The Week of Climax!

Once in a while a week comes when so many events line up that it feels like we are reaching climax of many! Next week feels like that.  Let's look at some of the events which could reach climax

Finals Week:

Since both my kids are in college, I know when is Finals Week and what it means. Next week is finals week for them (one of the final is on today Sunday - who schedules final exams on Sunday?) Knowing the pressure of finals and maintaining grades, I am only imagine the relief these kids will have at end of week. I am definitely looking forward to seeing smiles on their faces after finals are over!

Trade-War:

While President Trump may say that there is no deadline, he has to make a call if he plans to put tariffs on rest of Chinese imports (including iPhones) on Dec 15 or not. That would give a signal to world if phase 1 deal is near or would continue what has been going on for last 12-18 months. So in a way, Dec 15 would be a day of climax for trade war between US and China. This would also be market moving event.

Brexit:

After 3 and half years of countless negotiations, potential deals, failed votes in UK parliament, 3 prime ministers and as many elections, it has come down to Dec 12 elections. This election is almost like re-referendum on Brexit. UK citizens have a choice if they want Brexit or not and accordingly vote. The only good thing is that finally this Brexit drama would be over - hope so since you can never predict what UK politicians may do.

Fed Meeting:

Fed is having its last meeting of 2019 to decide interest rate direction. Exactly 12 months back, Fed spooked market by increasing the rate in last meeting of 2018 and giving indication that more increases are coming. What a difference 12 months make?  Fed not only changed the course but reduced interest rates 3 times since then. This meeting would be less dramatic. Fed would stay the course of pause given mixed signals on economy, employment and inflation. Most likely 2020 FED meetings would be "no event or do nothing" and that would be a good thing.

Economy and Markets:

Economic signals are mixed. Both Manufacturing and services readings are below expectations signaling potential trouble in making. Inflation is low. Employment is again at 50 year low with Nov employment report is strongest in many months. Holiday shopping season started with a bang (even though crowds in malls are noticeably less - that means online shopping is really becoming mainstream). Markets are generally reacting positively and are up by 28% till date in 2019. Another 2-3% increase and it will beat 2013 record. With best month for markets underway, S&P can touch 3200 before year end (my prediction was 3100 few weeks back). 

So let's wrap these climax events and get ready for holidays. My next update would be in new year with 20 recommendations for 2020!

Happy Holidays!

/Shyam

Unicorns: Hope, Hype and Reality!

Unicorn which is supposed to be rare is known to many people working in tech or general investment community. Let's look at Wikipedia definition: The unicorn is a legendary creature that has been described since antiquity as a beast with a single large, pointed, spiraling horn projecting from its forehead. In private market (per-IPO) unicorn means startup which has billion $ valuation before IPO. This used to be very rare and hence association with unicorn! Based on latest Google search, there are over 300 "unicorns" (it used to around 100 in 2015). Let's look at journey of these unicorns from "Hope, Hype and Reality"!

Hope:
By definition, startups are all about hope of starting something new, changing the industry and world and improving lives of billion people. They are also about dreams of founders and employees to make big in terms of monetary rewards. VC community is able to fund these with initial capital, guidance and groom them to become unicorn in hopes of multiple times return on their investment. Common people also get excited when they read the stories of college dropouts becoming billionaire and richest people on planet. They can see that anyone with dreams can make it big without inheritance (like old times). Investing community ride their hopes on potential to participate in outsized returns like they have done in last 2-3 decades by investing in Amazon, Microsoft, Apple, Google and so on! So hopes all around....

Hype:
The companies start getting their products/services out which start getting wide-scale adoption. The heady triple-digit growth (albeit on very small base) get everyone excited and every financing round becomes a news. In span of 2-3 years, private valuations from millions to billions making them "unicorns". The excitement continues since many VCs join later financing rounds at every higher valuations reaching the climax of valuations of tens of billions (WeWork at $47B, Juul at $38B and so on). In this phase profits don't matter. As they say, growth at any cost becomes the only mantra! Companies start expanding in new markets because it feels like nothing will go wrong. Founders start getting coverage in magazines and start flying in private jets. And then..... the phase of reality starts!

Reality:
In this phase, suddenly profits matter and law of large numbers start catching up. Growth slows from triple digits to under 30%. Founders start cashing out in ever increasing valuation rounds. IPO talks start because "profit at all costs" need new funding and VC funding dries up. Employees want to cash out.  The new markets do not pan out and companies remain "single pony trick" (no wonder Unicorn has only one horn). Despite all these challenges, IPO happen and first day pop happens. And then over next six months, gravity brings down stock to below IPO price. Lockups expire and employees start cashing out even if stock if 50% below their post-IPO highs. Many times, change of management (including CEO) happen. The vision evolves from "changing the world" to "making profits" and "survival". And then the real winners  (like Microsoft, Apple, Amazon, Salesforce, Facebook, Google, Netflix) emerge which really change the way world works!

Looking at current set of companies, Uber seems to have gone thru all three phases and has most potential to survive and prosper. Because it is changing the way we commute!

/Shyam

Chips and Clouds!

First of all, Happy Diwali - Festival of Lights to all my readers. Its' climax of series of Indian Festivals which start at end of summer and is considered biggest Indian festival. It's 5 day festival which also marks start of new Hindu calendar year! On eve of such festival which celebrates Lakshmi (Goddess of Wealth), S&P is within inches of reaching all time high. I am sure it will reach new highs next week on its way to 3100 as seasonal Santa Rally gets underway.
So what changed in supposed scary October month? As in Halloween, markets have been playing "tricks" on investors with scare of upcoming recession but at same time "treating" patient investors for just staying invested. 2019 is turning out to be one of best year of returns with S&P returning over 20%. It does not feel that way due to recent drubbing software/cloud stocks took. That brings me to today's topic of Chips & Clouds!

Chips:
You can read this blog eating Chips and Salsa but you know what I really mean by chips. Semiconductors are generally referred as "chips". In product development we also use term called "Chip to Ship" means how long it takes when we get key "chip (ASIC)" to when we can "ship" final product. The semi stocks took drubbing in early year with MU, NVDA, TXN, QCOM and even Intel falling off 20-50% on fears of inventory overhang, slowing cloud spending, delays in 5G/IOT/AR/VR and generally no major game changing device/application on horizon. While all of these played out as predicted during the year, semiconductor companies have been adjusting their capital spending and investments to address these (in past these companies used to go thru boom and bust cycles every few years). They were able to burn down the inventory, introduce incrementally improved offerings. At same time, cloud spending is slowly ramping up and iPhone11 seems to be doing well (no wonder Apple stock has gained 50% in 2019). As phones are becoming cameras (and very good ones), they would need faster CPU, more memory, more storage and better image processors. All of these are provided by "chip" companies. Semiconductor ETF SMH is all time high and will continue to do well in 2020! My favorites in this sector are MU, AMD, INTC, AMAT and beaten down NVDA. But I would recommend to just go with SMH.

Clouds:
Cloud companies span from cloud providers like Amazon, Microsoft to cloud software providers (SAAS) like Salesforce, Splunk, MongoDB, Zscaler or recent IPOs like MDLA, Pagerduty, HCAT and so on. There must be over 100 companies one can choose from. The line between enterprise software, cloud/SAAS providers or even security providers is vanishing since almost all software players are moving to delivering their software over Cloud. Salesforce pioneered this and Adobe showed the path of how traditional software players can transition to this model. Microsoft did same with Office365. In last 8-12 weeks, stocks of many of these companies took hit bringing their valuations down by 20-50% - almost exactly what happened to Chip companies in Spring. So is it time to consider investing in this sector? Let's look at secular trend. This week one most important news came out was "Pentagon awarding $10 Billion cloud deal to Microsoft". While Microsoft is direct winner of this, IMO all cloud companies (even Amazon who supposedly lost Pentagon deal) are winners. If one of the most secretive organization in world can trust cloud for its IT operations, why not banks, retailers and other government agencies? The trend is almost as powerful as Internet trend in late 90's. That means double digit growth of cloud companies would continue in next decade (at expense of traditional IT players). And it's still relatively early to jump on this trend and reach the state of Cloud9! My personal favorites in this sector are NTNX, MDLA, HCAT, SPLK, NOW, WDAY and of course MSFT! But best way to invest would be thru IGV (ETF)

Happy Halloween!
/Shyam

"Bet" (BREXIT, EARNINGS, TRADE) ing Season!

October is known for market moving events since most of the big downward moves (1929, 1987, 2008) have happened in Oct. Why Oct?  It could be Autumn Blues or upcoming time change with Fall Back, Back to school season... There are many potential topics for behavior finance scientists to study and may get some doctorates. This year's October started with its usual volatility in first week due to inflation and not-so-good manufacturing and services sector confidence readings. Second week  gave some positive signals on trade talks bringing back markets. Now let's look at events for remaining part of October.  All of these events again could impact markets!

Brexit:
Finally the deadline of Oct 31 is almost here and that has forced UK and EU to seriously talk to each other on some kind of deal - including the question of hard vs soft customs border between UK and N. Ireland. It will come down to the wire but my guess is that either deadline will be extended by another 3 months or some kind of Phase 1 of deal would be in place. Either way it would be good since crashing out of EU without a deal could seriously jeopardize the confidence in UK and extend it across EU and World Economy does not need yet another uncertainty.

Earnings:
Next week earnings season should kick off with full force with Netflix and many major banks announcing earnings. The expectations have been lowered across the board. So earnings would play out similar to what's happening over last few quarters. Companies after companies would beat already lowered earnings and give slightly cautious-to-upbeat forecasts with caveats of trade deal, interest rate direction and so on. Basically companies will talk about external factors and still boast how they are doing well despite these challenges (which is true by the way). Markets would react positively to the companies who guide higher and severely punish who miss on guidance even slightly. I call it as putting them in "penalty box" for couple of quarters. Many cloud/SAAS companies including some of the recent IPOs have reset their valuations. So these companies would go up if they can maintain double digit growths. I like the potential of HCAT, MDLA, NTNX and MRNA.

Trade:
President Trump is learning the art of "phasing" from Silicon Valley (even if he hates California and valley). It was very evident from his supposedly trade deal, Basically he announced BVP (barely viable product) and told his trade representatives to write "PRD" over next three weeks for phase 1 of the deal. At same time he also said that we have started work on phase 2 of trade deal. As we all know this seems like any product development in high-tech. I am sure there would be phases 3...n. But either way it's positive signal that something is happening and risk of increased tariffs has gone down significantly.

There are couple of other factors which one need to watch out. Interest rate direction in Fed meeting at end of Oct and Election results in Argentina. More on that some other time!
/Shyam

Is IPO party over?

2019 was supposed to be multi-billion unicorns coming out to markets with big bang with their stocks going up by 50% plus on first day. But suddenly these unicorns are finding that staying private was much easier than public scrutiny on their books. WeWork had to cancel it's IPO because valuation it was getting was nearly 70% below last valuation of $47Billion. Uber and Lyft also had to reduce their valuations and they are further down by 30-40%. Peleton is down by 15% since their IPO price. Slack is down by 40% since opening day price. There are few exceptions like Zoom and Guardant Health. But generally mood is downbeat. Is IPO market having Autumn Blues or is this the start of trend similar to what we saw in late cycle during dot.com bubble? It feels very much like late 90's - similarities are too many to ignore. Let's look at them

• Longest economic cycles (1991-2001 and 2009-2019). So the economic cycle is getting tired and markets are betting that recession is in sight
• Federal bank policy of interest rate cuts to keep the expansion going as much as possible
• Cheap money due to low interest rates
• Currency crisis - Russian ruble, East Asian currencies and now Argentine Peso (and currencies of many emerging countries)
• And of course Impeachment - The tables have turned. Republicans were going after Clinton and now Democrats are going after Trump. In modern times, every 20-25 years, US gets a President which does something illegal (Nixon, Clinton and now Trump) and country had to go thru Impeachment drama!

Markets have returned barely 3% since Jan 2018 and are just about 3% below all time highs reached in July 2019. So what's in store for last quarter of 2019? Would it be as scary as last quarter of 2018 or will it be sane as last quarter of 2017? Looking at events in October - Q3 earnings, Brexit, Elections in Argentina, continuous back-n-forth trade war drama, Impeachment, Biden getting hunted out of democratic nomination race due to his son's involvement in Ukraine (his son's name happens to be Hunter!) and Warren becoming leading democratic candidate. Lots of potential market moving events. So IMO, October would be rough and then markets would be mix of 2017 and 2018.

Happy Navratri!

/Shyam

Tweets, Trade and Treasuries!

Three T's are driving the market sentiment and ups and downs (two of them are caused by another T). After increased volatility in which DOW was going up and down by 300-800 points on regular basis. August wrapped up where it started. So if you were enjoying your summer vacation without looking at daily ups-and-downs, you did not miss anything. Let's look at each of the T's and see where market is heading for rest of the year and 2020.

Tweets:
Tweets are the new norm on how policies are made and communicated on the fly. You know whom I am referring to. President Trump had almost made this as norm. I am sure his twitter followers know what's in his mind before his chief-of-staff. His decision on additional 5% tariffs on China, his constant criticism of Fed Chair Jay Powell or his supposed offer to mediate between India and Pakistan and his "hereby" order to American companies to move their production to USA - all of these would have been carefully thought and communicated in previous administrations. But hey, Trump is not a "normal" president and given everyone is "twitter" happy, President is just following how today's world is operating. How many of us still write letters and make a phone call to wish, congratulate or console instead of just sending a WhatsApp message? So we have to get used to policy by "tweets"

Trade:
What started as skirmish between US and China is turning out to be a potentially full-fledged trade war. Last December after Trump and Xi meeting at G20, many thought that by early 2019, trade war would be over. However after some back and forth discussions, the intensity of barbs and tit-for-that tariffs seem to be increasing. While actual trade $$ amount (~$600 Billion in combined GDP of $35 trillion) is small, the impact on sentiment is dis-proportionate. And when it comes to markets, sometimes sentiment and confidence matters more than actual numbers.

Treasuries:
It's no secret that Trump does not like Fed and it's chairman Jay Powell (whom Trump appointed). However Fed being independent institution is doing its best in ignoring Trump tweets and comments and that's good for economy and markets. At start of year, many pundits were predicting 10 year rate to be near 3% and Fed planning 3-4 interest rate hikes (I am no market pundit but I was expecting same). What changed suddenly that 10 year is yielding 1.5% and Fed is on his path to do 3-4 interest rate cuts? No one knows the answer. Rest of the developed world is swimming in negative yield. German Government is getting paid to buy it's bonds. Italy which does not even have a functioning government is able to issue bonds at 1% (lower than US government). UK is mired in Brexit mess and impacting overall sentiment in EU (watch out for British Halloween on Oct 31).  Emerging countries are mess with Argentina on verge of default and slowing economies in China and India. It's ridiculous  out there and shows that there is no better place than US to park your money and still earn small but positive return. No wonder world money is coming to US treasuries even at 1.5% return.

So what does all this mean to rest of year? The answer is always - It depends!
The calendar has two of scariest months (Sept/Oct) for markets followed by two of best months - Nov/Dec (2018 being exception). So if you are in market for long-term, do nothing for your existing investments. In fact when markets go down in Sept/Oct, be ready to make opportunistic investment for dollar-cost averaging. On sectors, I still like Tech and Biotech. Recently NTNX ($24), MRNA ($15), my favorite ROKU ($150), Disney ($135), Microsoft ($135) and WDC ($55) seem be holding up well and could do better than market for rest of year and 2020!

Happy Ganesh Chaturthi and Long Weekend!
/Shyam

Streaming Wars and the Winners are....

Just came back from relaxing vacation in Kauai and surprisingly we did not even turn on TV during all of vacation. That must be some kind of personal record given the countless choices we have in world of streaming with Netflix, Prime Video, Hulu, HBO, Cinemax, Hotstar and so on! And given this week's announcement of upcoming bundle of Disney+, Hulu and ESPN+ coming in Nov 2019, more choices are coming! Not to be left alone, AT&T is going to launch HBO Max. Viacom and CBS are talking about combining their content. And each of these are offering some high quality content to watch almost on daily basis. What started as a small experimental stream by Netflix about decade back is turning out to be a flood-gate. By some counts combined spend on streaming content would exceed total US  movie box office collections (which was around $11B on annual basis). Netflix alone plans to spend over $12-15 Billion on content - majority of that would be on creating original "Netflix" original content. It has spent $150 million on Martin Scorsese directed "The Irishmen" starring Robert De Niro and Al Pacino. And Netflix subscribers would get to watch from their own home without paying any additional money! Disney+ would make all Star Wars, Marvel and Pixar movies available as soon as their theatre run is over (within 3-4 months). HBO Max, Apple TV, Prime Video...I can keep on going. And then of course you have sports to watch! So it feels like streaming wars are on with all these companies fighting for subscribers,  their entertainment time and monthly subscription $$.

So who are the winners in these streaming wars?

• Netflix and Disney are going to be leaders when it comes to content. Each of them would have over 200 million subscribers in next 10 years. And most of them won't mind paying $15 per month to consume quality content every day for less than price of movie ticket!
• Content creators: There is real war going on in acquiring content and signing up top-notch content creators. Prime video paid over $250M to acquire rights of "Lord of the Rings" TV series. Netflix signed Game of Thrones creators David Benioff and D.B. Weiss for nearly $300 million over 5 years. 
• Subscribers: You get to consume quality content from your home for significantly less than what it would cost to subscribe to linear TV and movies in theatre. And you get significant diversity in content from all over the world anywhere in the world!
• Roku: This is not-so-obvious winner. But here is my hypothesis. To stream any of the channels mentioned, you must have a "streaming" device to connect to your TV. And Roku is most popular device with significant market share lead over Amazon Fire, Apple TV and Google Chromecast. The Roku device is like gateway to streaming world. Roku company has complete data on your streaming habits. It also has free aggregate channel "Roku Channel" on which it provides access to free movies, TV shows as long as you are willing to watch some ads.  It has over 30 million "subscribers". It also licenses Roku OS to TV manufacturers. No wonder it's stock is on fire in 2019 rising over 300% from under 30 at start of 2019 to trading above $120 now. And relatively speaking it's still cheap at $13 Billion valuation. And this was one of the stock I recommended as 2019 pick in "Best of New Year 2019"

With every war, someone is losing. And in this case, linear TV and broadcast and cable channels are the losers. Do you remember Blockbuster. Hollywood and RedBox? Those were the early victims of streaming wars.
That's all for now.. Time to check what's new in streaming world today....After all I am back from vacation!
/Shyam

Markets: What's in store for rest of year?

As I wrote at start of year "Third year is Best", 2019 is turning out to be exactly like that and more. In 3rd year of president's term, markets have been up on average of 15%. This year, S&P is up by 20% and only half the year is over. So does that mean we have seen all the gains for 2019 already? With earnings season about to get into high gear, let's look at key factors which would decide what's in store for markets.

Earnings: 
Next two weeks, large number of companies would be reporting 2nd quarter earnings and provide forecast for 2nd half. While some companies have started warning season (e.g ILMN), it has been relatively quiet on warnings front. Analysts have already lowered their expectations. Economy is not doing as badly as feared at start of year. Trade noise is subsiding. So majority of companies would meet/beat earning forecasts and provide cautiously optimistic forecast. The earnings show is becoming too predictable. No one likes surprises. So companies which manage avoiding surprises would get rewarded and those who will not, will get punished.
Tariffs and Trade:
Another G20. Another patch-up between Trump and Xi. The "Game of Brinkmanship" continues. These half-yearly meet ups are becoming as exciting and at same time predictable as episodes of just concluded "Game of Thrones". With recent G20, both presidents did some patch up and asked their representatives to restart talks even though there are some major differences in policy. The show will continue in fall but given 2020 election cycle, Trump needs to show some victory on this front. He could also use his hard-stance to force lead democratic candidates (Biden) to take position.
Fed and Interest Rates:
Of all these factors, this is the most important factor supporting markets and economy. Fed chairman changed the tune of 3 interest rate hikes in 2019 to potentially 2-3 interest rate cuts in 2019. What happened for this sudden change of heart? Many factors: there is some softness in world economic growth, inflation is stubbornly staying below 2%, trade war fears and constant pressure from President Trump (even though it's not acknowledged). Fed chairman Greenspan extended the 90's expansion by cutting rates in 1998 giving the reasons of LTCM blowout, Russian currency crisis and markets continued to party till 2000. Fed is doing something similar in 2019. That means it would be all clear for markets to party till end of 2020. This expansion is already the longest expansion on record (records are kept since 1854). Fed is going to keep the party going for another few quarters. So if you are thinking of investing, don't fight the fed and invest in S&P indexwhen opportunity presents in Fall (Sept/Oct) when some correction could happen!
/Shyam

The World Cups!

Its exciting time in sports with two world cups in progress. Being from India, I am fascinated by Cricket world cup which I have been following closely since 1983 when India won its first cricket world cup. I still remember the 1983 world cup final in which India (which was not even underdog) beat 2 times world champion West Indies with many stalwarts. It was and still the biggest Indian achievement in world of sports. Dhoni's team repeated the feat in 2011 and now its time for India to claim the Cup third time. The Indian sub-continent is crazy about cricket and even regular matches make viewing history. India-Pak match was watched by 700 million people - highest watched match possibly in any sports. If India makes into final, this record may also be broken. Just as reference, this is 7 times viewership Super Bowl gets! I won't be surprised to see billion people watching India-Pak match in 2023 world cup (which would be held in India).

While I watch FIFA Men's soccer world cup every 4 years and honestly did not follow Women's soccer world cup, I am very proud that USA women's team made to final and wishing them best of luck to win the Soccer World Cup on Sunday in final against Netherlands. Two sundays - two world cup finals. My adopted country (USA) beat England to go to finals. My mother country (India) also has to beat England to go to Cricket world cup finals. It's exciting time to follow and watch sports!

And it's exciting time for markets too! Market returns in Jun were best since 1938 and with dovish fed, truce in US-China trade wars, economy not too hot and not too cold and corporate earnings not as bad as projected just few months back, markets are poised to make new records. S&P will break 3000 next week and start inching towards year end target of 3100. 

The race for democratic presidential nomination is on. Looking at initial round, looks like Biden is leading contender for nomination. Maybe Biden-Kamala Harris should pair up for common ticket against Trump who may have to dump Pence and select Nicky Haley as VP candidate to counter Kamala factor. It's interesting times for politics!

Happy 4th of July!

Just a follow-up:
USA Women's team won Soccer world cup 2nd time in row. Congrats to team USA!

Despite having great tournament and coming on top of points table, India lost to excellent play by New Zealand in Semi-final. With this loss, billion dreams of winning Cricket world cup in 2019 got crushed. Now onto next cricket world cup in India in 2023!

One Win; One Loss!

/Shyam

May is over. What about "Mayhem" in Markets?

First of all, the Greatest Show on Earth wrapped up on May 23 with Indian elections producing a resounding victory for PM Narendra Modi and his party BJP. Modi got complete mandate to lead India for next 5 years. Congrats to Indian voters for making a wise choice in electing Modi and rejecting one of the possible 22 PM candidates from smaller parties (yes - Rahul Gandhi is from a small party called Congress). Even if large number of Indian voters are un-educated, they have demonstrated lot more maturity in selecting their leader than educated electorate in Britain.

As I said in last couple of blogs, "Sell in May and Go Away" was right on mark! It was one of the worst May month since 2011 and first down month of 2019. Just six weeks back S&P was on its way to 3000. And then it all fizzled out. Let's see what changed the narrative.

• Brexit - PM May had to announce her resignation due to Brexit mess. British must be thinking what mess they got into by narrowly voting for Brexit. New PM (Boris?) will most likely push Britain into Brexit without deal with EU and cause some nervousness. It would have been better for them to of for another referendum (maybe best of 3) and let people decide instead of MPs.
• Trade War - The US and China trade squabble is turning into war of words and could lead of real trade war. It may be that both sides want to raise the stakes leading up to G20 meeting in Japan so that both Trump and Xi can play to their respective populations and then agree to deal. 
• Tariff Wall - President Trump opened another front in his trade war. Since he cannot get funding for real wall at US-Mexico border, he is using threat of tariffs (Tariff Wall) to influence immigration. Given Mexican President's statements, most likely Mexico would do something about people coming into US and Trump would soften the threat
• Slowing Economy - Q1 grew at 3.1% but again doubts started taking roots about overall GDP growth. This is evident from 10-year treasury reaching 2.13 (lowest in 2 years). Just in Dec, Fed was talking about multiple interest rate hikes in 2019 and 2020. Now most likely they would end up cutting rates by 1 or 2 times in 2019. Finally Trump may be getting what he was saying about interest rates but given 2020 election cycle, he should be careful what he wished for
• Chips and Oil - Semiconductor chip prices are indicators of modern economy and oil price is indicator of 20th century economy. And both of them are down. With these down and inverted yield curve, signs are pointing to potential recession on horizon.

So what should one do? It depends on what politicians and policy holders would do. Trump can change his tune on tariff (for both China and Mexico) on a tweet. Fed chairman Powell can give definite indications of next step being interest rate cut. Chairman Xi can give some positive indications at G20 about deal with US. These three people can change the narrative of the world economy and hence the markets. So I am still cautiously optimist in terms of 2019 year end target being closer to 3000 than 2500 (currently S&P is right in the middle at 2752). So if you believe in the cautious optimism, next two weeks should give ample opportunity to invest. My favorite sectors are Semi, Tech, Biotech and Energy. As they say, "When Chips are down, it's time to go all in"! (if you have the right hand).

Go Warriors!

/Shyam

Deal or No Deal?

What seemed like final climax of trade negotiations turned out to be another round of back-and-forth negotiations between Americans and Chinese (from last count, they are in 11th or 12th round of negotiations). Last Sunday President Trump surprised the world and markets with his tweet that US is going to put 25% tariffs from Friday May 10. Markets took the note and tumbled 2-4% across the world. While Chinese team did come to Washington to continue negotiations, on Friday US increased tariffs from 10% to 25%. Chinese reaction was relatively mild but future of further trade discussions is uncertain. Markets and companies were expecting that Trump and Xi will sign deal in May or at most by G20 summit in Jun. Now that's most unlikely unless both sides back off little bit in give-and-take of negotiations. Both sides are banking on their relative expertise and history. On one side we have president who wrote "The Art of the Deal" book while other side prides itself on legacy of "The Art of War" written by one of the most revered military strategist Sun Tzu. President Trump wants a deal in 2019 so he can claim victory during Presidential Election campaign while Chinese would rather wait post 2020 and hope they don't have to deal with Trump. Now that Trump has put the tariffs and if negotiations don't proceed fast, he promises to put on remaining $300B plus imports, Chinese may feel some urgency. However "Art of War" says "If you know the enemy and know yourself, you need not fear the result of a hundred battles" That means Chinese could be in this for long haul and willing to put up with short-terms pain. So are Americans and Chinese in "Mexican Standoff"? The external event which could force both Trump and Xi's hands would be sudden sell-off in markets (similar to last quarter of 2018) and economic downturn. After all no one wants to rock the boat or in worst case repeat of 1929 or 2008. So as I mentioned in my last blog, one must pay attention to "Sell in May and go away" till clouds on trade negotiations clear up!
/Shyam

"GUI" of Goldilocks Economy!

In today's world of UI/UX, people don't normally talk about its original term of "GUI" which means Graphical User Interface. In App world, it's all about UI/UX. The first GUI based computer was invented in PARC in 1973. Apple later popularized it with MAC. Apple then changed GUI to UI/UX with iPhone introduction by unleashing the App world. Now most of the companies developing apps have separate groups focused solely on UI/UX! But let's talk about another GUI!
 GUI of economy is about (GDP) Growth, Unemployment and Inflation. And given recent Q1 numbers demonstrate that we are in "Goldilocks" economy - not too hot, not too cold. Let's look at:

GDP Growth: On back of major market churn in Q4, 2019 started with fears of growth falling below 1%. Slowly as quarter progressed, growth forecasts got revised to 2%. However actual GDP growth came in at 3.2% which was much stronger than anyone (except may be markets) was expecting. The adrenaline of Trump tax cuts got over in 2018. So is this growth now real? Only rest of 2019 would tell the real story if US economy can grow 3% sustainably.

Unemployment: At 3.6%, its lowest unemployment in 50 years. Even in roaring 90's unemployment did not reach this low. What's driving it? Wasn't it supposed to be other way in which automation, robotics, trade, manufacturing moving China/Mexico supposed to be killing jobs. Yes - all of these factors are killing old jobs but at same time creating new opportunities like "social economy" jobs, retail jobs moving to Amazon warehouse jobs, travel agent jobs moving to "Instagram moment" jobs. America is best in re-inventing its economy every 2-3 decades and this time is no different.

Inflation: 50 year lowest unemployment is supposed to create inflation - that's what get taught in economy classes in colleges. So why is inflation still at 1.5% and having trouble reaching fed target of 2% and cause Fed to worry? Well - this is something to be researched and could be a good topic for PhD in Economy. My hypothesis is that forces of automation, geek economy, "flat world", mobility of goods and people, plenty of energy sources (unlike in 70's when Oil embargo caused inflation to jump to double-digit) are changing the way inflation used to work. It's no more just linked to unemployment or commodity prices. And it's good for world population as long as low inflation does not turn into deflation.

That's why I call today's economy in America as Goldilocks economy! Now all that change if President Trump really follows thru its threat of putting tariffs on most of the goods coming from China. It's good negotiating trick but can risk de-railing the confidence and markets! And its that time of year when the saying on Wall Street "Sell in May and Go Away" could have relevance!

/Shyam

2019: Culmination of Avengers, Thrones, Starwars and Markets?

It's Avengers Mania across the board with movie breaking all records in multiple countries (even in non-English speaking countries like India and China) and already collected over $1.2 Billion in 3 days! That's a juggernaut which would rule the box-office for next few weeks and would easily cross $2 Billion in matter of days. Looking at similar "culmination" events, 2019 turning out to be year of culminations. Let's look at these:

• Starwars: Started in 1983 and after 8 movies, final episode is coming Dec 2019. So this saga is wrapping up after 36 years of fan-mania. It would be interesting to see if it will break "End Game" records.
• Avengers: It started with first Ironman Movie in May 2008. After 21 movies over 11 years "Avengers: End Game" brings all stories together. While this may be called as "End Game", I am sure Disney/Marvel will keep on churning new superhero movies. Now it's just matter of time, if there is Marvel and DC superheroes come together to save the galaxies at some time in future. Given expanding world of Disney, I won't be surprised if it happens over next few years
• Game of Thrones: This expansive and most popular cable series started in 2011 and after budget of nearly $10 million per episode (means more than $500 million cumulatively), it will wrap up with movie style (1 hour and 20 min) runtime in May. Even in today's world of streaming and countless choices, GOT has created buzz similar to last season/episodes of MASH, Seinfeld etc. What's next? AT&T (which owns HBO) must be planning multiple spin-offs of GOT
• Markets: Markets are on its 2nd longest bull-run and in Q2 it will become longest bull-run on record. While one can never predict when this bull-run will be over, it's reasonable to assume that as election cycle gathers momentum, we would see markets taking a pause in summer and potentially make one last run towards all-time highs towards end of 2019 before having a shallow bear phase in early 2020. Till then enjoy the ride since markets will reach all time highs with S&P potentially breaking 3000 in next few days.

There is something about the timing since coincidentally all of these started in Spring (Starwars: May 1983, Avengers: May 2008, GOT: Apr 2011 and Markets: Mar/Apr 2009). No wonder there is a term called "Spring Fever"

It's time to go and enjoy Avengers Movie!

/Shyam

It's time to DISCO

From the title, one would wonder did I change narrative of my blog and started blogging on dance style or what? Well - yes and no. I like movies, music and of course nice choreographed songs (even though personally I am absolutely not good at dancing). DISCO was one of the major trend in early 80s and gave world some of the exciting dance moves! One of the bollywood producer Karan Johar also seem to like DISCO style and tries to mix one of the song with DISCO style in his movies. Check out It's time to DISCO song in Kal Ho Na Ho.
But this blog is about investing. So let me explain what DISCO means.
DISCO is new acronym coined by me to cover stocks which are relatively old tech/media companies but doing exceedingly well especially in 2019 and would be relevant in 21st century. All of these companies with exception of one are more than 30 years old and most importantly they are also dividend paying companies with yield ranging from 1.5% to 5%. These companies (with exception of one) were written off multiple times during their lifetime and each of them reinvented. So here are these companies in DISCO!

DISNEY (DIS)
Intel (INTC)
Salesforce (CRM)
Cisco (CSCO)
Oracle (ORCL)

Let's talk about each company briefly since none of these companies need big introduction.

Disney: YTD 21%
This is the oldest company of DISCO. With it's streaming announcement, it has definitely pivoted itself to be relevant in 21st century. No company can match its creative assets with universe of Disney, ABC, ESPN, MARVEL, PIXAR, STARWARS, FOX assets (Fox studios, Hotstar, Star India), Theme parks and many more. With streaming, it will bring all of these to homes at reasonable price. Now it can hold its own against Netflix onslaught and be relevant in 21st century.

Intel: YTD 25%
Intel has transformed itself multiple times after written off by every new trend - be it mobile, alternate CPU architecture, AI, ML and so on. By making smart decisions (like getting out of 5G race or focusing on data center), it has kept with pace of innovations in its core space. It had made some smart acquisitions along the way (even though it should have acquired Nvidia few years back). Intel is here to stay no matter where Semi world goes!

Salesforce: YTD 13%
This is the youngest company in DISCO and only exception of more than 30 year old and dividend paying rules. But this company deserves to be part of DISCO. It invented how software should be delivered 20 years back and since then it has been leader. It's the leader of cloud SAAS players and even big software companies like Microsoft, Adobe and even its arch-rival Oracle is following the path.

Cisco: YTD 30%
Since I work at Cisco, I cannot write much about company to avoid conflict of interest. But as publicly available information has shown, Cisco started the journey of focusing on core and transforming itself into world of software and subscription. Credit goes to our CEO Chuck Robbins for this transformation. In terms of YTD returns, this is the leader of DISCO with 30% YTD returns

Oracle: YTD 21%
Oracle is 2nd company in software to make into DISCO. But as Marc Andreessen written in his blog "Why Software Is Eating the World" in 2011, the trend is increasing and hence it's worth to have 2 software companies in DISCO. While Salesforce is nipping on Oracle's business, almost all biggest companies run on Oracle's core product of databases. Oracle is investing heavily into moving its offerings into cloud and made decent progress. The story would play out similar to Microsoft albeit slowly. 

As one can see, DISCO stocks are having a good time in 2019 and most likely continue the "dance" even though stock market music stops in 2020. Most importantly this group would be relevant in  21st century.

Happy Easter Sunday!
/Shyam

The Greatest Show on The Planet!

You must be wondering what would be "The Greatest Show" on the planet we call The Earth! Many events would qualify for this honor. For college basketball fans, it would be March Madness which wrapped up last week (Virginia won). Then there was the biggest comeback in any sports with Tiger Woods winning Masters at Augusta. This would be his first major win since Jun 2008 - even before longest running bull market started. At age 43 and after a gap of 11 years, this can definitely be "biggest comeback" but does not qualify as greatest show. Last time he won any major was when Game of Thrones was only books! Now for "Game of Thrones" fans, first episode of final season which aired on Sunday Apr 14 could be called big show with highest TV ratings. But hey, those many people watch an average Indian soap-opera or an IPL match. Now 2019 IPL (Wildly popular 20 over cricket tournament between 8 teams in India) comes close to "Greatest Show" which happens every year during Indian summer. Cumulatively 100-200 Million people must be watching IPL matches.
But to top it all, Indian Parliament Elections is truly the " The Greatest Show" on earth. It happens every 5 years (most of the times due to stable governments - in 90's record was few months). This year it started on Apr 11 and would finish on May 23 when counting will start. The elections will happen over 7 phases and nearly 900 million would be eligible to vote, And Indians do vote with average participation of over 60-65%. That means 550-650 Million people will cast their vote (twice the population of US). So it's not only watching any TV show or sports match but actively participating in electing the Government which would decide the fate of 1/6th of world population and run 5th largest economy. Now if that's not The Greatest Show, tell me what would be?
2019 elections are going to be key to how India would realize her full potential. PM Modi had shown the path with bold and decisive policies what can be done with strong and corrupt free government. But 5 years is a short time to make significant change. China took 30 years to become 2nd biggest economy because its leaders do not need to get elected every 5 years. Despite almost continuing elections (local, state, federal), India had done an amazing job in growing economy at 6-8% in last few years. India needs another strong government led by PM Modi to take her to next level ands realize her full potential. That's why these elections are so crucial for India and for world!
The Greatest Show on The Planet is On! Stay tuned for May 23 for the Finale!
/Shyam

March Madness!

After brief hiatus due to around the world tour (first time in southern hemisphere), it's good to be back home. And of course it's March Madness season. It's futile to even come up with perfect bracket since even most advanced AI with all the data crunching in the world will not be able to predict perfect bracket even in 22nd century. Looks like after 40 games, there are two perfect brackets remaining (out of tens of millions) as of this writing. So let's pick only top 4 teams. Here are my picks:

• Virginia Cavaliers
• Kentucky Wildcats
• Duke Blue Devils
• Gonzaga Bulldogs

Any one of these could win the championship. While college basketball march madness is in full swing, there are other events in the world which match the "madness" aspects! Let's look at them

Brexit "May"hem:

This is truly a "Shaskperean" class drama unfolding in Britain. At this time, no one knows what British people and politicians want. Accordingly to rules, Mar 29 was supposed to be the key date when Brexit would have been effective with or without deal. After multiple failed votes in parliament, May keeps on going to EU to get additional concessions or extended timelines. Now she got two dates - one in Apr and one in May. So depending on how British MPs vote, world will know what happens to Brexit. Given the size of British economy and in general EU's state of economy, maybe world does not care what happens. May should just have another referendum and let people decide once for all. I guess British would decide to stay in EU if there is another referendum (provided there are no "external" forces influencing the elections)

Muller Report:

After almost 2 years, Muller has wrapped up his special investigations of Russian meddling into US presidential elections and submitted his report to AG. Muller has done an outstanding job in running the investigations professionally and without any public statements. So while both parties will try to politicize the findings, people would trust what's in the report and make their own conclusions. So what happens next? AG would have to make the report public at some point of time and then congress and people have to decide in upcoming elections what to do with President Trump and congress.

Fed Interest Rates and Markets:

Just few months back, everyone was predicting 3 or more interest rate hikes by US Federal Reserve Bank. And based on last week's Fed meeting and direction of 10 year yields, interest rate cuts may be on horizon. What happened? One word - Recession! Last week, yield inversion happened - means interest rates on 10 year treasuries is less than 3-month treasuries. And since 1975, every time it happened, recession followed up in next 18 months. So I won't be surprised if we have recession (even shallow one) in 2020. Given markets normally react to potential direction of economy 6-12 months in advance, market swoon last week was expected. Now Fed can always come to rescue by actually reducing interest rates by end of 2019 and delay the recession by few quarters. 

US-China Trade Talks:

These talks are entering into 6 or 7th innings with back-n-forth talks in Washington and Beijing. Most likely we will see Trump and Xi meeting and wrapping up the deal in late Apr or May. 

So lots of "madness" in the world. Outside of this madness: India elections are announced, IPL cricket season has started, US college admission results started coming in. More on these topics later!

/Shyam

Bull in China (Shop) Stocks?

Past few years on Oscar Sunday, I have wrote blogs titled "and Oscar goes to..." and most of the times my prediction rate was above 50-75%. This year Oscar event seems to be creating more and more controversies and overall event seems to get boring (as compared to other choices available to spend Sunday evening). Nevertheless, I love movies so here are my predictions for this year's Oscar winners:

1. Best Picture - Roma (this would be historic recognition to streaming world)
2. Best Director - Alfonso Cuarón, Roma
3. Actor in leading role - Rami Malek, Bohemian Rhapsody
4. Actress in leading role - Glenn Close, The Wife
5. Actor in supporting role - Mahershala Ali, Green Book
6. Actress in supporting role - Regina King, If Beale Street Could Talk

Unfortunately I had not seen any of above mentioned movies (other than Roma) till now. No wonder there is less excitement about Oscars this year. The new category Academy tried to create (Popular movie) and then cancelled would have definitely gone to Black Panther. Let's see how my predictions do.

Next week is also interesting on international political front with Trump and Kim meeting in Hanoi and US-China trade talks deadline of March 1. President Trump will make sure that there is enough optics to show progress and will claim (which to some extent is true) that he is the only President who could make this happen. That brings me to the title of my blog. 

Definition of bull in a china shop: a person who breaks things or who often makes mistakes or causes damage in situations that require careful thinking or behavior.

You know who can match to this definition! But I am looking at this from different angle.

Let's look at "Bull in China Stocks"

Chinese markets are in downdraft since it reached all time highs in 2015 when Shanghai Stock Exchange index reached 5131 on Jun 1, 2015. Now it stands at just over 2800. Almost same level as S&P500 index. So in next 12 months, which index is going to do better? While S&P will cross 3000 this year for another 6-7% growth, Shanghai index will do even better. Once trade agreement is reached, Chinese stocks will continue its momentum since their valuations are still relatively low (avg PE of 11 compared to 15-16 for S&P). In next 12 months, Chinese stocks will return at least few percentage points more than S&P. So it should be almost no-brainer to have some exposure thru ETFs like FXI, KWEB or even stocks like BZUN, NIO, BABA, IQ (only after doing your own due diligence).

Enjoy the Oscars!

/Shyam

Apple's next move? Entertainment, Autos, Games or Healthcare!

Earnings season is almost wrapping up with most of the companies announcing results and forecast better than feared in Dec. With Fed on hold, avoidance of shutdown, incremental but positive progress on trade talks and economy's "goldilocks" state, markets are responding well with 11% gain YTD (largest since 1991 and 1987). IMO, biggest catalyst of trade deal with China is yet to come in Spring. So markets has some more upside left before summer. 

Apple has amassed nearly $250 Billion cash and everyone has opinions on what they should do with the cash. With its flagship product iPhone sales slowing down, its obvious that Apple needs next big market to move the needle. So let's look at 4 new markets and potential companies Apple can acquire to get started!

Entertainment: 

The entertainment industry is changing to streaming world started by Netflix and boosted by Amazon Prime. Netflix original movie "Roma" winning Oscar next Sunday will make it official! Even behemoth like Disney had to respond by planning to introduce Disney+ by end of year. Apple has been toying the idea for last few years but has been very slow to respond. Their supposedly new service to be introduced in Apr will be too late and too pricey. So if Apple is serious about being major player in this, it should consider buying Netflix or Disney. Of course this will cost $200 Billion and would be biggest acquisition of all time and I don't think it will happen (due to Apple's DNA).

Autos:

Auto industry is going thru similar transformation with electric vehicles and self-driving cars. Apple's rumored "Apple Car" is supposed to come in 2020 or later. Tesla, NIO and even traditional car companies like GM have at least 5-10 year's of head start with battery technology and self-driving AI driven software. Google's Waymo is also way ahead. Apple is playing catchup. Apple could buy Tesla (for say $80 Billion) and instantly become leader in both EV and self-driving cars (and also solve Tesla's cash problem). Auto industry is over trillion $ and even 5% market share would move the needle for Apple

Games:

Game industry is tricky since gamers are very finicky. However as Netflix's Reed Hastings said, entertainment/streaming industry has to pay attention to this since person can do only one at a time - play games or watch movies/shows. And Epic Games's "Fortnite" has proven what a compelling, multi-player game can do. Fortnite has over 80 million active monthly users with over Billion hour of playtime over multiple months. It had effectively garnered so much playtime and attention that traditional game companies like EA and Activision had to announce warnings in their quarterly results. Apple could become instant leader by buying Epic Games (for say $25 Billion) if it is willing to sell or go traditional by buying Electronic Arts (will cost about $50 Billion) and leverage its gaming properties and expertise to create something like Fortnite.

Health care:

With Apple Watch and partnerships with various companies, Apple has been testing the waters of health care. Health care industry has been bigger than all three mentioned combined and one of the most complex industry. Due to regulations, it is also slowest industry to adopt changes and hence almost opposite of tech industry. By applying tech industry's speed of innovation and Apple's stance on privacy (which is very much needed), Apple could make a big difference in not only moving the needle for itself but also change the cost of healthcare for US economy. There is no obvious company Apple could buy to jumpstart (that's why Amazon, JP Morgan and Berkshire started new company), it could consider parts of United Healthcare, CVS or Epic Healthcare!

It's hard choice for Apple. It can do all of these organically over next 10 years or make a big splash by changing the way it enters new industries. After all cash in bank has no value when it comes to growing the company! And if its hard choice, Apple could afford to enter multiple industries with its $250 Billion war-chest! 

And it needs to move fast before new iPhone launch event becomes as boring as Oscars!

/Shyam

After Worst December comes Best January: What's next? Year of the Pig!

After stock markets had their Worst December since 1931 and Best January since 1988, one would wonder - what's next? As investors are always in dilemma, answering this question is important. Also while I don't believe in relation of market returns to Super Bowl winner or Chinese year, it's good to look at some of those predictors just for fun!
The Super Bowl week of earnings just got over and as expected most of the companies announced decent earnings and forecasts (Amazon was major exception). That produced sixth week of market gains. Given Nvidia's dis-appointing pre-announcement and Intel's not-so-inspiring earnings, AMD's earnings were outstanding and it got rewarded for that. Finally the hypothesis I laid out in my blog about "AMD new A in FANG" 5 months back is playing out. If AMD continues its market share gains in datacenter CPU/GPU segment and holds its ground in server/consumer/embedded section with 7nm technology advantage, 2H2019 could be very good for AMD. It should continue to reflect in AMD's share price reaching near $30-$32 during the year for 20-25% gain. Despite so much negative publicity, Facebook business seems to be on roll. All Facebook properties rocked in terms of  their reach and effectiveness of advertising. FB stock could go above $200 during year for a gain of close to 20%.
Now let's look at Year of the Pig. This is 12th year of 12-year cycle of Chinese Zodiac calendar. Happy New Year! Looking at some historical co-relation of year of the Pig and stock markets, S&P returns are above average during Year of the Pig. No wonder Pig is associated with wealth in Chinese culture. Year of the Dog (and 2018) was very bad for Chinese stocks due to various headwinds - mainly slower GDP growth, credit cycle and most importantly trade war with US. In the year of the Pig, these headwinds could become tailwinds starting with "Trade Truce" with President Trump. Watch out for three ETF related to Chinese market (FXI, MCHI, KWEB). Each of them are up by 9-15% and could go up by 20% during 2019 if tailwinds pan out.
In non-football terms, tomorrow's Super Bowl can be called:

• Oldies vs Newbies
• Experience vs Youth
• Snow vs Beach
• East Coast vs West Coast
• Quarterback: Wolverine (UMich) vs Bear (Cal)
• Generation X vs Millennial

It's Super Bowl between two generations. Will it be "End or continuation of Patriots and Tom Brady Legacy" which started in 2002 with matchup between same two teams!

As side note, Rams winning Super Bowl is better for stock markets (based on Super Bowl predictor)

Have a great Super Bowl Sunday!

/Shyam

Super Bowl of Earnings, Fed and Employment!

Super Bowl of NFL is just a week away when Patriots would be appearing 9th time since 2001 and Rams will be playing their first since moving to City of Angels! Who would win? It's match up between experience vs youth. Patriots' quarterback Tom Brady (age 41) and head coach Bill Belichick (age 66) have been playing/coaching football before their respective counterparts Rams' quarterback Jared Goff (Age 24 - Cal graduate. Go Bears!) and head coach Sean McVay (Age 33) were even born! In a way it's representation of today's society including corporate world. When it comes to which team I support - I am split. I stayed in New England for one year so would like to see Patriots win. But then Rams is now California team with quarterback from UC Berkeley (my alma mater). So I am just going to enjoy the game and let the best team win! But before we get to Super Bowl Sunday, let's look at this week's Super Bowl of economic events starting with earnings.
This week can easily be called as Super Bowl of earnings when 114 S&P companies are reporting representing maybe close to $4-5 Trillion market cap. The companies span across almost all industries but most important earnings to watch are:

• Monday: Caterpillar 
• Tuesday: Apple, AMD, Amgen, Biogen, Pfizer, 3M, Verizon
• Wednesday: Alibaba, Microsoft, Facebook, AT&T, Tesla, Visa
• Thursday: Amazon, GE, UPS, Mastercard
• Friday: Exxon Mobil, Chevron, Merck

These companies are who's who and can really provide where world economy is heading so watch out for their guidance. In addition to these earning reports, there are two critical events:

• Wednesday: FOMC meeting conclusion and guidance on direction of interest rates. 
• Friday: Employment report. Due to shutdown (glad it's over for now), the numbers may be little skewed but should show unemployment steady at 3.8%

With so many events, what should one do when it comes to investing in markets? If you take long view, markets are still about 10% below all time high (even after rising nearly 13% since its recent low on Christmas eve). As I wrote in "Third Year is The Best", things will be ok in 2019 and one can tiptoe in the markets depending on his risk/reward profile.

Enjoy the Super Bowl of earnings and actual Super Bowl!

/Shyam

The Antidote for Four Horsemen of the Markets!

About 15 months back, I wrote bog Four Horsemen of the Markets about what could end the good times markets were having (back in 2017). Other than taxes, all other three (Fed, Earnings and Trump) played a role in market turmoil exactly one year later producing worst December since 1931. Looks like I was year earlier! Now that scenario has played out, let's look at antidotes for Four Horsemen of markets (for references to Four Horsemen, read on wikipedia and my blog)
Markets have recovered half of their losses after reaching low on Christmas Eve and playing the theme of Markets take steps going up and take elevator coming down. Let's look at the antidotes which would keep markets chugging along potentially reaching all time highs in 2019 again!

FED and Interest Rates: 
Fed did act as horseman and played its role for Q4 turmoil by declaring its intentions of raising interest rates almost like autopilot. No one including President Trump liked it and Fed also realized that it may have gone beyond what it intended to convey. New year brought some dovish tone from Fed including chairman Powell. Now instead of saying "autopilot", they are saying policy of interest rates would depend on various economic factors. So now markets are feeling that Fed is on its side and interest rate hikes are either done or max 1-2 hikes are in front of us!

Earnings:
While most people believe that we are reaching peak of longest bull market and peak earnings, no one expected company like Apple giving major negative earning warnings. While some of the Apple problems are specific to company (high-priced iPhones, incremental innovation in iPhone and no new must have products/services in sight), some of the signs were also indications of slowing economy in China and results of trade war. After Apple's bombshell announcement, surprisingly earnings season has been relatively good. Especially banks have been producing record earnings and energy companies are also on mend. There were also major M&A in biotech means big bio/pharma companies seem to be confident about their earnings. That leaves Tech outside Apple. In next two  weeks, we will hear from Microsoft, Alphabet, Facebook and most importantly Amazon. Most of them should announce reasonably good earnings and forecasts.

Trade War or Truce:
NAFTA became USMCA without much fanfare. Now most important is US-China trade discussions and deal it may produce. This has potential to change the world trade landscape for next decade and hence markets are so fixated on these negotiations and react wildly (up or down) depending on any news coming out of these discussions. Initial rounds seem to be going well. Another round is coming up end of month. Hope both sides agree to amicable deal and announce by middle to end of Feb to avoid "Truce" becoming "War". Given the sensitivity of this deal, both sides are extending hand. Even though US has stronger hand, US presidential election cycle would motivate President Trump to do the deal and declare victory.

GDP:
China is slowing closer to 6%. India is entering into election cycle and GDP would be closer to 7%. US will be around 2% (even with shutdown entering into 5th week. Rgarding shutdown, its whole another topic to write about) and EU (due to Brexit mess) would be around 1-2%. So overall world GDP growth is slowing down maybe by 50-100 basis points compared to 2018. Slowing down is better than entering into recession as feared just few weeks back. So as long as first three antidotes work, world GDP would still be growing in 2019 which should be good for employment and markets.

So if you believe these antidotes would work and looking for investments (many people ask me for specific stock tips), check out my new year blog "BEST of 2019". Many of those recommendations are up by double-digit but there is still some upside left!
/Shyam

Third year is Best!

You may have heard the terms "Third time is the Charm" or "Third time's lucky". All of these terms have some meaning. For example, "Third time's lucky" has its origin in 19th century hanging in which one would be freed up from hanging if he survives third attempt. So how does this relates to "Third Year is Best"? 2019 is third year of Presidential term and based on historic data,  this is the best year for markets. Since 1950, markets are up 100% of time in third year. On an average  they are up by close to 15%. Check out WSJ article on this! General theory is that first two years Presidents spend on fulfilling difficult campaign promises as done by Obama with Health-care reform law and Trump did with tax reforms. In third year, President gets into campaign mode in first term and "Leaving Legacy" mode in 2nd term and start focusing on economy. The major policy changes in first two years start playing out in third year. In addition, based on recent history, third year also brings post mid-term political changes creating "divided government". That means President has to work with other party to run the government and hence consensus building takes center-stage. It won't feel that way given government shutdown but at least now both party leaders are talking and most likely shutdown will be over early next week. So would "third year is best" play out for 2019? Let's look at some of the factors:

• Markets have reset themselves from all-time highs of summer 2018 and are at reasonable valuation. The froth has almost gone!
• Employment is still close to all time low and labor markets are healthy
• With inflation in check, Fed can afford to wait on raising interest rates
• Economy seems to be at equilibrium with GDP growth of around 2-2.5% and inflation at 2%
• Trade discussions with China will get into high-gear in Jan and given risks to both US and Chinese economies if trade talks fail, both parties would be willing to extend hands for handshake after Chinese new year in Feb.
• Brexit deadline would be extended to give more time for reasonable deal (or no Brexit at all)
• While Apple's earning warning was bad (even though it was expected given warnings from Apple suppliers), it won't be like 2000 or 2008 when there were flood of earning warnings. We will know in next couple of weeks.

So all factors seem to indicate that "Third year is BEST" could live to its historic expectations!

/Shyam

"BEST" of New Year 2019!

Happy New Year to all. Finally 2018 is over and hopefully new year of 2019 would bring some much needed calm and sanity to the world of politics, economy and markets! 2018 ended as worst year for investing since great recession of 2008. While I have written about 2018 to be similar to 1998, it turned out to be worse than expected. Looking back at my recommendations at start of year, it turned out to be one of the worst year of recommendations. Let's take a look at it briefly.

• Overall returns were negative high double digit percentages (compared to negative 6.2% for S&P). 
• Only 6 out of 18 recommendations did better than market
• Best performers were NTNX, RGNX and QURE
• Worst performers were SN, NLNK and GE. The last one (GE) was real surprise. I never expected GE to be down by 57% in 2018.

So overall it was quite dismal performance. It would have been better to just invest in S&P instead. But that was last year. The Q4 market turmoil has left many stocks at "discounts" and I cannot resist the temptation of coming up with my 2019 list of 20 recommendations. In the world of acronyms, let's call 2019 theme of recommendations as "BEST" - Biotech, Energy, Streaming/Social/Semi and Technology! And here are the recommendations:

• Biotech: NKTR ($33), VKTX ($7.50), CRSP ($28), CELG ($64), XBI ($71)
• Energy: RIG ($7), OAS ($5.5), ECA ($5.7), XLE ($57)
• Social/Streaming/Semi: FB ($130), NFLX ($260), DIS ($109), MU ($31), AMD ($18), ROKU($30)
• Technology: AAPL ($155), MSFT ($100), ZUO ($18), WDC ($36), AMAT ($30)

Let's see how these BEST recommendations do in 2019. It will all depend on how markets do and that depends on following factors:

• Direction of US interest rates 
• US/China Trade 
• GDP growth of world economy
• Regaining of Trust by tech companies (especially FANG)
• Establishing confidence in banking/financial institutions (that it's not 2008/2009)
• Sanity to world political landscape

If 2018 indeed mimics like 1998 or even 2008, there is silver lining since both 1999 and 2009 had 20% plus returns! Here are my market predictions:

• 1-2 more Interest rate hikes by FED. 
• 10 year treasury would hover around 2.75 to 3.25
• US GDP growth: 2 to 2.5%
• US unemployment rate: 3.5 to 4.5%
• S&P by end of 2018: 2750 to 2850

Happy New Year!

/Shyam