Category Archives: News

Amazon.com gets intimate as our Cash-Strapped Consumer hooks up with the Connected Society

Amazon.com gets intimate as our Cash-Strapped Consumer hooks up with the Connected Society

Amazon is taking a step into the scariest dressing room on the planet, the place where most of us women dread to go, particularly in the cooler months when we can’t hope for a tan to help us be more comfortable with our least favorite bits.

Competitors argue that women won’t want to purchase intimate items like bras without being able to touch them first, but, HELLO! The idea of being able to try on such items at home, away from those horrid lights that department stores seem to enjoy inflicting on us is quite appealing! Come on people, show a girl some love and throw a little flattering ambiance. Amazon and its subsidiary Zappos have already taught us the job of easy returns, so I doubt this will be much of a barrier.

 

Amazon.com Inc. is moving onto Victoria’s Secret’s turf. The online retailer plans to start selling its own line of competitively priced women’s intimate apparel on its U.S. website, according to people familiar with the matter.

 

As a woman who likely has more intimate apparel than is reasonable, including many of the brands listed above at the pricier end of the spectrum, I have to say “Go for it Amazon!” I’m well aware that the prices I’ve paid for tiny bits of lace and elastic are utterly ridiculous, but like many, I’m a sucker for those secrets that make us feel beautiful, particularly on the tough days. If Amazon can deliver the way it does with damn near everything else on its platform, this will be a blockbuster. My local delivery guys both in the U.S. and Italy can attest to my level of commitment!

This sector is ripe for a shakeup with price points that are in my humble opinion well into “bubble” territory with many brands and customer experiences from leading providers that offer plenty of room for improvement. Here is one woman who is hoping that as Amazon reveals its intimates, it is as revolutionary for us ladies as it was for lovers of literature.

Source: Amazon.com Takes Aim at Victoria’s Secret With Its Own $10 Bras – WSJ

Weak Global Trade Yet One More Headwind for Banks

Weak Global Trade Yet One More Headwind for Banks

 

Yesterday the Danish shipping and oil giant A.P. Moller-Maersk (AMKBY:OTC) reported fourth-quarter net profit below consensus expectations with EBITDA of $1.5 billion versus expectations for $2.01 billion. The company also delivered top line revenue of $8.89 billion, below analysts forecasts for $9.54 billion.  That swing and a wide miss pushed the shares down almost 6 percent at the open in the U.S. OTC markets.

That miss shouldn’t be all that surprising when we look at how much global trade has been slowing in recent years. For example, the Baltic Dry Index, which essentially measures the demand for shipping capacity versus the supply of dry bulk carriers, had been on a steady downward trend for years but started improving in the early parts of 2016. That upturn has now been reversed with the index once again trending downward, falling below both its 50-day and 200-day moving averages, indicating further weakness in global trade.

In fact, according to the Director of the World Trade Organization, General Roberto Azevedo, world trade is likely to have grown just 1.7 percent in 2016, the weakest rate of growth since the financial crisis. It takes a bit to compile all the data so that’s the estimate for now.

This doesn’t affect just shipping as today Commerzbank reported earnings that fell 5 percent in the fourth quarter due in part to provisions against bad shipping loans.

 

German banks were among the biggest lenders to shipping in the boom years before the financial crisis, but have since suffered from the brutal downturn in the industry caused by a slowing global economy and chronic oversupply in the container market.

According to Stephan Engels, CFO, the bank isn’t expecting things to improve much in 2017.

“Our view for 2017 is just as critical as it was for 2016, as far as shipping overall is concerned,” he said. “We still have — particularly for container ships — more new vessels coming on to the market than are being scrapped. And that in a market which is already on the whole operating below full capacity.”

While the headlines continue to be dominated by the new administration, data points like this are not getting the attention they normally should as investors bid up prices based on hope, while the hard data gets ignored.

Weak levels of global trade mean translates into reduced economic potential for everyone, particularly the world’s major economies.

Source: Commerzbank earnings dip on increased maritime loan provisions

JOLTS Jars with Mainstream View of Jobs

JOLTS Jars with Mainstream View of Jobs

Yesterday the Bureau of Labor Statistics released its monthly JOLTS report (Job Openings and Labor Turnover Summary), revealing further details on labor market conditions in December. Despite all the post-election euphoria, the number of job openings actually declined by 4k and has dropped 130k since September.

While the number of new hires rose 40k, the level of hiring is 16k below the level in August and firings increased 16k in December, the third consecutive monthly increase for a cumulative 122k. That’s the highest level we’ve seen over a three-month period in more than three years. On the other hand, voluntary quits, which are viewed as an indication of confidence in the job market, fell by almost 100k in December.

We continue to see a historically very high skew between the average duration of employment versus the median duration of employment. (The average takes all the numbers together and divides them by number data points so a few large outliers can affect it, while the median is just the middle data point when all the numbers are sorted in ascending value, this not affected in the same way by those outliers.) This means that there is a large group that continues to not find employment up until, (and likely beyond) the period for which they are eligible for unemployment.

 

This is yet another manifestation of how the labor pool in the United States is structurally not functioning the way it has for decades. Having an unusually high percent of the population that would under more normal conditions be gainfully employed, contributing to the nation’s economic health, means that our potential growth is materially hampered. Just what is causing this structural alteration is the subject of much debate. Some argue it is caused by more generous policies around disability pay or other public assistance programs. Others have argued it is related to the percent of the population that has been incarcerated as the U.S. has the highest incarceration rate in the world: America is responsible for approximately twenty-two percent of the world’s prison population with only 4.4 percent of total population. Just look at the revenue trend for CoreCivic (CXW) which manages correctional and residential reentry faciliites.

 

We suspect that it is likely a combination of many of these factors and is also a result of the hangover from the last boom-bust cycle, in which many people became highly skilled in areas that are unlikely to regain their pre-bust employment levels. Someone who was a well-paid mortgage loan officer in 2007, is going to find a lot fewer openings in that field today, which means developing new skills and even more painful, likely taking a pay cut. Some may have found they cannot stomach the cut and so are staying on the sideline, nursing their understandably bruised ego. That means opportunity for those firms that can develop ways to take advantage of these unemployed and help them because productive again.

With a lower percent of the overall population employed it means that those with a job are shouldering a bigger portion of their family’s expenses. Adding to that, recall that Friday’s employment report showed that nominal annual wage growth was rather weak for 2016 at just 2.5 percent. Compare that rate to the 4 percent increase in rents and the over 5 percent increase in home prices and you get an image of households getting squeezed – something very much in tune with Tematica’s Cash-strapped Consumer investing theme.

Inflationistas ought to consider that and after having had near zero policy rates since 2008, with considerable rounds of quantitative easing on top of a record-breaking stock market and a recovery that is historically exceptionally long in the tooth, this is the best we can muster?

  • CPI Inflation 2.1 percent
  • PCE Inflation 1.6 percent
  • Core PCE Inflation 1.7 percent
  • Nonfarm Business Price Deflator 1.5 percent
  • Unit Labor Cost 1.9 percent
  • Employment Cost Index 2.2 percent

Add into that a strong dollar that is likely to continue to strengthen with oil looking to have topped out, (more on that later) and the inflation trade is not an obvious bet.

Earnings not boosting Trump Trade, yet markets continue to rise

Just a little over two weeks ago Donald Trump took the oath of office. Since then, nary a day goes by without President Trump dominating the pages of most every major publication. Love him or hate him, the man certainly knows how to command attention.

Yesterday both the Dow and the Nasdaq hit new interday highs, but on valuations that remain stretched as earnings reported so far have been beating less than normal and caution over policial volatility holds the “C” suite back.

Fourth-quarter results have so far eclipsed Wall Street expectations, with 65 per cent of companies beating earnings projections and 52 per cent topping forecasts for sales — both below the five-year average. Corporate America’s guidance for the current year is already coming up light, with BofA noting that twice as many companies have forecast earnings below projections than above.

 

“[Companies] are clearly excited about lower taxes, a lower regulatory environment and more pro-growth policies, but that is offset by the trade policy and immigration,” says Grant Bowers, a portfolio manager with Franklin Templeton. “There was some built-up hype after the election but we have seen a lot of conservative guidance as companies face an uncertain outlook.”

 

At Tematica we suspect that investor expectations, which translate into higher share prices, are getting way ahead of themselves. According to a recent Gallup poll, 53% of American’s disapprove of the job he is doing with only 42% approving. That is the lowest level of any president in history after two weeks in office. So whether you love or hate the job he is doing, he is likely to face significant headwinds pushing through legislation, which means these changes that investors are so optimistic about are likely to come later rather than sooner and may not deliver quite the level of change anticipated.

What has us even more concerned are all the global events that would otherwise be receiving front-page treatment that are relegated to lining hamster cages, without much attention. Greece… still a potentially big problem. Italian banks … still seriously troubled. French elections… one of the front runners is hell bent on exiting the European Union. Were that to happen, the Eurozone would collapse and its currency with it – a very big deal.

We will have a lot more on this in the coming days and weeks, so stay tuned!

Source: Corporate America fails to add gas to Trump rally

Friday’s January Job Report a Blowout, But There’s More You Need to Know

Friday’s January Job Report a Blowout, But There’s More You Need to Know

This morning’s January Employment Report showed the economy added 227K  jobs in January, beating consensus expectations for 170K jobs.  This comes after the surge in January private sector jobs to 246K vs. the expected 165K reported by ADP earlier this week. Great to see some data to back up the uber-optimistic market these days, but there is a bit more to this story.

While the headline number looked great, digging beneath the headline and into the details the report wasn’t as rosy. If we take into account that revisions to the prior two months reduced jobs by 39k, the average is closer to expectations and the 3 month moving average is less impressive.

We also saw a decline in employment in the key working age group of 25-54-year-olds of 305k, which was partially offset by a 195k increase in 55+ employment – more near retirement working and fewer in prime working years isn’t a positive sign. Looking at the bigger picture, job growth averaged 239k in 2014, falling to 213k in 2015 and this report brings the recent 12-month average to 182k. The pace of job growth continues to slow,  total payrolls rose now up 1.6 percent year over year versus 1.9 percent in the first quarter of 2016, which is typical with an economic recovery that is rather long in the tooth.

We also saw an increase in those working part-time because they cannot find full-time work by 232k – we’d obviously prefer to see that decline. Those expecting a Fed rate hike soon should note that this is one of Fed Chair Yellen’s favorite metrics.

 

Along these lines, we saw the underemployment rate (as measured by the U6) rise to a three-month high of 9.4 percent from December’s 9.2 percent.

Along with that increase in part-time workers, we saw the change in weekly hours worked drop to a rate not seen since the recession, which indicates that future strong job growth is less likely.

 

More frustrating is the lack of meaningful wage growth, rising just 0.1 percent month over month and 2.5 percent year over year, the weakest year over year gain since last March. Average weekly earnings saw the weakest gain in six months at 1.9 percent.

 

One of the biggest challenges facing the employment situation is the mismatch between available labor and business needs. Small businesses are finding it increasingly more difficult to find qualified talent for the position they are looking to fill, which clearly negatively impacts their ability to grow – another headwind to the economy. This is also reflected in the record level spread between job openings and hirings we see every month in the JOLTS report. Our next take on that data comes next week with the December report.

 

All this those doesn’t address the much bigger issue the country is facing and this is what investors need to understand far more than the monthly fluctuations.

The growth of an economy is dependent on just two things: the size of the available workforce and productivity levels. For an economy to grow one or ideally both of those need to be rising.

It has become a popular refrain to refer to President Trump as the next Ronald Reagan, implying that his policies will lead to the type of economic boom that the country experience during and after Reagan’s presidency. We’d love nothing more than for the country to see that kind of growth again, but the fundamentals today are very different from those in the 1980s.

When Reagan took office median baby boomers were moving into their prime working age and the percent of women in the workforce was rising significantly.

 

When Reagan took office, less than 50 percent of women were employed. That number peaked in 2000 at 58 percent but has declined to just 54.1 percent in January.

 

The weak employment relative to total population though isn’t all about the baby boomers retiring as the percent of those in the prime working age cohort ages 25 to 54 years rose dramatically from the early 1980s to just over 72 percent to a peak of over 81 percent in 2000. As of January, 78.2 percent are employed, a level we haven’t seen, outside of a recession, since the late 1980s.

You might have heard as well that fertility rates in developed economies have been slowing dramatically. In many European nations the rate has dropped below replacement levels, which means that without immigration, the total population of those countries would be declining. In the U.S. the rate of growth of the working population, either through immigration or native births has been slowing significantly.

 

The potential growth rate of the U.S. economy is materially different today than during Reagan’s era because of significant changes in the dynamics of the labor pool. Today the percent of people choosing to be in the workforce is lower than it has been in decades. Compounding this problem, the growth rate in the working age population has slowed dramatically from where it was in the 1980s.

To increase the potential growth rate for the economy, outside of any handicaps placed on it through legislation, regulation or taxation, the population of those in the workforce needs to increase and/or productivity needs to rise.

When it comes to productivity, it is all about capital investment and for years we’ve seen companies choosing to buy back shares rather than reinvest in their own productive capacity… but that’s a topic for next time!

 

America First? When it comes to GDP we get the bronze!

America First? When it comes to GDP we get the bronze!

Yesterday we talked about how the American economy, despite all the euphoric headlines since the election, didn’t deliver much of a performance in the fourth quarter and in fact we saw the weakest full-year GDP growth rate since 2011 which was well below the U.K.’s 2016 growth rate of 2 percent. Today we learned that the Eurozone as well kicked our economic tuckus in 2016.

GDP grows 0.6% in final quarter of 2016, beating expectations and taking annual figure to 1.8%

Yep, that hurt. So much for America being the “cleanest shirt in the economic laundry.” Despite headwinds ranging from the accelerating Greek drama to the mountain of Italian non-performing loans that led to the nationalisation of Banca Monte dei Paschi di Siena, Brexit, failed Constitutional reforms leading to the resignation of Prime Minister Renzi in Italy …. the list goes on, they beat us.

 

Last week talks between the U.S. and Mexico hit a serious bump after a President Trump Tweet led Mexico’s President Peña Nieto to cancel their upcoming meeting, while the administration has been threatening a 20 percent tax on imports from Mexico, which would put serious upward price pressure on, (among other things) fruits, vegetables and auto parts. Today Peter Navarro, Trump’s top trade advisor, accused Germany of currency exploitation. According to the FT, “In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.”

While last week’s meeting with the British Prime Minister Theresa May ended with some serious hand-holding, over the weekend the President’s sudden implementation of an immigration ban left, “our closest ally flailing after the UK government was openly contradicted by US diplomats over which British nationals were covered by the measure.”

After Trump’s election victory, the Bank of Japan was initially more optimistic about more favourable economic conditions amid expectations for stronger American growth. That enthusiasm has been fading as yesterday, ahead of a two-day policy meeting, officials are less optimistic about the impact on Japan’s economy. According to the Wall Street Journal, “We now realise that we know very little about him.”

Trump’s team has been poking our allies in some uncomfortable ways, making many around the globe nervous, and yet the VIX (a measure of implied volatility) is pretty much yawning.

The 90 percent of the America economy that is not represented by either inventory build or state and local government spending managed to grow at a whopping 0.6 percent annual rate in the fourth quarter.

Amidst all this, the Fed keeps talking about further rate hikes

Under Armour (UA) just released its fourth quarter and full year results and was yet one more citing currency headwinds.

Upon the announcement of Trump’s immigration ban on Friday, the markets started to fall. Monday the S&P 500 fell 60 basis points and is now down 0.76 percent from its most recent closing high last Wednesday. Bespoke compiled headlines over the past few days that reveal concerns the Trump hope trade is starting to fade.

Is this an inflection point? Too soon to tell, but we can say that having an administration with no political history who has pretty much tossed out the rule book is likely to cause heightened volatility, which is not reflected in market pricing. Erecting trade barriers and surprising the market, let alone allies, is likely to induce more caution in the C suite.

This morning we also saw that compensation costs in 2016 rose 2.2 percent, significantly faster than GDP of 1.6 percent, which makes another Fed hike more likely. We’ll be hearing from the Federal Reserve on Wednesday and will be looking to see if the tone from the FOMC meeting is more dovish than we heard in Fed Chair Janet Yellen’s testimony on January 19th. We will also hear from over 100 companies this week on their earnings, putting the relative complacency in the markets to a test.

Source: Eurozone’s economic recovery picks up speed

Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

Consumers Spend More in December, But Ouch Those Revolving Debt Levels Sure Could Hurt

This morning the US Bureau of Economic Analysis published its take on Personal Income & Spending for December. We’re rather fond of this monthly report given the data contained within and the implications for several of our investment themes, including Cash-strapped Consumers as well as Affordable Luxury and the Rise & Fall of the Middle Class. 

So what did the December report show?

Personal Income rose 0.3 percent, far faster than in November, but still below the 0.4-0.5 percentage gains registered in September and October. We saw the same pattern with Disposable Income (which is a better barometer for discretionary spending), as one would expect to see during the holiday shopping laden month of December.

That’s as good a segue as any to remind our readers that holiday shopping during November and December came in stronger than the National Retail Federation had forecasted. The final tally was a year over year increase of 4.0 percent compared to the NRF’s 3.6 percent forecast.

Now you’re probably saying to yourself, “How can that be given all the bad news that we’ve been hearing from Macy’s (M), Target  (TGT), Kohl’s (KSS), Sears (SHLD) and other brick and mortar retailers?”

To be honest, we doubt the average person would have thrown in the “other brick and mortar retailers” part, but we know our readers are smarter than the average bear.

The answer to that question is that non-store sales, Commerce Department verbiage for e-tailers like Amazon (AMNZ), eBay (EBAY) and digital Direct to Consumer business like those found at Macy’s, Under Armour (UAA), Nike (NKE) and other retailers, rose 12.6 percent year over year to $122.9 billion. We certainly like those stats as they confirm several aspects of our Connected Society investing theme, but we would argue a more telling take on the data is that non-store sales accounted for 19 percent of holiday shopping in 2016, up from 17 percent the year before. Nearly one-in-five shopping dollars was spent through online or mobile shopping.

We’ll get a better sense of this shift, which we only see as accelerating, later this week when both United Parcel Service (UPS) and Amazon report their quarterly results for the December quarter. Team Tematica will also be listening to Direct to Consumer comments from Under Armour and other apparel and footwear companies as they too report quarterly results over the next few weeks.

Now let’s take a look at December Personal Spending – it rose 0.5 percent, a tick higher than was expected. Given the NRF data above, it was rather likely we were going to get a better print vs. expectations.

In combining both the income and spending data for the month, we get the savings rate, which fell to 5.4 percent, a five-month low. Compared to a few years ago, that savings level looks rather solid even though it’s well below the longer-term trend line. What we do find somewhat disconcerting, given the prospects for the Fed to boost interest rates up to three times this year after only doing so just two times in the last two years, is the amount of revolving consumer debt outstanding. As evidenced in the graph below, those levels have continued to climb steadily higher during 2015 and 2016.

Should interest rates move higher in 2017, the incremental interest expense could crimp consumer wallets, reducing their disposable income in the process. To us, that could mean less Affordable Luxury or even Guilty Pleasure spending as more become Cash-strapped Consumers.

Once Again the Fed Overestimates the Strength of the US Economy

Once Again the Fed Overestimates the Strength of the US Economy

Looking at the moves in the stock market, one would likely think all is right with the world and the US economy is back on track after bobbing and weaving around 2 percent GDP for much of the last several years. That is until we got the most recent reading on the health of the economy.

Friday’s estimate for fourth quarter 2016 GDP came in below expectations at 1.9 percent quarter-over-quarter, seasonally adjusted, versus the consensus expectations for 2.2 percent and the Atlanta Fed’s GDPNow estimate for 2.8 percent. The Fed’s consistently excessive expectations never cease to impress. To put 2016 in context, going all the way back to 1950, only four other years were as weak and they were all recessionary (1954, 1958, 2008, 2009).

This reading was a material decline from the 3.5 percent posted in Q3, but then that was primarily driven by an increase in inventories and exports. The net export contribution in Q3 was the largest since late 2013 was due in large part, and we are seriously not making this up, to soybean exports to South America where the weather decimated their soybean crop, adding a full 0.9 percent to the Q3 GDP growth. Exports in Q4 dropped -4.3 percent with goods declining -6.9 percent, revealing the headwind presented by a strong and strengthening dollar as net exports overall subtracted 1.7 percent from the fourth quarter’s growth. We’ve heard comments from a growing number of companies about the impact of the dollar and foreign currency translation in the current earnings season, but to put it in context, Q4 was the largest trade-related drag on overall growth since Q2 2010.

The U.S. economy decelerated in the final three months of 2016, returning to a lackluster growth rate that President Donald Trump has set out to double in the face of challenging long-term trends.

We are seeing some recovery in fixed investment, with fixed investment in mining, shafts and well structures contributing to GDP for the first time since Q4 2014, thanks to rising oil prices. While this contribution was relatively small, the removal of the headwind of low oil prices in this sector had allowed it to start contributing to GDP. We remain cautious here as the number of rigs coming online is rising week after week (see today’s Monday Morning Kickoff for more), and we remain skeptical that the OPEC deal on production cuts will survive given all the, shall we call them, colorful relationships involved.

Real investment in industrial equipment is at an all-time high, totaling more than $200 billion in 2009 chained dollars and looks to be still rising. On the other hand, investment in manufacturing structures is slowing a bit, which isn’t shocking given that capacity utilization rates are at levels normally seen around a recession.

We have also now seen Consumer Spending decline over the past three consecutive quarters despite all the euphoric talk.

This brings full-year 2016 GDP growth to just 1.6 percent, putting the U.S. growth now in 2nd place within the G7 group with the U.K. delivering growth of 2 percent for the year. We are no longer the cleanest shirt in the laundry. This is the worst growth rate for the U.S. since 2011 and down from the 2.6 percent in 2015. America has now experienced a record eleven consecutive years without generating annual 3 percent GDP growth going all the way back to 1929. Is it any wonder there is a lot of frustration in the country?

 

Despite what we keep hearing from the Fed, this is not an economy that is accelerating. While over 80 percent of the survey data has come in above expectations, giving investors a sense of security, the actual hard data, rather than the more sentiment-oriented survey data, has seen over 50 percent come in below expectations.

With the recovery in oil prices and inventories back on the rise, two major headwinds have been removed, but the biggest and potentially most lethal remains – a rising dollar. The Fed still appears to be confident that it will raise rates three times this year which increases the dollars’ relative strength. Any trade barriers that result in fewer imports into the US, such as a 20 percent tax on fruits and vegetables from Mexico, would also serve to strengthen the dollar; the less we buy from the rest of the world, the fewer dollars are outside the country. That scarcity bids up the price of the dollar, particularly given the effectively massive short position in the dollar due to the over $10 trillion in dollar-denominated emerging market debt.

Mr. Trump has argued the U.S. can achieve stronger growth by overhauling the tax code, boosting infrastructure spending, rolling back federal regulations and cutting new trade deals that narrow the foreign-trade deficit.

The two big hopes that Wall Street has been relying on to boost the economy have been President Trump’s infrastructure plan and his tax cuts. This past week we saw signs that our concerns over when these would actually be enacted are warranted. Last week senior congressional aides revealed that the spring of 2018 is a more likely target for passage of tax reform legislation. According to Reuters, as the days passed at the annual policy retreat for Republicans last week in Philadelphia, leaders were also discussing that it could take until the end of 2017 or even later to pass fiscal spending legislation. Trump has taken office with the lowest approval rating in modern history and the level of controversy surrounding him isn’t declining, which will likely make passage of legislation he wants more challenging.

Putting it all together, despite the headlines over more sentiment-oriented reports, the economy does not look to be accelerating and the expectations around the timing of Trump’s infrastructure spend and tax reform plans are likely overly enthusiastic. Even the Wall Street Journal’s survey of over sixty economists projects GDP growth of 2.2 percent in the first quarter of 2017 and 2.4 percent in the second. We will continue to monitor the data to see how likely that consensus view becomes in the coming weeks. We believe the market is also incorrectly discounting the potential negative impact of a strengthening dollar and the degree to which this strengthening may occur.

Source: U.S. Economy Returns to Lackluster Growth – WSJ

Dow hits 20k – Hope Trumps Uncertainty

Dow hits 20k – Hope Trumps Uncertainty

 

For anyone whose has spent time listening to Wall Street types, the mantra, “The markets hate uncertainty,” is a familiar one. So with the political upheaval here in the U.S., (an election that defied the pundits and an administration unlike anything we’ve seen before) combined with the upcoming volatile elections across much of Europe, convention wisdom would expect investors and businesses alike to run for safety, but instead, we just saw the Dow Jones Industrial Average hit 20,000 for the first time ever at the Trump Trade is reignited.

 

The conventional wisdom among economists is that people don’t like uncertainty and the unknowable. Faced with the prospect of upheaval and change with unpredictable outcomes, they become less confident about their prospects and more cautious about making big decisions on spending.

 

Consumers and businesses in the U.S. and Europe appear undaunted by the prospect of profound political change on both sides of the Atlantic and may even be encouraged by it.

Let’s face it, the problem isn’t uncertainty but the absence of hope. What investors and businesses alike needed was a reason to believe that something was going to kick the economy into gear and get us out of the economic doldrums we’ve been experiencing since the financial crisis.

What we needed was hope that things could change for the better. Today the U.S. appears to be bubbling over with hope. The markets have pretty much fully priced in successful new policies as if they are a fait accompli, but the reality is that President Trump is facing an unprecedented level of antagonism, while history shows that at best, presidents are lucky to see around 60% of their agendas come to fruition. The danger here is that after having priced in all the pro-growth rhetoric, the market may become impatient with the time table.

Just a few days ahead of his election, Trump had a 37% approval rating versus a 55% disapproval rating. For a historical perspective, going back to the same point in the cycle with other newly elected presidents, approval ratings were more optimistic with Ford at 90%, JFK and LBJ at 80%, Obama, George W., Bill Clinton and Reagan all at 70%, and finally Bush Sr. and Nixon at 60%. JFK, Carter, Clinton and George W., with majorities in both the House and Senate, struggled to get through much of what they promised.

To get any significant legislation passed through the Senate, Trump needs 60 votes to avoid a filibuster, which means getting eight Democrats on board. The nomination hearings are giving us quite the preview of just how cantankerous the legislative process is likely to be. On top of that we are already seeing division within Trump’s own party on what corporate tax reform will look like and there is considerable debate over how personal income tax deductions will be affected.

 

Surveys of sentiment point to a strengthening of confidence in both the U.S. and the U.K. over recent months, while a similar rise in optimism is under way in Europe, which faces a number of elections in 2017 that could lead to big changes in policy.

We love to see enthusiasm, but the reality is that while over 80% of the survey data over the past two months has beaten expectations, over 50% of the actual hard data has come in below expectations. As the indices continue to tick higher, so does downside risk if all that positive sentiment isn’t met by reality before the ever-fickle markets lose patience.

Source: Global Uncertainty Gets Brushed Off in the U.S. and Europe – WSJ

Voice Recognition Technology Hears Whispers of M&A

Voice Recognition Technology Hears Whispers of M&A

Earlier this month we had CES 2017 in Las Vegas, a techie’s mecca of new whiz-bang products set to hit the market, in some cases later this year, but in others in 2018 and beyond. A person tracking the CES trade shows over the years likely remembers the changes in inputs from clunky keyboards and standalone number pads to rollerball driven mice to laser based ones, which gave way to trackpads and touchscreen technology. Among the sea of announcements this year, there were a number that focused on one aspect of our Disruptive Technology investing theme that is shaping up to be the next big change in interface technology — voice recognition technology.

Over the years, there have been a number of fits and starts with voice technology dating all the way back to 1992 when Apple’s (AAPL) own “Casper” voice recognition system that then-CEO John Sculley debuted on “Good Morning America.” As the years have gone by and the technology has been further refined, we’ve seen more uses for voice recognition technology in a variety of applications and environments ranging from medical offices to interacting with a car’s infotainment system. As far back as 2004, Honda Motor’s (HMC) third generation Acura TL sported an Alpine-designed navigation system that accepted voice commands. No need to press the touchscreen while driving, just use voice commands, (at least that was the dream — but for those of us that tried to change the radio station and ended up switching the entire system over to Spanish, it wasn’t so useful!)

More recently with Siri from Apple, Cortana from Microsoft (MSFT), Google Assistant from Alphabet (GOOGL) and Alexa from Amazon (AMZN) we’ve seen voice recognition technology hit the tipping point. Each of those has come to the forefront in products such as the Amazon Echo and Google Home that house these virtual digital assistants (VDAs), but for now, one of the largest consumer-facing markets for voice interface technology has been the smartphone. Coming into 2016, market research and consulting firm Parks Associates found that nearly 40 percent of all smartphone owners use some sort of voice recognition software such as Siri or Google Now.

In 2016, the up and comer was Amazon, as sales of its Echo devices were up 9x year over year this past holiday season and “millions of Alexa devices sold worldwide this year.” If you’re a user of Amazon Echo like we are, then you know that each week more capabilities are being added to the Alexa app such as ordering a pizza from Dominos (DPZ), calling for an Uber, checking sports scores, shopping with your Amazon Prime account, hearing the local weather forecast and getting the latest news or perhaps some new cocktail recipes.

Not resting on its laurels, Amazon continues to expand Echo’s capabilities and announced that Prime members can voice-order their next meal through Amazon Restaurants on their Alexa-enabled devices including the Amazon Echo and Echo Dot. Once an order is placed, Amazon delivery partners deliver the food in one hour or less. Pretty cool so long as you have Amazon Restaurants operating in and around where you live. We’d point out that since you’re paying with your Prime account, which has a credit card on file, this also expands Amazon’s role in our Cashless Consumption investment theme as does Prime Now which lets Prime members in cities in which the service is available get deliveries in under two hours from Amazon as well as from local participating stores.

But we digress…

Virtual digital assistants cut across more than just smartphones and devices like Amazon Echo and the Google Home. According to a new report from market intelligence firm Tractica, while smartphone-based consumer VDAs are currently the best-known offerings, virtual assistant technologies are also beginning to emerge within other device types including smart watches, fitness trackers, PCs, smart home systems, and automobiles – hopefully, this time not switching us into Spanish.

We saw just that at CES 2017 with some landscape changing announcements for VDAs such as withAlphabet that had several announcements surrounding its Google Home product, including integration into upcoming Hyundai and Chrysler models; and acquiring Limes Audio, which focuses on voice communication systems, and will likely be additive to the company’s Google Home, Hangouts and other products. Microsoft also scored a win for Cortana with Nissan.

While those wins were impressive, the big VDA winner at CES was Amazon as it significantly expanded its Alexa footprint on deals with LG, Dish Network (DISH), Whirlpool (WHR), Huawei and Ford (F). In doing so Amazon has outflanked Alphabet, Microsoft and even Apple in the digital assistant market, but then who doesn’t find Siri’s utility subpar? To us, that’s another leg to the Amazon stool that offers more support to the share alongside the digital shopping/services, content, and Amazon Web Services businesses.

To be fair, Apple originally did not license out its Siri technology. It was only in June 2016 that Apple announced it would open the code behind Siri to third-party developers through an API, giving outside apps the ability to activate from Siri’s voice commands, and potentially endowing Siri with a wide range of new skills and datasets, potentially making a mistake similar to the one that originally cost Apple the Operating System market to Microsoft. Amazon, on the other hand, has been eager to bring other offerings onto its Alexa platform.

Tractica forecasts that unique active consumer VDA users will grow from 390 million in 2015 to a whopping 1.8 billion worldwide by the end of 2021 – Juaquin Phoenix’s Her is closer than you’d think!  During the same period, unique active enterprise VDA users will rise from 155 million in 2015 to 843 million by 2021.  The market intelligence firm forecasts that total VDA revenue will grow from $1.6 billion in 2015 to $15.8 billion in 2021.

In the past when we’ve seen new interface technologies come to market and move past their tipping point, we tended to see slowing demand for the older input modalities. Case in point, a new report from Technavio forecasts compound annual growth of just 3.63 percent for the global computing mouse market between 2016-2020. By comparison, Global Industry Analysts (GIA) expects the global market for multi-touch screens to reach $8 billion by 2020 up from $3.5 billion in 2013, driven by a combination of mobile computing and smart computing devices. For those who are less than fond of doing time calculations, that equates to a compound annual growth rate of 11 percent. We’d also point out that’s roughly half the expected VDA market in 2021.

One potential wrinkle in that forecast is the impact of VDAs. Per eMarketer, 31 percent of 14-17-year-olds and 23 percent of 18-34-year-olds regularly use a VDA.

Putting these two together, we could see slower growth for touch-based interfaces should VDA adoption take off. Looking at the recent wins by Amazon and Google, factoring in that Apple and Comcast (CMCSA) are favoring voice technology in Apple TV and XFINITY TV and growth in the smartphone market is stalling, there is reason to think the GIA forecast could be a tad robust, especially in the outer years.

Turning our investing gaze to companies that could be vulnerable should the GIA forecast prove to be somewhat aggressive, we find Synaptics (SYNA), whose tag line is “advancing the human interface,” and the “human machine interface” company that is Alps. Both of these companies compete in the smartphone, wearables, smart home, access control, automotive and healthcare markets — the very same markets that are ripe for voice technology adoption.

From a strategic and thematic perspective, one could see the logic in Synaptics and Alps looking to shore up their market position and customer base by expanding their technology offering to include voice interface. Given the head start by Apple, Alphabet, Microsoft, and Facebook, while Synaptics and Alps could toil away on “made here” voice technology efforts, the time-to-market constraints would make acquiring a voice technology company far more practical.

Here’s the thing, we’ve already seen Alphabet acquire Limes Audio to improve its voice recognition capabilities. As anyone who has used Apple’s Siri knows, it’s far from perfect in voice recognition and voice to text. In our view, this means larger players could be sniffing around voice technology companies in the hopes of making their VDAs even smarter.

In many respects we’ve seen this before whenever a new disruptive technology takes hold alongside a new market opportunity — it pretty much resembles a game of M&A musical chairs as companies look to improve their competitive position. In our view, this means companies like Nuance Communications (NUAN), VoiceBox, SoundHound, and MindMeld among other voice technology companies could be in high demand.

Disclosure: Nuance Communications (NUAN) shares are on the Tematica Select List. Both Nuance Communications and Synaptics, Inc. (SYNA) reside in Tematica’s Thematic Index.