1998, 2008 and now 2018: History Repeats!

Only 2 weeks back I wrote about markets "Melt Up" which really turned out to be a "Meltdown.  It all started with employment report on 2/2. DOW dropped 666 on 2/2 and continued into next week  with 1000 point swings on DOW. What may have suddenly triggered change of course for markets? There are multiple theories being hashed out. Before we get into some of those, let's learn little bit about history which seems to be repeating every 10 years. Let's look at 1998 and 2008.

Year 1998:
This is the time US was in its longest bull market and irrational exuberance was in full force with "dot.com" bubble forming. Another president (with somewhat similar personal character traits) was in white house. Experts (including Nobel Laureates behind LTCM) were making one-way bets on "convergence" in bond prices. Questionable dot.com companies were coming to markets with billion $ valuations with just some eye-balls as "customers". Generally life was good and then boom. Asian crisis, Russian ruble crisis (Russia has to be in news every time) caused LTCM bets to go bust and markets to crash. Check out news around that time

• U.S. stocks suffer largest weekly drop - Aug. 28, 1998 - CNNMoney
• Dow plunges 512 points - Aug. 31, 1998 - CNN Money

In general, economy was still on solid footing and 1998 ended with 28% returns on S&P and overall markets went up by close to 60%  from their bottom in Aug/Sept 1998 till Mar 2000.

Year 2008:

Most of us still vividly remember the dark days of Great Recession which started in Sept 2008 with bust of Lehman Brothers. Percentage equivalent of today's 1000 point swings were common in those days. All of these went on for a year before markets reached bottom in Mar 2009. This was caused again by very aggressive bets on housing prices will never go down and derivative, credit default swaps on MBS (mortgage backed securities).  Some of the news during this time

• Stocks Take Record Tumble, Down 777 Points - CBS News

Year 2018:

That brings to events of last 2 weeks. This time markets became complacent about "calmness" or lack of volatility. Despite unpredictable nature of our president and stretched market valuations, experts  made one way bets against volatility. And when just a small sign of inflation in employment report triggered interest rate on 10-year treasury to jump to 2.85 (which is still very low historically), volatility returned ferociously. Change of guard at Fed (from Yellen to Powell) and additional deficit as part of budget deal in congress added fuel to "volatility". The forced un-winding of bets triggered wave of selling and caused 1000 point swings in DOW (4 out of 5 days last week). Now that markets got its long overdue correction, is it done? Don't know and for long-term investors it should not matter. Look at history of 1998 and 2008. As long as you believe in long-term economic trajectory of US and world, markets would come back. These weeks would become part of market history but won't change long-term trajectory. You can always do dollar-cost averaging to catch some of the opportunities presented by this correct. So relax and enjoy Valentine's Day with your loved ones!

/Shyam

Meltdown, Meltup and Super Bowl of Earnings!

January of new year is almost wrapping up and I must say what an exciting way to start new year. It started with Intel (followed by other CPU vendors) announcing security vulnerability called "Meltdown". Combined with "Spectre", these security vulnerabilities were reminder of another Y2K type problem which impacted almost every known computing device. The CPU vendors including Intel handled the issue relatively well by coming out with patches and system/server/equipment vendors quickly integrated these patches into their software releases. To some in high-tech world, it also presented an opportunity to upgrade antiquated equipments with newer ones creating additional business. What started as major issue for Intel at start of year became an opportunity as seen in Intel's latest quarterly results. Intel stock crossed $50 after many years. That brings me to "MeltUp". The way markets are rising with almost 7% return in Jan month itself, we can definitely characterize this as "MeltUp". People who were afraid that market is too high at 20000 level for DOW are worried that they missed out on big gains and jumping back into markets in panic for fear of losing on more gains. Could markets repeat lats 90s (1995 to 1999) in which each year produced 20%+ gains. There are quite a few similarities. For example:

• Controversial and business friendly presidents
• De-regulations (Clinton deregulated financial markets which gave birth to 2008/2009 financial crash)
• Congress was as divided (no surprise there)
• Shutdown politics was the talk of town
• New technologies were changing the landscape of business (Internet in 90s vs blockchain/AI/Genetics today)
• Interest rates were rising
• Un-employment was at lowest
• Tax reforms (real estate and capital gains taxes in 90s were reduced)

In summary, market's narrative in Trump's first term (and I hope only term) could be similar to Clinton's second term. As investor, it is important to understand macro trends and economic narratives to make informed decisions. 

Just before the Super Bowl, we are going to have Super Bowl of earnings with Apple, Microsoft, Facebook, Amazon and Alphabet reporting. Almost each one of them will announce plans on how they plan to use repatriated money (combined they have over $500 billion) and how they see 2018 shaping up. I won't be surprised if markets get excited again and make another set of all time high milestones. When it comes to investing, I am staying with "BET" as I wrote sometime back. Tech is on fire, Energy is getting some momentum and Biotechs are on verge of another breakout with onset of Immunotherapies, Gene Therapy, Gene Editing and friendly FDA approvals. Best way to ride these are three ETFs - XLK, XLE and XBI!

/Shyam

New Year 2018: Hit Refresh!

To all my readers, I wish you a very happy new year 2018. During holidays two of my friends gave me Satya Nadella's book "Hit Refresh". Initially I was little skeptical since we read about these companies and their CEOs almost on daily basis so I was wondering what new I would learn from reading the book. I must confess that I was totally wrong. Satya has narrated his personal life, his passion about cricket and corporate life effortlessly and authentically. It's more of a story of transformation he took personally and how he applied his personal experiences to transform a company like Microsoft. Over next few years Microsoft transformation will be similar to what Apple did at start of century. This book is for everyone (not only for those who work in tech) as it does provide some simple tips about life, empathy and culture.
As happens to most of us, start of new year brings new resolutions (which get forgotten by Groundhog Day). So instead of making new resolutions, I thought let's list down few simple tips based on 5 "E"s!

• Engage: Engage with real people face-to-face. Take a break from your phone, social network and look around and engage with nature. Engage with your friends and family in person!
• Energize: This may sound new year resolution of "doing exercise". But it is as simple as taking an afternoon walk, doing 10 min meditation. Go to different places, explore new routes to energize your daily routine.
• Educate: This is one of the best investment one can make. Educate yourself with new skill from YouTube videos or online micro courses. These can be anything from learning a new language (computer or spoken) to cryptocurrency or history of Chile! Help your kid prepare for her AP Psychology test (and learn about brain). Share your thoughts. Write a blog on something you are passionate about.
• Empathize: In general there is lot more need about Empathy in today's world and in particular tech world. And it starts with us practicing every day (even if it may not come naturally for left-brained people). This may be most difficult but one has to consciously try.
• Enjoy: Don't let your new year resolutions rob those enjoyable moments of finishing Ghirardelli Hot fudge Sundae or bucket of popcorn at movies. It's OK to splurge occasionally and enjoy those life-moments. Travel and visit new places (I know one of my friend does this two times every year).

That's enough before this blog starts feeling like life-advise blog (I am sure many of you have stopped reading after first few sentences and that's ok).

Let's look at predictions I made about 2017 and make new predictions and recommendations for 2018.

On macro front, most of my predictions were right on mark (tax reforms, Merkel winning, Oil price, US unemployment, 10-year treasury rate). My prediction about DOW crossing 21K was blown away by nearly 4000 points. On individual stocks, predictions were decidedly mixed. While there were winners like MU, CVRR, VRX, PTCT, there were quite a few losers like SN, REN, ENDP. 

So let's look what would 2018 bring and make some predictions and stock/ETF recommendations:

• Index levels at end of 2018: DOW: 27000-28000; S&P: 2850-2900; Nasdaq: 7500-7600. So overall about 10% gains
• GOP keeping both houses of congress
• US unemployment reaching 3.6%
• US GDP growth averaging between 2.5 to 3.5%
• Emergence of strong nationalist personalities across the world capitals

Now let's pick 18 stock/ETF recommendations:

• Biotech: XBI ($84); QURE ($19); RGNX ($33); NLNK ($8), BMRN ($89)
• Pharma: VRX ($20); ENDP ($7.7)
• Technology: XLK ($63);KWEB ($58). NTNX ($35), MU ($40)
• Energy: XLE ($72);SN ($5); KMI ($18);MRO ($16); GE ($17)
• ETF: XLF ($$27); EEM ($47);

Invest in these ONLY after your do your own due-diligence. As Buffet had said, most of the times it's best to invest in index like S&P 500 (SPY)

Hit Refresh and Be Optimistic!

/Shyam

The Greatest Showman!

We saw the musical "The Greatest Showman" based on one of the greatest showman of 19th century P.T. Barnum. I love musicals (who won't especially folks who grew up seeing bollywood movies - 99 out of 100 movies are musicals). After seeing Hugh Jackman singing in Les Miserables, this was must watch for us. I would recommend both movies if you love musicals. Finally Hugh Jackman is done with his Wolverine claws and exploring other genres (Hugh - there is an idea "Wolverine the Musical"). Now coming to PT Barnum - he was one of the most famous personalities of 19th century. He tried his hands in many fields from entrepreneurship to politics. Along the way he got famous (and infamous) for many of his quotes like:

• There's a sucker born every minute
• Without promotion, something terrible happens... nothing! 
• We have got something for everyone
• The noblest art is that of making others happy

PT Barnum is also associated with "Barnum Effect". It is a common psychological phenomenon whereby individuals give high accuracy ratings to descriptions of their personality that supposedly are tailored specifically to them but that are, in fact, vague and general enough to apply to a wide range of people. To some extent modern medicine trials including placebo (random double-blind) are based on psychological effects associated with Barnum effect. So Barnum's influence on American society continues well into 21st century in many fields he may not have even imagined.

Who is today's Greatest Showman? I am sure you know the answer. He has all the ingredients of what made Barnum The Greatest Showman. Many of the Barnum quotes could be directly attributed o him. You guessed it right. Today's Greatest Showman is undoubtedly President Trump. He knows how to promote himself and he knows that in his latest tax bill, he got something for everyone (more for his rich friends than common man). Everyone got surprised at the speed Tax Reform Bill was passed by congress and signed by President. He did not even wait for big celebratory function to sign the bill. He really wanted to get those tax-cuts effective on new year's day. He kept his campaign promise. Many folks may not like him but he is keeping his campaign promises like "declaring Jerusalem Israel's capital" without the consequences. After all he was elected based on those promises!

What should President Trump do: Embrace the "TIIH"

• Taxes - done!
• Immigration - He had given time-bound ultimatum to congress to act on DACA before these kids are forced to leave US. By taking on making DACA into law, he would score another major policy victory. Democrats would be fully supportive of this
• Infrastructure - Its time for America to invest in infrastructure (and avoid train accidents near Seattle). There are so many opportunities to bring America's infrastructure to 21st century. This initiative would also get support from democrats and boost economy to 3% plus which Tax bill is counting on.
• Healthcare - Trump tried and failed to repeal Obamacare. Trump and GOP are trying their best to kill it slowly by removing individual mandate in tax bill without providing any alternative. It's time for them to work with democrats to fix remaining parts of Obamacare (and call it Trumpcare if that's what he wants).

If President Trump can get these 4 initiatives done and be more inclusive and less abusive on Twitter, it would be good for him (for his re-election campaign) and America. 

Merry Christmas and Happy Holidays!

/Shyam

May the Force be with You!

As millions of people, I was eagerly waiting for Star Wars: The Last Jedi. I even did advance booking  for all my team members back in Oct. The movie did meet the expectations of all the hype. The story line is kept simple and even though it was a bit long, it kept audience engaged. Now the wait starts for Episode 9! 2019 is going  to be big year with Cricket World Cup, GOT final season and Star Wars Final Episode!

The final details of tax bill is out. Let's take another look at some of the "Good, Bad, Ugly" aspects we discussed back in Nov. 

• Tax brackets went back to 7 but still simplified with lowest starting at 10% and highest at 37%. Generally its good since overall rates have come down for everyone
• Corporate tax rate reduced from 35% to 21%. They could have settled down with 22% and given more tax cuts to individuals. But we know who controls GOP so this was expected
• Expands child tax credit - thanks to Marco Rubio. Looks like he is one of the rare ones in GOP who is looking after not so fortunate. Well done Marco!
• AMT for individuals is still kept. I can't understand how this goes with supposedly simplification of tax-code. They should have got rid of this and instead kept AMT for corporates
• Changes on how corporate taxes are calculated. It's generally good so that we don't need repatriation debate again. Companies can pay taxes where they earn and bring back money at will without too much financial engineering
• Education benefits - removed proposal of taxing tuition waiver. Someone must have gotten wiser that higher education is critical for US competitiveness!
• The most ugly part (specially for CA, NY, NJ residents) of not able to deduct state taxes remains. These are BLUE states and GOP don't give a damn about them. It's politics after all!
• The biggest tax reforms after 1986 is marginally positive and would sail through congress next week and President Trump would claim as "Biggest Christmas Gift" for American people.

What does it means to stock markets which are already at all time high? Should one follow "Buy the Rumors, Sell the News"? Based on many experts, these tax reforms are:

• About 50% priced in markets
• Should marginally improve GDP growth above 2%
• Should increase corporate earnings by about 5%
• That means we could see stock markets heading higher by end of year and well into spring. Q4 results and Q1 forecasts would decide overall direction beyond that.

Given all the news and discussions around Bitcoin, you may want check out well-written article in New York Times by Prof. Robert Shiller. 

Bitcoin = Ambiguity + Animal Spirits (there is no economics at play here) and hence no one can predict it's price.

Happy Holidays and May the Force be with you in 2018!

/Shyam

Taxing Times, Bubbly Bitcoin and Wonderful "Wonder"!

Hope you had great Thanksgiving. Lot of interesting events have happened in last two weeks so its time to look at some of these - especially on two topics we have visited in past - Taxes and Bitcoin!
Unless you are on different planet, you may have heard that Trump and GOP are working on tax cut plans to reward big corporations and their rich donor friends. As college students are getting ready for their finals in next 2 weeks, GOP finally did one night-out (almost) to get something done. They passed almost 500 page (some of that is hand-written) tax reform in senate. Now house and senate need to sort out their differences and vote on final bill. President Trump is going to push his party leaders to get it done before Christmas so that Trump can claim that he had given "Greatest Christmas Gift EVER to American People" for holidays. Watch out @realdonaldtrump twitter feed for such claims! Who benefits from these tax reforms? Check out my earlier blog regarding this. I would suggest there is still time to fix some of the "bad" and "ugly" aspects of this bill - only if some of the GOP members have will to address these aspects and really push for tax cuts for everyone (including CA, NY, NJ residents). One thing is for sure - in 2017 GOP and Trump did not had any legislative win. So they need this and they are going to get it done!
Now coming to "Bubbly" Bitcoin! It has reached almost $12000 in just matter of days. This reminds me of nineties dot.com bubble where adding .com used to boost market valuations by hundreds of millions. Some companies have started doing same by adding "coins" or "blockchain" to their strategy and boom - unsuspecting investors are rushing into "fools' paradise" by buying into these. As I have written previously, there is fad, fraud and new frontier of investing in cryptocurrency world. By one of the chart I have seen, Bitcoin is third biggest bubble (# of days to rise in price) in all known history of bubbles. Is it ready to burst? Don't know. Bubbles can get lot bigger before hot air comes out. Bitcoin may cross $15000-20000 but in the end this bubble will burst and it will have crash landing! Bitcoin total market valuation is more than 475 S&P companies! When its valuation starts approaching top 10 S&P companies, it would have reached "bubblical" proportions! So my advice - just watch out and don't gamble!
It's different story for stock markets - while markets are at all time highs and crossed the year end targets I predicted in Oct, they would keep at these levels for some time due to synchronized global GDP growth, US tax cut bill and healthy corporate earnings! We may see DOW at 25K, S&P at 2700 and Nasdaq at 7000 in early 2018. Two sectors in particular are still very promising for investing - Energy (XLE) and Financials (XLF).
Finally something I personally liked. The wonderful, light hearted movie "WONDER" I would recommend watching with your kids. Wonder is an earnest, funny and emotional family drama with a subtle message of kindness (which we all need in this world). All kids acted very well. Jacob Tremblay played Auggie so well that he deserves an Oscar nomination!

Rumble in the (Retail) Jungle!

As holiday shopping season is upon us, millions of people would be shopping for gifts for their loved ones and for themselves. One week from now, Americans would have finished their Thanksgiving dinners and shopped till drop during "Black Friday" followed by "Cyber Monday" and "Terrific Tuesday" and "Wonderful Wednesdays" and so on. Retailers can be quite creative in coining the terms as we had seen with "Singles Day (11/11)" in China and "Prime Day (7/11) by Amazon". Thanks to Expanding Amazon Jungle, retail landscape is changing dramatically. In last 12 months, Amazon stock is up by 50% while combined market cap of key retailers (Target, Macy's and others) have gone down by 40%. Market is sending clear signals who is winning retail wars. And then there is Walmart. Last week Walmart published it's quarterly results and surprised everyone with kind of progress it had made. So what does it has to do with "Rumble in The Jungle"?

For sports fan and history buffs, one would know about historic boxing fight between World Heavyweight Champion George Foreman and challenger Mohammad Ali in Zaire, Africa in 1974. This fight was promoted as "Rumble in the Jungle" and many consider it as greatest sporting event of the century (Indians would not agree since for Indians India's 1983 Cricket World Cup win against West Indies is still the greatest sporting event of all time). Ali won the boxing fight by knockout in 8th round.

Rumble in the Jungle is good analogy to look at emerging retail fight between Walmart vs Amazon (I did consider David vs Goliath but it does not fit since both companies are so big). Let's look at key attributes of both companies:

Amazon: 

• Sales: Over $150 Billion growing at double digit
• Profits: Does not matter since its in investment phase for last 20 years (EBITDA: $12 Billion)
• Market Cap: Over $550 Billion
• Key strategy pillars:
• Leader in online shopping
• Prime membership
• Entry in in-store/grocery with Whole Foods 
• AWS - crown jewel
• Relentless focus on customer

Walmart:

• Sales: Close to $500 Billion growing at 1%
• Profits: $13 Billion (EBITDA: $32 Billion)
• Market Cap: Close to $300 Billion
• Key strategy pillars:
• Leader in in-store/grocery shopping
• Excellent presence with stores in three formats (Neighborhood market, Superstore and Sam's Club)
• Everyday low-prices
• Good momentum in online presence with Jet.com

As you can see, both companies have key strengths which have started producing results and getting rewarded. Both are preparing for fight which would go on for a decade (boxing fight went for 8 rounds). Unlike the boxing fight, there would not be knockout in this fight. So looking all the way into 2030, both of these companies would be winners. However in the rumble, other companies (watch out Target, Macy's, Kohl's and so on) may get trampled. What does it mean to making investment decision? If "retail" is the sector you get excited about, I would recommend picking one of both of these companies for investment and stay away from other retailers (Home Depot and Costco may be exception to this).

Have a great Thanksgiving!

Vision without Execution is Hallucination!

The quote "Vision without Execution is Hallucination" has been attributed to Thomas Edison and Henry Ford. Both of these men were great visionary and made profound difference in human-kind by executing on those visions. Why is this quote so important in today's world? As earnings season is wrapping up, we see incidence of "execution" or "hallucinations" in almost every earnings report. The companies which have great vision and great execution (Apple, Microsoft, Amazon, Google, Facebook, Intel, Nvidia, Netflix and many others) did extremely well and got rewarded with stock price gains. Apple being best of them would become first trillion $ market cap company in few weeks. Steve Jobs was great visionary but what made today's Apple is Tim Cook's almost flawless and laser-sharp execution! Tim Cook had added more than $500 Billion into Apple's market cap in less than 6 years. That's double of what Steve Jobs added during nearly two decades at Apple. Same story with Satya Nadella. Great vision and execution around cloud and software-as-servicve! I particularly admire Netflix CEO Reed Hastings' vision and execution. Moving to streaming world by killing its own cash-cow of shipping DVD was a gutsy vision and almost bankrupted Netflix. Another similar gutsy vision of creating original content (even at expense of spoiling relationships with big media companies like Disney) and executing on both of these visions with persistence has turned Netflix into an unstoppable force in entertainment. This is forcing companies like Disney to rethink its vision and execution for the new world of entertainment. Who would have thought?
Now let's look at other side -  companies which have great vision but are faltering in their execution.

• Tesla: I admire Elon Musk and his visions in so many fields. Elon is Steve Jobs of 21st century and like Apple for Steve Jobs, Tesla is for Elon Musk. Unfortunately recent reports on struggles on Model 3 production is creating doubts regarding execution capabilities (I am not happy that delivery of my model 3 is pushed out by few months). Execution on production ramp-up an delivery of model 3 to nearly half-million customers who have paid advance of $1000 would decide fate of Tesla. So Elon, it's time to execute on your great vision! (as a side note, Steve Jobs and Apple had similar phase when Steve's execution on his pet project "Lisa" computer faltered)
• Snap: Evan Spiegel found a great niche of "vanishing messages" and has evolved Snap's vision to be a camera company helping people the way they live and communicate. However since Snap went public, it has failed in its execution every quarter. Kids love the app because of its stories and creative tools (my knowledge of snap app is limited as you would have guessed). But lack of focus (trying to change from social network to camera company) and poor execution (inventory write-down of $40M on Spectacles) is creating a narrative that Snap would go same way as Twitter and GoPro (and would never be able to match Facebook's vision and execution)
• General Electric: And finally company which was formed by merging Thomas Edison's companies is faltering in its execution for almost 10 years. Today's GE lacks both vision and execution for 21st century. Its stock is at multi-year low and could be removed from DOW index first time (GE is the only company which had stayed in DOW since index was created). Everyone is awaiting for new CEO John Flannery to define a new GE for 21st century creating new vision and execute on it. I am confident that company which had survived two world-wars, great depression, great recession and many ups-and-down would be able to survive and thrive!

Energy markets are back on upswing as I predicted back in July. Given aggressive stance of Saudi Arabia and synchronized global GDP growth oil price would cross $60. Energy stocks would finally turn around in 2018 after nearly 3 years of under-performance.

It's one year anniversary since biggest surprise in political history of USA. More on that next week!

GOP Tax Act: The Good, the Bad and the Ugly!

Finally long-awaited GOP and Trump Tax Act was published last week after last minute delay of 24 hours. What started as "biggest tax reforms this country had seen ever" campaign promise turned out to be just another GOP "give-away" to its benefactors! This is what happens when you try to govern one-sided which limits tax cuts to fit within $1.5 trillion deficit increase over decade. If only discussions included all sides the way President Reagan did with 1986 Tax Reforms, we would have seen much different proposal. I am sure you must have read many articles to try to understand your personal tax situation. So I am not going to repeat them here. You can refer to Tax Act details in article by Tax foundation.  Being a movie buff, I wanted to look at Tax Act in light of one of all time favorite movie "The Good, the Bad and the Ugly". Similar to the movie plot, the actors of this Tax Act are trying to find "fortune" in buried cache of over $20 Trillion deficit amid the chaos of DC politics! While we know who is Good (American People), the Bad and the Ugly (any guesses for who is bad and who is ugly?), let's look at some of the specifics of tax act proposals

The Good:

• Simplifying 7 tax brackets to 4
• Removal of AMT
• Doubling of standard deduction
• Increase in child tax credit to $1600
• Territorial taxes for companies and repatriation of overseas holdings (companies would bring back trillions to USA)

The Bad:

• Corporate tax rate cut to 20% (from 35%). While this was also good thing, such significant change would only increase company profits which are already at all time high as reflected by stock market rise. In trickle down economics, companies should pass these to workers. But that almost never happen. Reduction of corporate rates to 25-28% while balancing out reduction in individual taxes would have been "good" thing
• Increase in lowest tax bracket from 10% to 12%. While some of this would offset due to increased deduction, the actual savings to lowest bracket is much lower than highest brackets
• Elimination of estate tax after 6 years. This was definitely a give-away to GOP "friends and families". While gradual increase in total estate taxes makes sense, eliminating this completely would force future generations of "rich" families not work at all (this is what happens in countries like India and many other Asian and European countries).

The Ugly:

• Cap on deduction for property ($10K) and elimination of deduction for local and state taxes. This was directly aimed at "Blue" states like California and New York and very partisan. Citizens of these states already pay very high tax rates and capping these deductions would make it worse
• Limits on mortgage deduction to $500K of mortgage. Try buying a house in coastal states!
• Pass thru rate for businesses - this opens up so many loopholes (unlike what was promised) that tax consultants would have a field day
• Elimination of student loan interest deduction. This was one of the smallest savings but GOP never cared about higher education so I am not surprised that they took it out

In summary tax act proposal falls short of grand vision President Trump had during campaign. Even in size, this is one of the smallest (0.9% of GDP) in last 100 years. I am sure hectic lobbying and debates and alternate proposals must be flying in DC and final bill would change.

As in the movie, finally the Good (The People) would decide what happens to the Bad and the Ugly in 2018 and 2020 elections!

Virtuous Cycle of Network Effects!

On Friday last week, 4 tech darlings (Amazon, Microsoft, Alphabet and Intel) added market cap equivalent of IBM's market cap (close to $150 Billion) in one DAY! It reminded go-go days of dot com era. Almost exact same happened on Flashback Friday back in Apr 2015. So is it different this time compared to 2000? Are these astronomical gains sustainable? One common factor which makes it different this time is: Network Effects.

Network Effects: The network effect is a phenomenon whereby a good or service becomes more valuable when more people use it. We see it in many services or goods we use. For example: land-line phones (more people used these when more people had phone connections), Internet, Social networks, Streaming networks, Costco membership and so on.

The virtuous positive cycle which gets triggered due to network effects is what is in play for many of these technology companies. Let's look at some of them.

Amazon: Back in July I wrote about Amazon "jungle". After that it expanded further by acquiring Whole Foods. Its just a matter of time when Amazon brown boxes would have your prescriptions delivered to you at cheaper prices and before you know you need to refill them. Within Amazon, two examples of network effects at work are: AWS and Prime Membership. AWS is rock-star in Amazon's myriad businesses. At nearly $18 Billion annual run-rate, it's growing 40% annually. That means as standalone business it would be worth more than tech stalwarts like IBM, Oracle, Intel and many more (could be in top 25 most valued companies). More companies use AWS, better and cheaper it becomes which prompt many conventional businesses to move to AWS and virtuous cycle continues. Same goes for Prime membership. Amazon keeps on adding value to Prime membership (I have been member for many years now) like free shipping, Amazon video, music, unlimited photo storage, special discounts, prime day and so on. More members join Prime, the better it becomes. (Amazon must have borrowed this idea from Costco). 

Google: Same network effect is at play at Google. The more people use Google for search, maps, videos the better these services become (which bring in more advertisements). Google cloud platform is not still at scale where network effects have kicked in virtuous cycle. However with hybrid cloud slowly gaining momentum, there is still time for it to pick up (Cisco/Google partnership could help both companies).

Facebook: Facebook is direct and prime example of network effects at play. Many articles have been written on these so I won't repeat them. But what Mark had done is even extra-ordinary. When it sees another platform which could start gaining due to network effects, he does not hesitate to buy it outright (WhatsApp, Instagram, tried to buy Snapchat). Facebook wants to become company of "platforms" of network effects!

Microsoft/Apple: These companies do benefit from "network effects" indirectly. The more people use their products, the better they become. Both had excellent opportunities in leveraging close to Billion users of their products. But now only they have started looking into how they could leverage this into creating "network effects". iTunes had 500 million accounts even before Facebook reached that milestone. But Apple could never create network effects around these (remember doomed ping?). Microsoft bought Skype but could not create the magic. These companies failed to create network effects because of their model of extracting value before it was created. I still wonder why Apple had not realized that charging for iCloud storage (above 5GB) is forcing die-hard iphone users like me to use Google and Prime photos for backup!

So which companies are next value creators by leveraging "network effects". Here are some  predictions: Uber, Slack, Venmo/Paypal and of course Amazon, Facebook and Google!

Next week should be another interesting week with GOP releasing details of their tax cut plans, Trump potentially nominating Powell as next Fed chairman and blowout earnings by Apple and Facebook. With GDP started growing again at 3%, its all clear now till new year for markets to continue doing what it has been doing for this year!

Have a great and safe Halloween!

Four Horsemen of the Markets: Fed, Taxes, Earnings and Trump!

The Four Horsemen of the Apocalypse is a metaphor depicting the end of times in the New Testament. They describe conquest, war, hunger, and death respectively. While this analogy may not exactly map to economy and markets, it's one way to look at how good times could end.
Markets are on a roll with indexes hitting all-time highs every week (DOW has reached this milestone 53 tines in 2017). At current pace, my predictions for indexes by end of year are: DOW: 24K, S&P: 2625 and Nasdaq: 6800 (about 2-3% upside from current levels). No one would have predicted that we would see these levels 12 months back. So with this backdrop, let's look at analogy of Four Horsemen which could propel or end the good times!
Federal Reserve (FED): For world economy and markets, this institution is most powerful in world (even powerful than US Government itself). FED came to rescue during 2008 financial crisis and still helping the economy with its policy of gradual interest rate hikes. Many believe that lack of action by FED was one of the major reason for 1929 Great Depression and Bernanke avoided similar fate during 2008 by opening the vaults and very un-coventional policy gimmicks. Who would be next FED chair-person would decide how policy would evolve. Current favorite (Powell) should reassure markets that Yellen's policy would continue. New chair-person would also have to decide on pace of interest rate hikes as well as un-winding of FED balance-sheet to reasonable level. 
Taxes: Last week some good news came out on this front with Senate passing budget with 51-49 (along party lines) which paves way for increasing deficits by $1.5 trillion over next decade. This means now congress can work out tax-reform details and pass it with simple majority. Despite major differences in who should get how much and hectic lobbying which is bound to happen, there is momentum building up to pass tax-reforms in next few months. I won't be surprised if congress pushes it in next few weeks and call it as "Christmas/New Year Gift" to American People. Any indications that this would fall similar to health care would be a major blow to GOP. With mid-term elections in 2018, GOP has every incentive to get it done (just for sake of self-preservation).
Earnings: Initial earnings season has been good with 75% earnings reports giving positive surprises. Next week we should expect more of these with more than 200 S&P companies reporting (AMZN, MSFT, BA, CAT and many more). Companies are reporting both top-line growth as well as expansion of margins. This should help justify high P/E ratios. There are few laggards like GE but these are exceptions. Even previous laggard IBM is showing some momentum. Next 2 months, laggards would take leadership role and help propel the market. Companies are also planning for how to use windfall coming due to repatriation at one time low-tax rate (below 10%) and reduced corporate tax rate as part of tax reforms. Both of these factors should be good for earnings in 2018.
Trump: And finally President Trump! During first 11 months of his presidency, every day has been different and full of new excitement (mostly caused due to his controversial comments/tweets).  It's difficult to understand why Trump does what he does. He could have handled condolences to fallen stars, NFL national anthem controversy, Puerto Rico hurricane and many such incidents to bring America together. Instead he wasted these opportunities to change the narrative. At this time markets don't care what Trump says and does not say. However this unpredictable and divisive nature could become dangerous especially if there is major international crisis caused due to North Korea, Iran or Russia. We need President Trump to be President to all Americans and re-establish himself as respected world leader!
These four horsemen could decide if good times would continue or not!

Economics: Science of Equations or Emotions?

During my MBA at Haas School of Business, UC Berkeley, my most favourite subjects were economics (macro, micro) and finance. I really enjoyed topics on how policy impacts countries' economic growth, currencies, interest rates as well as formation and success of businesses. Around that time I also developed interest in "behavior finance". Since then I have always wondered - Is Economics a science of pure math (Equations) or human behavior (Emotions) or mix of both?
In most of the academic history of Economics, it is considered a mathematically precise discipline. There have been few exceptions along the way when in 30's Maynard Keynes suggested that we should also consider Animal Spirits which was taken up as book topic by Yale professor and Nobel Laureate Richard Shiller. This years Economics Nobel was awarded to another practitioner of human side of economics - Dr. Richard Thaler (his book Nudge is my reading list).
In my opinion, Economics as science is best understood when we balance it with:

• Mathematics: Rigorous mathematical foundation
• Psychology: Human behaviors 
• History: Geo-political and stock markets

Upcoming week also happens to be 30 year anniversary of Black Monday (Oct 19, 1987). On that day DOW crashed by 22.6% (equivalent of more than 5000 point drop in today's numbers). This was largest fall on any single day. There has been extensive study done on causes of crash and many articles/books have been written. No one can precisely point out reason(s) why it happened. Few factors which have led to this largest crash were:

• Markets were at peak after nearly 7 year expansion
• Computers had started taking over large amounts of automated trading
• Republican president was in white house
• Month on Calendar was October (somehow crashes of 1929, 1987, 2008 happened in Oct)

Well - all four factors are applicable today. Does that mean we are heading for something similar and one should convert all of their holdings into cash?

Answer lies into "Psychology" aspect of Economics/Finance. Most of the recent indicators (consumer confidence, unemployment, inflation, interest rates) have been very good. While there is lot of noise in political spectrum, there is general indication that President Trump is going to reduce regulations and taxes which are generally good for growth (unfortunately its not good for environment). Fed is slow and steady in raising interest rates and most likely Trump would nominate market friendly FED president (re-appoint Yellen or nominate Kohn or Powell). Given all these factors, economy would keep on chugging with growth between 1.5 to 3% and that should keep markets at elevated levels for next 6 months. In fact there is fear of missing out which would push people to start investing. When all of these factors converge (similar to what happened in 2000 and 2007), that's time when we would have really reached peak. So the merry-go-round would continue for another six months. If Trump and congress are not able to pass tax reforms by Spring 2018, it may be completely different narrative. We will revisit that in Spring 2018.

Till then enjoy the the holidays. Happy Diwali to all my readers!

Bet on "BET = Biotech, Energy and Technology"?

My family and friends know that I like to take small bets almost on any topic. They also know that I win most of them. I did lose  big one with one of my colleague on Hillary vs Trump (no one would have imagined Trump would win except may be few folks like my colleague Arun). I ended up buying lunch for my colleagues for losing the bet. Investing is somewhat like betting. Depending on analysis and confidence, one is really making bets on companies doing well (or not) and investing (aka making bets) on stock prices going up (or down). Markets being at all time high, one must be wondering: Are there any sectors which are still worth making bets? Based on my analysis there are still opportunities in three of my favorite sectors - Biotech, Energy and Technology. In today's world of acronyms like FANG, I decided to call these as "BET". Let's look at why these three sectors?
Biotech: Two years back our family went thru experience on cancer. Since then, I have been doing quite a bit of reading on biotech field. I am reading The Emperor of All Maladies as well as follow various trials and FDA submissions. This field is really on cusp on major break thru for treatments for many fatal and rare diseases as well a finally some kind of cure for cancer. Last week Barrons even had cover-story on Gene Therapy With phase 3 trails for CAR-T, Gene Editing, Personalized medicines, world of cure is going to significantly change in 10 years. And biotech companies are leading the way. On investing side, this field is really brimming with activities with startups, big biotech companies as well pharma companies trying to transform into biotech companies (e.g Gilead buying Kite for $12B). Trial results and FDA decisions being "binary" event, one needs to be really brave, knowledgeable and lucky to make investing decisions. With this backdrop, here are my picks. Biotech ETF (IBB $330), Biogen (BIIB $320), Zogenix (ZGNX $38), Newline (NLNK $10), Regenxbio (RGNX $32). Most of these are extremely risky so best way to get exposure to biotech would be thru ETF (IBB)
Energy: With oil finally settling up above $50, I still stand behind my hypothesis that Energy stocks would have repeat of 2H of 2016 as I covered in my previous blog "It's time to get some Energy" So to avoid repeating myself, just check out my previous blog.
Technology: Outside of FANG, there is vast world of technology. So while FANG stocks are up significantly, there are still opportunities to grab. Personally I like small to mid-cap tech companies which are on upswing. With tax reforms almost here, tech companies are going to significantly benefit from worldwide economic growth as well as favorable repatriation rates. With trillions coming back to US, big tech companies would be on acquisition spree in next 2 years. Whom they are going to acquire? small to mid-cap companies to close portfolio gaps. Here are some picks: Nutanix (NTNX $22), AMD (AMD $13), Blackberry (BB from Oct 16, $10-11), FireEye (FEYE $17), Cloudera (CLDR $16), ServiceNow (NOW $100). With semiconductors back in action, SMH ($90) could be worth a look.
October is always tricky month - there are always surprises in Oct like political, economical as well as investing world. So to avoid getting caught in these surprises, I would recommend let the third quarter earnings season play out. It would give good indication on how companies in all three sectors have performed in Q3 and confidence level their CEOs are projecting, Then decide to do your own analysis and invest. Just don't "bet" based on my analysis!
It's also time to celebrate Holidays - starting with Diwali all the way to New Year! So enjoy the holidays with your family and friends!

Micron: New Nvidia?

Nvidia has been hottest tech company (and stock) for last 3 years with his stock more than triple in just 18 months. Most of the excitement is justified due to Nvidia's unique position in cloud players (Amazon, Google etc) as well as emergence of Artificial Intelligence in self-driving cars (Tesla and so on). So while Nvidia stock may not repeat last 3 years feat, there are other companies which could offer similar excitement. Micron (MU) has been on similar trend with its stock already tripling from under 12 to 39 in 18 months. Last week Micron announced record quarter with revenues growing at 91% compared to last year. Let's look at factors which are causing "commodity" players like Micron shine.

• Micron makes DRAM and NAND memories. In technology world, ASP (average selling prices) go down every year. Due to demand and supply imbalance, ASP for DRAM and NAND   have gone UP by 6-8%. That's rare!
• On demand side:
• Memory markets used to be driven mainly by PC industry. It's no more true since memory is being used across so many devices like mobiles, automobiles, robots, VR, watches, IOT devices and so on
• Average use of memory everywhere is going up (blame it on SW engineers)
• Applications are becoming memory intensive even if some of the compute intensive tasks can be handled by customized ASICs/GPU/TPUs
• On supply side:
• There are really only 3-4 players in this market - Samsung, Hynix, Micron and Toshiba
• It takes major capital investments and close to 3 years to bring on new supply
• Due to obvious benefits of quadropoly, none of the suppliers want to rock the boat by over-supplying the market

So in all, supply-demand would remain in favor of demand and hence ASP of memory would remain high or steady for some more time. 

With Sanjay Mehrotra as CEO, Micron got a seasoned CEO (and he is from Cal, Go Bears!) with excellent background in technology and business. So Micron company is in very good position. What does it mean to stock given it has already gone up so much. It is worth the investment? After results, it has already gone up by over 11% in one week. It has potential to go $60 in next 18 months giving potential return of over 50%. (MU management rejected Chinese offer 3 years back to acquire it at $33 which was right decision). I recommended it at $22 at start of year and would still stand behind my recommendation of MU at $38-$39. Given that Oct is here (worst month for stock markets), you may want to wait to see how it plays out over next 3-4 weeks and take small positions if stock goes down.

PS: Usual caveat of doing your own research before investing remains!

Savings: How much is needed?

I am not expert on retirement planning and have many years to go before readers of this blog would need to worry about "withdrawal" rate. However it's never too early to plan. Thanks to one of the friend, I came across few articles on "withdrawal" rate and how much one needs to save to maintain decent living standards.
Here are few assumptions to make:

• "Safe or risk-free" rate of return is about 3% (equivalent of coupon on 30 year US treasury)
• Protect "principal" as many years as possible
• Mortgage is paid off
• College expenses are over (and kids have settled down)
• No major health care expenses

With these assumptions, one could assume that $100K per year income is sufficient to live in areas like Bay Area (which is one of the costliest but most cosmopolitan areas to live in USA).  Assuming about $25K in social security benefits, one would need to create $75K per year in additional income from retirement savings. That would mean one needs close to $2.5M in savings to maintain the "principal" and still maintain a decent life-style. Of course many of these assumptions would change if one moves to less costly area or assumptions change.

If you are interested further, read on following.
https://www.thebalance.com/how-much-can-you-withdraw-from-your-retirement-portfolio-453997

https://www.fool.com/retirement/2017/07/02/3-serious-problems-with-the-4-retirement-rule.aspx

http://money.cnn.com/2017/04/12/retirement/4-percent-rule/index.html

https://www.financialsamurai.com/the-ideal-withdrawal-rate-for-retirement-doesnt-touch-principal/

Well if these are the savings one need, it's good to know now! As I mentioned, this is just my interpretation of various articles. One should consult proper financial advisor to plan!

Coming to Trump drama, there is never a boring week. Only President Trump has skills to antagonize NBA, NFL players, Obamacare supporters (including some GOP senators) and North Korean dictator Kim in same week. Despite all this drama, I am surprised that stock markets are making new highs every week. So are there any good "picks" in these frothy markets? Given that oil market is holding up well, I am still staying with my hypothesis on "energizing" portfolio.

Crypto-currencies: Fad, Fraud or Frontier?

As of last count there are more than 800 crypto-currencies and more are coming every few days. And unless you are hiding on another planet, you must have heard about BitCoin. Since then there are other "credible" (if you can call any of these) alternatives like Ethereum, LightCoin, Dash have come. Most of these are based on underlying technology called blockchain While the blockchain technology has tremendous potential and could at some point match buzz created by cloud, AI, VR, BigData, currently it is "(in)famous" for it's main application of digital currencies . So let's discuss if these crypto-currencies are Fad (aka bubble), Fraud (like Ponzi scheme) or New Frontier of Investing (like dot-com companies including Amazon in late 90s).
Let's understand basics of "money" or "currency". Why do humans need "currency"?
Currencies serve multiple purposes like:

• Medium of exchange (makes bartering much easier and friction-less)
• Storage of value (one can't store farm-output like grains or fruits to be consumed few years later)
• Investment (GOLD as investment)
• To finance countries/governments (ever heard of "printing money" by Federal banks)
• Movement of wealth (e.g. convert pesos into US $)

History of currency has evolved from stones, grains, commodities (salt, gold, oil) to most widely used  "paper" or "fiat" currency. Governments print these paper currencies, put a value on it ($1-$100) and put it in circulation. Before Nixon ended Bretton Woods International Monetary system in 1971, printing of money was tied to value of gold governments held. After this link was nixed, there is no reference to value of "paper" printed by any government other than what people believe it. This one move by Nixon helped US $ to become reserve currency of world since there was no other country which could match might of United State of America (which could change  in second half of 21st century). Now that we understand basics of currency, let's look at crypto-currencies. 

During financial crisis of 2008-2009, some people realized that money is not safe in hands of biggest (and supposedly safest) financial institutions of the world. And to save these banks from going under, governments would go to any distance and run printing presses to full capacity to flood the market with paper currencies. So some techies decided to come up with what they do best. Apply technology to create a solution. That's how BitCoin was created in 2009. Compared to gold which has been used as currency for more than 5000 years, BitCoin is only 8 years old.

Last few weeks BitCoin has been in discussions. First due to technology split (which created BitCoin Cash), then crackdown by Chinese authorities on digital currencies and now Jamie Dimon calling BitCoin as worst bubble than tulip mania. 

So coming to my original question: What are these crypto-currencies? Fad, Fraud or New Frontier of Investing?

In my opinion, they are bit of all three. 

Fad: Every few decades there have been new fad of investing. In 17th century, Dutch went crazy with their investing in tulip bulbs, In 18th century, genius like Newton lost significant savings in south sea bubble. Recently in 20th century, we saw dot-com bubble and 21st century started with housing bubble. This decade we are seeing bubble of "coins" with some of these gaining from 300% (bitcoin) to over 1000%.

Fraud: Out of 800+ crypto-currencies, very few would still be around 5-10 years from now. Some crooks are issuing "coins" and raising millions of $ without anything to support. These are equivalent of dot-com companies which raised billions just based on website. We all know how that ended. So be careful!

Frontier: Out of every bubble, some value gets created. From dot-com bubble, we saw survivors like Amazon, Netflix and few others. The investments also created massive fiber-optics infrastructure on which today's cloud movement is built. So there would be survivors coming out of crypto-currency bubble and surviving currencies could have multiples of value they are fetching today. Also block-chain technology would have lot more commercial applications. 

So as I said it's mix of all three and that's what makes it interesting economic, technology and behavioural investing topic. 

Preparing for "taxing" Times!

One would wonder why am I writing about taxes right now when there are more than 3 months left for year-end and another 7 months before tax-filing deadline. But that's the whole point. There is still some time left in 2017 to take advantage of some interesting tools available. In my previous blog After-tax 401K to Roth IRA I had written about how one could maximize savings in 401K by making after-tax contributions and how these after-tax contributions could be converted into ROTH IRA. Many folks call this as "back-door" mechanism to contribute to ROTH IRA (even though it is completely legal unless tax-reforms in discussions closes this backdoor).
Good news is that overall limit has been increasing over last couple of years as evident from following table. This means one could contribute upto $54K (or $60K if you are over 50) to 401K. After full contributions of $18K and your employer's match, it would still give you an opportunity to contribute 25K or so for after-tax contributions (which could be converted to ROTH IRA).

	Tax Year 2017	Tax Year 2016	Tax Year 2015	Tax Year 2014
Elective Deferral Limit	$18,000	$18,000	18,000	$17,500
Overall Contribution Limit	$54,000	$53,000	$53,000	$52,000
Catch-Up Contribution	$6,000	$6,000	$6,000	$5,500

Table courtesy of Motley Fool Article

In addition to this, there is another "hidden" but equally beneficial savings tool called HSA. Most big companies now offer these Health Savings Accounts. For all practical purposes, these work like 401k for medical expenses. You can read extensive details on how these accounts work in well-written Barron's article. Hope these articles would give you insights into various tools available to maximize your savings and make "taxing" times less "taxing"!

President Trump and team have finally realized that sometimes its better to work with your opponents than your own party leaders. In two weeks, he seems to have negotiated two deals with democrats. Trump, Shumer and Pelosi seems to be best buddies in these days and that may be good for America. Ryan and McConnell must be fuming in their chambers but they had it coming their way. Trump being Trump, no one can predict what he would do next but for now, he seems to have realized that to get anything done, he better work with democrats. If this continues, we may see long awaited tax-reforms before year-end. Would be good for companies (due to repatriation holiday and lower corporate taxes) and individuals with lower taxes. Let's hope 2017 ends with new less complex tax regime!

/Shyam

It's time to get some "Energy"!

First half of 2017 is over and earnings season would get full-steam in next 2-3 weeks. Given lack of major pre-announcements, there should not be any major surprises coming out of this season. With Fed taking dovish view on interest rates, markets seem to be loving "Goldilocks" scenario "not too hot not too cold". We already know that some sectors are getting hot like technology especially FANG stocks. At same time, it's worth exploring are there any sectors which are "cold" or "out of favor"? And of course one major sector which keeps on coming on radar is "Energy" sector. It started year on high hopes that OPEC deal in Nov would bring back oil markets in equilibrium and with Trump promises economy would grow closer to 3%. Both of these did not pan out in first half. US shell producers and Nigeria/Libya nullified whatever smaller effect OPEC deal had on supply side and due to lack of any concrete steps from Trump and Congress on tax reforms and infrastructure spending, US economy is still far away from growing at 3%. These two factors caused to oil slip back to $42 (before rising back to $46) and causing energy sector to be worst performing sector in S&P (down by over 12% in just 1H2017) So now question is where is energy sector headed. Here are some factors to look at to make prediction:

• US congress would one way or other decide on health-care before Aug and move onto other important topics like tax-reforms and infrastructure spending, This should get US economy growing closer to 2% (3% growth seems to be pipe-dream)
• US Fed would continue to be dovish making US $ weaker compared to Euro/Yen/Pound. This should give some boost to oil prices
• BRICs would continue to grow at healthy pace with India leading the pack (thanks to Mr. Modi's drive)
• Europe finally would start to grow with all major elections out of way. Merkel is almost guaranteed to win in Sept for another term
• With all these factors, overall world economy should be in reasonably good shape
• Opec would continue to make noises on "quotas" and US shell producers would continue to produce at record levels albeit at much lower costs. This would mean Oil would hover around $42 to $52 range for quite some time

What does all these means to companies in Energy sector. In general, they would be ok due to demand not falling off the cliff and supplies coming at lower cost point. So break even prices for all these companies coming down. Some of the companies/ETF to invest during this pessimism would be QEP ($9), SN ($6), HK ($6), MRO ($11.50), REN ($30), XLE ($65), RSPP ($33), APA ($48), TRGP ($44). The stocks and overall energy sector could have deja-vu like 2016 when they roared back in 4Q2016. Same could happen in 2H2017.

Have a great "Energy" driven weekend!

/Shyam

Tesla: Car company or Tech company!

Tesla is one of the most exciting company around and almost all of the credit goes to its visionary CEO Elon Musk. Over last few years, I have written two blogs dedicated to Tesla
Seeking Alpha by Adding Beta: Tesla = Apple of Cars?
Seeking Alpha by Adding Beta: Should Apple buy Tesla?
And give the action happening with first production Model 3 coming out this week and bear attack on Tesla stock bringing it down by over 10% in one week, promoted me to consider 3rd blog on same company! A ride in my friend's red Tesla (I call it as his mid-life crisis car) and seeing it in action also played a role!
Tesla - is it car company or tech company. This would decide if stock would eventually touch $1000 (from around $300 today) or touch maybe $500. Let's evaluate both sides:

Tesla as car company:
Tesla's major product is CAR and everyone love the product and willing to pay $1000 and wait for 2 years before they can get their hand on Model 3 (I am one of those). Which car company has this kind of power in today's ultra-competitive and ultra-choice world? It's current cars are exorbitantly costly and hopefully Model 3 would change that. It's also a low-volume car-company when you compare it with giants in car-industry like GM, Ford, Toyota and Volkswagen. Its considered as status symbol (even higher than owning BMW or Benz) with additional bonus of creating eco-friendly image. So even as car company, it has all things going for it. No wonder it's most valued car company in US with only 1% volume compared to GM (100K vs over 10 Million). However that's where story is about to change. Tesla needs to learn and perfect volume production and shipments to become a major car company (over million cars per year). That means it would need significant amount of capital to build and expand it's factories and investments in battery packs. Also it would have to build the charging stations across US to make sure that people would be able to take these cars across cities. So in nut-shell, it would have its growing pains to be a major car company and that would limit its valuation. It would still reach $100 Billion valuation by 2020 but further growth would be difficult if it gets valued as car company

Tesla as tech company:
In the ride I took in my friend's red Tesla, I am amazed with the technology integration - the big dashboard with so many knobs, information about surroundings shown right in front of driver, software upgrades to enable autonomous driving/parking features. Tesla seems to be way ahead of competition when it comes to smooth integration of technology, user-interface into final product.  It's at least 2-3 years ahead of all other car companies. It may be at least 1 year ahead of Waymo and 2 years ahead of Apple. It reminded me of Apple when iPhone was introduced exactly 10 years ago. iPhone was way ahead of all its competition (remember Blackberry - the first smartphone with clunky keyboard?).  If Tesla is able to license this technology to some of it's friendly competition, it would become a technology company (similar to what Google is trying to do with Waymo). Even as "Tech" company - Tesla has choice - should it follow Apple iPhone model of end-to-end integration into end-product or follow Google Android model where it could become supplier of "CarOS" for car companies. Both models proved to be very successful in smartphone market. Tesla seems to be heading towards Apple model.  I am surprised that when we compare Tesla with other tech companies, it's cheaper than Netflix, Priceline, Uber, Salesforce and valued at less than 1/10th of Google. So if markets start valuing Tesla as tech company, you are looking at stock touching $1000 in next 3-5 years giving it valuation of $200Billion.

My prediction is that it would be valued somewhere between car and tech company. Of course all of this would be moot if Apple ends up buying Tesla before 2022!
Have a great summer!
/Shyam

Amazon "Jungle" Keeps Expanding!

Normally I don't blog about my work and company I work at (Cisco). However this time I will make small exception. This week Cisco launched one of the biggest launches in company's history with Catalyst 9000, DNA/SDA and ETA. I am proud to mention that my team (along with some other teams) have been working on these intuitive products and solutions for last two years (Network.Intuitive). Congrats to all my team members!

Environmentalists would be very happy if real Amazon jungle stops shrinking (due to human activity) and expands in the way Amazon company is expanding its reaches. Amazon is one company which has proven everyone wrong. I am sure there is not a single person in the world (other than Jeff Bezos) who had belief in this company when it went IPO in 1997 and it's journey as public company over 20 years. If there is such person who had invested $10000 would be worth close to $5 Million today (assuming he/she has lived thru all ups and downs). No wonder Jeff Bezos would be richest person and first one to be worth more than $100 Billion before end of 2017. Hats off to Jeff! He is "Warren Buffet" of our generation! Amazon's decision of buying Whole Foods was based on principle of "Everyone has to eat" and Amazon can make it as simple as what it had done for millions of items to "grocery". The kind of impact this move would have is enormous even at macro-economic level in areas like

• Lower inflation
• Lower energy needs (less car-trips to malls and now grocery shops)
• Productivity gains (due to savings in time)
• Higher-paying jobs (from cash-register jobs to data analysis jobs)

Economists and even Fed governors would need to start incorporating "Amazon" effects in their models while projecting these macro-economic indicators. 

So where does Amazon goes from here - let's make some bold predictions for 2027

• Amazon sales would be over $250 Billion per year
• Amazon profits would be over $10-15 Billion per year
• Valuation  would be $ 900 Billion to 1 Trillion
• Could be most valuable company at that time

Switching gears to my thoughts on markets:

Generally markets have been slowly inching upwards with lowest volatility (as evidenced by VIX below 10). This is happening despite policy uncertainty in US. Would this be "calm before storm" similar to what happened in 1987, 1997 and 2007. There seems to be pattern with these years and we are in 2017. So watch out for direction post Q2 results and beware of Sept/Oct. It would be prudent to take some profits off from your gains and wait till late Oct to invest.

If you have to invest during summer, it may be good time to rotate from "best performing" sectors like "tech/bio-tech" to "worst-perfuming sectors" like energy. This is contrarian advice but goes with Buffet's principle.

Have a great weekend!

/Shyam

Recovery "kid" Stocks: Ready to become Adults?

For last few weeks I was developing an hypothesis of recovery "kid" stocks and their likelihood of getting into "Adult" valuations. So before I get too far, let me define the terminology:

Recovery: Stocks which were once high-flying crashed with stock prices below 15
"Kid" stock price: Stock price in range of 5-15
Adult stock price: Stock price generally greater than 20
With is criteria, during this earnings season which is just wrapping up, I was monitoring stocks in technology sector and after some research, shortlisted 4 stocks which have high chance of reaching "Adult" valuations.

1. FireEye (FEYE: $15) - this stock crashed from over 90 to close to 10 in 2 years. After changing CEO and business model from selling security appliances to recurring software revenues, this stock is on mend and could see 20+ price in next 12 months. This also happens to be in hot security area and with hacks like "WannaCry", companies are ready to invest in this part of technology. 
2. Nutanix (NTNX: $18) - this had very successful IPO with stock shooting to over $45 in few weeks only to crash after disappointing quarter. It's back to where company had IPO at. So essentially one could buy this stock at IPO with no premium. It is also in one of the hottest technology sector of hyper convergence (server, storage and networking). It has also started the business transformation of selling hardware to recurring software revenues. It has potential to go over 25 in next 12 months (provided they don't have similar quarterly mishaps). 
3. AMD (AMD: $11) - This #2 CPU company had already shot from $2 to over $15 in last 12 months. It has come down to $11 due to lukewarm response to new product introductions and looming competition from Intel and Nvidia. It's tough competition but it also has chops to play in one of the hottest semiconductor sector (GPU, AI, ML). It would take 2+ years to reach adulthood but in next 12 months, it could climb back to 15+
4. Blackberry (BBRY: $11) - To be honest, this caught my attention when one of the most vocal short (Andrew Left) recommended this for long position. After that I did some research and found a completely different company than what we know. It is in middle of business transformation from selling smartphones to selling software and services. And guess what - one of the oldest asset (QNX which I had used 20 years back in one of my product) had suddenly become a hot property in two sectors - Car-tech and IOT. This stock could double from here in 2 years.

First two companies (FEYE and NTNX) would cross $1Billion in next 12 months and other two are already over that threshold. Barron's had an article that when a company reaches $1Billion and growing, valuations start reflecting that in non-linear fashion. It happened to many many companies. So could any of these would become next NVDA, FB or AMD (in terms of stock returns). Well you have to figure that out yourself by investing.

(As always, these are risky recommendations so do your own research before investing
These are my personal opinions and do not represent company I work at).

Have a great weekend

/Shyam

And the Oscar goes to...

As the tradition goes, I must write blog on afternoon of Oscar night. Given my love for movies (a good movie in any language would do - that's why I have been Netflix member for more than a decade) and penchant for predictions, how can I resist making predictions on who would win Oscars. So I have picked six categories for predictions. Here are these:

1. Best Supporting Actress: Viola Davis (Fences)
2. Best Supporting Actor: Mahershala Ali (Moonlight)
3. Best Actress: Emma Stone (La La Land)
4. Best Actor: Denzel Washington (Fences)
5. Best Director: Damian Chazelle (La La Land)
6. Best Movie: La La Land

We saw La La Land in a nostalgic theatre in Santa Barbara during Christmas vacation. We all moved the movie (and songs). It is one of the highest nominated movie with 14 nominations. However it's Oscar haul would not match that of Titanic and others which won 11 Oscars. Most likely La La Land would by high-single digits.

Next week there is another action happening in City of Angels (LA). It's high-profile tech company Snap Inc is going IPO next week. Given my limited survey (with Yash and Isha), this seems to be very popular with high-school and college kids. Over last couple of years, it has added interesting and cool ways of communicating with friends. While it's audience is still small (1/10th of that of Facebook and 1/2 of Twitter), it seems to be highly engaged audience. At $20 Billion valuation at IPO which most likely would become close to $30 Billion by end of week, is it worth investing? Answer lies in predicting if Snap would become mini-Facebook (success!) or Twitter (not-so-much). At $30 Billion valuation, it would be worth 1/12th of Facebook and almost 3 times of Twitter. On this, I most likely would take my kids advice who are users of Snap and may decide to do small investment!

Happy Oscar viewing and Snapping!

/Shyam

Thank You President Obama: Yes We Did!

President Obama,

Thank for your being our President for last 8 years. It started with an inspiring speech in 2004 during democratic convention leading to that historic fall night of Nov 2008. On that night I felt so proud of my adopted country and Americans who elected first African American President. In 2012 and I along with my son volunteered for your campaign. Historians and authors would write many books on your achievements and your presidency. One could not do justice to your presidency just by listing few. But I could not resist listing few here.

• You saved American economy (and by extension world economy) from 1930's style depression by working with Fed and congress. 
• Presided over economy which did not had a single recession once it recovered from depths of 2009 recession
• Created over 15 million jobs during 8 years and brought down employment from over 10% to 4.5%
• Stock markets nearly tripled (as measured by DOW index of 6600 to nearly 19800)
• Enacted first major overhaul of heath-care system in America since 1960's. With "Obamacare" more than 22 million Americans got health care insurance
• Did not had any major terrorist attack on American soil
• Ended two costly and un-necessary wars
• Saved American car industry and banking institutions by bailing out even though these were unpopular decisions
• Under your presidency, innovation engine in Silicon Valley and across USA is in full action helping creation of hundreds of unicorns as well as some big-value "sharing economy" companies

No wonder your approval rating (60%) is one of the highest among departing presidents. You and Michelle inspired us all to aspire to do our best. Even in your final words, you gave us hope by saying that "At my core, I think we're going to be OK.". We never met in person but I always felt that I have a friend in White House. I personally is going to miss you. I am sure millions of Americans and people across the world are feeling same.

/Shyam