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.

 

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.