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.

One Of Our Submarines

I am going to go a little outside my norm here and do a pop culture post.  The other day I went down a musical rabbit hole on the web and stumbled across an interesting historical artifact regarding a song that I had recalled from my youth.

If you are a fan of techno-pop from the early 80’s, you may recall a quirky album from 1982 by Thomas Dolby – The Golden Age of Wireless.  Lots of interesting songs with unique sound effect textures.  Anyway, one of the songs that I remembered on this album was a song about a relative of his that died on on a WWII Submarine.  ‘One of Our Submarines’ details the story as he understood it from his youth.

It turns out, with the declassification of records, the story behind this song was all wrong.  On a recent post, he revealed the true story is far different than the one written in his song – you can read the true story here.

Just a reminder that history is always changing.

If you are not familiar with the song,  you can take a listen here:

And if you want more, other interesting songs of note from this album are Europa and the Pirate Twins, Windpower,  Flying North and Radio Silence.

 

 

My Most Recent Home Automation: Electronic Blinds.

Kind of a random off topic post, but I thought it might be helpful for anybody considering buying electronic blinds out there.

For about 15 years my wife and I have been wanting to buy electronic blinds for my west facing windows, and have been stymied by the shortcomings of the different options and the cost.  Last month, we finally took the plunge, and made a decision.  If you are looking electronic blinds, my shopping experience and decision making process may be of help.

I had been looking at two options – Somfy (sold with Hunter Douglas, Graber and other blinds provider) or Lutron.  Lutron had been my preferred choice, as it has the best integration with my Wink hub and has been working on home automation interface for a long time.  Recently a third option came into view as the Shade Store is gaining traction as they are expanding nationally.  They recently opened a showroom in my neighborhood, and I was able to go in and view the options and see the differences

We had a few requirements for our installation.  We only wanted white solar shades, which simplified things.  However, we didn’t easily have access to wired power near our windows.  Also, we didn’t want the shades to degrade from the wood trim around our windows.  We got quotes from all three providers, and the prices were pretty similar, so cost wasn’t much of a factor (though beware – motorized shades are not cheap!).

Here are the pros and cons of each option as I see it:

  • Somfy:  We met with a Hunter Douglas rep who was very helpful in defining the options.  Unfortunately, the Sompfy battery operated shade bar looked a little clunky.  Each shade required 8 D batteries, so in addition to the motor bar, you had a battery bar right above it. So it doubled the profile of the roller bar, which was the biggest negative.  Not to mention I would have to by D batteries in bulk to keep them running (We needed 7 shades @ 8 batteries a piece = 56 D batteries).
  • Lutron:  Lutron did have a mini display at the Best Buy in our neighborhood, so I stopped in and checked it out.  The shade demo was tucked away in the same room as some speakers and audio equipment, so it wasn’t easy to see.  However, the big drawback with Lutron was for battery powered shades you have the same D battery dilemma, but also they have a 4″ tall fascia to hide the batteries and roller bar.  So these would be pretty noticable installed on our window trim, adding a dimension we didn’t want.
  • Shade Store:  I was leaning against going with upstart Shade store, as they are rapidly expanding (going into a potential economic downturn), so it would be more of a risk for ongoing support if they were to go out of business.  The Shade store offers both Somfy and their proprietary motorized shades, and after seeing their proprietary motors, I think they are the best option currently out there.  The roller bar is single width, and in the roller bar is a lithium iron battery that you recharge (once a year’ish according to the sales team).  This was by far the sleekest profile of them all, and also noticeably quieter than the Somfy’s.  However, the home automation app with the shade store motor is pretty limited as compared to the others, and the phone app got terrible reviews.

After going around and around on the various options, we finally chose the Shade Store brand.  In my opinion, their hardware was the best of the options, so I was willing to risk the company’s upstart nature.  The customer service experience I had with everybody in the company was excellent, from the designer to the measurer to the online customer service.  The best customer service experience I have had in recent memory.

Now that we have had the shades for awhile, I found out a few things.  There is a small wifi hub that comes syncs the blinds with the app, and the first thing I did was set my shades to go up and down on a timer.  I found that every once in awhile one of my shades would not go up or down on the timer, so I moved the hub closer to the shades (even though my hub was only a room away) and that has solved the problem for now at least.  Also, after conversing with customer service, I found out that the Shade Store does support IFTTT, which is a service that allows you to integrate various home automation platforms.  So I can set my shades to go down at noon if the solar index is going to above a certain level (i.e. a sunny day), and go up or down at sunrise / sunset each day.  I can also program my own rules.. another project on the programming backlog.

Regarding the mobile app that got such bad reviews, I have found it just fine. I don’t use it that often, as I just use the remote that came with the blinds instead.  If you have a burning need to open or close your shades when you are not home however, the app should suit your needs just fine.

If you are in the market for motorized shades, I hope this info helps.  This was a surprisingly difficult shopping experience for me based on the options available.  Once you get over the sticker shock and select a brand, they are pretty cool.  If you stumble across this post during your buying experiece, and have any questions – feel free to drop me a line.

The Stock Market and the Fed

2019 has started out as an interesting year for the stock market. The year was set up with a disastrous December 2018, leading to some gloom and doom over the holidays. I recall telling friends in December (following the 5% Christmas Eve drop) that I thought there was a decent chance January would be positive, and if so, take that as a selling opportunity as the rest of the year will be crap.

I was right about January, as the market (as measured by the S&P 500) was up a solid 8%. Time to sell? Now… I am going to answer maybe not. In December the Federal Reserve was signalling 3 rate hikes, and there is an old Wall St saying – ‘don’t fight the Fed’. The saying refers to when the Fed is raising rates, be cautious. Now it turns out, in January the Fed has signaled that it may go more cautiously, presumably because the stock market threw a tantrum. Now there are predictions of a rate cut in 2019, even though the economy is presumably as strong as it has been in recent years.

In my opinion a rate cut may be economic malpractice – but even worse (from a fiscal responsibility perspective) there is now talk that the fed may slow quantitative tightening. This you may recall is the selling off of all the securities the government bought up during and after the 2008 market crash:

Federal Reserve Balance Sheet Expansion

Of course we were told that when good times return, the government would sell off those securities and shrink down the balance sheet. And maybe it’s no coincidence that the stock market had a down year in the first year of quantitative tightening. But now there is talk of stopping this drawdown in 2019 or 2020, presumeably over concern that the economy is slowing too fast. The Federal Reserve now appears to be overly sensitive to the movements in the stock market, which for stock investors I guess is a good thing. This removes one big negative factor for the market I had going into 2019.

If the Fed has our back and is working to protect shareholders, I guess I am less negative than I was over the holidays. Other negative factors still exist, such as slowing growth in Europe, continued governmental dysfunction (i.e. the past and potential future shutdown), and Brexit. So I am still not calling for a great year, maybe just not as bad as I thought. I still think we have some major economic reckonings in the future, it’s just that the Fed is now willing to ‘run up the credit card’ to delay the economic downturn.

2018 Solar Year In Review

Time for my fourth annual solar power progress report.  This is the fourth year of having solar panels on my roof (for the full story click here), and production has been humming along.  For 2018, the panels produced 3591 kilowatts of power, 6 kilowatts less than last year.   Below is a chart of my 4 years of production by Month:

Solar Production Chart
Solar Production 1/15/15 – 12/31/18

We had a sunnier than average year overall, however our summer skies were filled with smoke from wildfires, and I think that is what kept me from beating last years number.

Payback Update

As I have mentioned in previous posts, I had originally penciled out a 6 year payback when I made the decision to move forward with this plan.  Last year I was projecting an 8 year payback on my investment, and this year, that is looking optimistic for the following reasons:

  • Drop in Incentives.  While may incentive rate per kilowatt remained at 50 cents for 2018, I think it is highly unlikely the rate will be above 20 cents after 2020.  It may even be 0, as the only reason I am getting an incentive is because my installation was grandfathered in (if I am reading the revised code of Washington correctly).  New solar installations do not receive any incentives, which has pretty much stopped installations as the payback is just not there.
  • Electricity rates dropping.  My assumption back in 2015 assumed electricity rates would increase around 5% a year, given the cost of phasing out coal generated electricity.  In 2015,  Puget Sound energy was charging 11 cents a kilowatt.  My latest electricity bill shows the current price at 9 cents a kilowatt, down 18%.  There doesn’t seem to be any pressure to reduce energy production from coal, as Puget Sound energy uses coal from a plant in Montana to generate 38% of its electricity:

Given this drop in incentives and electricity prices, I am now targeting a payback of 15 – 18 years.  When the incentives presumably end in 2020, my annual revenue will be in the neighborhood of $370 dollars, unless electricity spikes back up or if they extend the incentive program past 2020.

The good news is the panel production has not been significantly dropping off, so they should last for a long time.  Interestingly,  I noticed on Amazon.com that you can buy panels now for about 80 cents a watt, the first time I have seen it under a dollar.  I suppose if I wanted to double down on solar power,  I could buy them as they get cheaper to reduce my payback time.  I think some rough calculations show that at 80 cents a watt, that would have around a 4 year payback, assuming I could easily add them into the current array.

Regarding maintenance, still pretty easy.  Twice a year or so I use a mop to wash them off with dish washing soap, then rinse them.  I don’t notice a big spike in production after I clean the panels, so more frequent cleaning doesn’t seem to make sense.  I am collecting a lot of tree debris underneath the panels, so I may have to figure out how to clear that out so as to not hurt my roof from rot.  I may invest in some racks that elevate the panels so I can clean under them, and the racks also allow for better angles for the sun.

Power Use Report

As long as we are on the subject of power, I also recorded my power usage again this year.  Usage was down again this year, but by only 1%.  I again attribute it to replacing more lights with LEDs as the old incandescent ones burn out.  I am guessing one of my biggest power expenses if the refridgerator, and we got a new larger one this year, so I will not be surprised if my power usage is up next year.

Overall, still happy with my investment, and I still think residential solar / utility scale wind and solar is the power model of the future.  I will get most my investment back in the first 5 years, so it still wasn’t a bad investment in a low interest rate world.

eMagin – Still Just Potential

My latest article for Seeking Alpha was just posted – titled eMagin Is Still Just Potential. This covers a company I followed for a long time -eMagin. They make high quality micro-displays, and have been trying to crack the virtual reality market for a long time. I have been waiting / hoping for them to find success, but so far it has been elusive. Recent developments have knocked the stock price down below $1, at a time where it would appear it is starting to perform. It’s an interesting story (I think..).

My Best Reads of 2018

It’s time for my third annual ‘Best Reads’ of the year post.  Again this year, this is not only my best reads, it’s all my reads.  So your first thought likely is, really?  5 books in a year?  And that surprised me too..  but I don’t really carve out a specific time to read, and I spend a lot of my free ‘relaxing’ time either writing or programming.  Plus.. the Peter the Great book was a big book with very few pictures..   Anyway, without further ado – here are my quick opinions of the books I read this year, in preference order:

1.  Peter the Great: His Life and World

My favorite book I read this year.  I knew nothing of Peter the Great and very little about European history circa 1700, and only decided to read this book because I enjoyed another book written by Robert Massie (Dreadnought).  What I most appreciate about Massie’s writing is he provides great summaries of all the related political landscape and important people throughout the book, providing a great feel for the layout of Northern Europe during Peter’s time.  He also has a way of giving you a feel for the subject of the book, a real persective on the quirkyness and intellect of Peter the Great.  If you have enjoyed any other of Massie’s books, I would definitely recommend this one.  And if you enjoy history, and have not read a book by Robert Massie, you owe yourself to try one out.

2.  The Good Rain: Across Time & Terrain in the Pacific Northwest

 I enjoyed this – it was like a collection of love letters to the Pacific Northwest.  The author obviously has a fondness for the Pacific Northwest, and has collected several short stories around various cultural aspects.  This was written in the early 1990s, so in some sense it is history, though since I lived thru this period and was working in Seattle at the time it brought back some interesting memories (Lesser Seattle anybody?).  He did a great job bringing to live some semi-obscure Pacific Northwest personalities of the time, bringing on a feeling of nostalgia for Seattle before the big Tech boom.

3.  When Paris Went Dark: The City of Light Under German Occupation

Since I was planning a trip to Paris this year, I read this prior to going to Paris.  Since I have already visited Paris a few times (and it is one of my favorite cities), I am pretty familiar with the layout and neighborhoods of Paris.  This provided me an interesting time dimension from this book to know the areas of Paris in a different time.  It makes you think about what it would be like to live under the oppression of a victor, something I hope to never experience.  Also an interesting recap of what happened after the war, and the division of the pro and anti-Nazi sympathizers after the Nazis left.  Definitely worth a read if you are interested in WWII history, and either are planning to visit Paris or have recently visited.

4.  Hillbilly Elegy: A Memoir of a Family and Culture in Crisis

I read this book with the hope of getting a good feel for mood, problems and culture in middle America, which I assume to be pretty distant from the relatively liberal Pacific NW.  It was an interesting and easy read, but I don’t feel like it gave me the insight I was looking a far.  It felt more like a limited picture of a hard luck story of one guy, who made it out of a tough childhood situation.  I think my goal would of been better accomplished if I found a book that interviewed many different people with different perspectives.  But an interesting story none the less.

5.  The Wizard of Menlo Park

This is a biography of Thomas Edison covering hist life and works, and I am not sure why this book didn’t resonate with me.  It was an interest period of time about an interesting guy, but I just didn’t get a good feel the person or the period.  I felt the author was kind of negative on Edison, which surprised me a little but I don’t think that impacted my interest.  I think it just seemed like a story told from 30 feet away from the subject, so it wasn’t as immersive as other biographies  I have read.

 

For 2019, Probably another book or two on European history, and probably some more American history subjects.  But when you only read 5 books a year, my challenge is to read history faster than time creates it.

VFS Rating – RIP

After 9 years I have decided to replace the old Puget Investor / Invest.vfsystems.net VFS Rating.  The VFS Rating uses various fundamental stock metrics to try to determine if the the stock is under or overvalued.  It has never been as accurate as I had hoped, for a variety of reasons.

As of 9/30/18, here are final results of the VFS Rating:

Note that over the life of the VFS Rating, on stocks rated 10 would on average outperform stocks rated 1 by .09% a month (.01x above represents the monthly premium, so on average a vfs 10 rating would equate to .10% a month return, where a 1 rated stock would return .01%).  There is high variability in these numbers, so I think this might be overstating the accuracy of the rating, but at least it is a positive correlation.

Note that on average the stocks in the portfolio outperformed the market by .12% a month, which annualized is over 1% a year over the S&P 500, which I like.  However, that number cannot be credited to the VFS Rating, that number is more a function of the stocks I chose to add to the portfolio.  I would like to think the over 1% number is due to my brilliance in picking stocks,  but I wonder what that number would look like had I not included Amazon in my portfolio during that time.

I am now taking what I have learned from the calculation of the VFS Rating, and using some more modern programming techniques to improve it.  Instead of a VFS Rating, I hope to come up with a target valuation of a stock, from which I can discern the discount or premium the stock market has applied to the stock based on fundamental indicators.  This is very tough, because the valuation of a stock (in my current opinion) is primarily based on the growth prospects over the next 10 years – which is a very subjective (and inaccurate) forecast.  But I have some ideas, and if I set up my measurements right I should be able to see if it can be done successfully.

In the meantime, I plan to rely on my technical indicator that is on the invest.vfsystems.net site.  This indicator has shown some promising early results. Since November 2017,  the performance of this indicator can be described as Y=.077x + .294.  This formula is a little convoluted, but my technical score goes from a -10 to a 10, so a stock with a score of 10 out performs a stock with a score of -10 by approximately 1.5% a month.  Again, this is a small sample set (13 months), but it is promising.

Finally, to repeat what I have told my friends – if you do plan to invest in individual stocks, the most important thing is to get your measurement systems set up.  There are so many wrong strategies out there its important to measure your strategy and make sure you are beating whatever index you would invest in as an alternative.  I have a number of measurements set up, so hopefully now as I embark on this new formula, it will show positive results.  If not.. it could be back to the drawing board once again.

Nordstrom’s 21st Century dilemma

One of the biggest question marks in investing over the last 10 years will be what happens to retail in the online age.  I have been following Norstrom’s off and on over the last 20 years as it is a high quality retailer with dedicated family management.  However, in the last few years I have been out of Nordstrom’s as  I have been avoiding retail all together until more clarity as to the future of retail is visible to me.

One of the statistics that most impressed me about Nordstroms was it was growing it’s web presence at something like 20% a year for the last few years.  It seemed to be one of the few retailers that has a good online strategy, and is keeping itself Amazon-proof.

However, that may be a curse in disguise.  As per this article on Business insider, this expanding retail presence is causing a problem, with digital sales now accounting for 30% of Nordstrom’s sales.

So they may be successfully fighting off Amazon (for now) – but it is clear they are cannibalizing their in store sales.  Online sales grew 20%, while overall sales grew around 3%.

Is this bad?  In Nordstrom’s case, I am now changing my mind, and I think this is a sign of trouble.  In my opinion, Nordstrom has differentiated itself by having premium stores, and excellent customer service.  Translating this differentiation to the web is a whole new challenge, other than the oft mentioned ease of returning things to Nordstrom.  Competing for a premium experience on the web is going to be difficult, especially with Amazon and other competitors (i.e. upstart Stitchfix) building a model around personalization.

My prediction is that Nordstrom’s will have to reduce their average store size, as it probably no longer makes sense to have the same level of inventory in store when people are increasingly buying online.  If this is the case, I think the cost of shrinking and retrofitting stores will exceed the (assumedly) reduced rent cost for the next few years, all the while spending to fight off online competitors.

So while I think Nordstrom’s is still a great brand and premium shopping experience, I am staying away.  I think the moves the company needs to make in the future may further cloud how brick and mortar retailing needs to change in order to survive in an online world.