsoft stock again.

After much thought – I think I agree with this guy’s sentiment – I just don’t get it.  Maybe there is a master plan where LinkedIn is the missing link that can help glue Microsoft’s units together, but I cant figure it out.

Maybe LinkedIn will integrate with Bing for a people search?  Will LinkedIn and Outlook be integrated/merged?  Maybe by moving Linked In to run under their cloud service ‘Azure’ they can grow Azure and reduce costs at LinkedIn?  Hopefully someone in Redmond has a master plan – but I am not sure Microsoft yet gets the benefit of the doubt on acquisitions after the disastrous Nokia and aQuantive buys.

I was heartened to see that Microsoft plans to keep LinkedIn as a separate entity – similar to the Berkshire Hathaway model, so maybe Microsoft felt it was a good undervalued investment that may come in handy in the future – but paying a 48% premium over the market value of the company kind of takes the ‘undervalued’ out of the equation.

One other nit – Microsoft plans to borrow to finance the $26 billion acquisition, even though they have $100 billion in cash sitting around.  Why?  Because 97% of this cash is offshore, and they would have to pay taxes to bring it onshore.  Yeah I know they could probably issue bonds in the 3-4% range, so it probably makes sense, assuming they are holding out for some tax holiday on foreign earnings before repatriating that money.  It just feels a little too slick to financial engineer it that way, especially if LinkedIn was primarily just an investment.

So I guess the answer I was looking for is No – this doesn’t get me excited about buying Microsoft stock.  As usual I could be wrong, but I am in wait-and-see mode until Microsoft clarifies it’s strategy.

Dan on June 3rd, 2016

Its been awhile since I have brought up the economy (OK.. a month or two..) but with all my prognosticating about the economic future I think I finally got one right that was worth mentioning.

A couple days ago I was looking to adjust my asset allocation to match my targets I have set. I noticed I was overweight on Bonds and REITs, and was going to re-balance.  Coincidentally, word on the street is the Fed was going to raise rates in June and bonds are dangerous at this level as increasing rates will lower their value.   However, I made a conscious decision to wait until after today’s job report to re-balance and re-evaluate, as my thesis is that the Fed won’t raise rates because of worldwide economic weakness, even in the face of zero or below interest rates.

In comes today’s jobs report – and  I got this one right.  It came in way weaker than expected, and now everybody is saying the June rate hike is off the table.  Bond prices are going up as market rates are falling.

What was my reasoning for my conviction?  Recent retail sales numbers.  If you have been following Macy’s or Nordstrom’s, you have seen sales fall off a cliff.  I think the economy has something to do with this, but I think this is just a harbinger of the acceleration of online retail sales.  Clothing is the biggest online sales category, and you are now seeing its impact on malls and stores.

In the first quarter of 2016, online retail sales percentage is just under 8% of total retail sales.  As baby boomers age, and millennials take over the shopping demographics, this has to accelerate.  Not to mention demographically millennials seem to buy less ‘stuff’ in this technology age.

So to make a long story short – I think we are at the point where online retailing is making an impact on the economy.   Not necessarily in a bad way – the efficiency of shopping online is reducing the cost of getting goods and services to the consumer – but at a cost of jobs.  Jobs of retail salespeople, cashiers, and soon to be bank tellers and office workers.  If online sales doubles to 20% of total retail in the next 5 years – how will it impact the malls and shopping centers?  I am guessing they will be a lot quieter.

So short to medium term, I think the story of the day is deflation caused by increasing sales efficiency.  Thus, 30 year T-bill rates will creep to under 1% (and be more in line with other developed countries).  So I am OK with being overweight in Bonds.  Interestingly I am not sure what to think about Real Estate (REITS).  My current thinking is that people will drop money in income producing properties as rates drop – however – as storefronts go dark -some REITS are going to have a lot of empty properties with no rent.  So for now I am overweight in REITS, but have a nervous trigger finger.

Medium to long term I do agree bonds are a dangerous place to be.   Governments are fighting an uphill battle to try to inflate their way out of debt, and some corporations are trying to grow their way out of debt.  So on Bonds I also have a nervous trigger finger – but more concerned about credit quality than inflation.  I also agree with many of the economic bears that we may see a recession later this year – and if that’s the case, being in the wrong credit markets could be a disaster.

Dan on May 17th, 2016

I am admittedly a fan of the Fitbit – the little device that you wear that tracks your daily activity.   When Fitbit the company went public last year, I was somewhat tempted to buy in, but I have an aversion to IPO’s as unless you are insider you usually overpay for IPO stocks.

So roughly a year later, I am looking at Fitbit stock, and its appears to me to be at a valuation that is pretty darn reasonable.  It’s a $14 dollar stock, earned $.75 a share in 2015, and has huge revenue growth numbers:

fitbitrevenue

Analysts have an earnings target of $1.17 for 2016, and $1.41 for 2017.

So you have to ask yourself – why is it so cheap selling at 12 times 2016 earnings?  I think the market thinks the Fitbit is potentially a fad with lots of competitors out there.  Also, the theory is the smartwatches and phones will replace the need for a separate tracking device.  Valid points, but I am going to take the other site of that bet.   The other day I posed this question to some co-workers who where wearing a Fitbit.  The comments were the phone is not a valid tracking device (if they are at home they don’t have their phone with them, or if the phone is in their purse it doesn’t track).  The battery life of a smartwatch is an issue – the watch is another device you have to charge daily – where the Fitbit goes for weeks before charging.  Fitbit  has a nice website where you can see how you are doing compared to your goals and your friends – so it does have a little network effect if it can continually be the market leader (If all your friends have a fitbit, you will want to be in their ecosystem).

I will be continually arguing with myself about whether the Fitbit will continually thrive, and watch for clues to which thesis will win.  I figure at this valuation I have some wiggle room – if new competitors come out or revenue starts to fall, I can probably get out before there is too big of loss.  But for now, I think Fitbit deserves a shot.

Dan on May 6th, 2016

I have been watching with interest the battle for Enterprise Market share of cloud computing.  Many large and small companies are transitioning their on existing on premise IT infrastructure to use publicly managed services such as Amazon’s AWS or Microsoft’s Azure platform.

The cost savings (and headaches) can be huge – no  servers to buy and replace, network architecture is simplified, and IT staffing can be reduced.

As mentioned above, Amazon and Microsoft are the two big players in this space, and while I knew Amazon had the bigger market share, I was curious how the two compare.

This article provided me some of the numbers I was looking for. Here is a brief summary:

Cloud Revenue

Company Last Quarter Revenue 2016 Est growth
Amazon 2.5 Billion 64%
Microsoft 560 Million 120%

 

Anecdotally, there is much more buzz amongst the people I talk to about Amazon’s AWS than Azure  – and I live in the heart of Microsoft country.  I have not talked to anybody that is using Azure, which surprises me a bit.  I know future Microsoft products are going to increase their integration of Azure into the product- for instance the database software SQL Server has some sort of feature where you can use Azure as a hot backup, or take peak demand loads, which is pretty interesting.  Given Microsoft’s current presence in most companies, maybe they can turn the tide and overtake Amazon, but so far I haven’t seen it.

One other important point from this article – most dollars added by Microsoft to Azure is likely a dollar (or more) subtracted from current licensing revenues.   For Amazon, this is all new revenue.  Also, Microsoft has to compete on price with Amazon, and Amazon has pretty deep pockets.

If the current revenue trajectory doesn’t change in the next few quarters – I worry it might be too late for Microsoft Azure to be the Enterprise platform of choice.  The old saying ‘Nobody ever got fired for buying IBM’ may soon apply to Amazon, as AWS becomes the safe and defacto standard for Enterprise IT Infrastructure.

 

Dan on April 23rd, 2016

Of late I have been seeing more and more reference to ‘Helicopter money’ as a fiscal stimulus tool.

Helicopter money is the concept of just printing extra money and giving it to citizens directly (i.e visualize a helicopter flying over a city dumping money out the windows).  Now that interest rates are near or below zero in some countries, people are getting tired of trying to stimulate the economy via interest rate manipulation.   The theory seems clear – with all this free money gained by the populous, demand for goods would increase, raising the inflation rate.

If you look at google trend – you can see an uptick of search interest – if that is any indicator.

helicoptermoney

Ben Bernanke, ex US Fed Chairman, just wrote an article about it, as a policy of last resort.  I agree with Mr. Bernanke – if countries do resort to helicopter money, it would be an admission that large scale manipulation of the economy and interest rates via the central banks is not effective.  So if this continues to be discussed, be aware we are down to a dangerous last resort.

Dan on April 9th, 2016

A year ago I wrote a post on why Nordstrom (JWN)  intrigued me.   Nordstrom’s online presence and growth was my thesis for making it one of my top holdings.

Last month I closed out most of my position in Nordstrom.  Why?  I have a stronger thesis:  Always fear Amazon.  And Amazon is getting into the online clothing business:

https://consumerist.com/2016/02/23/amazon-now-selling-clothing-under-its-own-in-house-brands/

From what I can tell, Amazon is going after the sweet spot of Nordstrom’s clientele.  No data yet on how successful this will be for Amazon, or how much it will hurt Nordstrom.   I still hold a position in Nordstrom’s as I think they are a great brand and well run, but I figure I should probably watch from the sidelines for a while.

On a related topic, online clothing sales is the biggest online sales category in 2015.  Conventional wisdom had been that consumers wanted to touch and try on clothes during the purchasing process, but apparently online convenience is more important.  Who would of thought that 5 years ago?

Is any bricks and mortar retailer safe these days?  That’s the question I continue to ask myself (that – and who is filling all these office buildings I see being built?).  For now the only other brick and mortar retailers I hold is Costco and Starbucks – companies I see as safe from the online revolution – for now.