Dan on November 30th, 2016

I typically have been a bottom up investor- look for companies I think are undervalued, and invest in the hope that others will see the bargain out there and raise the price.  This is called ‘Bottom up Investing‘, focusing on the individual market vs the stock sector or the asset class.

However, the market action of the last month has shaken my belief that bottom up investing is rational.   Since the Presidential Election, stocks in the Financial and Industrial sectors have taken off, on really no fundamental news.  For example, take a look at Columbia Banking (COLB)  and the Vanguard Financial ETF (VFS) over the last 3 months:

colb

No news, no management changes, just a lot of stock being pumped into the financial sector because of the new administration.

Here is another example, FLIR Systems (FLIR) systems, in the industials sector, compared to the Vanguard Industrials ETF (VIS):

flir

Again, no news, just happens to be in a sector where money managers are moving money too.  FLIR Systems has a number of industrial products centered around imaging and surveillance cameras – I hope this doesn’t reflect a belief that this administration is going to ramp up spending on domestic surveillance, but this isn’t a positive sign.

And what caused this huge shift in sector allocation?  My best guess is Trumps leaning towards rebuilding infrastructure and piling up bigger government debts.  That’s a lot of money moving around based on an administration whose policies are murky at best.

So, should I abandon bottom up investing and switch to top down investing?  No.  I won’t abandon it – I cling to the belief that undervalued companies will be recognized eventually.  However, I do think I need to increase my focus on watching asset class and sector indicators.  It does appear in this world where so much money is managed by a small pool of investors, there is is something to watching what the so called ‘smart money’ finds attractive.

 

Dan on November 16th, 2016

A while back, I saw a tweet from Elon Musk recommending the reading of the book ‘The Machine Stopped’, and was curious as I thought I was somewhat up on historical science fiction.  You can access a public domain copy of the book here:

http://archive.ncsa.illinois.edu/prajlich/forster.html

Considering this book was written in 1909, the vision of the future by the author is pretty good.  Television, public air travel, the internet(?) all pretty well envisioned.  This is definitely worth a quick skim.

 

 

 

 

Dan on November 9th, 2016

As an avid reader of history, and a follower of the US political scene –  I have to rank last nights election of Donald Trump to the presidency as one of the most astonishing national events that I have witnessed.  Much will be written in the next days/months/years/decades about how this came about, so I may not have any unique insight, but I thought it would be worth recording my initial impression.

The fact that the winning candidate himself was so flawed is perhaps not the biggest political wonder.  Not to mention a popular incumbent Democrat, a 4.9% unemployment rate, and little inflation.  A Republican party which in large part refused to endorse their candidate, waiting for him to go away, is now running the show.  This defies all conventional thinking.  This also results in the huge power vacuum that was in the Republican party to make its way to the White House.  Nobody knows what to expect or who the power players will ultimately be – for that matter nobody really knows what Donald Trump stands for.  The Democratic opposition is temporarily shattered, decapitated overnight.  Trump’s policy predictions were necessarily incoherent to get him elected.  Nobody even knows if he wants the job of President.

Long term, the big takeaway from me is how nationalism is gaining momentum in the US and in most developed economies.  I think people did not vote for Donald Trump, they voted against the status quo and the elites, a vote driven by the growing wealth inequality.  Call it the ‘revenge of the flyover states’ – but the booming high tech wages and increasingly large Wall street profits caused this as much as any of the politicians messages.

This proves Brexit was not an anomaly – too me this election has the same signature as the Brexit – the middle class taking control and voting for change regardless of what the power elite recommend.  I would expect more nationalist and rightwing votes to happen in Europe, and possibly Japan.  Should this trend continue, I have little optimism for the world economy and the hope of world peace.

After writing this post, but before publishing it,  I ran across Glenn Greenwald’s post also supporting this theory.  It’s a great read to help try to make sense of this.

Shorter term, I look for a recession within the next year.  Nothing to do with whatever policies might arise out of the new administration, more due to the massive uncertainty in the next few months.  This has to put a lot of capital spending (across the world) on hold as corporations wait and see who fills the power vacuum.  Early reports are the widely expected December rate hike is off the table- if so, that shows the Fed is already going on the defensive.  I can’t see how this will not slow the the world economy.

The Obama administration came in on the slogan of ‘Hope and Change’, and in some ways he delivered on the promise.  Now perhaps the slogan should be changed to ‘Fear and Hope’,  as we perhaps need to fear the anger demonstrated by the middle class with this vote, and hope that this administration can surprise us and help build a better world.

Dan on October 26th, 2016

When I read these two articles, I was reminded of the Seinfeld episode where George realized that he has been making bad choices all his life – so he should do the opposite of what he thinks is right.

Case in point:  This article discussing how the budget deficit is now increasing due to stimulus points how how the government has been making bad choices.

The uptick, which had been projected last winter by government analysts, largely reflected the revenue loss from expiring tax breaks for businesses and individuals that Congress extended in December.

Wait a minute..  I thought lower taxes were supposed to trickle down and result in increased tax receipts – how could that happen?  And all you Keynesian government economists out there – what are you thinking?  We are supposed to stimulate the economy with deficit spending during downturns, and recapture that excessive spending during the good times.  Are these not good times?  How low to employment rates need to go before we are in good times?  If not now,  when?

Just like George – I think they need to rethink their choices.

Now lets move onto the Fed.  Now, the thinking is,  maybe low rates are hurting the economy!

In the minutes for the central bank’s Federal Open Markets Committee September meeting, several higher-ups at the Fed hinted that the policy of historically low interest rates was doing more harm than good to the economy.

After several years of keeping rates at or near zero to grow the economy – they now wonder if low rates are stifling growth?  Perhaps their models did not take into account the huge demographic of baby boomers who are trying to save for retirement are getting no interest income, causing them to try to save more and not stimulate the economy.  Well, at least now they are thinking about it.

I think the next step is to take a page out of the Costanza playbook.

 

Dan on October 12th, 2016

I was glad to see this post on the programming churn. I thought the authors point interesting regarding the lost productivity of switching languages and software development paradigms every couple years.

I agree with the point that the progress in software is logarithmic, that in the early  days the progression from one language to another was dramatic, and now the progression is much more incremental.  Also consider the amount of software code still running in a wide variety of languages, and you realize the lost intellectual capital caused by the obsoleting of languages.

I have learned to deal with the changing language landscape by watching and waiting.  I have a stable of languages that I am comfortable with, but I watch and sometimes tinker with new languages to see if they truly are radical improvements.  A good analogy would be car ownership – new cars come out every year with new features, but I don’t get a new car every year.  I watch to see what the emerging trends are, and when my current car has enough deficiencies over a perceived new car, I upgrade and ‘learn to drive’ the new car.

With software, ‘learning to drive’ a new language can be more painful than learning to drive a new car (well… unless you get in accident in your new car).  Every new language has new concepts that you have to grasp, and hours can be wasted going down dead ends and googling solutions.  Plus just because you upgrade, it doesn’t mean all your code written in the previous language was ‘traded in’ – all that code is still around, and in theory needs to be rewritten to the next language.

Having said all this, the changes incorporated in new software and tooling in the last 20 years have been remarkable.  Thing such as true component architecture, an API architecture, and unit test frameworks have all allowed us to make huge leaps in things we could do.  But do these improvements as a whole outweigh all the painful incremental language changes it took us to get here?  That’s a tough one.  I lean towards yes, it is worth it.  As painful as the constant innovation has been, the world of software has evolved to support a wider variety of functions than anybody ever dreamed.

Dan on September 29th, 2016

For all the internet has brought is in the last 20 years, perhaps overlooked the most is how much media has changed.  Pre-Internet – news was provided by the Big 3 Networks and your local newspapers or weekly periodicals.  Now you have thousands of sources of news, anybody can publish (for better or worse) info that would never make the news outlets.

I thought of this when I ran across this article written by Russ Baker – exposing a little known angle on the assassination attempt on Ronald Reagan by John W. Hinkley.

One could easily file this under one of the many internet conspiracies out there, but the information contained in Russ Baker’s article is at least eyebrow raising when you look other Bush family political  lore.  Who knew there was a relationship between the Hinkleys and the Bush’s,  and you would think it would of at least been discussed more indepth than the minor references printed in the news coverage of the day.

Russ mentioned that he left this story out of his book on the Bush family, fearing the book would be seen as a collection of conspiracy theories.  So perhaps his website is the best place for this information – maybe not really ‘history’, but worth a special note.

How many previous historical documents have left out fringe stories or things feared to hurt the sales of books?

Historians have always had the tough job of piecing together a narrative based on fragments collected from documents, interviews, or news reporting of the day.  It will be interesting to see if future historians are able to build a ‘more accurate’ history, as the volume of information on the internet should provide a huge increase in documentation and multiple facets of events and people.  The future of history should soon be upon us.

 

 

 

 

Dan on September 7th, 2016

Hats off to  Amazon,  the first US company of note to offer a 30 hour work week for employees.   Maybe I am wrong, but I  think this could definitely help them recruit and keep talent in the tech talent starved world.

Hopefully, this isn’t just an attempt to get people to work more hours but cut their pay by 25%.  To me, it seems there are many potential benefits to this:

  1. Many young dual income couples both have full time jobs, and would gladly cut back on some of their pay in order to better manage their lives.  Take it from me, even with no kids, when both spouses work full time, weekends are just a way to catch up on errands and appointments that you couldnt get to during the week.  Indeed, I would bet that employees working 30 hours a week take less PTO time off for doctor, dental, car appointments, etc – as they can work them in better on their off hours.
  2. By having more workers spread across the same number of hours, more cross training can (must) be built into everybody’s job functions.  This helps lessen the damage caused by key employees leaving with business knowledge known only to the departed.
  3. Offering a 30 hour work week would differentiate Amazon from other tech employers.   Again, in this Gig Economy,  10 extra hours a week would provide opportunity for self managed career growth for employees:  they can work on their next startup, write the next great American novel, or if musicians, have time to pursue their dreams of being rock stars.  I hear lots of smart people in tech feel weighed down because they dont have those spare hours to pursue a dream.

So I think CEO Jeff Bezos at Amazon is on to something.  I have no doubt those attracted to a 30 hour work week are likely the best and brightest.  Jeff Bezos has always been a step ahead of everyone else, and I think this is another move that will pay off.

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.