Global Market Comments
October 11, 2019
(TEN SURPRISES THAT WOULD DESTROY THIS MARKET),
(USO), (AMZN), (MCD), (WMT), (TGT)
Global Market Comments
October 11, 2019
(TEN SURPRISES THAT WOULD DESTROY THIS MARKET),
(USO), (AMZN), (MCD), (WMT), (TGT)
The technology infrastructure company Cisco sold off over 2% after Goldman Sachs analyst Rod Hall downgraded the stock to neutral from buy.
His downgrade was based on a guess that enterprise spending will weaken further, and that telecom spending will continue to remain unimpressive.
This shows you how far the bank of the elite has fallen and the quality of their research considering Cisco’s earnings report was in August and this call should have gone out far earlier.
Goldman Sachs (GS) has trimmed headcount fiercely as their traditional businesses from IPOs to trading have been squeezed to suffocating levels forcing the bank to go into the subprime segment with the Apple (AAPL) credit card.
In Silicon Valley, Cisco’s shares will be subdued for the foreseeable future because the telecom segment is softening up as we motor into 2020 nicely, noted by Goldman.
The headwinds stem from the slow adoption of 5G and requisite carrier network automation implementation.
If you thought 5G would happen with a mere snap of the fingers, you are wrong. It will be implemented in agonizingly slow stages with lots of trial and error along the way.
Enterprise spending has also tapered off boding ill for the company that supplies the foundational technology to the software startups.
Adding fuel to the fire, waning business confidence at large enterprise driven by trade volatility as opposed to a broader macro slowdown is somewhat disconcerting and Cisco will most likely trade sideways in a stupor until external catalysts either pick up the stock or the bizarre world of geopolitics slams it down.
The floor of the stock is solid and deeply rooted in the profitability of the stock.
This is a great company and is one of the premier brands that slide in nicely in most offices in Silicon Valley.
The company isn’t a growth company, yet not written off into the legacy dustbin, and the sudden paradigm shift to value has made this stock even more attractive.
The 7% revenue YOY growth last quarter is not a problem as risk appetites are reigned back as the economic cycle ends.
EPS grew to $3.10 highlighting the ultra-profitable nature of the company.
Many of the recent tech selloffs in individual names have been induced by sour forward-looking outlooks and Cisco followed suit calling for 0-2% revenue growth, and GAAP EPS growth of -14% year-over-year.
The company has turned to the exciting revenue stream of subscriptions accounting for around 70% of the company’s software sales.
This has created inflated net margins with Cisco improving from 16.7% five years ago to 25.8% today.
Cisco is a cash cow generating $15.8 billion of cash flows from operations, up 16% year-over-year.
The bump up in cash flow has made it easier to justify M&A which Cisco has routinely turned to in an effort to shore up different areas of the business.
A dividend was initiated in 2011 providing shareholders with strong annual double-digit percentage increases.
Financial engineering doesn’t stop there with Cisco’s buyback approach resulting in reducing its outstanding share count by roughly 16.3% over the past 5 years adding to the profitability narrative.
Macro-risks have gone up the wazoo in the external market and Cisco is a legitimate candidate for a short-term trade to safety at these levels and a long-term investment.
Considering that their Chinese business is only in the single digits and revenue growth is in the high single digits, value-added management should make this company even more compelling.
And as the next wave of 5G adoption hits, this stock will experience a tidal wave of asset appreciation.
I can guarantee that the best is yet to come, and the status quo isn’t all that bad too.
Global Market Comments
October 10, 2019
(IS AIRBNB YOUR NEXT TEN BAGGER?)
Airbnb promises to be one of the biggest IPOs of 2020, provided we don’t go into recession first. And while the pickings have been thin lately, the world’s largest hotel deserves some close inspection.
How would you like to get a 90% discount on all of your luxury hotel accommodations?
During my recent trip to Dubrovnik in Croatia, I rented an 800 square foot, two-bedroom, two-bath home inside the city walls for $300 a night.
A single, cramped 150 square foot room in the nearest five-star hotel was $600 night.
That is a 90% savings, and all that was missing was room service, a hand out for a big tip, and a surly attitude.
Sounds like a massive, game-changing disruption to me.
Thank you Airbnb!
I was not surprised to hear that the home-sharing app, Airbnb, was given a $31 billion valuation in the latest venture capital funding round.
The big question for you and me is: Will the valuation soar tenfold to $300 billion, and how much of a piece of that will you and I be allowed to get?
To answer that question, I spent six weeks traveling around the world as an Airbnb customer. This enabled me to understand their business model, their strengths and weaknesses, and analyze their long-term potential.
As a customer, the value you receive is nothing less than amazing.
I have been a five-star hotel client for most of my life, with someone else picking up the tab much of the time, so I have a pretty good idea on the true value of accommodations.
What you get from Airbnb is nothing less than spectacular. You get three or four times the space for one-third the price. That’s a disruption factor of 7:1.
The standards are often five-star and at the top end, depending on how much you spend. I found out that I could often get an entire three-bedroom house for the price of a single hotel room, with a better location.
Or, I could get an excellent abode in rural settings where none other was to be had, whatsoever.
That’s a big deal for someone like me who spends so much of the year on the road.
You also get a new best friend in every city you visit.
On most occasions, the host greeted me on the doorsteps with the keys, and then introduced me to the mysteries of European kitchen appliances, heating, and air conditioning.
Pre-stocking the refrigerator with fresh milk, coffee, tea, and jam seems to be a tradition the hosts pick up in their Airbnb orientation course.
One in Waterford, Ireland even left me a bottle of wine, plenty of beer, and a frozen pizza. She read my mind. Thanks, Mary!
She then took me on a one-hour tour of their city, divulging secrets about their favorite restaurants, city sights, and nightspots. Everyone proved golden.
After you check out, Airbnb asks you to review the accommodation. These can be incredibly valuable in deciding your next pick.
I had one near-miss with what I thought was a great deal in London, until I read, “The entire place reeks of Indian cooking.”
Similarly, the hosts rate you as a guest.
One hostess shared a story about picking up her clients from town after they got drunk and lost in the middle of the night. Then they threw up in the back of the car on the way home.
Guests forgetting to return keys are another common complaint.
Needless to say, I received top ratings from my hosts as fixing their WIFI to boost performance became a regular habit of mine.
After my initial fabulous experience in London, I thought it might be a one-off, limited to only the largest cities. So, I started researching accommodations for my upcoming trips.
I couldn’t have been more wrong.
Just the Kona Coast on the big island of Hawaii had an incredible 50 offerings, including several bargain beachfront properties.
The center of Tokyo had over 300 listings. The historic district in Florence, Italy had a mind-blowing 351 properties.
Fancy a retreat on the island of Bali in Indonesia and tune up your surfing? There are over 197 places to stay!
While we weren’t looking, Airbnb has truly gone global.
Airbnb’s business model is almost too simple to be true, involving no more than a couple of popular applications. Call it an artful melding of Google Earth, email, text, and PayPal.
While no one was looking, it became the world’s largest hotel at a tiny fraction of the capital cost.
The company has 2 million hosts worldwide, and 100 million customers. That supply/demand imbalance shifts the burden of the cost to the renters, who usually have to fork out a 12% fee, plus the cost of the cleaning service.
Hosts only pay 3% to process the credit card fees for the payment.
The tidal wave of revenues this has created has enabled Airbnb to become San Francisco’s second-largest privately-owned “unicorn”, right after the $70 billion behemoth ride-sharing app, Uber.
To say that Airbnb has created controversy would be a huge understatement.
For a start, it has emerged as a major challenge to the hotel industry, which is still stuck with a 20th-century business model. There’s no way hotels can compete on price.
One Airbnb “super host” in Manhattan is managing 200 apartments, essentially, creating out of scratch, a medium-sized virtual “hotel”.
Taxes are another matter.
Some municipalities require hosts to pay levies of up to 20%, while others demand quarterly tax filings and withholding taxes. That is if tax collectors can find them.
Airbnb may be the largest new source of tax evasion today.
In cities where housing is in short supply, Airbnb is seen as crowding out local residents. After all, an owner can make far more money subletting their residence nightly than with a long-term lease.
Several owners told me that Airbnb covered their entire housing cost for the year while paying off the mortgage at the same time.
Owners in the primest of areas, like midtown Manhattan off of Central Park, or the old city center in Dubrovnik, rent their homes out as much as 180 days a year.
It is doing nothing less than changing lives.
That has forced local governments to clamp down.
San Francisco has severe iron-clad planning and zoning restrictions that only allow 2,000 new residences a year to come on the market.
It is cracking down on Airbnb, as well as other home-sharing apps like FlipKey, VRBO, and HomeAway, by forcing hosts to register with the city or face brutal $1,000 a day fines.
So far, only 1,675 out of 9,000 hosts have done so.
Ratting out your neighbor as an off the grid Airbnb member has become a new cottage industry in the City of the Bay.
Airbnb is fighting back with multiple lawsuits, citing the federal Communications Decency Act, the Stored Communications Act, and the First Amendment covering the freedom of speech.
It is a safe bet that a $31 billion company can spend more on legal fees than a city the size of San Francisco.
The company has also become the largest contributor in San Francisco’s local elections. In 2015, it fought a successful campaign against Proposition “F” which meant to place severe restrictions on their services.
An Airbnb stay-over is not without its problems.
The burden of truth in advertising is on the host, not the company, and inaccurate listings are withdrawn only after complaints.
A twenty-something year old guy’s idea of cleanliness may be a little lower than your own.
Long-time users learn the unspoken “code.”
“Cozy” can mean tiny, “as is” can be a dump, and “lively” can bring the drunken screaming of four letter words all night long, especially if you are staying upstairs from a pub.
And that spectacular seaside view might come with relentlessly whining Vespa’s on the highway out front. Always bring earplugs and blindfolds as backups.
Researching complaints, it seems that the worst of the abuses occur in shared accommodation. Learning new foreign cultures can be fascinating. But your new roommate may want to get to know you better than you want.
In one notorious incident, a Madrid guest was raped. The best way to guard against such unpleasantries is to rent the entire residence for your use only, as I do.
Another problem arises when properties are rented out for illegal purposes, such as prostitution or drug dealing.
More than once, an unsuspecting resident woke up one morning to discover they were living next door to a new bordello.
Wild parties that trash the dwelling, annoy the neighbors, and bring in the police is another worry.
Of course, the million-dollar question is “When will the company go public?”
The current “unicorn” philosophy is to milk the company for all it’s worth, and take it public when it is about to go ex-growth.
That’s what happened to Twitter (TWTR) which grew exponentially and then saw shares dive a gut-churning 72% after its initial public offering.
On seeing the massive crowds of new tourists packing Europe this summer, my conclusion is that the travel industry is entering a hyper-growth phase. Blame the emerging middle-class Chinese who seem to be everywhere.
That means that whatever price Airbnb goes public at, there may not be a ten-bagger left for you.
But a two or three bagger may be possible.
The real shock came when I left Airbnb and stayed in a regular hotel. Include the fees and the cleaning charges, and the service is no longer competitive for a single night stay.
In any case, most hosts have two or three night minimums to minimize hassle.
When I checked in at a Basel, Switzerland five Star hotel, all I got was a set of keys and a blank stare. No great restaurant tips, no local secrets, no new best friend.
I spent that night surfing www.airbnb.com, planning my next adventure.
The administration banning 8 Chinese tech companies screams one thing – American cybersecurity will become more important than ever before.
Interestingly enough, most of the entry list included Chinese own version of cybersecurity companies which usually participate in heavy-handed censorship including facial recognition startups Sensetime, Megvii and Yitu, video surveillance specialists Hikvision and Dahua Technology, iFlyTek, Xiamen Meiya Pico Information Co and Yixin Science and Technology Co.
All of these companies have “borrowed” American source code while applying American designed semiconductors to create a business aiding the interests and model of the Chinese Communist Party.
As the stakes become higher, American companies too will have to grow cybersecurity budgets, and instead of budgeting for mass authoritarian censorship, American companies will need to spend to protect the technology and networks they develop from getting pillaged from totalitarian regimes.
If American tech companies renege on the Faustian bargain of doing business in China for their technology, then it will force the Chinese to acquire this sensitive technology by any means possible and that doesn’t involve sitting on the emperor’s chair in Beijing.
What does this mean for the broader trade war?
Even if we get a mini deal, it won’t address that the main guts of the trade conflict entails killing off Chinese tech in the way we know it now.
Being able to agree on some sort of enforceable mechanism is a pipe dream, even if an enforceable mechanism is agreed on, who will enforce the enforceable mechanism?
That’s how tricky it is for corporates doing business in China and now the NBA (National Basketball Association) has received a small sampling of the trade war with one innocuous quote by Houston Rockets General Manager Daryl Morey who tweeted then deleted his democratic support for the Hong Kong freedom movement.
The ban of these 8 Chinese companies means they will no longer be able to purchase U.S.-made technology parts to use as inputs of a censorship business model that goes against democratic values.
The trigger for the blacklist was the way these technologies were used to imprison ethnic Muslim minorities in Chinese Xinjiang province paving the way for China to lash out again against the U.S for the ban.
Not only has China applied the technology to Chinese nationals, they have exported this technology to African states and are allowed access to the data which could theoretically be exploited for additional economic and political gain about which they essentially have no qualms.
Chinese foreign ministry spokesman Geng Shuang has characterized this move as “interfering in China’s internal affairs” and as you probably believe, he expressed great unsatisfaction with this move as Chinese and American delegations plan to meet shortly to hash out their differences.
The 8 banned companies will need to source alternative tech in the same way that Huawei Technologies has done.
Huawei was banned this past April under national security premises blocking access to US-made software for its handsets and devices, such as Google’s Android operating system and Microsoft’s Windows.
This will hurt certain semiconductor manufacturers like Nvidia who sell artificial intelligence chips for video surveillance to Hikvision and semiconductor stocks have sold off hard on this news.
Washington’s move has laid bare the fierce struggle for technology supremacy and America’s refusal to allow Chinese technology companies to reign supreme off of ill-gotten intellectual property and American semiconductor chips.
It could be the final straw in corporate America funding China to take down itself or at least another step to disengaging with the Sino cash cow.
And this new episode is almost guaranteed to usher in a flight of capital to American cybersecurity companies as Chinese hackers open up a new frontier to hack the best of America’s intellectual property.
I envision the likes of Palo Alto Networks, Inc. (PANW), Fortinet, Inc. (FTNT), CrowdStrike Holdings, Inc. (CRWD), and CyberArk Software Ltd. (CYBR) as good long term buy and holds that offer quality exposure to the cybersecurity story and the future growth of it.
Global Market Comments
October 9, 2019
(HOW FINTECH IS EATING THE BANKS’ LUNCH),
(BAC), (C), (WFC), (SQ), (PYPL),
(WCAGY), (FISV), (INTU), (BABA),
It was another dreadful DAY for the banks. All bank shares are now down in 2019 with the sole exception of JP Morgan, which is up a modest 10% since January 1. Although their core business is good, the share price hasn’t even bothered to mail it in.
So, I thought it would be time to take another look at what is disrupting the 200-year-old business model of this sector. And that would be Fintech, shorthand for Financial Technology.
To say that fintech was gobbling up the financial industry’s lunch would be a vast understatement. But here’s the problem. Fintech is taking over the world one transaction at a time in an industry that sees billions of transactions a year. The change is almost invisible. If someone were blowing up bank branches on a large scale this would be a far easier trend to see, but the net effect is the same.
The potential market is enormous. While the world’s physical money totals $5 trillion, actual assets controlled by banks today total a staggering $90 trillion.
Why this is all happening now is due to a confluence of several independent technologies. The number of people on the Internet has soared from 1.8 billion in 2010 to 4 billion today, to 8 billion by 2024.
Smartphone usage is diffusing at a similar rate. The roll out of 5G wireless assures that all communications will occur seamlessly, quickly, including financial transactions. Blockchain is enabling encryption on an industrial scale.
This has enabled the rise of a number of online firms over just the last few years that are rapidly taking over a number of traditional banking functions.
So far, the greatest impact has been overseas. Many countries that lack banking infrastructure are leapfrogging straight to mobile. It makes a ton of sense. Poor countries lack the capital to build expensive branch networks to raise fund, and the expertise on how to invest the deposits once in hand.
Good Money (https://goodmoney.com ) is an example of the new online banks that have burst onto the scene. The company offers depositors a generous 1.8% interest rate on overnight funds. Legacy banks are still paying close to zero, even though the Fed has raised rates seven times in three years.
US banks charge an average of $400 in fees a year for a full-service account. Good Money charges nothing.
You will never know where the money goes when you place it with Citibank (C), Bank of America (BAC) or Wells Fargo (WFC). At Good Money, you can specify that your funds be lent to a certain industry or even a specific company. While this means nothing to you or me, it is important issue to oriented Millennials.
Such efforts are called Crowdlending. It first took off in the US with startups like Prosper and Lending Club in the mid 2000s. We’re not talking small potatoes here, or a market that might develop someday. In 2018, some 22,000 businesses extended $380 billion in such loans.
There are other big markets ripe for disruption. I had to pay a Filipino developer $500 for some work he did on my website. Wells Fargo wanted to charge me $50 and the wire transfer would have taken a week. An outfit called Payoneer, Israel-based, did it for $5 and it took 5 seconds.
Wire transfer fees are in fact a global industry worth billions of dollars a year that is there for the taking. The SWIFT international transfer network alone processes some 24 million transactions per day.
It may not surprise many of you that China already has a huge lead in this area. It’s logical since their established banking system is primitive at best. China has three times more mobile phones than the US, five times more Internet customers, sees 10 times more eat-out orders, and 50 times more mobile transactions. In a future where data is currency, this is huge.
Ant Financial, an affiliate of Alibaba (BABA), is in the forefront, facilitating an eye-popping $8 trillion worth of transactions in 2017. Using artificial intelligence to scour public records for past borrowing, income, education, web surfing preferences, and even political leanings, smart finance can use artificial intelligence to gin up a quickie FICO score and generate a new $200 micro loan in as little as eight seconds.
Bank of America eat your heart out.
What gives the Chinese such an advantage here is their huge market, with some 800 million online participants. The money Ant Financial makes isn’t important now. It’s the digitized data they’re collecting and the way it can be manipulated with artificial intelligence. That gives them immense market power. Remember, in the new world, data is the new currency and the Chinese are creating more than we ever will.
The problem with early, under-the-radar but broad-ranging trends, it can be tough to flesh out pure investment plays. Listed liquid tradable stocks are few and far between. You can simply go out and buy Square (SQ) and PayPal (PYPL) and you’d be half the way there in getting some good exposure.
Here’s the problem with that plan. PayPal has tripled in the last two years, while Square has gone ballistic with a 2,000% gain. I expect further appreciation from here, but those ships have already sailed.
A better way to participate might be the Global X Fintech Thematic ETF (FINX), granted you have all the usual problems with specialized ETFs here such as liquidity, high management fees, and tracking error. But you do get exposure to a number of companies that are either domiciled abroad or are not yet publicly listed.
The five largest holdings of (FINX) include Square (SQ), Wirecard AG (WCAGY), Temenos Group AG, Fiserve Inc (FISV), and Intuit (INTU).
You could also simply buy Alibaba. However, as long as America’s trade war with China continues, all Chinese stocks will perform poorly. Given the stubbornness of both sides, the earliest that can happen is January, 2021.
To learn more about (FINX), please go to the manager’s website by clicking here.
Global Market Comments
October 8, 2019
(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F), (TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (RSX), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL),
Global Market Comments
October 7, 2019
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WILL HE OR WON’T HE?)
(INDU), (USO), (TM), (SCHW), (AMTD), (ETFC), (SPY), (IWM), (USO), (WMT), (AAPL), (GOOGL), (SPY), (C)
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