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.

 

Dan on March 24th, 2016

I guess I am  a sucker to click on any article describing the next Four Horsemen of the ‘economic apocolypse’ – but this article resonated with me not for the belief in an apocolypse, but for the economic analysis:

http://www.businessinsider.com/36-south-four-horsemen-2016-2

My favorite quote from this article (emphasis mine):

The central-bank economic models that worked in the past aren’t functioning properly, in part because of changing demographics and technology.

“You have the Four Horsemen of the Economic Apocalypse out there as well,” Limbrick said. “You have aging baby boomers, tech disruption, a globalized labor market, and massive debt.”

And if that’s not enough to spook investors, they’re realizing that the next bank crisis will most likely end in losses on bonds and deposits rather than another bailout.

So if you think about it, the Fed has a real uphill battle trying to spur growth in this environment.

  • Aging baby boomers are retiring, reducing spending and income, slowing the growth of the workforce
  • Tech disruption making everything more efficient –  squeezing margins and reducing costs, allowing product producers to lower prices to try to gain market share while still being profitable. Just look at how many free services we use on the web these days – and there is so much free software and information published to make it easier to create things.
  • A Globalized labor Market making it easier to have work done anywhere in the world.  Anybody, with the assistance of services such as Alibaba, can work with Chinese manufacturers to build a product – increasingly leveling out wages across the world.
  • Massive worldwide government debt has pulled forward demand – or ‘borrowed demand’ from the future.  Governments piled on debt to help us grow out of the last economic malaise, and while it softened the impact of the last recession, it may just have pushed the pain into the future.  Indicators such as negative interest rates hint that we are at the limit of that borrowing – and now we may have to flood the world of lowered demand with oversupply.

Throw in long term low energy prices (perhaps brought to us by the tech disruption horseman) and that adds even more headwind to increased growth.

Maybe economists should be working on financial stability, and quit trying to force economic growth when so much is lining up against it.  It’s been 8 years now since the start of the last recession – given historical business cycles another one cannot be too far away.While I am not predicting financial apocolypse, I do think the next one will be painful, perhaps with bondholders being the surprise victim as govenments around the world use strategy from the wrong era.

None of this is new of course.  To quote from a copy of ‘Bankers Magazine’ in 1941:

“…like armies always training to fight the last war, our banking system is always merely setting up protection against past experiences.”

Dan on March 11th, 2016

I know America doesn’t have the money to waste on art projects (we need to keep adding to that defense budget) – but Iceland is providing a great example of alternative ways of spending money other than on a bloated defense budget.

Take an existing eyesore, add some ingenuity, and you get a piece of art:

icelandart

 

A great overview of the project here – the Choi+Shine architecture firm is responsible for this – but give Iceland kudos for spending a little more money on this project to provide something special.

Dan on February 25th, 2016

I was watching this Vine video of a Virtual Reality (VR) rollercoaster experience complete with mechanical enhancements:

 

Maybe VR will revitalize the movie and themepark entertainment experience, rather than keep people in their own homes for VR entertainment?

The addition of physical movement would be hard to replicate at home, and some venue featuring these experiences would be great group entertainment.   As to how to invest for this, that remains a question.  Will theaters adopt this new business model, or will new disruptive companies rise to replace theaters (think back to how newspapers adapted to the internet, and blockbuster adapted to streaming).

So don’t necessarily think VR will kill the public entertainment industry – maybe we all won’t be holed up in our house with goggles on.   This may be a trend to keep an eye on.

Dan on February 20th, 2016

A surprising frank interview with Ray McGovern – an ex CIA Analyst who appears to be spilling the beans on the ‘Deep State’ running American foreign policy:

http://www.salon.com/2016/02/07/intelligent_people_know_that_the_empire_is_on_the_downhill_a_veteran_cia_agent_spills_the_goods_on_the_deep_state_and_our_foreign_policy_nightmares/

The first half of this article is marginally interesting but provides some historical perspective – but the 2nd half picks up speed when discussing Ukraine, Syria and the ‘Deep State’.

Looking at Ray McGovern’s bio on Wikipedia shows that he was “a CIA analyst for 27 years (1963 to 1990), “routinely presenting the morning intelligence briefings at the White House” and “where he was responsible for the analysis of Soviet policy in Vietnam”.

He is clearly a student of Russian history, and maybe he could be biased towards the Russian point of view (And the interview took place while he was attending a global political conference sponsored by RT (Russia Today).

Having said that – even if the truth about American foreign policy is ‘somewhere in the middle’ of his version and the Russia/Putin perception propagated by American media, its a pretty scary revelation about how far out of control the CIA is.

This is perhaps the most damning article I have seen on the CIA from a pseudo – main-stream news source (Salon is rated the 38th most popular News Entity in January 2015 by unique visits).   If only more news sites would expose this kind of information.

PS.  the article references the leaked discussion between Victoria Nuland and Geoff Pyatt regarding the American strategy in the Ukrainian coup – this article has the transcript and analysis of the call providing more great insight into how foreign policy works.

Dan on February 6th, 2016

I have always been diligent about looking at past performance of mutual funds prior to investing, and consider it to be one factor when comparing mutual funds.  However a recent improvement I made to  the VFS Daily Investment contest caused me to look at historical performance in a different light.

Starting in 2016, I am providing a prize for the portfolio with the best 3 year cumulative return.   The purpose was to reward ‘long-term’ excellence, and assumed the top portfolios would be pretty consistent.  However, I was surprised when I saw the results for 01/31/16 – the rankings for the top 10 portfolios changed dramatically:

One Month Change

 

So this caused me to immediately assume my calculations were messed up – so I did a little analysis of the top two portfolios:

 

Karen’s Portfolio Greg’s Portfolio
Month Monthly Return $100 invested
1/1/13 to 12/31/15
$100 invested
/1/13 to 1/31/16
Monthly Return $100 invested
1/1/13 to 12/31/15
$100 invested
2/1/13 to 1/31/16
1/31/2016 -3.89%  $  190.29 -7.54%  $  181.96
12/31/2015 2.34%  $  197.24  $  197.99 -4.98%  $  206.56  $  196.79
11/30/2015 2.61%  $  192.73  $  193.46 5.99%  $  217.37  $  207.09
10/31/2015 19.97%  $  187.82  $  188.54 9.37%  $  205.08  $  195.38
9/30/2015 -2.58%  $  156.55  $  157.15 -4.11%  $  187.51  $  178.64
8/31/2015 -2.06%  $  160.70  $  161.31 5.02%  $  195.56  $  186.31
7/31/2015 8.10%  $  164.07  $  164.70 0.67%  $  186.21  $  177.40
6/30/2015 -4.63%  $  151.78  $  152.36 -1.96%  $  184.98  $  176.23
5/31/2015 1.59%  $  159.16  $  159.76 4.19%  $  188.68  $  179.76
4/30/2015 1.75%  $  156.67  $  157.26 5.40%  $  181.09  $  172.53
3/31/2015 -2.02%  $  153.98  $  154.56 -0.89%  $  171.82  $  163.70
2/28/2015 7.40%  $  157.15  $  157.75 5.35%  $  173.36  $  165.16
1/31/2015 -1.26%  $  146.32  $  146.88 7.62%  $  164.55  $  156.77
12/31/2014 -3.65%  $  148.19  $  148.75 -2.65%  $  152.90  $  145.68
11/30/2014 2.77%  $  153.80  $  154.39 2.32%  $  157.06  $  149.64
10/31/2014 5.12%  $  149.65  $  150.22 0.23%  $  153.50  $  146.24
9/30/2014 -2.45%  $  142.36  $  142.90 -1.79%  $  153.15  $  145.91
8/31/2014 1.93%  $  145.94  $  146.49 4.60%  $  155.94  $  148.57
7/31/2014 1.37%  $  143.17  $  143.71 -1.79%  $  149.08  $  142.03
6/30/2014 0.65%  $  141.24  $  141.77 3.03%  $  151.80  $  144.62
5/31/2014 5.11%  $  140.32  $  140.85 6.09%  $  147.34  $  140.37
4/30/2014 -0.33%  $  133.50  $  134.01 -0.15%  $  138.87  $  132.31
3/31/2014 -0.98%  $  133.95  $  134.46 -3.44%  $  139.09  $  132.51
2/28/2014 6.70%  $  135.27  $  135.78 4.00%  $  144.04  $  137.23
1/31/2014 -2.99%  $  126.78  $  127.26 -1.80%  $  138.50  $  131.95
12/31/2013 2.63%  $  130.69  $  131.18 4.74%  $  141.04  $  134.37
11/30/2013 2.86%  $  127.34  $  127.82 3.31%  $  134.65  $  128.29
10/31/2013 9.14%  $  123.80  $  124.27 7.58%  $  130.34  $  124.18
9/30/2013 0.90%  $  113.43  $  113.86 5.08%  $  121.16  $  115.44
8/31/2013 -1.22%  $  112.42  $  112.84 -1.51%  $  115.31  $  109.86
7/31/2013 4.78%  $  113.81  $  114.24 9.06%  $  117.07  $  111.54
6/30/2013 -1.71%  $  108.61  $  109.02 0.24%  $  107.35  $  102.27
5/31/2013 1.48%  $  110.50  $  110.92 1.08%  $  107.09  $  102.02
4/30/2013 3.26%  $  108.89  $  109.30 1.44%  $  105.94  $  100.93
3/31/2013 2.90%  $  105.45  $  105.85 2.15%  $  104.44  $    99.50
2/28/2013 2.87%  $  102.48  $  102.87 -2.60%  $  102.23  $    97.40
1/31/2013 -0.38%  $    99.62 4.96%  $  104.96

 

And I found my explanation.  Using the approach of measuring return in terms of ‘$100 invested 3 years ago now is worth x’ does really magnify recent performance.  Note that even though Gregs portfolio was down 7.5% in January, it knocked $15 off his hypothetical investment.  So losses for the leaders are magnified as they hypothetically have more assets to lose.

The other important point is the starting point makes a big difference.  Greg’s portfolio for the period 2/1/13 – 01/31/16 got hurt, because he had a decent month in January (highlighted in green), which no longer counted. Removing the 4% gain from the first month knocked $10 off the 3 year return, further causing the large drop in Greg’s portfolio’s value.

So the moral to the story?  Be careful when looking at mutual fund past performance – as the time period you are looking at may make a big difference in how the performance is measured.  Or better yet – maybe mutual fund expense ratio is a much better indicator of future fund performance, since past performance is a pretty fluid measurement.

Dan on January 28th, 2016

Smart move by GM to invest in Lyft – perhaps they see the disruption coming to the car ownership model that self driving cars will bring, and are hedging their bets.  Interesting that Google gets all the press on self driving cars while Detroit is seemingly under emphasizing the future of self driving cars.  A great article here on  GM’s venture into the self driving cars.

The model for the future of cars is not only self driving – but renting on a per-trip basis.  Essentially automating Uber.  Statistics show cars go unused 94% of the time – sitting in the garage.   So my prediction?  Google (or some other ‘new-tech’ company’) will win the battle.  The self driving car ‘disruption’  reminds me of a number of times in the past 20 years I have voted for the incumbent, dominant company.  I recall a discussion with a co-worker – ‘why would you invest in Netflix when you can buy Blockbuster at a much bigger discount’.  After all, Blockbuster had the customer base, inventory and retail presence.  When Amazon went public in the 1990s at a huge premium, I thought ‘how can Amazon compete with entrenched booksellers – how hard can it be for booksellers to sell books over the internet?’

The problem is the entrenchment and lack of original thinking by the incumbents.  The market leaders have to worry about protecting their existing business model for as long as possible – hampering the adoption of the technologies and business models.

Detroit seems to be in that category – I am sure margins are much higher selling cars to individuals  and executives will fight to keep the existing model (and short term profits).   Maybe GM’s tiny investment in Lyft shows there is some chance that they can re-invent themselves – but I am skeptical.