Streaming Wars

The battle for the living room has been interesting to watch from an investing perspective. I have been down on Comcast for years, thinking their business model would be severely hampered by the cord cutters eliminating cable. This has been somewhat true as the stock price has been flattish over the last 5 years:

Comcast 5 year chart

The one stock I have been kicking myself for not owning is Netflix – which has had an incredible run over the last 5 years:

Netflix 5 year chart

Earlier this month, Netflix reported slowing growth, and the stock got hammered – down from 360’ish to 310’ish. Recent earnings showing a slowing of subscriber growth, and fears of the Disney streaming service and Apple streaming service spooked investors.

The way I see it – the market is wrong on this one. Granted Netflix’s valuation is awfully high, but even with their subscriber growth not meeting projections, it was still decent domestically and great internationally. Interestingly their growth in the previous year’s quarter also missed expectations, and it bounced back nicely the following quarter. The word on the street was that areas that had price increases fared the worst. I am willing to bet that subscribers to Netflix are not that price sensitive. Amazon raised the price on Amazon Prime and nobody blinked – I think Netflix has more levers they can pull to raise revenue if they feel the need.

Regarding the increase in competition – I think the market is overreacting on this one too. I agree Disney is going to be a formidable competitor (and luckily I have been long Disney for awhile), but I hardly think Netflix will be the one hurt the most by this. Netflix is an establishment in most households – and I think it has the strongest network effect of all streaming companies. I think the big losers will be the 2nd tier streaming/content services – things like CBS Interactive, maybe Showtime, HBO etc. If people want to cut down their expenses on monthly TV subscriptions, I think Netflix will be low on the list. Regarding Apple’s offering – I am willing to bet that it will be underwhelming and not meet expectations. I still am in the camp that Apple is struggling to execute on its new initiatives, so I think the market is overly concerned about this one.

I initiated a small position in Netflix a few months ago when I saw the stock price weaken on these competition concerns. I prefer to invest in companies with CEO’s that consistently make the right moves, and Reed Hastings meets that criteria. So even though I am underwater on my holdings of Netflix, I am definitely not selling, and considering doubling down on this one – I am just waiting for the stock market and price to stabilize then will take a closer look.

Windows 10 Updates And Microsoft Access

I got a note from a client who runs a medium size Microsoft Access application, and recently they have been getting ‘Unrecognized database format’ errors on multiple client machines. This is a standard Access app they are running, with the client access database linked to a database of Access tables on the server. Microsoft Access is notoriously finnicky when it comes to network errors, and so my first assumption was that my clients networking setup had issues.

But I did a little poking around as it seemed odd that it would start cropping up on multiple machines, and I found this post pointing to what looks like a problem with an incompatibility with Microsoft Access and a recent update to Windows 10. From the looks of this article, this problem as impacted a large number of Access users, but has remained uncorrected for over a year. This article does show a workaround:

(courtesy https://www.devhut.net/ )

I wonder how many Access users would feel comfortable editing the registry on their machine (and their server), and even then it sounds iffy. Note that staying with Windows 10 build 1709 works, but given all the tightening of security in todays corporate world, that’s likely not an option for many users.

The fact that this problem has gone uncorrected for so long underscores to me that Microsoft Access will be deprecated or made functionally useless in the near future by Microsoft. Either explicitly, or through other ‘breaks’ that happen as Windows and/or Office moves forward. I understand why Microsoft is uncomfortable with Access. It’s foundation language, Visual Basic for Applications is outdated, and the native Access database format is underpowered when compared with SQL Server. When Microsoft released a free version of Microsoft SQL Server for small databases, this was the point where all hope for Access was lost. Microsoft is correct – there are better platforms for software these days, but I think they underestimate the number of business critical applications still run on Microsoft Access.

I am a huge fan of Access – it was ahead of its time in the 1990’s for quickly developing desktop apps. Many businesses, small and large, quickly built little Access applications to automate a business process. Often these applications were built under the radar of IT and without a budget. I know of many such Access Apps that have been around over 15 years, still providing value, yet there is no budget to rewrite them.

So unfortunately, Access users beware. Microsoft’s interest in Access is waning, and as they compete for Enterprise business and cloud applications, Microsoft Access may not have a seat at the table.

The Chase For High Yield

Every once in a while I get a notice of a bond offering from my broker for Ford Motor Credit. As I am always on the lookout for higher yields, I always pause and give this some thought.


With a 7 year CD yielding around 2.0%, my first thought is sure – Ford Motor seems pretty safe, maybe I should go after a higher yield. But after thinking about it a bit more, I always back off.

A couple problems keep creeping back in. First, I think the next market downturn will be initiated by some sort of credit breakdown, whether it be corporate borrowing, consumer borrowing, or sovereign borrowings – all at historically high levels. There is too much debt out there and so I am leery of low rated credit getting rated even lower. If this happens, I either want to be in high quality corporates, or government bonds. I am not sure I can consider Ford Motor a high quality corporation. The stock is lower now that it was 20 years ago, and has a terrible Debt/Free Cash Flow ratio of 6.77.

The second thought I have is the future of car manufacturers. The automobile industry is in the midst of a huge transformation and will likely look quite different in the next few years. From the switch to primarily gas fueled vehicles to electrics, to the concept of ride share replacing car ownership, I think the automobile business model will change drastically.

This disruption will lead to winners and losers. Will the ride share companies running autonomous vehicles be the winners? Will Tesla be the next big car manufacturer? All these questions nag at me as I look over the yield of these Ford Motor Credit bonds.

Investing in high yield bonds is always difficult. Every high yield bond/corporation has its fault, thus the risk premium. In many ways its similar to investing in stocks. It requires an investment thesis and opinion about the future. And for me, a low rated bond focused on consumer credit and the car industry looks like a risk that is too big to bear.

The World of Software Developers

Stack overflow recently released a survey of its users, and while it had a lot of insights into the current world of software development, two charts stood out to me as exceptional.

If you are not familiar with stackoverflow.com, it is in most developers opinion the best place to find solutions for technical questions. When coding a program, and you run across an error message that doesn’t make sense, or confusion on how to do something in your language of choice, stackoverflow is the place for answers.

Anyway, in this survey, here are the two charts that stood out to me.

Connected technologies

https://insights.stackoverflow.com/survey/2019/

This is the best display of the different galaxies in the computer universe. Most developers live in one, maybe two of the galaxies, and this maps all the related languages and tools nicely. If you are a developer looking to expand your skills, this gives a great idea of the technologies and tools that might be the most helpful to you in your collection of skills.

The second chart gave interesting insight to the problem of lack of women in software development:

Development role by gender
(click to expand)

In the decades of my software development experience, I have noticed how the ratio of female developers has dropped off. In the early part of my career, my bosses were mostly women, and the ratio of programmers was pretty evenly split. Looking at the above chart, you can see how that has changed. But this chart shows change might be coming. The areas with the best concentration of women in tech is in the researcher and data science area. The world of programming will look a lot different in 10 years as the focus moves more to data science and less on algorithmic programming. Give machines the data, and they can write the program will be the new mantra (for better or for worse). So assuming this prediction comes true, its it appears that the gender gap in software development will start to close. As a side note, in the world of data science, it will be important to get a wide variety of skilled workers, as data bias could be a real threat in the future. Heaven help us if we leave to the bubble of silicon valley to determine how the world should be defined in the future.

If the world of software development interests you, take some time to go though this stack overflow survey. It gives interesting insight into the minds that are creating the technology that will be changing our world.

Finally – A Clean Financial Data API

For years I have been automatically retrieving financial data from a variety of sources to help manage my stock portfolio, and power the VFS Daily Investment Contest. For years I just scraped prices from various websites and parsed the results into a database. Its not elegant, but it has worked. I have been looking for cleaner ways to do it, but many of the online data services for financial data charged high monthly prices that didn’t make sense for the minimal quotes I retrieve on a nightly basis.

Recently, I stumbled across a great new service to pull all sorts of financial data. In addition, for my needs I can likely stay at the free level, and its the cleanest API I have seen for financial data.

All I had to do was sign up for a free account, which provides a token that I can use to access the data. The API calls are all simple GET requests, with the token in the querystring:

The result is nicely formatted JSON, which can be easily parsed using library (I use Newtonsoft). No more parsing and stripping html to get to the data. The full list of data options provided by the API can be seen here. Below is a C# example of the code I use to pull quotes on a nightly basis:

(click to expand)

Amazingly simple, and I have been re-purposing this code to handle requests against other data points, so its real easy to get at all the API end points.

The pricing structure for this is smart also. The free level that I am currently at provides you with 500,000 request points a month. A delayed quote is 1 point, a dividend list is 10 points, and fancier things like full financials are 5000 points. So if you just want to get daily prices you can get virtually unlimited. If you want more advanced data that has been difficult to get to in the past, the free level limits will likely be exceeded. The pricing for the next level up is $9 a month, and that gets you 5,000,000 request points a month which would more then meet even my wildest data dreams.

This is a relatively new operation (the API came out of Beta in April), and they are constantly updating/improving it. It is missing some features I want (Can’t currently get prices for mutual funds, or dividends for ETFs. But those fixes are on their road map to be done soon. The IEX cloud GitHub repository does a great job of keeping users updated on changes, bugs, and upcoming fixes.

As I said above this is a new service, and in this world of online services, many do not survive. I really hope this one does. If you are looking for easy access to a wide variety of data, give this new API a shot. This is a pretty exciting development for financial data geeks such as myself.

Employment Data As Economic Predictor

Every month the financial press makes a big deal about the total payroll report. I have never really paid attention to it, as it seems like its just headline material rather than anything one can act on financially. Recently, I was poking thru the FRED data sets looking for an employment indicator that I could plug into my valuation model, and the one that caught my eye was a subset of the big monthly number – the Temporary Help Services number.

I put together this chart below comparing the numbers of the Wilshire 5000 stock market index, the Temporary services number, and the headline Nonfarm Payrolls number.

wilshire 5000, temporary employment and full employment chart
(click on image to enlarge)

As far as an early indicator of economic downturn (and hence a stock market downturn), it seems like the temporary help number is a much better indicator. The temporary help number started trending downward months before the non-farm payroll number, and even started rising sooner after the 2001 and 2008 recessions. There are some ‘headfakes’ in the temporary help number, but with a little smoothing I think my stock market model can be taught to ignore those.

One thing I have learned over the last several years while looking for correlations is there are a lot of coincidental correlations. So when I add data factors to my model, I give the data a good old fashioned smell test – does this data seem reasonable? In this case, I have rationalized that yes, it seems reasonable that in an economic downturn, companies would start jettisoning temporary employees early as they start to slow down, since those are typically the easiest and cheapest employees to part ways with.

So now when the monthly noise comes out about the jobs number, I will continue to ignore that number – but that will trigger me to look deeper at the temporary help number that gets released at the same time.

Townsquare Media Goes Digital

Townsquare Media is a company I have followed for a few years. I decided to post an article on Seeking Alpha about the company because I think it has an interesting story. The company primarily runs a number of rural radio stations, but is now working on tools to upsell its advertisers.

This stock has long been a value trap (and may still be), but if this new strategy pans out, it might be worth a look. For more details check out the article on Seeking Alpha.

Townsquare Media: Digital Solutions Could Be Catalyst For Growth

UFPI – To Sell or Not to Sell

Note – Post updated on 4/27/19 – see below.

The other day I was looking over my portfolio to make changes based on what my valuation model suggested. One of the stocks in my top 10 holdings, Universal Forest Products, Inc (UFPI), came up as a stock to underweight based on relative valuation. UFPI is a pretty inexpensive, low growth stock, and it had a small run in the last few months.

As I often do with stocks in which I have a short term gain, I give some pause to selling. My model predicted a .44% increase in May, so its not like I was bearish on the stock, just thought there might be better alternatives in other securities. So I took a quick look to see if it might make sense to sell a covered call against my position, collect some extra income since I don’t think the stock is going to move much in May. So I pulled up the options chain, and saw an interesting tidbit:

It is interesting to see that the volume on most UFPI options is zero. This is a small 1.89 billion market cap stock, not followed by many people. But curiously, in this list of zero options, someone tossed down a 40 contract trade betting that the stock would go from its current price ($31) to over $35 by May 17th. Granted that is only a $400 investment (40 contracts @ $.10 * 100 shrs a contract), so this isn’t likely the so called ‘smart money’, but it is curious. UFPI releases earnings tomorrow (April 24th) after the bell – perhaps some small roller is ‘playing a hunch’ and trying to earn some extra cash.

At any rate, this raised my curiosity enough for me to hold onto my position until after the earnings release. I am not in any big hurry to sell, and maybe this is telegraphing some good news around the corner.

4/27/19 Update

Earnings came out more positive than expected, pushing the share price from around $30 to a $36.65 close on Friday. those options purchased for $0.10 are now worth approximately $1.90. That $400 option investment translates to a current value of $7,600. So it appears that if you are going to sell a stock, it may be worth always check the options trades to see if anybody might be making a big bet.

The Trouble with Boeing

I have owned Boeing stock, but sold out of it last year due to a couple reasons. First, its a very large cap stock that grew a lot, and I didn’t understand why it jumped so much. My current opinion is on large cap stocks, you are competing more against institutional money that really models the company and the profits, so I don’t know if I want to try to outperform those companies with those resources.

The second reason I unloaded Boeing was more anecdotal. A group of guys I socialize with have and had worked for Boeing for the last 30 years. They were always very positive on Boeing and its management – until a few years ago. All of these employees were disgusted with management, and felt things were going downhill. I try to make a point in investing in superior management, and so this change in sentiment was enough to convince me to stay away.

With the recent drop in the price of Boeing stock due to the whole 737 Max events, I gave some thought to re-entering Boeing stock. The consensus had been that the problem is a software problem, easy enough to fix with software update. But more info is starting to come out, and now, I am beginning to think weak management is showing its hand.

This article on Quartz provides a great overview as to the issue surrounding the 737 Max. To summarize, when Airbus came out with a fuel efficient A320, Boeing had to quickly adapt the 737 to stay competitive. And to adapt the 737 to the new engines, they had to move the engines on the wing. This led to some handling problems, so they created software ‘as a kludge’ to offset the handling problem. So this is much more than just a software fix – the need for the software is due to a design flaw, which is additional complexity in the airplane. It seems this need to rush out a new plane for competitive needs may have led to deadly consequences. Also hitting the news is headlines about the approval process and the training provided to the airlines, none of it positive for Boeing.

So now, given this complexity and the headline risk, why would an airline pick the 737 Max over the A320? It seems this puts Boeing at a real competitive disadvantage. Indonesian airline Garunda already cancelled their orders for the Max – I would guess more will follow. Perhaps unsurprisingly, Boeing received no new orders for the 737 Max in March, and only 10 orders in the first quarter of 2019. Add on congressional investigations into the FAA certification process, the extended groundings, passenger perceptions of the airplane, and pilots concern related to the training, and I think the story gets worse before it gets better.

So if your bull thesis on Boeing is based on this 737 Max problem just being a software fix – think again. I think this could be the sign of cracks in the company culture and missteps by management. I think this plane that management forced out for competitive purposes could end up being a long term disaster for Boeing.

10,000 Millionaires

An interesting thing to ponder based on this article –

Thousands of New Millionaires Are About to Eat San Francisco Alive

With the Lyft IPO yesterday, this kicks off the creation of a new wave of an estimated 10,000 silicon valley millionaires. In addition to Lyft, Uber, Airbnb and Pinterest are expected to IPO in 2019, and given the compensation structures of San Francisco startups, this will result in a huge wealth realization for all those employees who hold stock options.

Should this number of newly minted millionairres materialize, it raises some interesting social issues. What happens to a city when a large amount of money floods a city (San Francisco is approximately 7 square miles)? The supply and demand of housing and premium services is going to be off the charts, likely worsening the homeless crisis currently in San Francisco.

It will also be interesting to see this wealth reverberate up and down the west coast. Historically housing prices in the Pacific Northwest correlate to California, so I would assume we will see ripples of this wealth bomb.

I fear this will also make the growing divide in the US between the technology disrupters in Silicon valley, and the declining income of those unskilled workers who lose their jobs to the disruption of the technological revolution. With all that money from the stock IPO’s going into those companies, it will only speed up the progress of the disruption.

So it will be interesting to see what happens in 2019. The impact on San Francisco will be interesting to watch, and hopefully it will drive some discussion about how to deal with this continued disruption across the country.