1. Healthcare: Searching For The Mega Hits

    The healthcare stocks have been one of the hottest performing sectors for many years. Old name big cap stocks like J&J and Pfizer provide strong dividend yields and tremendous safety but that usually does not add up to outsized returns.

    For the last decade or two, biotech has been the go to sector. Names like Medivation (MDVN) returned over 11,000%, Questcor (QCOR) 5000% or even Illumina (ILMN) returning just 4000% provided lots of joy to investors.

    If you are tempted to dabble here are a few things to consider. Ideally, you should turn this into a part time hobby spending hours every week reading and doing research. Once you have found your target companies, be ready for long commitment and lots of volatility along the way.

    Finally consider this rule of thumb. Private companies seeking venture capital funding are considered to have at most a 5% chance of success. Today development stage companies are seeking public capital well before most venture capitalists even consider them. This means the odds of success could fall well below 5%.

    Where Is The Next Medivation

    It doesn’t matter if you are a budding bioscientist or a smart investor; every one wants to be the next big Medivation. Investment bankers have having a banner year. I went through the list of healthcare IPO’s and SPO’s so far this year. Total filings have been running about 60 per month. Healthcare of all types has accounted for over 20% of the filings. That works out to almost 100 so far this year. I did not realize there was that many unsolved diseases in the world. How can they all be successful? How can you even know where to find the next Medivation?

    Having sorted through months of filings and read endless S-1 documents, I am more than a bit skeptical. We have included a few examples in an effort to guide you in what to look out for.

    Take Sienna Biopharmaceuticals Inc. who filed a $65 million IPO in late July. Here is how the company describes itself: “We are a clinical-stage biopharmaceutical company focused on bringing innovations in biotechnology to the discovery, development and commercialization of first-in-class, targeted, topical products in medical dermatology and aesthetics.

    Translation: We have a few ideas about a skin cream. We have mixed up a batch in the lab but don’t have anything yet.

    Consider Genprex who filed a $22.5 million IPO in late July. Here is their self-portrait: We are a clinical stage gene therapy company developing a new approach to treating cancer. We have a novel proprietary technology platform designed to administer cancer-fighting genes by encapsulating them into nanoscale hollow spheres called nanovesicles.

    Translation: Even though billions have been thrown away in a vain attempt to cure cancer, we have discovered the path to a cure using little dots.

    And then there is Aileron Therapeutics Inc. (ALRN). They define themselves as a clinical-stage biopharmaceutical company focused on developing and commercializing a novel class of therapeutics called stapled peptides. Their lead product candidate, ALRN-6924, targets the tumor suppressor p53 for the treatment of a wide variety of cancers.

    Translation: ALRN-6924 is in multiple Phase 1 trials and this means it will be years before the first dollar of revenue comes through, if ever. And there is always the probability to consider that ALRN-6924 never makes it out of Phase 1.

    Healthy Skepticism Is Needed

    If these opinions seem overly critical, no apologies offered. In a market brimming with ever-higher valuations, lots of companies get foisted onto the public that possess little more than hope and vision. It is a sellers market for businesses that in other times would be advised to stay private and grow up using venture capital.

    To be successful investing in healthcare, diversification is mandatory. Between 10-20 stocks will diversify and big cap portfolio. With early stage companies the number should be much more. In order to find the winners, you also have to be prepared to loose.

    The next time flashy headline offers a top 10 list of hot performing healthcare stocks like Medivation, Questcor and Illumina remember to average these extraordinary stocks with the many others in you healthcare portfolio that never made a dime.

  2. Emerald Expositions Events, Inc. (EEX: 21)

    In searching for overlooked opportunities, it’s good to poke around for companies that don’t fit typical industries like technology, finance or healthcare. Companies that don’t make it onto the Wall Street radar can offer good value.

    Emerald Expositions Events is in the business of organizing and executing trade shows. It is just not a business you come across everyday. It would be hard to find one more boring. So, it fits the description of an offbeat business with perfection.

    Trade Shows Are Huge

    According to the company, approximately 9,400 trade shows are held each year in the United States with the majority owned by industry associations (e.g. American Medical Association).

    In the modern era of online buying and mobile messaging, trade shows might appear to have lost their relevance. No so, trade shows still provided the best means for industry participants to get exposure to products and service experts, to communicate with other industry members and get their questions addressed.

    It is where willing buyers and sellers come together to do massive amounts of business. There is nothing boring about that.

    It all adds up to $13.5 billion a year industry with EEX accounting for just 2% of the total. The industry is highly fragmented with market concentration of the top four companies representing just a few percent.

    Typically the number of trade shows held each year varies by industry vertical. Technology, for example has the most with camping gear among the least. Thus the level of competition each trade shows faces varies by industry vertical.

    Based on Stax’ market research, EEX estimates approximately 95% of their revenues are generated in industry verticals where EEX offers the leading trade show.

    So What Makes EEX Standout

    Emerald is the result of a series of acquisitions dating back to 2013. Since then the company has made 13 acquisitions for a total sum of $530 million. If you are looking for investment opportunities in industry rollups, EEX might be worth a look.
    Based on Net Square Feet (NSF), EEX is the largest operator of business-to-business (“B2B”) trade shows in the United States. Their first trade shows date back over 110 years.

    EEX currently operates more than 50 trade shows, including 31 of the top 250 trade shows in the country as ranked by TSNN, as well as numerous other events. In 2016, EEX events connected over 500,000 global attendees and exhibitors and occupied over 6.5 million NSF of exhibition space.

    Based on a $6 million average from each show EEX beats the industry average by a substantial margin.

    EEX claims that their shows are frequently the largest and most well attended in their respective industry verticals, this is a key to attracting high-quality attendees, including those who have the authority to make purchasing decisions on the spot.

    Their portfolio of trade shows is balanced and diversified across industry sectors and customers.

    Leveraged Balance Sheet

    On April 28th, underwriters lead by Barclays Capital, Merrill Lynch and Goldman Sachs took EEX public at $17. This was below the initial filing range of $18-$20. Since then the shares have risen to more than $20.

    Net proceeds to the company of about $95 million went to reduce the sizable $687 million in debt. Continued high debt raises questions by analysts as to how the balance sheet will be able to support future rapid growth.

    Another issue to consider, sifting through its acquisitions, investors are challenged to extract a solid calculation of how much of the company’s growth has been internally generated.

    So is EEX going to turn out to be a successful rollup or just another 2017 IPO? Getting the debt further reduced, it seems, would add a lot of sizzle to story. However, at least with a publically traded equity, EEX can offer stock to lure acquisition prospects. As long as the price at least remains near current levels, EEX growth strategy has a chance.

  3. Sprouts Is A Goner

    I have no inside info and I am not making an investment recommendation. But Sprouts Farmers Market will not be an independent company a year from today. The dynamics of the retail food business are changing. Right now Sprouts is caught in the middle and that is not an ideal place. The solution: sell out or suffer.

    Full Disclosure

    I am a big fan of Sprouts: written about them several times, believe they compare favorable to Whole Foods on several metrics and even shop there regularly.

    The reason for this was simply that Sprouts stores offered essentially the same organic foods as Whole Foods but at a smaller markup without sacrificing profits.

    Admittedly, going into Whole Foods is a mind altering experience with vastly more products to choose from and a super slick store presentation. But those prices at Whole Foods are ridiculous.

    Previously we presented a financial table that showed the gross profit margins at Whole Foods were 34% versus 29% at Sprouts and 21% at Kroger. Bear in mind that all three concerns offer a full range of organic products. The conclusion at the time seemed obvious, prices at Whole Foods somehow, someway had to come down.

    Enter Amazon The Disrupter

    The August acquisition by Amazon of Whole Foods is history. What followed the closing of the deal was Amazon’s action to begin lowering prices at Whole Foods.
    The headlines of this move served as a warning shot over the bow of Sprouts and many other food retailers.

    Not only was Whole Foods becoming more aggressive on price, but with the unpredictable likes of Jeff Bezos running the ship, a new level of uncertainty came into play. Would robots be taking over and speeding the checkout process, would drones be delivering customer orders? Does Jeff have another card up his sleeve to surprise the food-retailing world?

    Since Amazon made their buy out offer in mid June, Whole Foods shareholders have enjoyed their payday watching the stock gain over 27% in about 60 days. Sprout shareholders have not fared as well with the stock selling just below its mid June price level.

    Eat Or Be Eaten

    Does Sprouts become an acquisition target now that Whole Foods is gone or is its survival threatened by the new Amazon presence and pricing strategy?

    In the initial days following the Amazon deal, investors bit up the price of Sprouts by 20%, fueling hope a suitor would emerge. And why not, Sprouts is fundamentally sound having recently beat Wall Street earnings estimates of their second quarter.

    However with Wall Street traders having short-term perspective and no deal for Sprouts, the stock price has fallen rather quickly.

    What Does Sprouts Offer?

    As one top analyst stated it, “Sprouts is the only likely takeout candidate left among grocers.” True, but there is more to Sprouts. The stock could hardly be considered overvalued selling at about 22 times earnings. That is just an average valuation in today’s market. However Sprouts is growing far faster than the 2% of the economy.

    Currently there are only 216 stores in 15 states. This is small change compared to Whole Foods or Kroger. The brand is well respected for quality, price and convenience. There is no reason that another 200-400 stores could be added and still not saturate the market.

    Secondly, Sprouts enjoys the industries second best gross profit margins at just about 29% and above average operating margin of about 7%.

    Reversal Of Fortunes

    Now with Whole Foods under control of Amazon, Sprouts has taken on the same role with regard to price levels as Whole Foods has previously. What we mean is someone including Kroger or others could buy Sprouts lower prices to more effectively compete. For example, Sprouts is almost twice as profitable as Kroger. This alone offers lots of flexibility on pricing.

    Amazon is the technology leader in the food shopping using, fast electronic checkout, home delivery via trucks and maybe even drones some day. This gives them a chip to play in the market share game.

    However, there is nothing proprietary here that cannot be replicated by Sprouts or others. Virtually anything from Amazon could be a game changer but it is not going to be a knock out move. The world usually doesn’t work that way so keep an eye on Sprouts.

  4. A Quiet Spike For Financial Stocks

    Little things sometimes mean a lot. Take the case of financial sector stocks. On Friday August 25th the S&P 500 Financial Index (SPSY) out performed the overall market. It wasn’t all that much to make it a headline-grabbing event. Most Wall Street types probably were more concerned about traffic congestion to the Hamptons on a Friday afternoon than boring financial stocks.

    You can’t blame them; the SPSY has provided a measly 6% return this year that is just a little over half the market rate of return. Financial stocks have not only been duds, they are one of the more boring groups to begin with.

    But that could be changing. The tectonic plates of the financial world are shifting and the shift could allow financial stocks enjoy better times.

    Politicizing The Fed

    Today, banks are stronger than ever, ten years after the crisis that brought down Bear Streans and Lehman Brothers and threatened the global financial system. Vast sums of additional capital has been raised by issuing equity or low rate long-term debt that their so-called “Capital Position” has improved sharply.

    Of course, none of these were voluntary. It took the embarrassment of 2008, the TARP program and the passage of heavy new regulation under the Dodd-Frank Act to force the change.

    After a sight of relief that the system did not collapse, money lending went deep into a shell. The mortgage industry all but disappeared, as did small business lending. About the only people that could get a loan were rich folks and they didn’t need the money. In fact, the rich became the biggest source of private lending.

    Now the debate begins. Are current-banking regulations restricting the already anemic growth of the US economy? By anemic we are talking about 2% while the Trump White House has promised 3%.

    So from a political point of view, the Donald is likely to use whatever excuse is available to blame. With the Chair of the Fed up for grabs in a few months, there is one big duck sitting on the pond: Janet Yellen.

    Yellen’s Swan Song

    On the very same Friday, those financial stocks outshined the market; Jane Yellen made what amounted to her farewell speech to the annual Fed monetary policy conference at Gran Teton, Wyoming.

    In her speech, Yellen lauded the benefits of the Dodd-Frank Act pointing out how increases in bank capital had significantly improved the resilience of the financial system. The media treated her speech as a warning sign to the Trump administration. So far into this administration, POTUS has not reacted positively to things like warnings, suggestions or constructive criticism.

    Reading between her lines, Janet Yellen made the statement; it is time for the prisoners to escape from the asylum. I want out of here before having to listen to a bombardment of Trump Tweets and I am going to take the first step.

    Climbing Into The Breach

    If you are holding financial stocks or thinking about moving your portfolio in that direction, Gary Cohn will help you make that decision. With Goldman Sachs as his financial birth place and President of GS as his last post, you could not find a more idea candidate for Fed chief.

    In addition to all of his skills and financial experience, the truth is, Cohn, the current White House chief economic advisor, wants out of his job. News headlines following the Charlottesville debacle point to considerable pressure from Jewish Organizations for Cohn to resign. He even penned a letter of resignation.

    As Chair of the Fed, Cohn gains his release from under the thumb of Trump while still having Trumps ear. Once appointed, he can not be fired. It is the ideal solution, Gary is happy, Jewish Organizations are mollified, and Trump avoids another potentially embarrassing resignation.

    All of this is not going to happen until Yellen’s current term ends in February. Given the daily turmoil at the White House, many things can happen between now and then.

    Frustrated with healthcare and tax reform in Congress, Trump has been a toothless tiger so far in his first year in office. Other than his nomination of Supreme Court Justice Merrick Garland, the post of Fed Chair represents Trumps biggest source of executive power. Reappointing Yellen will never look like a power move. February is just about six months away within focus for even short-term investors.

  5. Does Facebook Need Some Botox

    There is nothing quite so nauseating to a teen son or daughter than see their parents emulating their own kids. This is true with everything from cars to fashion and that includes technology. The whole idea is to be as different as possible from mom and pop.

    Take email for example or even texting. Moms and dads everywhere are using it. That has to make it yucky for their kids. So off go the kids to find new chat apps.

    Could Facebook be getting yucky? It has roundly 2 billion monthly active users. That amounts to just under one third of the world. FB practically created social media as we know it today. If a parent wanted to know who their kids were hang out with, the answer was probably somewhere on their kids Friends list.

    Launched in February of 2004, Facebook founder Mark Zuckerberg is no longer the 20-year-old entrepreneur but an amazingly accomplished 33 year old bizillionaire. Facebook has remained on the leading edge of social media technology for longer than 90% of even the most massively successful startups produced by Silicon Valley.

    No one can suggest even in the slightest that team FB has been resting on their laurels. Neither are we suggesting that Zuckerberg is some antique like Bill Gates. In fact, continuous changes, improvements, innovations have been FB’s mantra. They have been coming up with lots of cool new stuff from their own staff of developers or acquiring them.

    When Mark Zuckerberg couldn’t convince Snapchat founder Evan Spiegel to sell his company, Mark turned to Instagram. Whamo, in no time there are 700 million active Instagram users. In June 2016 there were just a mere 500 million. The photo sharing service has been a massive success for team Zuckerberg and probably comes at an important time.

    Facebook: Loosing Just A Little of Its Mojo

    Instagram has become the “go to” app for kids that are looking for something that their parents haven’t yet figured out. This is a key to Facebook as a corporation. Evidence supplied by eMarketer suggests that Facebook is loosing its mojo with kids from 12-17 and young adults 18-24. These are the important years for advertisers to connect to their audience. Teach a kid to drink Budweiser at 18 and you have a Bud drinker for life.

    The experts at eMarketer five-year prediction place FB user growth after next year to tail off to less than 2%. That is no better than the rate of GDP growth for the whole US economy. FB usage by 12-17 year olds is falling at an accelerated 3.4% pace up from1.2% in 2016.

    As for Instagram and Snapchat, the predicted growth rate is about three times faster. Clearly, the next wave in social media is underway. If eMarketer projections prove accurate, there is a critical battle about to unfold with predictions that Snapchat will grow at a faster pace than Instagram: OMG!

    Instagram may well turn out to be the secret sauce that keeps Facebook on top of the social media scene for years to come. The stock has been huge this year returning almost 50% in price appreciation just this year. So no serious investor seems too concerned about a little slippage in Facebook’s here to fore flawless face.

    Nevertheless it is always important to remember that in technology, nothing last for long and FB continues to beat the odds.

  6. Craft Brew Alliance, Inc. (BREW: 18)

    It’s summer time, time when a man’s (and woman’s) thoughts turn to the three B’s, barbeques, beaches and BEER. That’s what this time of year is all about. And these days’ craft beers are the go to adult beverage of the young crowd. Anybody that spent time in college knows that kids between 18-22 years old drink over 20 gallons of it every year.

    That is where Craft Brew Alliance, Inc., fits in. BREW is the sixth largest craft brewing company in the U.S. and a leader in brewing, branding, and bringing to market world-class American craft beers. BREW is headquartered in Portland, Oregon, and operates breweries and brewpubs across the U.S.

    A Market Worth Billions

    Craft brews are the biggest thing since lite beer arrived in the 1980’s. According to The Brewers Association, craft beer represented 12.3% of 2016 total beer sales or $24 billion. On a per capita basis, that works out to a lot of drunken college kids. Consumption grew 10% that year.

    TBA figures show that microbreweries and brewpubs continue grow every year with around 8,000 combined total at the end of 2016. Regional brews account for only a tiny fraction. This all suggests there is lots of room for brand consolidation of craft beers while still offering good growth against traditional brands like Budweiser.

    Focus on BREW

    The Company was formed in 2008 through the merger of Redhook Brewery and Widmer Brothers Brewing, the two largest craft-brewing pioneers in the Northwest at the time.

    You may have the impression that the world is overpopulated with craft beers and to some extent you would be right. The industry is consolidating and BREW is a force in that trend.

    BREW’s portfolio consists of a stable of strong regional breweries including Appalachian Mountain Brewery, Cisco Brewers, Omission Brewing Co., Redhook Brewery, Square Mile Cider Co., Widmer Brothers Brewing, and Wynwood Brewing Co., as well as Kona Brewing Company.

    Kona has become one of the fastest-growing craft brands in the U.S., and has expanded its reach across all 50 U.S. states and approximately 30 international markets.

    Contract Brewing Agreement with Anheuser-Busch

    Last August BREW entered into a Contract Brewing Agreement with Anheuser-Busch to brew, bottle and package up to 300,000 barrels of various BREW brands products annually for the next nine years. This will save BREW substantial capital in brewery building costs.

    At the same time BREW also entered into an International Distribution Agreement whereby ABWI will be the sole and exclusive distributor of BREW’s malt beverage products outside the United States,

    Spot Secondary Filed

    On August 2 2017 BREW filed a Spot Secondary to raise $75 million with all the proceeds to go to the company for general corporate purposes. Aside from tidying up their balance sheet, it should add a few bucks to the BREW bank account. It is always nice to have flexibility for growing brands or making acquisitions.

    Financial Record

    Acquisition growth is important for BREW and that is easy to see from their financials. Back in 2012 revenues totaled $169 million. For nearly three years the annual figure has hovered around $200 million. Per share profits were last reported around $0.06 per share.

    The additional $75 million will be a welcome addition. The company has assets of about $200 million. Against that are long-term liabilities of nearly $50 million. There is nothing striking about those numbers. However, cash flow has been slowing in recent periods and is under $500,000.

    Between the brewing and distribution agreements with Anheuser-Busch and the prospective addition of $75 million, BREW looks to be in good shape for expansion. Cheers.

    Flat Stock Performance

    For all the excitement over beer, the stock of BREW has been flatter than a day old bottle of Kona. Gaining just a little over 3% in the last 12 months, investors have not been thrilled. Will the addition of $75 million aid the outlook for growth and push the stock higher. Before the next Memorial Day Barbeque we will have the answer. In the meantime, bottoms up.

  7. Market Volatility Can Provide Asset Protection

    As we turn to the time of the year when history shows the most stock market corrections having taken place, the questions naturally arises, will 2017 be one of those years? An honest answer of course is: nobody knows. The savviest professional investors don’t know either. They estimate the chances of a correction and incorporate it into their strategy.

    After a record bull market run, most every stock is above levels of the 2009 debacle. It is a safe statement that there are a record number of investors with generous paper profits in their portfolios.

    This year alone the market has risen over 10%. Super stocks like NVIDIA have been up over 150%. Stock market sentiment indicators show that investors are filled with glee, the most in years.

    The temptation is to check your portfolio as often as you check you email, constantly watching. It can trap you into a state of greed and this is dangerous.

    Reality Check

    But eventually markets correct and this one is no different. The question is how to protect yourself against the inevitable. If you are young and just getting started most financial advisors will tell you not to worry about short-term price changes. Virtually every long term study supports this recommendation.

    But what if you are blessed with assets but cursed with advancing age? What if your retirement plan has less then 10 years before being activated? This is where investment planning changes. No portfolio is bullet proof so being overconfident and complacent can be costly.

    Things To Consider

    You could rush out and sell your highest priced most overvalued stocks. The IRS would love you for that. They would collect a nice tax. To overcome a 15% capital gains tax, you have to achieve a 30% investment return to get back to the same capital level. A 15% stock market correction would be uncharacteristically severe. Even if you switch asset allocation you are likely to run into some taxable event.

    Stock and Index options are alternatives used by many professionals. This usually involves selling options that can put you in a position of paying large premiums or even taking short selling risks. Unless you are experienced in the world of options or work with a bona fide expert, options can be a quick path to trouble.

    Research the VIX

    Instead of doing all the math calculations basic to options, consider the VIX. It is a measure of implied volatility of the S&P 500 Index options so it does all the calculating for you. When you buy the VIX there is no short seller risk, only long side risk. The VIX runs counter to the general market. It is popularly known as the fear index so it can be an effective hedge with little taxable consequences.

    Nerd Alert

    For those who are interested in doing deep research, here is how the VIX is calculated. The VIX is the square root of the risk-neutral expectation of the S&P 500 variance over the next 30 calendar days. The VIX is quoted as an annualized standard deviation. Now that this is perfectly clear, we can move on.

    Lately Serenity Is Turning To Agita

    After years of calm, the VIX is starting to stir.

    Since the financial crisis when the VIX shot up almost overnight to a high of 60, the index fell to a low around 6 during the summer. This is what happens when stock prices are rising and investors are feeling good.

    There have been just two brief days when the index has poked its head above 30. Since May 2012, the VIX has been hanging out between 10-20. If you are getting the picture of a downward sloping trend line, you are getting the right message.

    But since late April, things have been changing. The volatility of the index that measures investor fear has been getting agita shooting up over 50% from record lows on three occasions before falling back.

    As we move into the seasonally volatile period for the stock market the VIX is just something to put up on your stock screen and keep an eye on. You never know.

  8. Carvana Co. (CVNA: 14)

    On The Hunt For Fallen Angels

    It can be interesting and profitable to look at companies several months after an IPO. That is about the time when the initial excitement has calmed down.
    This is usually about the time when the lack of sell side following can hurt stock prices and in turn provide value to investors.
    Take Carvana Co. for example. Underwriter’s lead by Wells Fargo Securities took CVNA public on April 28, 2017 at just 11 per share. The shares jumped to 24 before falling to the current level around 14.

    Would You Buy A Used Car From Ernie?

    Lots of folks want to be the next CarMax or TrueCar and Ernie Garcia III is no exception. The Stanford graduate honed his consumer finance skills for over 10 years before getting involved in the used car business back in 2011 when he formed Carvana.
    Carvana sees itself as a leading eCommerce platform for buying used cars. Ernie is out to transform the used car buying experience with a wide selection, a superior price/value proposition using transparent pricing in a simple no pressure environment.

    If that sounds like just another used car sales pitch, it is. Here is what Ernie says makes Carvana stand out from the others.

    Using the Carvana platform, consumers can research and identify a vehicle, inspect it using proprietary 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle and schedule delivery or pick-up, all from their desktop or mobile devices.

    No More Showroom Sales Delays
    Their transaction technologies and online platform transform a time consuming process by allowing customers to secure financing, complete a purchase and schedule delivery online in as little as 10 minutes: instant gratification!

    Carvana lays claim to proprietary algorithms to optimize a nationally pooled inventory of over 7,300 vehicles, inspect and recondition vehicles based on their “Carvana Certified” 150-point inspection process.

    Ernie and the Carvana team operate their own logistics network to deliver cars directly to customers as soon as the next day. Customers in certain markets also have the option to pick up their vehicle at one of several proprietary vending machines, which provides an exciting pick-up experience for the customer while decreasing costs.

    A Road Tested System

    Carvana is no startup. Between January 2013 and the end of 2016, 27,500 vehicles were purchased, reconditioned, sold and delivered to online customers. Carvana serve 21 local markets. The number nearly doubled last year and more are to be added.

    The growth trends are impressive. From 2105 cars sold in 2014 to 18,761 in 2016. Revenues during this time:$41 million to $379 million.

    Carvana is loosing money, $0.72 per share in 2016. There are bright spots mixed in the red ink. The company turned gross profit positive last year. The trend is moving in the right direction.

    Use of Proceeds

    Car dealers are leveraged so most of the $220 million proceeds is going to clean up the balance sheet.


    Carvana is relying on their vertically integrated business model to provide a meaningful and sustainable competitive advantage.

    These claims may not sound much different from CarMax or TrueCar, but that may not be the key issue.

    The U.S. used car marketplace is highly fragmented. There are approximately 45,000 independent used car dealerships and nearly 18,000 franchise dealerships.

    According to Edmunds.com, the top 100 used car auto retailers collectively hold approximately 7.0% market share. So the pie is large and the slices are small. What about Ernie?

    Well-Educated Management

    Ernie Garcia, III co-founded has been President and Chief Executive Officer since 2012. He has spent more than 10 years in the auto and personal finance business. He holds a B.S. in Management Science and Engineering from Stanford.

    Mark Jenkins is Chief Financial Officer. Mark was a professor at The Wharton School from 2009 to 2014. Mark received a Ph.D. in economics from Stanford and a B.S.E. from Duke in Mathematics and Civil Engineering.

    Ben Huston co-founded and Chief Operating Officer. He holds a J.D. from Harvard Law School and a B.A. from Stanford.

    With all this brain power, maybe the company should be called SmartCar.

  9. Narcissism: Expecting The Unexpected

    This has been another winning year for the financial markets. Stock prices keep making new records. Markets outside the US are following along with America. Inflation continues tepid, job growth is steady, the prospects of the Fed taking away the punch bowl with higher rates is diminishing. Perhaps best of all consumer confidence is solid.

    There are several things that make today’s investment environment differ from the past. There is a growing and healthy amount of skepticism on the part of Wall Street Economists, investment strategists and other talking heads. Without going into all the boring detail, each presents a well reasoned cause(s) why the market is in store for a significant correction.

    It could be interest rates shooting up, wage stagnation, global warming, the North Korean thing, or a number of visible well identified issues. There are plenty to choose from. But sharp corrections are always caused by surprise events. The big issues of today are so well known and thoroughly documented, how could any of these surprise investors. Let’s look elsewhere.

    The Market Enigma

    It doesn’t take much research to document that market corrections are virtually always created by some surprise event. Hence by this very definition, market corrections cannot be predicted. At best you can only prepare for an unknown future.

    The Trump Enigma

    There are plenty of mental health professionals with far greater skills than I have pronouncing POTUS as a full-blown narcissist. This is the guy that a minority of America voted into office knowing his personal flaws fully.

    Trump is a quirky cannonball loaded with surprises.

    In the beginning, his quirks were so amusing that comedians all over were licking their comedic chops looking forward to eight years of fresh material. That day is over.

    Since Inauguration Day, I have read several books about narcissistic personality types. There are at least a dozen available online so there must be lots of interest in the topic.

    There are several traits about narcissists that stand out. According to psychiatric studies, 75% of cases are men. There is a constant need to create tension and anxiety with the people in their inner circle.

    They are easily offended and have perfected the art of blaming literally everyone (except themselves) for causing trouble. The absolute inability to take responsibility for their actions makes it impossible for anyone to bring about a change in their behavior.

    Could Charlottesville Be The Surprise

    How could a small little Virginia town of about 49,000 people shake the world? It could happen. The events of August 12th represent the most severe test. The White House response was not the first time they bungled the job of communicating with the public. However, given the emotional nature of events, this is where Trumps narcissism gets really costly.

    Even if you are a life long Trump fan, you must admit he screwed up in as big a way as possible. Then came the Intel and Merck CEO resignations from the Business Council followed by the dissolution of the entire Council.

    The Trump response was pure and predictable narcissism, blame, insult, and diminish. Now in addition to a verbal war with North Korea, there is an exploding war with corporate America. A narcissist thrives on tension.

    Now the media headlines are shifting to an even wider focus. Has the mess in handling Charlottesville become so bad, it is driving White House advisors to the brink of resigning? Names like Gary Cohn and recently appointed Chief of Staff John Kelly are bellwethers. Without Cohn, the Presidents tax reform legislation is crippled and without Kelly, the White House continues to be dysfunctional.

    There are calls from all over the business and political community from Ken Langone, founder of The Home Despot to Mitt Romney and throughout Congress for Trump to acknowledge his mistake and to apologize to the American people for the mistake. The odds of this happening are extremely low. Mental health experts say the more the narcissist feels attacked, the stronger their reaction.

  10. USA Technologies Inc (USAT) SPO

    Malvern Pennsylvania is the home of USA Technologies, a town of just 3000 people. In Malvern it pays to think small. USA Technologies is trying to make it big by thinking small.

    The words small ticket comes up frequently in USAT’s self-description. Here is why they are happy being a big fish in a small pond.

    They provide wireless networking, cashless transactions, asset monitoring, and other value-added services to the small ticket, unattended Point of Sale (“POS”) market. This sounds super cool, but what does it mean?

    USAT developed something they call ePort technology. When it is installed into things like vending machines, commercial laundries, amusement games, or stand alone kiosks you no longer have to carry cash. It is another application of network technology and it is spreading rapidly.

    While thinking small, USAT also developed ePort Connect, which amounts to a Payment Card Industry Data Security Standard (PCI DSS)-compliant, comprehensive service that includes simplified credit card processing and support, consumer engagement services as well as telemetry, Internet of Things (“IoT”) and machine-to-machine (“M2M”) services, including the ability to remotely monitor, control, and report on the results of distributed assets containing electronic payment solutions.

    Raising Money The New Fashion Way

    The company is out to raise about $37 million having filed an S-1 on July 7, 2017. In a bit of an unusual twist it will be a spot offering at $4.50 per share. Proceeds will go entirely to the company for general corporate purposes. Translated into English, this means money for the growth of a business that is not yet throwing off loads of cash.

    Competitive Position

    Company CEO Stephen Herbert claims the company is a leading provider in the small ticket, beverage and food vending industry. They are expanding solutions and services to other unattended market segments, such as amusement, commercial laundry, kiosk and others.

    Historically, these businesses have relied on cash for payment in the form of coins or bills, whereas, USAT systems allow the acceptance of cashless payments through the use of credit or debit cards or other emerging contactless forms, such as mobile payment.

    How Does USAT Make Money

    Revenues are generated from the sale of equipment and from license and transaction fees. It is this last source that helps make USAT most interesting.

    During the fiscal year 2016, 73.0% of revenues came from recurring license and transaction fees related to ePort Connect service and just 27.0% from equipment sales.

    CEO Herbert believes that a service based business model, will create a high-margin stream of recurring revenues as a foundation for long-term value and continued growth.

    Financials: Small Is Getting Big Quickly

    USAT strategy seems to be paying off handsomely. Revenues over the past five years have been growing a better than a 20% pace going from $29 million in 2012 to $77 million in the year ended June 2016.

    For the nine months of fiscal 2017 the company matched all of last years total ringing up about $70 million in revenues, a 27% increase.

    USAT has only one small blotch on its record. Earning consistent and sizable profits hasn’t been their habit.

    You can forgive them for this faux pas. It is tuff-maximizing earnings while investing in expanding the business from its small base.

    Management With Beverage Industry Background

    CEO Stephen Herbert has considerable history in the beverage industry and has been CEO at USAT for over 5 years. In other words, he needs no on the job training.
    For the 10 years prior to joining USAT in 1996, Herbert had been with Pepsi-Cola in their beverage division vending area.

    The company believes Herbert’s intimate knowledge and experience with all aspects of USAT for over 20 years and his extensive vending experience at PepsiCo before joining USAT provide the requisite qualifications, skills, perspectives, and experiences to serve. We would tend to agree.

  11. First Internet Bancorp (INBK)

    On August 8, 2017 underwriters for INBK filed a registration statement for a $150 million secondary offering with all proceeds going to the company for “general corporate purposes.”

    At first glance this is about as uninteresting a deal as you can find this summer. A bank headquartered in Fishers, Indiana; not exactly the epicenter of economic activity. They describe themselves as a community bank. This usually means small loans to small business: yawn, yawn.

    First The Sizzle: Then The Ho Hum

    So what makes INBK different? First Internet Bank is the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank.

    INBK does not have a conventional brick and mortar branch system. It operates through a scalable Internet banking platform. That may not sound like a big deal since every bank around has mobile banking.

    So little old plane vanilla First Internet Bancorp has the key benefit of being an FDIC chartered and insured bank just like the big boys like Citibank and JP Morgan Chase but without the bricks and mortar branches.

    It gives INBK nationwide reach. The implications for costs and customer acquisition are major.

    Now The Ho Hum

    INBK offers the usual assortment of commercial, small business, consumer and municipal banking products and services. They conduct consumer and small business deposit operations primarily through online channels on a nationwide basis and have no traditional branch offices.

    Residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending.

    Consumer lending products are originated nationwide over the Internet as well as through relationships with dealerships and financing partners.

    Commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking and public finance.

    A public finance team was established in early 2017, provides a range of public and municipal lending and leasing products to government entities on a nationwide basis.

    Bank Of The Future

    Mobile banking means that in 20 years it is possible that 80% of all branches will be gone. Perhaps there will be none at all.

    In 2016 customers shelled out about $45 billion in fees to the banking industry in account service fees, check return fees, overdraft fees and more. All of this was needed to cover the overhead of the bazillion bank branches.

    With no branch overhead to cover, First Internet and others like them can offer appealing perks like free checking, no overdraft or bounced check fees. That is a big selling point.

    Customer Turnover Is Low In Banking

    Customers hate those annoying fees but it takes a lot to get them to move. Costs are often measured on the amount of marketing dollars needed to attract new customers. There are many ways of measuring these costs so there is no single guide to the true cost.

    One bank, BBVA placed the cost at $100. Other estimates run as high as $145. Both numbers include the cost of branches.

    A study that I participated in several years ago placed the cost for an online bank as low as $50 per new customer. The difference in these two numbers is why you should get excited about pure online banks.

    INBK Is A Rare Bank

    You have to look pretty far to find an FDIC Insured bank like First Internet. Everybody in fintech wants into the branchless online banking but it isn’t so easy. It takes a huge amount of paper work and lots of time to get approval.

    The period following the 2008 financial crisis has made entering the business far more difficult; many have tried, few have succeeded.

    What To Do With $150 Million

    Considering the current market cap of INBK is about $250 million, the offering is huge. It will substantially bolster Tier One Capital. That means for the first time in a while since the financial crisis that INBK can expand its deposit and lending base. With a $150 million it could be major. So you may want to keep an eye on the plane vanilla bank in Fishers, Indiana.

  12. International Diversification

    Should You Invest Where You Travel?

    August is the peak time for vacation travel. Lots of Americans can be found these days all over the globe from Europe to Asia. If you are one of these lucky soles, chances are you will run across something that will catch your investment eye.

    This could be as simple as a receipt for a French food treat or a company that is changing the way people do their banking like M-Pesa in Kenya or QPAGO in Mexico. The world is fill with opportunity to be uncovered if we open our eyes.

    More and more investment experts are recommending caution with the continuing rise of US stocks. That is good advice considering the tripling of stock prices from the lows of 2009.

    We don’t have a precise count but we read of more advisors suggesting asset protection strategies that include greater global diversification. This raises several questions: Is this a prudent (smart) move and is it right for you?

    The Past Is Not Prologue

    The practice of global diversification harkens back to a period when the world was less connected, when economic growth varied considerably, for example, between the US and Europe and even within Europe.

    Prior to 1999 when the Euro came into circulation, Europe’s multiple currencies fluctuated independently creating an abundance of investment opportunities. That no longer is the case. For all its controversy the Euro has been a massive success in stabilizing exchange rates.

    Good investment opportunities require something that math nerds call asymmetric information. This takes place when information is not widely known or understood and investors have the time to act. We all know what the Internet has done to eliminate asymmetric information. Currency exchange rates respond instantly to global events taking away any time to act on new information.

    Access To Global Markets

    Some or all of everything we own, wear, ride in or even eat, comes from somewhere else. The globalization of manufacturing assures the world economy is more synchronized that anytime in the past. So there are very few wide disparities in economic growth within the 20 largest economies of the world. The homogenization of the world prevents arbitraging the difference between regions.

    Markets In Lock Step

    To really succeed at arbitraging global markets, there needs to be a wide difference in performance. Why move out of the US market at a record high for some place like Hong Kong for example. The markets there are facing the same blotted valuations as the US.

    A quick look at the world’s main stock indices illustrates the point. Year to date performance of the three main American stock indices has ranged from roundly 10% for the S&P 500 to 17.5% for the technology heavy NASDAQ.

    Looking at nine major world markets only the CAC 40 (France), the NIKKEI (Japan) and SSEC (Shanghai) have seriously lagged the US. And if performance were measured over the last 12 months, only Shanghai at a 6% gain could be deemed a laggard. So where can you greatly lower you risk?

    What About China

    You may already have achieved global diversification in a passive fashion. If your portfolio includes Facebook, Alphabet or Microsoft these guys are about everywhere in the world you could imagine.

    If you are tech averse and prefer more dividend yielding names like Coca-Cola or Colgate Palmolive you have global representation. More than half of all earnings come from offshore, so these names give you lots of global diversification.

    But what about opportunities in China: lots of asymmetric information here. In a slow year, China’s GDP can grow 3-4 times faster than the US. China is loaded with rare earth elements. The government is investing in industrial development at an astonishing pace. The consumer is the end beneficiary of it all.

    If China fits into your investment interest, Alibaba (BABA: NYSE) will give you diverse exposure to consumer spending in Asia. The company reports both in local currencies as well as US dollars so they are very readable. If you summer vacation travels take you to Beijing chances are you will run across at least one of Alibaba’s mobile services. Bon Voyage.

  13. Elio Motors, Inc, IPO

    To Dream The Impossible Dream

    By now who has not heard of Elon Musk a guy who has to rank of one of the biggest dreamers in America today. Perhaps Elon’s only true rival would be Jeff Bezos but who can measure such things anyway.
    It is fair to say the Elon is best known for his incredible slick, sleek and much in demand Tesla electric powered amazamobiles. Against long odds, Tesla has managed to carve a serious niche into the bazillion dollar auto market. Slowly the US is moving to electric powered vehicles.
    If Elon Can Do It, So Can I
    What Elon has already accomplished is an example for the rest of the world. Enter Elio Motors, Inc. On August 3rd, Elio filed its S-1 Registration Statement for an IPO. If successful, the company will raise about $100 million.
    This is chump change in the auto world where the value of GM and Ford total $100 billion. Throw in Tesla at $60 billion and you get the idea. Under optimal circumstances, Elio is not even a jumbo shrimp.

    Where Does The Catchy Name Come From?
    The name Trump is plastered all over every one of POTUS’ hotels and condos so what’s wrong with a car guy doing the same. Meet Paul Elio and the entire nine members of the current team Elio Motors.

    Making America Great Again
    The way the company describes itself is a chapter out of the “Make America Great Again” book. This is their mission statement:
    “We have a simple mission—we are committed to the American dream, creating American jobs and bringing American automotive ingenuity to every vehicle we build.”
    A Product With A Different Design

    Paul Elio believes he has designed a revolutionary front engine, front-wheel drive, two-seat, gasoline-powered vehicle with two wheels in the front and one wheel in the rear – the Elio. See: www.eliomotors.com. Of course, what else could you possibly call it?

    The design of the vehicle more aerodynamic while providing significantly higher gas mileage than standard vehicles. Here is how they make comparisons.

    The Elio has a range of approximately 672 miles, based upon an 8-gallon tank and 84 mpg highway. This is significantly greater than most gas or diesel-powered vehicles that have an average range of 371 miles.

    And then there are those electric vehicles that are typically limited to 60 to 300 miles. There is also the limited availability of charging stations.

    Hybrid vehicles have an average range of 510 miles, which is pretty cool. However, Elio with its fuel efficiency offers a far better sticker price as well as the best environmental benefits.

    Yes We Have Orders!

    The company’s website claims to have orders of over 65,300 vehicles at a base price of just $7450. That is half the price of the least expensive Smart car and a third the price of virtually any hybrid.

    Part of the low price can be explained by the ultra compact nature of the vehicle whose principal buyer most likely will be for commuting purposes.

    Wrapped In The Flag

    Paul Elio is not only a seasoned engineer but a patriot as well. He anticipates creating thousands of jobs in the United States, positively impacting the environment through lowered engine emissions, reducing the United States’ dependence on foreign and domestic oil, and favorably affecting the trade deficit through the eventual export of vehicles.

    Who Is Paul Elio

    Elio may not be a household word like Elon Musk but he has been working hard at Elio Motors for nearly a decade. He has the heart and soul of an engineer. Before founding Elio Motors, Paul built ESG Engineering, a consulting business that created a methodology for developing new products using simulation tools. ESG holds 10 patents.

    Will Paul and his nine-member team turn into the next Tesla or the next DeLorean? As always, time will tell. In the meantime one thing can easily be said: Elio Motors could turn out to be a cheaper way to invest in the next generation of automobile renegades. If Tesla, with no profits in sight for years is valued more than GM or Ford, anything is possible.

  14. Greater Cannabis Co, Inc. (GCAN) IPO

    Combining Crowdfunding and Cannabis

    Here is something to amuse you on a hot summer day. Every investor is looking for ways of making money on weed. Do you invest in the growing, the wholesaling, and retailing or in drug paraphernalia? Take a clever 51-year-old dude named Wayne Anderson who presumably has a lot of experience in the bud business. Wayne has huge diverse plans to be everywhere.

    Financing Wayne’s dream begins by declaring himself an emerging growth company under the Jobs Act and then going to raise $6 million using crowdfunding. This may sound like a typical big hat no cattle scenario that has been repeated over and over. But remember we are dealing with weed, one controversial but highly powerful business.

    Wayne even went to the trouble of writing an S-1 document of nearly 100+ pages. That is much more than many companies with far more business than GCAN.

    Most venture capitalists agree that 95% of startup companies fail within their first 24 months. So before you light up, please keep that in mind. Like most emerging growth companies, Wayne’s revenues have yet to emerge. But that is ok because it’s all about the future of Cannabis.

    Greater Cannabis Company’s Enormous Plans

    The Company’s business segments are divided into four operating segments direct from Wayne’s S-1 filing:

    E-commerce- Through the Company’s wholly owned subsidiary, GCC Superstore, LLC, the Company has established an online store whose merchandise includes pipes, vaporizers, grinders, hemp related products. The online store was opened in June 2017 at www.gccsuperstore.com. The GCC Superstore carries in excess of 1000 products from 20 suppliers and over 50 brands.

    Advertising- With the development of the GCC Superstore, the Company will place directed advertising throughout the online store. Advertising will originate through Google AdSense or direct-advertising sales by the company. The company will also use social media outlets such as Facebook, Twitter and Instagram.

    Licensing- On July 31, 2014, the Company entered into a Licensing Agreement with Artemis Dispensing Technologies for the development and resell of an automated dispensing machine. Under the agreement, Artemis is responsible for the development of a high end automated dispensing product.

    Direct Investments- The Company also intends to investigate direct investment in private entities within the cannabis sector either through stock purchase agreements, debentures, joint ventures or a hybrid of each.


    Wayne Anderson is the President and Board Chairman of the company. Thus far he is the only executive as well as the only employee. The S-1 states that Wayne leverages nearly 15 years of business experience in the financial and medical sectors. He received a Doctorate degree from Temple University so we are guessing that Wayne is no dummy.

    Financial Considerations

    The extent that Wayne succeeds in raising $6 million via crowdfunding, it will be used to fund daily operations and to develop the business plan. As of December 31,2016, the S-1 places the amount of cash at $0. So if successful, at least he will be able to afford a Debit Card.


    This is almost a silly point considering that having a little extra weed to sell your friends puts you in the business. In terms of formal competitors we are talking about competitors such as 420 Science, GRAV, Got Vape and Smoking Cartel.

    The Company believes the density of cannabis consumers and the wide product selection are what will make The Greater Cannabis Company, Inc. and The GCC Superstore attractive to cannabis consumers and will help to serve as their main competitive advantage.

    Why Wayne?

    Now some of you might take the point of view: Wayne’s Weed World is such an ultra long shot, why even bother mentioning his ambitious dream. The answer is simple: in the world of financial democracy created be the Jobs Act and crowdfunding, everyone has a fair chance no matter how well thought out or wacky the idea.

  15. The Weird Economics of Sports

    The economics of sports is fascinating. It’s unlike other businesses. Where else does a group of companies legally collude so that they can pay their average employee millions of dollars solely on the hope the player will show up for work and deliver their end of the bargain?

    Only in sports and Mrs. Banta’s second grade elementary school class does someone get a “time out to sit in the corner” for not behaving properly. But in sports, the offending player still gets paid.

    Where else but baseball can a player perform so poorly that he gets fired and still collects more then $70 million in 1040 wages? Just ask Pablo Sandoval; the man known as “The Panda” will get all this dough even if he gets another gig.


    What made the Red Sox make such a crazy ill-conceived decision? Wow $70 million down the drain. There are at least a half dozen small market teams that don’t spend that much for their entire payroll.

    A year ago at this time Alex Rodriguez was given a pink slip by the Yankees costing the Steinbrenner family nearly $40 million. What happened with Sandoval and A-Rod is part of a much bigger longer-term trend.

    Big Data Is Big Business Especially in Sports

    Money Ball, the hit 2011 movie about the Oakland Athletics GM Billy Bean popularized the term sabermetrics. One of the more interesting measures developed is something called WAP or Wins Above Replacement.

    WAP measures the value of a player compared to the cost of getting rid of the bum. Unlike a batting average or a pitchers earned run average, the precise calculation of WAP is above my pay grade. Nevertheless this obscure little measure has the power to change baseball economics.

    Millennial Ball

    Millennials have received massive attention for their contribution to technology. Their contribution to professional sports is easy to overlook. Without having the advantage of sabremetrics, I am going to speculate that the talent level of players pursuing a professional sports career has never been higher.

    The success of the Chicago Cubs and Cleveland Indians illustrates the point. The average age of a rookie in the major leagues is getting lower each year. It also appears that more high-level draft picks are coming from graduating high school students.

    Who can blame a young athlete; major league minimum pay is around $500,000. A 17-year-old high school kid can get a multi million deal. Even if the best college offers a full scholarship, it’s an easy choice.

    WAP Math

    WAP is giving young athletes the best opportunity to reach the major leagues anytime in modern history.

    Fans are packing ballparks in record numbers to what these future stars like Aaron Judge perform at super high levels.

    High cost contracts like Sandoval’s are a thing of the past, or at least an exception. Even Brice Harper may find a few more of his future pay linked to performance incentives.

    The Winners: Play Me Anywhere

    If a shortstop hitting .300 is worth $5 million a year and a second baseman hitting .310 is worth $8 million, how much is a player worth the hits .290 but is a gold glove candidate both at short and second?

    Minor league players are being trained at multiple positions. The next wave of talent can replace the current roister of players that specialize in a single position. That saves money. This value is enormous. If the player also happens to be a switch hitter, that’s even better.

    The Designated Hitter Is Dead

    The Designated Hitter is going the way of the Dodo bird. Last year the top five designated hitters were paid $58 million. Perhaps only Red Sox legend David Ortiz paid off.

    Shohei Otani the 22-year-old Japanese star pitcher and current home run king is a threat to become a unique asset capable of DH’ing and pitching. Several other players in the 2017 draft also fit this multi talent description.

    Think of it as having one player that can function as two but at a lower cost. Now that starts to make real economic sense.

  16. Apple: Business Success or Tech Success

    Success is what the investment world is all about. If a company stock is hitting record highs, it doesn’t much matter how it got there. Of course there are all those nit-picking analysts that are paid to worry about something. But it’s delivering the bottom line that allows CEO’s to keep their jobs along with their inflated compensation.

    Creation and innovation are given a fair amount of lip service but how much do they really matter? These terms often get used interchangeability with success.

    With innovation, what we are talking about is a company’s unrelenting drive to find new and better products and services that thrill the senses and improve our lives.

    The late Steven Jobs was a perfect example. His critics call him just a great salesman. True, but that is true because he created innovative new products that made it possible to spin his personal hyperbole.

    Jobs unspoken legacy is the Apple ecosystem that holds customers to the company’s, here to fore, technologically superior products. Those days are coming to an end. Deeply rooted values of innovation are giving way to an occasional face-lift. This is the same mistake Microsoft made 20 years ago.

    Signs of Success Are Everywhere

    Apple stock is hitting record highs after the company released surprisingly favorable results for revenues and earnings. The symptoms of their success underscore our point. The source of revenue surprise was a bump in sales of the iPad, a product introduced more than 7 years ago. Until recently, sales had been drifting lower but that seems to have changed. New models have been developed in response to the innovative Microsoft Surface Pro.

    This development would have been unthinkable had Jobs still been at the helm. But the far worse foible is the neglect with their voice-activated assistant Siri and the early applications with Artificial Intelligence.

    The eyes of tech aficionados roll when Siri is compared with Amazons Alexa ($129) and Eco ($180) or even Google’s Home ($129). In June, Tim Cook announced Apple’s response, HomePod. Critics have declared it somewhere between Eco and GoogleHome, calling it neither fish nor foul. That is hardly the accolade that Steven Jobs would have aimed for.
    If that were not enough, the Apple HomePod won’t be available until December (just in time to be too late for Christmas 2017 selling). For those willing to wait to the last minute, the asking price will be $349.

    Nor would an innovative Apple Corp welcomed the New York Times headline that appeared in July: How Microsoft has become the surprise innovator in PC’s by Farhad Manjoo. The article notes how Microsoft wrote off over $900 million in unwanted Surface tablets in 2012. In spite of this, they kept on innovating.

    That was a write off that got a Bronx cheer from Wall Street but in the end, it was only a billion dollars and Microsoft had many more billions in the bank. Surface was never expected to be the iPad killer; it was a fly on the giants back. That attitude allowed designers to be risk takers. Now Apple is chasing the innovator and Surface Pro is the design leader. Steven Jobs would not be a happy camper.

    The Bananas Aren’t Green Anymore

    One of the many keys to Apples legendary success is the creation of a brilliant ecosystem that attracts and joyfully permits willing participants to pay premium prices for it unique and innovative products. The eco system is still strong but weakening. Competitors are sensing this. Now even Facebook is developing a “video chat device” designed for use in the home using Artificial Intelligence.

    Slowly Apple is loosing its distinctiveness and someday it could find itself in the same position of Microsoft and Windows. That of course would still be better than Kodak or Xerox. It is time to get to the drive for innovation. Apple needs a visionary. Someone please save the ecosystem.

  17. Revolut: Apps For Cryptocurrencies

    The payments business is one huge area of opportunity for entrepreneurs. Think of it: if the US economy generates close to $20 trillion in GDP that’s a lot of money moving through the system. How it gets where it is suppose to, who gets it there and how much money is charged along the way is mysterious. This mystery is what the payments business is all about.

    The global business has long been a gigantic oligopoly controlled by a series of networks, governments, banks and a group of oversized corporations such as Visa, MasterCard, Fiserv and others.

    Taken together it is like a mafia of financial behemoths interested in nothing more than keeping the status quo. Perpetuating the system enables them to maximize the amount of fees for the mindless service of money transfer.

    Fintech Is Out To Disrupt the Industry

    Efforts to disrupt the mafia have been going on for some time. So far not much can be said for most of the efforts. There are at least two major walls to climb. The first is the cost and time required to reach critical mass.

    Take a really cool thing like ApplePay for example. It has been almost three years since this electronic wallet was first introduced in September 2014. The convenience of touching the screen of your iPhone is so much easier than digging out a plastic credit card. Yet with all of Apples billions in cash, ApplePay has been slow to catch on. Merchants must have special terminals to handle the electronic signal.

    PayPal no doubt is the most likely candidate to shake the foundation of the traditional payments business. During the many years under the wing of eBay, PayPal was able to garner acceptance both from customers and merchants. PayPal, of course was spun off by eBay. The company is expanding from solely an online presence to creating its own electronic wallet that can be used in traditional bricks and mortar stores.

    The Crypto Buzz Is Big

    The second big wall is having lots of capital. Just link a capital raising effort to cryptocurrencies and investors eyes light up like a six year old kid on his birthday.
    Cryptocurrencies like BitCoin, Etherium and others create the crypto buzz.

    According to Wikipedia, as of now, there are about 900 digital currencies in existence in the world. This means there is a growing audience for applications.


    Case in point is Revolut, a UK based payments company in business just since July 2015. Within just the last few weeks, Revolut founders Nikolay Storonsky
    and Vlad Yatsenko raised over $66 million in VC funding and another $23 million from Crowdfunding. The Crypto buzz had something to do with their success.

    According to company literature, the Revolut app allows customers to open a current account in under a minute, and includes a pre-paid contactless MasterCard debit card. So far there is nothing unusual about Revolut. But there is more.

    The firm launched personal international bank account numbers (IBANs) across Europe just recently, and plans to integrate virtual currencies like Bitcoin, Ethereum and Litecoin in the future. This includes plans to add a wealth of new services in the coming months from the integration of cryptocurrency to pay-as-you-go travel insurance at the tap of a button.

    Even before this gets accomplished, Revolut offers currency exchange with 25 different currencies and a peer-to-peer payments service. As Storonsky tells his story, “ . . . what we are demonstrating goes beyond banking.”

    Storonsky must be pretty good with a pitch deck considering the implied $200-$400 million valuation of the company. He and his partner have deep experience in the global payments business. Nikolay spent years as a currency trader with Credit Suisse so he understands the absurd level of fees charged by the current system.

    The technical wizardry, however, rests with his partner Yatsenko. Vlad spent over 10 years building financial systems for major Wall Street investment banks. He serves as the company’s CTO.

    The one question that few investors seem to be concerned about is how all these wonderful free services will be monetized. Oh well, these are the same silly questions that few asked about during the dot.com craze. This time, however, is different, right?

  18. Gaming: A Long Way From Pong

    There are some things that are painful to admit. The video game business is one that totally passed me by. Even after it was revealed that the business was bigger than the annual box office receipts from feature films, the brain synapses still didn’t fire.

    Game of Thrones chalks up billions in revenues and I still don’t understand what’s the big deal. Why would anyone what to sit in front of a computer screen all day long: dah?

    And then there is the indisputable evidence provided by game designer and developers like Activision Blizzard and Electronic Arts whose fortunes have been heading north for years. Even so, I always followed the legendary Peter Lynch: get involved with things you like, use frequently and understand.

    Little did I appreciate that these two companies were just part of something even bigger.

    Being an active sports minded person, I never appreciated the mental challenges and all that gamers got, the thrill of victory, and all the yada, yada. In my mind, if you didn’t run 26.2 miles, you were a couch potato.

    Wake Up To eSports

    First came video game tournaments and now eSports competitions. According to ESPN, eSports events routinely fill arenas and outdoor stadiums containing tens of thousands of screaming fans cheering for their favorite team. And what are the teams doing? Team competition in video games, what else?

    eSports isn’t the NFL, NBA or MLB, but they are getting there. Events held in midweek are drawing more than 100,000 online fans. This is in addition to live audiences. eSports is borrowing the business model of the big guys. There are eSports teams, leagues and there is even a franchise fee to enter certain leagues.

    Already big name sponsors like Coke, Logitech, Red Bull and several auto companies are onboard and more will follow as the sport continues to expand globally.
    Asian Tsunami

    According to independent research, over 200 million people either watch or play eSports. But that study is three years old. The number is far larger today. The popularity is truly global. eSports is huge in Asia especially Korea. Other regions are catching up.

    The US, Canada and Europe are estimated to have between 30-35 million members. These markets are still in their infancy so it is understandable if you have overlooked eSports up to now.

    Considering there are over 500 million people populating these regions, it is easy to see the massive potential of this market. The research firm of Newzoo was quoted by ESPN placing market growth at more than 20%.

    I must not be the only ignorant soul on the planet. Just recently CNBC Mad Money Host Jim Cramer interviewed Logitech CEO Bracken Darrel. What Darrel had to say about eSports even shocked Cramer (another non gamer).

    Logitech is fully behind eSports as a designer and manufacturer of electronic peripherals. This gives Logitech a big boost to its revenue line and its image.

    Darrel sponsors frequent conferences where gamers get to input their ideas for product features and improvements. We are told that gamers worship Logitech products.

    Not only do gamers love Logitech but the stock market has taken notice as well. Just this year, the shares have gained nearly 60% in value.

    The company has long been known for add on peripherals like computer keyboards, mice, small speakers and other high quality but less than glamorous products. Their investments in eSports is truly changes the game for Bracken Darrel.

    The recently reported June quarter was impressive. Revenues grew 32% to $530 million while fully diluted per share profits gained 70% to $0.22. Not bad for a company that is hardly a high tech company.

  19. This Time It’s Different

    Bull markets come and go, most end with a bang, a few with a whimper. The current one just happens to be the longest in history. This simply means that predicting the future of stock prices has never been more risky. Whenever you hear the expression, “this time it’s different”, you know that you will be embarrassed by any prediction.

    The month of July is now in the history books. With better than a 2% gain; it was the second best month of 2017. And technology stocks with a 5%+ gain set the pace.

    Remember just a few weeks ago tech stocks were tumbling. Market watchers were wondering if the bull market end was near or if a change of leadership was taking place. Suddenly tech stocks steamed ahead to new record highs.

    Smitten With The FAANG

    As FAANG stocks go, so goes the market. Collectively they account for 10.5% of the market weighted S&P 500 Index. This year the index has gained about 11%. Take out the FAANG stocks and you are left with a measly 1% increase. So you get the idea pretty quickly.

    Critics of the market compare the current dependence on technology stocks with the dot.com bubble of 2000. There are similarities: record high stock prices, narrowness of investor focus, plenty of danger signs.

    One thing stands out separating FAANG fever from Dot.com mania. FAANG companies not only have revenues and earnings, they have way above average growth. If you add the buzzwords, Artificial Intelligence and it is easy to get sucked into believing, this time it is different.

    Handicapping The Horses

    It was this combination that showed up in July including a supply of earnings reports that helps explain the FAANG recovery.

    Netflix Wins By 8 Furlongs (A Mile)

    Netflix revenues in the second quarter exceeded forecast growing 33%. The big surprise was the addition of 5.2 million new subscribers compared to estimates for 3.23 million. NFLX stock gained over 20% in July making it FAANG #1.

    Facebook Was A Fast Philly

    Analysts described Facebook Q2 results as “beating estimates with ease” that included a 69% increase in earnings. That is a huge gain for a company that has over 2 billion users worldwide. The pleasant surprise came from better that expected advertising revenues. Management keeps warning the street about a slowdown but so far it has not happened.

    In return for a good quarter, the shares gained 12.5% in the quarter, second best of the group.

    Apple Was No Nag

    Apple stock had a pretty solid July gaining about 3.5% making it the third best performer in the FAANG. The stock has been on a tear this year gaining 30% even though the company is still highly dependent on the iPhone.

    Q3 results are almost irrelevant in the sense that September is the time for iPhone 8 and the 10th anniversary of its first introduction. As the biggest weight in the S&P Index, AAPL will be one big key to the markets total performance going forward.

    Alphabet: The Also Ran

    Alphabet Q3 beat estimates both on revenues and earnings. The company paid it’s fine to the European Union in the quarter placing a drag in the reported number; otherwise advertising revenues drove the biz once again. The stock enjoyed a 2.5% gain in July and that is a bit better than average.

    Bringing Up The Rear

    Amazon is a something of a faith stock. You are a believer or you are not. In July, the non-believers held sway. The stock increased just about 2% making it only an average performer, the worst in the group.

    Analysts greeted Q2 results with a thumbs down citing such problems as the rise in “negative unearned revenue”. Amazon’s accounting is complicated. Jeff Bezos doesn’t manage Amazon according Wall Streets standards for profit maximization. So if you are a believer, don’t try to understand the exact definition of negative unearned revenues.

    Summer is more than half over and the market will soon focus on the most volatile period of the year. The treacherous months of September and October are coming up. But this time it’s going to be different.

  20. Mexico: The Promised Land For Payment Processing

    Recently I decided to check out Mexico. It was time to say goodbye to overcrowded freeways, over priced rents and Taco Bell. I wanted a real enchilada.

    Inspiration comes from the legendary investor Jim Rogers who is known to have circled the globe on his Harley Davidson looking for interesting investment opportunities.

    I don’t own a Harley and stopped making investment recommendations long ago. But that doesn’t take any of the fun out of the adventure. So off I went on the journey.

    The first stop was the beautiful Mexican seaside town of Puerto Vallarta along the Pacific Ocean. In less than 24 hours after arriving, I discovered something rather amazing: no acceptas la tarjetta de credito! What do you mean no credit cards?

    After some reading I discovered the vast majority of Mexican business transactions, including restaurants, supermarkets and other stores are made in cash. Official figures put to total as high as 95%. Check out the World Bank and they claim that nearly two-thirds of the Mexican population doesn’t even have a bank account.

    For the average observer, this may not be a surprise. After all, Mexico has a huge percentage of poor citizens, wages are extremely low and there is only a small segment considered middle-income.

    Breaking News From Nairobi

    But then I was reminded of Kenya and the success of M-Pesa, the mobile money transfer business that was the focus of a 60 Minutes piece in 2016 titled “the future of money”.

    The report claims that virtually everyone in Kenya has a mobile phone and this enables them to download M-Pesa and transfer money to pay rent, utilities, or anything else where the recipient has an M-Pesa account.
    Mexicans Are Mobile Too

    According to the market research firm Statista, Mexico will have exactly 86.3 million mobile phone users this year and the figure continues to rise. There are about 120 million in the population so the user population is about two-thirds.

    This matches the number of unbanked citizens. So if M-Pesa can work in a country even more impoverished and under banked, why can’t it work in Mexico?

    QPAGOS Is Making Noise

    Well perhaps it’s starting to. A small company QPAGOS, (translation: Q Payments). according to Reuters was incorporated on September 25, 2013. It appears they are using pretty much the same business model of M-Pesa.

    Reuters describes the company as a provider of physical and virtual payment services in the Mexican Market.

    The Company provides an integrated network of 700+ kiosks, terminals and payment channels that enable consumers to deposit cash convert it into a digital form and remit the funds to any merchant in its network.

    The Company’s Payment Gateway connects service providers and their clients through Qpagos Corporation’s technology and processing system. Its RG Processing is a platform designed for processing payments collected through various devices and interfaces, such as self-service kiosks, windows (WIN) terminals, Java terminals and extensible markup language (XML) terminals. RG Processing controls various financial operations, provides monitoring services and accumulates statistics.

    Competition From Traditional Sources

    Reuters identifies QPAGOS competitors to include Wal-Mart, Soriana, Chedraui, OXXO and 7-Eleven. No doubt true but truly the potential is so large, it hardly matters. Besides, most of these are fixed locations rather than mobile.

    QPAGOS has only recently got much revenue traction showing about $2.7 million in 2016 revenues. The leadership is in the hands of 69-year-old Gaston Pereira who has been with the company since the beginning. Senior Pereira’s bio in the payments world of Mexico is lengthy.

    We surmise some sort of IPO or reverse merger was accomplished as the stock of QPAGOS is quoted in the pink sheets. When last we looked it was trading around $0.40 per share.

    On the US side of the great wall of Mexico, the world is watching as cryptocurrencies threaten the status quo. On the other side, there are so many opportunities in fintech it would make Jim Rogers get off his Harley and take notice. For those Harley owners traveling to Africa, M-Pesa is listed on the Nairobi exchange.

  21. RBB Bancorp (RBB) IPO

    Scanning The Universe

    It can be most interesting to look at young companies. Not just startups, but companies that have achieved a level of success. A good hunting ground can be the list of smaller IPO’s. When a company is going public to raise less than $100 million, it raises a whole bunch of interesting questions.

    The first is: why bother, what is the motive. Public ownership involves a new layer of administration, reporting and compliance. And then you have to deal with Wall Street analysts and their expectations. This can take up loads of time and money.

    The motive for many smaller offerings is to establish a market price and use it to sell out to a bigger competitor. Sometimes this works and a lot of times you can get stuck with owning a small fish in a big lake.

    RBB: Targeting With An Asian Persuasion

    Lately, we have made note of several small state and regional banks going public with such a plan fairly evident.

    This does not appear the case with Los Angeles based RBB Bancorp. They are carving out a special niche in traditional banking services. Their plan appears to based on growing the business rather than selling out.

    RBB stands for Royal Business Bank. Back in 2008, CEO Alan Thian and a group of his business partners started as a California state-chartered commercial bank. Here is what makes RBB different.

    Most members are Asian born and began their banking careers in Asia. They each worked together at various banks in California for more than 20 years.

    Thian and his group identified a high level of dissatisfaction with the banking service to Asian-American and Chinese-American communities.

    Thian focused on providing commercial banking services to first generation immigrants, initially concentrating on Chinese immigrants, and now includes Koreans and other Asian ethnicities.

    Team Thian utilized their strong local community ties and relationships with both federal and California bank regulatory agencies to create a bank emphasizing strong credit quality and a solid balance sheet without the burden of the troubled legacy assets of other banks.

    RBB picked one of the worst times to open a bank during the 2008 financial crisis. Overcoming those difficulties demonstrated management strength. Over the past few years RBB has amassed more than $1 billion in deposits. That is up from about $650 million just two years earlier.

    The bank welcomes deposits from all customers but seems to have found the right formula for its target audience. The average RBB depositor is not a billionaire Chinese politician seeking a safe haven in the United States. Rather RBB appears to be a reliable lending source to small business from its downtown Los Angeles headquarters, just a few blocks from Chinatown.

    The Offering

    RBB is out to raise about $80 million after fees and expenses. Wall Street banking specialists Keefe, Bruyette & Woods, Sandler O’Neill and Stephens Inc are managing to offering. The S-1 was filed at the end of June so it will be a while before there is much of a read on the marketing of the deal.

    The entire proceeds will go entirely the company either to strengthen its balance sheet or to use for growth, which includes acquisition. Obviously with the Asian community extending well beyond Los Angeles, there are several options for the proceeds of the offering to be put to use.

    We all appreciate the role that timing plays in public financings. Like most things in life, it makes a big difference.

    We never make an investment recommendation that is not our role. Nevertheless, RBB attracted our interest for two reasons. First: bank stocks have been dogs this year so for underwriters to offer any company in this group makes a statement. Secondly, the offering was filed in late June, historically one of the worst times of the year.

    With two strikes against the offering it, the RBB deal will be fun to watch.
    But then, RBB started their business at one of the worst times for banking. So perhaps they just have the right feng shui.

  22. Wall Street Retreats: Arrivederci Research

    Goldman Sachs is a perfect example of what’s happening on Wall Street. The company’s stock is trading below its peak price of 10 years ago seriously underperforming the market. The company just reported one of its worst quarters in trading. They refer to it as FICC, which stands for, fixed income, currency and commodities.

    Why is trading so important to one of Wall Streets biggest, most diverse and most pure investment banks? Because the future is not as bright as it once was and industry “doers and shakers” haven’t come up with the next big thing to generate massive profits. In the meantime Wall Street is in retreat mode.

    If it is happening at Goldman Sachs, retrenchment is happening elsewhere. Goldman is the bellwether. Evidence is hard to find but it is clear, sellside research coverage is shrinking and that means higher costs for buyside firms.

    Sellside research directors are becoming modern day magicians. They can take a six-person group focusing on retailing, for example, and cut out three junior members. Up front on the firing lines it appears the three senior analysts are still covering the same stocks. The three juniors that do all the time-consuming grunt work simply disappear.

    Why Is This Happening?

    Wall Streets traditional role of raising capital and brokering stock trades is being disrupted.

    Things like private equity and crowdfunding have created alternative sources of capital. High Frequency trading has taken over traditional markets.

    Wall Street leadership has become less risk oriented. This has become ever more evident since the 2008 financial crisis.

    In the past investment banks like Goldman Sachs and Bear Stearns would routinely leverage their capital to a ratio of 50:1 even financing operations with risky overnight lending instruments called repo agreements.

    Commercial banks, on the other hand were limited in their capital ratios to something closer to 10-12:1. Following the 2008 crisis that forced Bear Stearns into the hands of JPMorgan Chase, a more restrained rule of financial law has gone into effect.

    The Changing Face Of The Client

    How can you earn a living when your clients don’t need you anymore? Consider High Frequency Trading or HFT.

    The exact extent of HFT trading in US equities is only an estimate. Glen Barrentine who is a partner at the law firm of Winston & Strawn recently produced data showing HFT accounting for 50% of all trades but others put the figure closer to 70%.

    HFT operators work with machines, not people. Buy and sell decisions are made totally by software programs and commissions amount to virtually nothing. HFT traders aren’t customers of Wall Street underwritings.

    The hedge fund business is another case in point. A tiny niche of fewer than 100 funds back in the early 1990’s, there are now over 11,000 hedge funds running nearly $3 trillion.

    Ron Baron, the well-known hedge fund star, has his own research staff and little regard for what Wall Street puts out. Ron picks his own stocks using a 10-20 year horizon. The quarterly wiggles that analyst write about are of little interest.

    As a hedge fund billionaire, Ron can afford just about anything he chooses. But what about a bright new star trying to get into the investment business?

    In the past Wall Street basked in game of soft dollar payments but with commission prices so low, the average buyside firm practically has to donate a kidney in order to get real service from the sellside. The only other option is to play the IPO game.

    Research: A Necessary Evil

    It is time for a tired old saying about research. In a bull market, one does not need an analyst and in a bear market you can’t afford one.

    Wall Street analysts are the most maligned group in the world. The worst critics are those who depend on analysts for their opinions on stocks when the real value is in providing intelligence on companies and industries.

    But because trading commissions traditionally paid their overhead, and those have shrunk to nothing, sellside coverage is shrinking as well. But somebody has to do the

    dirty work. This gives big firms with their huge budgets the advantage over new comers. On Wall Street, the rules are simple: eat or be eaten.

  23. Energy: On The Ropes Again

    If you are putting together a list of the five worst performing groups in 2017, look no further than the S&P 500 Energy Sector. The Index fell 13% in the first half and it hasn’t gotten any better since then.

    If you had the misfortune of owning crude, the current per barrel price around $46 has fallen 18%. It wasn’t that long ago that a barrel of crude commanded the fat sum of $105. But then it was only last year it was at a lowly $26.

    The energy world has never seen such volatility in prices. Does this mean that traditional and conservative investors should continue to avoid putting money in this area? Great question, let’s take a look.

    The Ripple Effect

    There are plenty of people cheering over the present state of energy. Oil plays a key role in the determination of other prices. Lower crude means less inflation; perhaps even deflation. This is good for food prices, transportation and just about everything else. For the average consumer it can be like getting more dough in their paycheck.

    But investors may not be cheering so fast. Energy earnings are an important component of total corporate earnings. Wall Street is all about earning expectations and one analyst Christine Short who works with Estimaze claims that if oil stays low and energy company earnings are hurt, growth expectations for the market could be cut in half. Let’s hope that Christine turns out to be overly pessimistic.

    With new highs being marked nearly every week, this would not be good, to say the least.

    Fracking: Disrupting The Global Economy

    One of the major causes of crude price volatility is hydraulic fracturing or fracking. You will remember from your college course Fracking 101, what is involved is extracting energy from rock using high-pressure injections of water and chemicals.

    Fracking is environmentally very controversial but that has not stopped the industry of buying its way into mainstream America. Sure it has had something to do with the record number of earthquakes in Oklahoma where fracking has been roaring ahead. And there are those questions about the safety of ground water near the drilling fields.

    Facts of daily life like earthquakes and poisonous water are the kinds of things that get called fake news. Powerful industries can get away with it. For backers of the fracking phenomenon, it is changing the world on the way to making America great again.

    US Reemerging Oil Exporter

    In 2014 the United States began exporting oil for the first time in more than 40 years. Output from fracking is what made this possible. It’s no longer places like Eagle Ford Texas or Bakken, North Dakota that are getting investment attention.

    Everyday there are announcements from spots in Pennsylvania, Ohio, Kentucky and elsewhere about new energy initiatives.

    The economics of hydro fracking are comparatively fast and simple. Compare the time and cost of offshore drilling for energy and you start to appreciate the appeal of fracking.

    One of it’s advantages is the low cost and short lead time to the start of production. Whereas offshore exploration might need prices of $60-$90 per barrel, experts have place the trigger price for fracking between $40-$50.

    It’s More Complicated

    It would be more than a bit naïve to suggest that the entire global energy quotient is determined by fracking. However it is worth noting that over the past two years, the trading range of crude has ranged between $43 and $57 and this matches the trigger price for fracking production.

    Any boost to corporate profits this year may not be coming from the energy sector. This is just something to keep in mind when trying to figure out this record high equities market.

  24. Calyxt, Inc. (CLXT) IPO

    XXXXL People Want To Be Healthy Too

    With as much as 70% of the US population either significantly overweight or simply obese, you would think it is time for them to take responsibility. But as studies have shown metabolically speaking, this is no easy task. Once the average person reaches a certain weight, the body kicks into prevent diets and other weight reduction methods from offering permanent relief.

    Does being overweight prove that these people don’t care what they put in their bodies? Not at all, who doesn’t want to loose some weight and be healthy? The question is how.

    Along comes Calyxt Inc. offering a gene-editing technology along with technical expertise aiming to create a paradigm shift in the delivery of healthier specialty food ingredients. We are talking about things such as healthier oils and high fiber wheat.

    Trying To Do Good With GMO

    Calyxt positions itself with a consumer-centric as well as commercial orientation. That starts with gene-editing technologies enabling them to provide meaningful disruption to the food and agriculture industries.

    Calyxt claims its technology enables them to precisely and specifically edit a plant genome to elicit the desired traits and characteristics, resulting in a final product having no foreign DNA. This seems to be a key issue in the battle with the “no GMO” crowd.

    You need to put on a white lab coat to appreciate the bioscience that allows Calyxt to compete effectively with companies like International Flavors & Fragrances and Givaudan who use synthetic chemicals to extend food products.

    Calyxt also competes against the major chemical giants like DuPont Pioneer, Syngenta, Dow and Bayer. In the view of Calyxt, these guys compete with only a relatively small portion of Calyxt business and in some cases could fit the role of joint venture partners with the company. Something to think about in the future.

    The term compete effectively may be a bit of a wish at Calyxt. Total revenues are less than $1 million and there are plenty of losses that go along. The term intends to compete or hopes to compete might be better choices.
    Biotech Buzz or Baloney

    Even if you spend your days in a white lab coat it is not always easy to understand the fine points of biotech. In this case, students of Calyxt look first to the team of five underwriters lead by CitiGroup to have performed their due diligence.

    Next lets look at Calyxt management.

    This starts with Chief Science Officer Daniel Voytas. This guy’s rap sheet looks more than decent having served the company for over 7 years. His bio in biotech includes a PhD in genetics from Harvard Medical College. He is one of the key inventors of the company’s technology. His academic affiliations include Johns Hopkins, the University of Minnesota and Iowa State University.

    Obviously, this guy is no slouch but he isn’t operating alone in some ivory tower. He is surrounded with help.

    More Management Than Revenue

    In addition to Daniel Voytas, the S-1 filing lists a dozen other, fully experienced and highly qualified executives or directors. Dollar revenues per member of management are about zero. As we said, Calyxt is just getting going.

    Nevertheless, having a dozen disciples signing onto a young company makes a statement. Surely, it isn’t for the salary. You’ve got to believe.

    These days’ lots of startup companies in the biotech field are going public to raise capital to fund research and build support facilities. Lots of these have next to nothing in revenues. This means investors are being asked to plunk down their dollars on a promise that may or may not every earn a profit.

    Calyxt is one of those companies. What we do know is that the markets they are targeting global, huge in scale and the solutions being sought have not been achieved by any of their distinguished competitors. That goal simply put is to extend the productivity of agriculture and to improve the healthfulness of the foods being consumed. Bon voyage to Dr. Voytas and his 12 disciples.

  25. Torrid Inc. (CURV) IPO

    Plump And Perfect

    Here is a fat fact. The majority of Americans are least 20 pounds overweight and half are obese. In raw terms, this equals over 220 million people, about half of which are women. Fat is now in fashion.

    Where do 110 million perfectly plump women go when they need to be fashionable or simply have that urge to be sweet and sexy?

    If you are near anyone of 487 Torrid stores in 48 U.S. states, Puerto Rico and Canada you can find a broad assortment of high quality fitted apparel, intimates and accessories that management describes as “unapologetically young, sexy and fashionable.”

    In addition to its bricks and mortar stores, Torrid has a growing and highly profitable online business. Management claims that in fiscal year 2016, they achieved industry-leading e-commerce penetration of 34%, an increase from 20% penetration in fiscal year 2012.

    Torrid appears to be the clear market leader for an underserved and growing demographic of young, plus-size women that no other national specialty retailer exclusively targets. According to Wall Street estimates, the women’s plus-size apparel market was approximately $21 billion in 2016, and has grown at more than twice the rate of the overall U.S. women’s apparel market.

    The Target: A Big Future

    Torrid’s target customer is a 25 to 40 year old woman who is curvy and wears sizes 10 to 30. They believe their customer values the convenience and appeal of a curated collection of merchandise that helps her be stylish at affordable price points.

    According to the company research, approximately two-thirds of U.S. women are plus size (sizes 14 and up), only 17% of women’s apparel sales during 2016 in the U.S. were in plus-sizes. As a result, there are approximately 34,000 plus-size women for each plus-size apparel store, as compared to 600 women for each other specialty apparel store.

    Fashionable Financials

    To say that Torrid’s sales have matched the company’s name is appropriate. For the January 2015 year the company posted revenues of $293 million, showing a modest 0.5% net profit margin. For the January 2017 year, revenues were more than double coming in at $640 million although Torrid’s slight loss was nothing to boast about.

    So Here Is The Deal

    On July 7, a top list of no less than six Wall Street underwriters lead by BofA Merrill Lynch filed a registration statement for a $100 million Initial Public Offering for Torrid. We mention this because both the size and reputation of the underwriters here stands out.

    When looking at Torrid, keep in mind the company is planning its public offering to accommodate selling shareholders. This includes Sycamore Partners Management, a private equity fund that holds more than 5% of the outstanding shares. Other members of management are also part of the group of selling shareholders. If the offering is successful, none of the proceeds will go to the company.

    In another era the sophisticated investor would take a dim view of this arrangement. However, in the era of private equity investing, this has become a more common an acceptable arrangement.

    Investors have come to understand that in exchange for a private company to attract investors, often management compensation is kept very low and often paid in stock. An IPO is the way for management’s operating success to be fully compensated. So in end, the absence of any funding for use by the company can be interpreted as a positive sign. Either way you look at it, Torrid is living up to its name.

  26. Asymmetric Information Is Dead

    Why are weddings so expensive? This question is confronted on a certain wedding planners website I ran across recently. With scientific precision, the voice over explains: asymmetric information.

    Weddings are not something you shop for regularly and there are literally dozens of options with just as many prices points. It’s nearly impossible to do comparative shopping.

    Let’s not forget the element of emotion involved in weddings. Good wedding planners with the right customer service people are in a special spot. For these folks asymmetric information is gold.

    What Does Wedding Planning Have To Do With Wages

    For sometime now we have witnessed the loss of US jobs to low labor cost areas in Asia and elsewhere. Before their 2008 bankruptcy, General Motor’s total cost of labor in this country was running as high as $75 per hour.

    Then there is apparel and footwear manufacturing. Who makes these items in the US anymore: not many. With labor rates under $1 per hour in countries like Bangladesh there is no need to explain Econ 101.

    Along came companies like Alibaba supplying products and manufacturing services and suddenly asymmetric information disappeared from the market for globally sourced goods.

    The Internet Is Twisting Economics

    Until now, the Internet has been a virtuous source in goods, services and just as importantly a source of information. Online shopping is disrupting the face of retailing and the ripple effect can be found in the commercial real estate market.

    There is no doubt that the Internet has virtually eliminated asymmetric information. If you have a laptop or mobile phone, there is no limit to the information you can get. If you shop on line, for example, at Best Buy or Wal-Mart, a few clicks enable you to quickly compare features, prices and customer reviews before making a purchase.
    These are all familiar themes we have been hearing about for some time. But there are a few things we have overlooked.

    The one thing we haven’t measured with the Internet is how much its impact has had on price levels, i.e. inflation. What we do know is that since the early days just after Al Gore invented the Information Superhighway, inflation, as we knew it during the previous 25 years, virtually ended.

    What Does Wedding Planning Have To Do With Labor Rates?

    Janet Yellen and members of the FOMC are wrestling with a problem that is contradicting Econ 101. It is the Internet and the disappearance of asymmetric information that is the most likely cause.

    We say most likely because, no one yet knows with absolute certainty. There has been only anecdotal evidence, and the logic makes sense. Here is what we are getting at.

    The unemployment rate is near it lowest level in the post-Great Recession period: around 4.5%. HR departments are reporting greater difficulty in finding suitable applicants to fill positions. Technology positions are particularly hard to fill but so are the more menial jobs in areas like construction, warehousing and others.

    Professors of Econ 101 argue that there are still millions or workers that fall into the category of the E6 Unemployment Index and that if labor is scarce it is because wages offered are too low.

    The New York Times recently dispatched a team to Omaha to interview the owner of Rooforia Home Exteriors, Sarah Smith. Roofing repair and replacement is not easy work so employees are offered $17 per hour. (Minimum wage is $9)

    With an accountant’s precision, Smith explained that Rooforia charges $8000 for a complete replacement targeting a 40% profit margin.

    Rooforia claims it is impossible to pay higher wages and remain competitive. Because of online services like Thumbtack, there is no asymmetry of information in Omaha’s roofing business. Says Smith, “A lot of customers we get through online lead services like Thumbtack are people who collect from four or five businesses and most of the time choose the cheapest one.”

    Extrapolate Rooforia’s observations to the general labor market and it spells one amazing fact. Everything we thought about the law of supply and demand is changing. This is bound to have a huge influence on Fed Policy and interest rates.

  27. Is The Cryptocurrency Craze For You?

    If you are an investor, your goal is to make money. If you are an accounts payable specialist at a large corporation or just a guy on the street, you want to transfer money quickly and seamlessly. If you are an Asian billionaire, a South American drug cartel or a Russian hacker, you want to operate in anonymity.

    On the other hand if you are Jamie Dimon Chairman of JPMorgan Chase in need of always staying on the forward edge of financial technology, than you simply must get involved with cryptocurrencies.

    But what if you are just Eddie the everyday guy watching the news about Bitcoin and this other thing called Ethereum and all the wild price gyrations of these currencies, what does it mean to you?

    Financial Revolutionaries

    Advocates for cryptocurrencies believe the world monetary system as we now know it is doomed. For financial, political and economic reasons, they argue, the 70-year long era of world dominance by the US dollar is ending. According to these folks, more and more global financial transactions will be done in electronic digital currencies.

    Bitcoin is perhaps best known having been created way back in 2009. More recently Ethereum has quietly made an impressive splash becoming a bona fide rival to Bitcoin. And there are others as well.

    If you are looking for parallels, think in terms of the early days of credit cards. Each represented an entirely new form of payment. As we learned there was room for more than just Visa or just MasterCard.

    Cryptocurrency evangelists believe they offer an important advantage over currencies like the dollar. Bitcoin, for example, was design to consist of a precise number of units. The supply of the dollar is random and determined by the Federal Reserve. So evangelists believe the true value of currencies like Bitcoin is reflected in their publically quoted prices.

    The mechanism for tracking price and volume is like a giant exchange or blockchain that instantly documents and electronically publishes every transaction.

    Why All The Attention?

    At the very least, cryptocurrencies represent a pathway for instant global money transfers. This represents a monumental improvement over the typical 1-3 day delay and the ridiculous 3%-6% fee.

    Cryptocurrencies mimic cash in that the identity of currency owners is anonymous. This is magnet for drug dealers and cyber criminals of all shapes and sizes. The FBI is having fits trying to track down the source of the recent attacks of cyber extortionists because of the criminals’ use of cybercurrency.

    The anonymity feature offers greater security than a Swiss Bank. A recent trade article point to 70% of Bitcoin transactions coming from Asia (a.k.a. China). There is no need to ponder what purpose these people would have.

    Criminal activity tends to obscure the virtues of cryptocurrencies like Bitcoin and Ethereum. In fact, the increasing array of applications available on Ethereum is one of the compelling attractions of this crypto brand. A quick check of the Ethereum website will give you an appreciation.

    Caution Advised

    So far, investing directly in Bitcoin and Ethereum is where the real money has been made in cryptocurrencies. This places you in the role of speculating on the future value and so far speculators have found a gold mine.

    From an initial trading price of $0.06 on June 19, 2010 Bitcoin recently traded over $2000. As for Ethereum, the trading started on September 1, 2015 at $1.32 rising to more than $370 in recent days.

    There is one thing that cryptocurrencies and the US dollar have in common. Neither are backed by any precious metal or collateralized in anyway. Both gain their stature through the full faith and confidence of the issuer.

    Confidence in the dollar is bolstered by the production of goods and services whereas such services are only now beginning to emerge with cryptocurrencies. In the meantime speculators in Bitcoin and Ethereum have been jolted by an occasionally flash crash and general price volatility.

    Price volatility can be brutal as we saw in mid June when the price of Ethereum dropped more than 50% and Bitcoin tumbled over 30%. The faint of heart should guard against temptation.

  28. Morgan Stanley Gives Snapchat A Slap

    Legend has it that on May 17, 1792 as the first trading began on Wall Street; the 10 Commandments of financial conduct were created. The first was: never tell a lie unless you can make some money. The second was: never tell the truth about a major investment-banking client.

    Unlike the 10 Commandments that were chiseled in stone, the Wall Street 10 Commandments were never written down. There was a good reason. Even way back, more than 225 years ago, brokers understood the legal consequences of leaving a paper trail.

    Over the generations, these rules have been passed from father to son. The only real threat came with the surge of small independent firms in the late 1960’s that did little of no investment banking. These creative types made their money issuing unbiased opinions even giving out sell recommendations whenever the situation merited. But alas, the Securities & Exchange Commission legislated these ingrates out of business in 1975.

    And so it has been in the land of money that for almost half a century finding an honest objective opinion one Wall Street has been tuff. It is easier to find a route to The Hamptons on a Friday in the summer in less than 2 hours.

    Morgan Stanley Delivers

    Top bracket underwriter Morgan Stanley took Snapchat public on March 1st instantly creating a $24 billion entity, on paper at least. The IPO totaled roundly 200 million shares and reportedly was over subscribed by a factor of 10 times.

    On March 1, the offering price was set at $17. The fact that none of the stock bestowed voting rights. When your in love, nothing else matters.

    On March 3rd the stock traded briefly at $27 but hasn’t been higher since. In fact, since early June, the stock hasn’t traded above 20 and has spent most of the month in the mid teens.

    Snapchat competes with the likes of Facebook, Twitter and Instagram. You post a photo of yourself with all your friends appearing to be enjoying life fully, you add a cute comment and zap off it goes.

    Snapchat claims an audience of 158 million daily users translating into 2.5 billion daily chats. Critics of the company have long noted that Snapchat’s cost of acquiring new users is higher than Facebook and Twitter at a similar time of their development. The critics also point out that these costs are rising at a time when the trend should be in the opposite direction.

    None of this seemed to matter back in March when Morgan Stanley put their seal of approval on the company and hoards of social media investors lined up to invest in a company whose losses amounted to more than 5 times its revenues.

    Breaking The Second Commandment

    In what can only be termed a history-making move, Morgan Stanley downgraded its investment opinion to average weight from overweight on Snapchat. They also reduced their target price for the stock from $28 to $16. So not only did MS violate the unwritten second commandment, they lower their price target to a level below their IPO pricing just 100 days earlier.

    In Wall Street cryptic language for an investment banker to reduce their highest recommendation for a client translates into a sell signal. But when the new price target is set below the IPO price, you don’t need a translator to get the idea.

    Kudos For The Analyst

    If you got caught by Morgan Stanley’s slap of Snapchat, your first reaction is probably anger. Fair enough, the typical target of investor ire is the analyst. In this case, the analyst Brian Nowak should be applauded. To be able to put out an honest opinion on a company puts him in a league of his own. Only trouble is he may need to be put in some sort of witness protection program. Violating the unwritten commandments of Wall Street has it consequences.

    Somewhere near the statue of the bull on lower Broadway, someone should at least install a bronze plaque commemorating Brian’s work.

  29. Forget The X’s and O’s, Get Hot and Sweaty Over Accounting

    This time of year, people’s thoughts start turning to their second most important preoccupation: FOOTBALL! The draft is over, training camps open any minute and heated debates starts over which team has the greatest need at Quarterback.

    So we are presented with a challenge. Is there any way we to divert attention from football long enough to get fans excited about accounting. Good luck with that idea.

    In order to be politically correct and gender neutral, we assumed the number one, single most important preoccupation for men and women would clearly not be the same. That makes the challenge even more interesting.

    If you work at Amazon or Tesla, they’ve already got the accounting thing covered. Today we want to focus on startups and small businesses that don’t have a pile of dough to waste. There are tons of you creating new ideas. The last thing on your punch list is hiring bean counters to count your beans. Accounting, ugh, well here is some great news.

    You have never picked a better time to start a business. Accounting software has come light years in just the past 36 months and is likely to get even better as Artificial Intelligence finds it way into the picture.

    If there were a 10 best list of good accounting news it would start with: Prices are falling. QuickBooks is the king of accounting software with an 80% share of market. Three years ago, the basic package cost $48 per month for up to 3 users. Today, the price is $5 a month per user. They even give you a free 30-day trial.

    Competition is forcing prices down. Names like WAVE, and Billy have all the same features as QuickBooks but come at no charge. That is hard to beat especially when all three services receive the same high customer satisfaction ratings. Think of it like a QB rating in the NFL with any broken bones.

    Making a decision on what accounting software to use goes beyond price. Getting it installed and operating was always one of the biggest headaches with QuickBooks. They made a lot of rookie mistakes.

    It was kind of like the Tim Tibow situation. If you started with flaws, you could be driven to committing a capital crime trying to find a person able to do a fix.

    If you didn’t have a QuickBooks expert on staff, you were well advised to send someone through the complete QB training. This, however, could add up to several thousand dollars not to mention the amount of time.

    Over the past three years, QB has gone through a virtual metamorphosis. The game is called follow the leader. This means what is available at QB can be found pretty much elsewhere. This also means price can now be the biggest issue in choosing an accounting package.

    When setting up the software there is a video tutorial to get you off on the right path: huge improvement. Next, every one of a dozen suppliers offers a cloud-based system, a critical feature for any business needing mobility.

    If you still have X’s and O’s dancing in the back of your head, consider this amazing fact. The arrival of Artificial Intelligence is really going to add kickoff excitement to you accounting chores. AI has already begun making a mark in the tax preparation field. Bean counters need to be aware.

    One of the big future benefits will be the ability to change accounting software suppliers quickly and effortlessly. In the past many customers hated QB but had few options and were loath to go through the aggravation of reorganizing their accounting systems. All this means a future of more accounting services and even better prices. You can’t say that about beer and nachos.

  30. Keeping Up With Artificial Intelligence

    At one time I was the master of the technology universe. With the title of Managing Director of Technology Research and Chief Market Strategist, my knowledge level was impressive.

    For example I knew everything about the difference between dial up Internet speed and DSL. I understood the speed of DSL was dependent on the users proximity to amplifiers located at the central station. The puzzling question of the day was how important Bluetooth was going to be?

    No matter how much effort goes into keeping up with technology, it changes too fast. It is possible to spend full time and still not know all there is. Fortunately, I am not alone; this is a common lament pretty much everywhere.

    Whatup Intel?

    Case in point is semiconductor giant Intel. Recently a major Wall Street firm lowered its investment rating from average to underperform. That is as close as you can get to a sell recommendation. Intel has been a huge investment payday over the past 30 years so what is the reasoning behind the change.

    It all has to do with deep neural networking. As a key part of Artificial Intelligence, DNN requires the type of huge computing power that makes Donald Trumps version of huge look modest.

    Opinion has it that Intel rival Nvidia has the edge in emerging parallel workloads like deep neural networking. Wow, now that is a real tectonic shift in the tech universe.

    I must admit in all honesty I can’t tell the difference between a deep neural network and a shallow neural network but I plan to take the next rainy weekend and brush up on my reading.

    The Tensor Processing Unit: This Is Bigger Than Huge

    Deep within Google with the help of a retired UC Berkley professor an effort is far along to create a newer faster chip. By itself, this is hardly novel. Everybody in Silicon Valley has run with that idea in the past.

    The development team was motivated by a $6-$10 billion incentive. Based on Google’s conservative estimates of user ship of its machine learning technology using either Intel or Nvidia chips, Google would have to double the capacity of its data centers. The cost of that would truly be a bigger than huge investment.

    In the world of computer chips, everyone makes claims of higher speeds and lower power consumption so it is important to be skeptical when such claims are offered.

    Faster Than A Speeding Bullet

    Ok, so here are the claims: TPU runs 15-30 times faster than anything produced by Intel or Nvidia while being 30-80 times more efficient. That is just nasty fast. If true this could cause problems for both Intel and Nvidia.

    Instead of investing in servers, Google parent Alphabet may be tempted to build its own semiconductor foundries; not exactly a small cost item itself. The other, and more efficient approach would be the Qualcomm model and license the technology and let others spend the big bucks.

    Remember Google is not the only company chasing the gold in AI. Virtually every company will have their own development interest and the FAANG companies are only part of the list.

    Under the old standard Moore’s Law, chip speeds double every 18 months. That law sounds about as antiquated as the dial up modem when the prospects of a possible 30 fold increase in the not to distant future.

    No question that AI is here and huge. Who knows some day AI may even be able to find a way to reset a password without needing to be told the name of my 3rd grade school teacher . Now that is technology doing work for the good of mankind.

  31. The Haves and The Have Not’s

    Recent headlines: “Dow Jumps 94 points after much better-than-expected jobs report “.

    “SMASH: Job growth surges by 222,000 way above expectations.”

    Both of these headlines lead you to the wrong conclusion. You think, gee things are getting better. Numbers often lie and news headlines almost always do.

    The US labor market is not in good shape. The only thing that has changed from the darkest days of the 2008 financial crisis is that more people are working. Yes that is a lot to be thankful for if you were one of the victims, but that doesn’t mean you are better off than you were before 2008.

    Recent reports show the US unemployment rate around the 4.5% level is near historic low levels. This rate has taken an occasional uptick as job creation is leading more and more long time workers to reinter the work force. This is a good sign.

    Job growth is so strong these days that HR departments and small business owners report frustration in finding applicants. Micro Economics 101 dictates that prices paid to labor should be on the rise.

    Corporations are in denial. If HR is only paying $9.75 per hour for a warehouse job and getting zero qualified applicants, maybe it is because nobody can afford to work for that price.

    Wages are barely keeping up with inflation. This means you are working more but can’t buy anything more. Something is wrong, how can this be?

    Please Teach Someone How to Fish. . . .

    The answer is another condemnation of our education system. The US is not producing enough of the right kinds of skills. This means not enough scientists and engineers for Silicon Valley. But it also means that there are not enough qualified applicants for mid level and basic jobs like an Amazon fulfillment center.

    Public education has been a disaster in addressing this issue. Cutting back on government spending on education is a favorite trick of politicians looking to balance state and local budgets.

    What we are talking about is not new. What is different today is the urgency. Technology is on the verge of tectonic changes that are demanding more specialized skills at all levels. Public education will never catch up.

    Looking For Solutions

    It is necessary to look to the private system. Start with a list of the top 10 schools that traditionally turn out the best in the field of science, engineering and business. This includes familiar names like Harvard, Princeton and Stanford.

    The total cost of attending four years at any of these institutions these days, excluding trips for Spring break and copious amounts of craft beer, runs about $250,000.

    Harvard’s website claims that “70% of Harvard students receive some form of financial aid. A Harvard education is more affordable than a state school for 90% of American families.” Here again, numbers often lie.

    Over 15% of American families live in poverty, the second highest level among developed countries.

    Harvard’s claims are spurious at best. The website fails to mention the level of financial aid. If we are taking about 10% off the list price of a dorm room, that isn’t much help.

    Elitism Isn’t The Answer

    Every one of the top 10 schools can afford to do a whole lot more. These institutions pay no taxes while receiving billions every year in donations. In 2015, donations totaled more than $40 billion, nearly 8% higher than the previous year. That is just one year’s take. This is more than the GDP of several countries.

    The value of endowment funds for just the top 10 schools is more than $175 billion. These endowments have been turned into nothing more than a safe deposit box for wealthy donors. These funds need to be used for something more than building a museum to hold the Rockefeller art collection.

  32. Growth Versus Value: Confessions of A Hedge Fund Manager

    One of the healthy signs for investors that the good times are not over showed up just recently. That sign is all about group rotation.

    Growth sectors like technology and healthcare lead the market during the first half gaining nearly 12% versus just under 10% for the overall S&P 500. Other sectors like energy and financials that fit into the value universe increased a mere 4% seriously trailing the averages.

    The rotation began in June and Wall Street strategists quickly picked up on the shift. It’s igniting a major debate over growth versus value.

    During June, the S&P 500 Value Index had one of its best months all year increasing nearly 1%. On the other side the Growth Index had one of its worse months of 2017 falling nearly 2%.

    The positive spin on this comes from people who make a daily living by trading the market consider this a very solid indicator that the good times are still with us.

    The S&P 500 Index is market weighted, meaning that high priced stocks like technology and healthcare carry a disproportionate influence. This is especially true of the FAANG stocks: Facebook, Apple, Amazon, Netflix, and Alphabet’s Google.

    These stocks are so important that they are an unofficial index of their own. June was a terrible month for these tech giants. So if the market managed to rise in the face of a falling FAANG, this is an indicator of the markets strength.

    Things to Consider

    As a former hedge fund manager, I loved to buy the out of favor sectors. Near the end of each year, I would scour the universe to find the two or three sectors that had been the worst performers of the year. Some call this value investing; I simply considered it common sense.

    Even in areas like retailing where there are some serious long-term problems, there are always a few exceptions. Several Wall Street analysts have sited Tiffany & Co as an example.

    Another thing to keep in mind is the role that activist investors are playing in beaten down and out of favor companies. Guys like Carl Icahn and others of a similar style are quick to put pressure on virtually any company in an effort to move the price of the stock higher.

    What is The Right Answer For You?

    If you are invested, it is always comforting to see signs like group rotation. Maybe this adds some logic to why the gage of market worries, the CBOE Volatility Index is around a lowly 12. There have been only two times this year when the index jumped as high as 15 but this is still well below it 10 year peak of 60 back in 2009.

    So what is the right next move? Several things to keep in mind that only you can answer. Basic question number one: Are you an investor or trader? Most of the financial news headlines are directed at short-term performance issues such as the group rotation that occurred in June. If your horizon is retiring in 2040, is the performance in one single month all that important: probably not.

    Serious minded investment advisors recommend periodic portfolio rebalancing once a year. There is nothing wrong with a quick review more often but there is an important thought. Alan (Ace) Greenberg, the former Chairman of Bear Stearns consistently recommend his clients rebalance their portfolios by selling only the loosing stocks.

    Shifting from winning growth stocks to lagging value stocks may be a great strategy for money managers that are graded on their performance every quarter but these folks don’t pay taxes. Following Ace Greenberg’s principals, selling losers could actually reduce your year-end taxes. There is nothing wrong with that outcome.

    No matter what your investment approach, the near nine year long rise in stock prices makes history every day that it continues. Nothing wrong with that.

  33. Byline Bancorp, Inc (BY) IPO

    Who decides to do an initial public offering in an out of favor sector that pretty much assures you won’t get the best price for your stock?

    The standard answer to this riddle is: it is an outstanding company that puts the sector to shame. Otherwise, the answer is that that the IPO is merely the first step in a bigger plan. So, hopefully the best price is yet to come.

    Either way, Byline Bancorp, Inc. successfully sold 5.7 million shares raising about $104 million in the process. Experienced underwriters will tell you how tricky it can be to get investor attention on the day right before a four day long holiday like the 4th of July, but Merrill Lynch and Keefe, Bruyette & Woods managed to pull it off on June 30th. Time to shoot off the fireworks for Byline CEO Alberto Paracchini.

    Not A Monster Bank

    With $3.2 billion of assets BY generates just under $50 million in revenues, which is not bad by industry standards. They bring $6.6 million to the bottom line so bravo for Alberto and his team. So what makes Byline Bancorp so special, obviously it is no monster in the banking world?

    On the surface, the answer is there is nothing on the outside that is unique. Headquartered in the City of Chicago, BY operates through 56 branches in the area offering the standard mix of banking products and services to small and medium sized businesses, including commercial real estate and financial middlemen. Their consumer business is geared to people living in close proximity to one of their branches.

    Plain Vanilla On The Outside

    Quoting directly from their S-1, “Our mission is to provide customers with a high degree of service, convenience and the products they need to achieve their financial objectives. We aim to do so one customer, one relationship and one neighborhood at a time. We believe that customers value convenience, prompt decision-making and knowledge of the local market when choosing a banking partner”.

    If this business description appears indistinguishable from every other small bank you would be absolutely right. Occasionally a bland “me too” offering statement can work if you are in a super hot sector like technology or healthcare but we are talking about a bank.
    The financial services sector has not been the place to make good stock market returns for some time now.

    Action Below The Surface

    Here is the story behind the offering. Back in 2013 Byline, then known as Metropolitan Bank Group was in trouble through bad real estate loans and other effects of the Great Recession. CEO Alberto Paracchini and his CFO lead a $207 million recapitalization effort that resulted in Alberto and his MBG Investment Group controlling just under half of the common stock.

    With the recapitalization plan working and the profitability ratios singing a sweet tune, it is time for the risk takers to get paid. About a third of the 5.7 million-share offering came from selling shareholders. We haven’t seen the final prospectus but we assume the MBG Investment Group was among the bigger sellers.

    The important thing is that Alberto and his team still controls a major chunk of BY stock. Our guess is that folks that specialize in recapitalization deals are looking for their next opportunity. That means taking BY public could be the beginning of a two-step process of establishing public valuation and then finding a buyer for the balance of their stock. Why else would there be an urgency to execute an IPO in a market for financial stocks that has been tepid at best?

  34. Tax Reform: The Perfect Solution

    This year reminds us of just how politically divided our country is. Republicans control the Executive and Legislative branches of the government. However, the Presidents Health Care reforms appear to be going nowhere.

    So where does this leave Income Tax reform, the next huge issue on the Trump Campaign List of Promises? Here is a hint: the odds of changes in tax law that result in things getting easier and better for you, zero!

    As every honest taxpayer understands, the tax code is intentionally complex because Congress is paid by powerful campaign donors to make and keep it that way.

    Legislators speak publically about the urgent need for taxpayer relief by simplifying the code, but they’re lying. This is the last thing they want.

    Bargaining with their colleagues over which special interest to support creates negotiating capital that can used now or held in reserve for a later date.

    The Tax Economy

    But the fundamental reason why tax reform will never happen is that is would disrupt the economy. The IRS employs approximately 100,000. That is the same number as Apple Inc.

    There are 300,000+ people that work in the $11 billion a year tax preparation business; one that is heavily populated by small business. In fact about 40% of the 250 million returns are prepared a mom and pop service. This is the ultimate small business. Attacking these folks is off limits.

    The Real Problem With Tax Reform

    Politicians have screwed up the tax system with all its complexity that the average citizen is left with only one question about tax reform. Am I going to pay more taxes or less tax? Why is it that I have to pay so much while the rich get off Scott free; the system is unfair.

    So much of the political discourse is spent on individual tax provisions that claim to give the tax benefits to the upper 1% while harming the rest of the 9-5 world. This creates enormous tax class warfare. Who wants to get the short end of the stick: nobody.

    Part of the blame for creating this adversarial situation rests at the doorstep of the Congressional Budget Office. Anytime a major piece of tax legislation is created, the CBO gets to opine on the proposed legislation.

    When the CBO did their work on the first attempt to repeal and rewrite Obamacare, the result was so hypothetical that hardly anyone understood. The CBO does not have best record in forecasting.

    The 50% Zero Tax Solution

    The perfect solution eliminates the class warfare over taxes. Eliminate all Federal Income Taxes for all individuals and families earning less than $60,000 annually. There are nearly 70 million people in this group. Imagine the political capital Congress would earn with this solution. Their approval rating might reach 20%!

    There is one trouble however. As popular as this solution may be, it runs counter to the spirit of the tax system: everyone should pay their fare share. This notion needs to be dispelled completely.

    The US Treasury took in a record $3.2 trillion in 2015 and the amount is likely to be even higher when all the 2016 returns are filed. Of this, people earning under $60,000 (those 70 million people) chipped in a paltry $95 billion. This equals only 3% of the total. It amounts to a rounding error, inconsequential to the history of the country.

    On October 4, 2016 Forbes Magazine reported that there were 540 billionaires in the United States, not counting those just earning a living in the US but domiciled elsewhere. Many of these folks are philanthropic helping save the starving poor in God only knows how many third world countries.

    For sake of discussion, lets assume each of the 540 has at least $6 billion stuffed under the mattress. That amount equals all the revenues generated from the bottom 50% of US wage earners.

    So instead of giving donating 3% of those assets to feeding others, just donate it to the 50% Zero Tax Solution. In the final analysis, the rich receive a tax credit for their generosity. Politicians are missing an opportunity here. Write your Congressman today.

  35. Voice Life: A Lesson For Entrepreneurs

    The statement on SEC Form RW reads, “The Company decided not to pursue the sale of securities pursuant to the Registration Statement.” With that, Voice Life ended a two yearlong chase for start up capital of $2.7 million.

    Efforts that started in July 2015 are a textbook case in how not to raise capital. In an era when capital is flowing for just about every purpose, Voice Life stands out. What were they thinking?

    The Business Sector is Hot

    The Internet of Things (IoT) is one white-hot area of technology. What does Voice Life do? The company is developing technology to enable wireless charging of multiple electronic devices at a distance combining Blue Tooth with innovative Artificial Intelligence algorithms. They call their product AI AirCharge.

    Founders of the company believe that the big advantage of their AI AirCharge technology is the ability to charge multiple devices within the home or an automobile without using a charging pad.

    The company believes this technology is unique allowing users to concisely target a fixed or mobile device, track that device as it moves and focus a stream of energy to the device without removing the battery or plug in the device.

    There are several different methods for wireless recharging and there is no lack of competition in the IoT marketplace. Company founders believe they are the only ones pursuing Blue Tooth and AI in combination.

    The company is developing a line of its own products and addressing OEM’s in the automobile business and other consumer product manufacturers.

    Tech Experienced Management

    The natural instinct these days is to assume the founders of Voice Life are two 20 something’s with big ideas and no money. Wrong, here is story on founders Robert Smith and Krishna Nath.

    Smith has more then thirty years experience in management, marketing and entrepreneurial experience with the likes of Microsoft, USC, Ingram Micro, and Cannon.

    Nath has 10+ years of experience coordinating the engineering of mobile device designs. He is skilled in the manufacturing process and the testing of mobile accessories components systems and products accomplishing tasks either directly or through manufacturers in China.

    What Went Wrong

    How can anybody go wrong when the business focuses on a white-hot area and the management has loads of engineering, marketing and entrepreneurial experience?

    The wording on Form RW provides almost no insight. However a thorough look at the original S1 filing tells us everything. It serves as the perfect learning tool for anyone seeking to raise capital.

    Abraham Lincoln is credited with the saying that anyone who hires himself for legal advice has a fool for a client. The fact that Voice Life founders had limited expertise in finance did not stop them from hiring themselves as financial advisors. The missteps were plentiful.

    To begin, attempting to do a legitimate IPO for only $2.7million is why the Jobs Act is responsible for creating Crowdfunding. These days there are plenty of companies getting funded for under $5 million using one of several Crowdfunding platforms.

    Then there is the choice of approach to their IPO efforts. Here is a direct quote from Voice Life S1 filing. “We will sell the common shares ourselves and do not plan to use underwriters or pay any commissions.” Smith and Nath should have used some of their Artificial Intelligence algorithms to figure out that this was not a good idea. Human intelligence understands that you only get what you pay for.

    Finally, it is always important to give potential investors a good, clear Use of Proceeds statement.

    “We do not intend to employ any material amount of the contemplated offering to discharge any current or future indebtedness of the Company. Moreover, we do not intend to use any proceeds of the offering to acquire any significant assets of acquire any entity. Our management will retain broad discretion over the allocation of the net proceeds from this offering. We may find it necessary or advisable to use the net proceeds from this offering for other purposes, and we will have broad discretion in the application of net proceeds from this offering.”

    Abraham Lincoln was right again.

  36. Robots: The Perfect Solution

    Take a minute and look at your last airline ticket, your last cell phone bill or your last hotel and car rental. What does each of these have in common? The hidden taxes are staggering. Politicians sneak these little tariffs one at a time piling them on one after another until the tax rate on a car rental in New York, for example, can add to more than 25%.

    How does all of this relate to robots? Those ultra productive, hyper cost effective machines that are about to dramatically reduce the role of labor should be taxed.

    Don’t Fear Them, Tax Them

    Tesla’s Elon Musk recently suggested the idea of a robotax. It really is nothing more than a common sense approach to solving the issue of replacing man with machine.

    The idea of taxing labor is nothing new so why not tax machines. People work their entire careers paying social security taxes. And what happens then, the money actually goes to pay for the retirement benefits of others. The system is deeply dependent on a steady growing number of workers. Otherwise dooms day could occur.

    If one robotically controlled machine eliminates three workers, where will the Social Security Administration get the money to pay current retirees?

    Social Security is already a financial disaster. Every so often Congress sidesteps insolvency with some crafty little accounting trick, some budgetary bamboozlement, but the implication of robots could make it tuff to continue the Congressional chicanery.

    The idea of robots replacing labor is hardly new. The auto industry has been shifting to robotic welding and other assembly techniques for well over a decade.

    Recent events could change the public outcry for protection.

    When Amazon recently offered to buy Whole Foods this grabbed the headlines and triggered prime time questions about the future of retail. Then with McDonald’s test of ordering kiosks that really pushed the limit. Taxing robots and even things like Artificial Intelligence is the next big thing.

    The Only Thing We Have To Fear Is Leisure

    It does not however answer the question, what is man/woman to do with his/her newfound leisure? If this question were raised in a country like France where leisure is an art form to be practiced religiously, there would be a list of answers.

    America is different; this is a country that is obsessed with work. Parents stress the virtues of working hard to their children. Capitalism rewards those who spend ridiculous hours every week at the office. Entrepreneurs abound in this country like no other place.

    It is no exaggeration to say that Americans are married to their work and fearful of what might happen if they don’t show up everyday. It could be their massive amount of credit card debt, the monthly mortgage or something else, but Americans are totally unprepared for more leisure.

    A survey published in May 2017 by Glassdoor revealed that half of the respondents utilized 50% or less of their allotted vacation time. Nearly 10% took no vacation time whatsoever. Some 23% used up all their allotted vacation but this is lower than when the survey was previously taken in 2014.

    What is behind this very “un French” attitude? Well according to Glassdoor, they sight fear. The say that people are either nervous or scared that no one else can do their work and that if they fall behind it might impact their chances of getting a promotion.

    Imagine when a worker is told not to worry about their work being done because a robot has replaced them? The American psyche is in store for a shock at one of its core beliefs.

    It is time to start retraining our minds. Instead of spending hours at a café on the Champs Elysees watching life, go to the closest Starbucks; just leave your Smartphone and laptop at home.

    Begin with 10 minutes a day and work your way up to a whole hour. It will take less than a week. Within two months you will be up to a whole day of leisure. It’s that simple. You can make the transition a success; you just have to work at it.

  37. The Market 2017: Goldilocks or Just A Case of Denial

    The world may be falling apart but the financial markets have seldom been rosier. Is there something going on that we are missing or is this just a case of mass denial.

    So far this year things have been pretty awesome. The total return on the S&P 500 has been almost 10% and nearly 20% going back to mid 2016.

    The yield on the US Treasury 10-Year Note at about 2.13% is at its low of the year. This, in spite of two-interest rate increases so far and talks of more to come. This isn’t supposed to happen but tell that to bond investors who held on to their positions, so much for economic theory.

    What does this all mean? Virtually every investor knows that equity markets have never been higher. From a valuation standpoint there have been only two times in the past quarter century when price earning multiples were higher. That occurred in 2009 and 2001. The history of those two years is not pretty.

    With these facts in hand, it is reasonable to suspect that investor awareness would translate into nervousness. There has been huge wealth created during the current 8-year bull market. The memory of the 2008 financial crisis and how it quickly wiped out dozens of billions of investor capital should be fresh in our collective memories.

    In other words, as investors, our minds should be bobbing and weaving back and forth with indecision.

    However, the exact opposite is taking place. Surveys confirm investor concern but market barometers aren’t registering their worries. The S&P 500 Volatility Index is often used as a gage of investor nervousness. At the height of the 2008 financial crisis the VIX reached 89.53. This year in late June it reached a 10-year low of 9.37.

    Schizophrenia Elsewhere

    With little exception, the market has had no great news to base its unbridled enthusiasm. Yes, unemployment is low and falling slowly, inflation is practically non-existent, and gas prices are a bargain. This is good news for consumers but for oil producers, not so much.

    Economic growth is paltry, the Trump administration is turning out to be a tweetathon: healthcare reform is doubtful and that makes tax cuts just as doubtful. All those nasty tweets are adding to POTUS’s political problems even within his own party.

    Economic growth, an anemic 1.2% in the first quarter is expected to have surged upward to nearly 3% in the June quarter. Reasons for this optimism are a bit sketchy but that doesn’t stop the Fed from mapping out interest rate increases up to 3.5% over the next 18 months. It can be argued that all of these factors should be rattling the nerves of investors. There is no need to break out the Ambien; everyone is sleeping well in Pleasantville.

    Sector Survey: A Quick Look

    Technology (+20%) and Healthcare (+17%), once again topped the list of best performing groups in the first half of 2017. This should come as no surprise. Technology has all the sizzle of Artificial Intelligence and the countless applications coming to our lives in the next few years. Healthcare of course still has the best pricing power of any sector of the economy.

    The big surprise has to be the S&P 500 Retailing Index. When you consider all the woes caused the by shift to online buying, the performance of major players like Target, Macys, Nordstrom, an 11%+ capital appreciation for the first half beat the market. Thank goodness for Wal-Mart.

    Post Mortem

    Applying logic to markets at times like these doesn’t work. There must be something we are missing or is this what Sigmund Freud called Denial?

    In the absence of psychiatric counseling we looked at Warren Buffets biggest investment successes over the past 25 years. The common theme is how he always seems to have bundles of cash available when market distress is at is highest and he can step in and name his terms. Mr. Buffet must be looking for work these days with the Goldilocks market and the VIX Index hitting record lows.

  38. Here Come The Retail Robots

    Self-service checkouts have been with us for a few years now in grocery and drug stores as well as places like Home Depot and IKEA. You get the sense that while they have become increasingly popular; it has actually been kind of slow to catch on.

    That seems to be the pattern with consumer technology. Lots of people take lots of time understanding and getting comfortable.

    Fast Forward: Tomorrow Is Here

    All of this slow transformation is about to gain a major head of steam and it has important implications for all of us.

    At last count there were 152 million people in our country’s labor force. About one in ten or 15.8 million are employed in retail trade. There are 9.8 million unemployed Americans. This number is very likely to be on the rise.

    Amazon’s recently announced $3+ billion offer to buy organic retailer Whole Foods set off alarm bells on Wall Street. Analysts look for Jeff Bezos to dramatically remake the WFM shopping experience with techno gadgets that take the current self-service check out concept a giant step further.

    Some day in the not distant future, in store sensors may take over the check out function altogether allowing shoppers to simply walk out of the store with their shopping carts: no lines, no credit card swiping, everything done without a touch.

    This may be fanciful speculation since not even Amazon’s acquisition of Whole Foods has been completed. However now even normally slow moving MacDonald’s Corp is getting into the game.

    The company plans to roll out mobile ordering to 14,000 U.S. locations before the end of 2017. They are calling it the “Experience of the Future”. Included in this is digital ordering kiosks installed in 2,500 locations. This is just a start to gauge customer response. You can be certain more will follow.

    The Big Names

    There are several major hardware and software suppliers in the robotization of retail. Many more participants will follow in the period ahead.

    The most visible at the moment include U.S. giant NCR, Swedish design firm ITAB (private firm) and Wincor-Nixdorf.

    ITAB is not so much a technology company as it is a company that works with retailers to make checkout as sleek looking and functional as possible. ITAB has operations across the globe but has made the least noise in the U.S. It has only one sales office in Columbus Ohio. We could not find any stock exchange where ITAB is publically traded.

    Wincor-Nixdorf was acquired by Diebold in 2016 forming the $3.3 billion revenue company renamed Diebold-Nixdorf (DBD-NYSE). The combination brought together both companies strengths in IT services to banks and retailers but so far hasn’t produced any profits for the combined entity.

    NCR (NCR-NYSE) began life as National Cash Register Company shifted directions to manufacturing ATM’s during the boom days of the 1980’s. With over $6.5 billion in annual revenues, NCR must be considered the leading supplier of this technology to retailers. It is ironic that the company returns to its roots after more than 40 years.

    Confessions of A Self-Checkout Bandit

    I love this technology and hate standing in line for anything. I might even go for a Big Mac just to see how the new kiosks work.

    Whenever I am forced to go grocery shopping, the self-service check out lane is my ultimate objective. I have become really proficient. I have tricked myself into believing that the lines are shorter and that I can work the system every bit as fast as the store cashier.

    In Los Angeles, paper shopping bags are not free. They cost $0.10. This is a ridiculously small amount to get annoyed by. However, by using the self-service check out, nobody ever knows that I pilfered a free paper bag.

    The more I read about the coming wave of self-checkout technology, the more concerned I become. Will all my pilfering skills become obsolete? This is the dark side of technology.

  39. Look Who Is Killing MasterCard and Visa

    Ok, Ok, killing may be a bit too dramatic but PayPal is steadily chipping away at the credit card duopoly. This warms the heart of every fintech entrepreneur. Many have tried to do what PayPal is doing and many have failed along the way.

    Bitcoin and other crypto currencies may grab more headlines with their highly volatile price gyrations, but PayPal shouldn’t be ignored. They are focusing on the details and getting them right.

    Background Check

    More than three-fourths of credit card transactions carry the Visa or MC logo. Every time your card is swiped or processed one of these two collects a fee. They are a marketing colossus. No bank would ever think of issuing a credit card without using one or both names.

    Since banks issue 90% of the credit cards and Visa/MC get the lion’s share of that, well, you get the idea; these guys control the market.

    But what do they really do to earn their fee. They depend on The Automated Clearing House (ACH). This is jointly controlled by a collection of the Federal Reserve and its member banks. ACH is notoriously antiquated. It transfers funds once a day and never on weekends. In a world of Bitcoin, Venmo and others, that is so 1970’s.

    Everybody agrees that the present system needs fixing but when you have a grip on trillions of dollars of transactions every year, there is simply no incentive to change.

    The challenge for disruptors is getting to critical mass. This is measured in the time and cost. We are talking about years and billions of dollars. This is why PayPal has a fighting chance to change the financial world.

    eBay The Mother Hen

    Much of PayPal’s early life was spent under the ownership of eBay. If you were an eBay customer, using the secured payment of PayPal made sense. eBay ownership allowed PayPal the necessary years to become self-sustaining.

    It also offered access to massive amounts of capital needed for growth. Along the way PayPal quietly bought a little company, Bill Me Later. This was their first step in becoming an issuer of consumer credit. The feature was only available for online transactions. That was cool because that is where all the growth was taking place.

    The Spin Off

    Then in 2015 eBay announced it’s intent to spin off PayPal and the growth game was underway. The marketing challenge was to get PayPal onto every online shopping site. But this is just part of the story.

    P-to-P Payment Breakthrough

    Every fintech disruptor knows, the real big breakthrough in money transfer is finding a way around the ultra slow ACH payment system. In the mobile world of today, people want to send and receive money instantly. The days of going to an ATM are so Y2K it is ridiculous. That could take forever.

    The key here is the network that ATM and also Debit Cards operate on. These networks are jointly owned by a host of banks. When you use your Debit Card for that Frappachino at Starbucks, your bank account instantly gets debited.

    At the same time if you are a Citibank account holder and wish to send money to another Citibank customer, provided you have their account information, you can do so instantly. If your friend is a Chase customer, well then you can forget about it.

    But now PayPal is launching a test for direct P-to-P payments and this could really add some firepower. There are very few details available so far. Has PayPal found a way into the Debit Card network? It appears so but we could not get confirmation. So we will have to wait for more information. Over time the test conditions will likely change. But one thing is clear.

    As a secured payment system, issuer of online credit and now a potential force in the gigantic area of P-to-P payments, PayPal is the brand that has the ability, the capital and consumer awareness to challenge the Visa MasterCard duopoly.

  40. Inflation, What Inflation

    It has been over 25 years since the economy has experience meaningful price inflation. When is the United States Federal Reserve going to admit this truth? The war is over.

    The recent FOMC decision to raise interest rates sends a false message that the economy is strong and inflation is looming.

    The fact that the US 10-Year Treasury Note has barely budged shows that the real world isn’t buying the Fed’s fears.

    A quick look at the Consumer Price Index tells a big part of the story. Last year about this time, the CPI was running about 1.9% higher than the prior year. Over the last 12 months it has been down 0.1%. This looks a whole lot more like deflation.

    Some key elements to our everyday living costs are shaking things up. It starts with energy: last year prices rose 5.4%, this year they are down 2.7%. Energy costs play a huge role in everything like food: last year up 0.9%, this year only 0.1%.

    All the housing news headlines these days focus on the dramatically higher cost of buying a home. However, all that construction frenzy in apartment building over the last few years looks like it is having an impact on pricing.

    Last year rental housing inflation was up a whopping 3.8%, this year a mere 0.3%. In several key cities like Denver and Dallas, it is cheaper to rent than to own a home.

    There are even some welcome surprises in Healthcare and Education. The year over year change in Healthcare went from 2.7% to 0.0% and from 2.3% to 0.1% in Education.

    The Fed Fumbles

    After pumping over $4 trillion of cash liquidity into the economy, the Federal Reserve is reversing course.

    From a near zero base, the Fed has raised rates three times since 2015. After the last FOMC meeting, the Fed announced that some of the $4.4 trillion in bonds it purchased since the start of the financial crisis would now be sold.

    In other words, Fed actions are being taken to reduce liquidity thus preventing it from overheating and becoming inflationary.

    Predicting the future is what Janet Yellen and her fellow Fed members get paid big bucks to do. Today, nobody is buying the Fed’s story and it looks really embarrassing.

    The most important responsibility of the Fed is to maintain price stability. Bravo for that. The Fed target for inflation is 2%. A year ago at this time they got close with the CPI gaining 1.9%. But as we saw, there is about as little a threat of inflation as the Brooklyn Nets winning an NBA championship.

    Even if you are on the side of the Fed you must admit one thing. It took $4.4 trillion in liquidity and years of zero interest rates just to achieve their 2.0% inflation target. Isn’t that a huge investment for such a small return?

    Let’s frame the question it in a slightly different way. If it took $4.4 trillion to achieve such a small outcome, are they underestimating deflation as an ongoing force? Just the last year of CPI data raises a warning flag.

    Greenspan Started The Talk

    Way back in the 1990’s when the personal computer was increasing worker productivity, a decrease in inflationary pressures began to show in the various Consumer and Producer Price Indices. Then Fed Chair Alan Greenspan reminded us all of the virtues of the PC.

    That phase of productivity gains may be over but the influence on technology continues. The real problem with technology is that it in not a big enough job creator to allow for a raise in real buying power throughout the economy. As unfortunate as this is, flat real wages act as a natural dampener to inflation.

    If the people who forecast the future of Artificial Intelligence are even close to accurate, inflation is one of our least important problems to face over the next 20 years. How we deal with job creation looms far larger. Working 4 hours a day 4 days a week may sound good until the mortgage payment is due.

  41. Boston Omaha Corp (BOMN) IPO

    America: The Capital of Capital Raising

    Isn’t American creativity just awesome? Where else are more billionaires created? To make money you have to start somewhere. Without startup capital it is really tuff. But thanks to The Jobs Act created under the Obama administration, it has become so much easier to get off the ground with just an idea.

    Crowdfunding for startup capital has become standard practice for thousands of entrepreneurs. But the traditional public offering market isn’t dead yet. Boston Omaha Corp is a good example.

    Started by a group of 30 something investment bankers, Boston Omaha is something of a rollup specialist in three well established industries: Outdoor billboard advertising, insurance and commercial real estate brokerage and property management.

    Alex B. Rozek 38 former analyst at Freedman Billings and Adam K. Peterson, age 35, a former investment advisor, must be financial wizards, not to mention pretty persuasive salesmen.

    Since reorganizing and renaming the company as Boston Omaha just two years ago, the couple has managed to raise $66.7 million in equity capital from former business partners of this dynamic duo. Bravo Adam and Alex.

    These days IPO filings are loaded with startup pharma/biotech/immuno/genomic research companies, so Boston Omaha stands out. There is not a hint of proprietary technology, no super secret software code, no SaaS recurring revenue stream. Hell, they don’t even have a cloud to peddle.

    Many times we see entrepreneurs steadfastly devoted to one business. Not Boston Omaha. If you warm up to this company, think diversified investment company. For example, consider their outdoor advertising business.

    They currently operate in Florida, Georgia and Wisconsin. The commercial property management business is located in Las Vegas. Company headquarters is in Boston. Total global revenues are just under $5 million.

    The obvious question is why outdoor advertising? Their 491 billboards (26 are digital displays) compete in a $4.8 billion industry where large corporations like Clear Channel, CBS and others own 50% of the market.

    However, outdoor advertising has not been hurt by the global ad shift to the Internet. Billboards are sensitive to economic activity but generally a good cash flow business if acquired at the right price. Another factor to consider is the limited supply. State and Federal legislation has put the kibosh on building new boards on highways.

    The very same questions can be raised about the insurance agency business and commercial property management. These are two of the truly unglamorous businesses for young entrepreneurs to get involved with. They do, however, fit the classic target of an investment company looking to do an industry “roll up”.

    What To Do With $85 Million

    Adam and Alex hope to bring in upwards of $85 million before underwriter discounts and allowances. What they are going to do with it is important to know.

    About one-third is being targeted at acquisitions in the outdoor space, principally small to medium-sized operations. This is the same pattern they have used up to now.

    They expect to use up to $20 million to provide additional capital reserves needed to expand current insurance and related brokerage operations. To date, efforts have been focused on acquiring a nationwide broker of surety insurance and the acquisition of UC&S, a Treasury Listed, A- rated surety insurance company.

    The company has filed applications with 41 states and the District of Columbia to expand UC&S’s authority to write policies on a nationwide basis. So they have a framework for acquisitions.

    That still leaves over $30 million some of which will be no doubt used to expand the commercial real estate business through acquisitions.

    Not A Garden Variety Offering

    In a public offering world dominated by healthcare and technology, Boston Omaha sticks out. This is one of those deals where it helps to have faith and confidence in Adam and Alex because these are the guys that will be managing the Boston Omaha portfolio going forward.

    We have no connection to either so we cannot offer an opinion. However, with $66.7 million in equity already invested, one thing is clear. Somebody already has put a pretty sizable chunk of dough behind these two dudes.

  42. Amazon/Whole Foods Deal: Bezos Is Uniquely Positioned

    When Amazon chief Jeff Bezos offered over $14 billion to buy Whole Foods Market the scramble was on to figure out precisely the strategy going forward. Some envisioned a new age in food retailing featuring cashier free checkouts. Others envisioned robots stocking shelves. Some savvy Wall Street analysts see a combination of Amazon Fresh with Whole Foods impeccable reputation for quality.

    My first reaction was that Jeff was just as appalled as any of us at the ridiculously high prices at Whole Foods and wanted to get some free gourmet grub. After all, Jeff is worth something like $78 billion. He didn’t get there overpaying for his daily bread. Anyway, a mere $14.3 billion is a drop in the shopping bucket.

    The Real Truth

    Only time will tell exactly what Amazon will do. The opportunities are pretty interesting. Two things stand out. Whole Foods may be a unique asset but it faces the basic truth that its strategy is no longer working. Its entire premium pricing structure is close to saturating its target demographic market.

    Comparative store sales and average ticket size has been a problem for some time. There are too many competitors in the organic food segment like Sprouts Farmers Market and even Kroger that offer equal quality and far lower prices. Whole Foods stands out because it has created a special shopping experience.

    From your first moment in a Whole Foods Market, there is almost a spiritual transformation that takes place. Immediately, you are engulfed in a higher level of quality that screams loudly starting with the products, how they are presented and the professional demeanor of the clerks.

    WFM has created a superior image and translated that into superior pricing but there are only so many people in that are able to pay $4 for a Granny Smith apple and still pay the rent.

    As is evident in the table below, having the highest gross profitability in the retail food industry exposes WFM to serious price competition. In the final analysis, consumers may prefer organic food but these days just about everybody but the corner hot dog vendor has a line of organics.

    Leading Grocery Chains

    Whole Foods







    Cost of Sales




    Gross Margin








    Operating Margin




    Why Amazon Is A Unique Acquirer

    The one major dig on Amazon since it earliest days has been its distain for maximizing short-term profits. Fact is Jeff Bezos operates the company more like a giant “growth at all cost” Venture Capital operation than a publically traded company.

    His growth mentality and successful risk taking has made him on of the worlds richest men. If Amazon is truly a venture capital operation, it has defied the odds and succeeded over and over.

    Consider the move that only Amazon could accomplish: if operating costs at WFM were lowered to the level of Sprouts through the magic of technology, selling prices could be cut the level of either Sprouts or even Kroger. Obviously income would take a reduction, but such a short-term outcome would be consistent with the Bezos habits. This type of strategy would allow WFM to appeal to millions of new customers.

    As a freestanding company, public shareholders would never stand by and let WFM founder John Mackey get away with such a strategy. But under the umbrella of Amazon anything can happen.

    Whole Foods has been a huge investment success. Back in the early 1990’s the stock sold for about $1.54 per share. The day Amazon’s offer was announced; the price ended the day just over $42. That is superior performance by any barometer. Now it time to let Jeff create new opportunities.

    There are Wall Street rumblings of a bidding war developing over WFM. Anything is possible but few have the currency to match Amazon. If Whole Foods wanted to sell itself, it would have already had discussions with others. This type of talk is more rumbling than reality.

  43. What’s Up With Housing?

    Everything was just right for the perfect storm in home buying. Millennial’s represent a huge pool of demand. After years of job searching, marriage and child bearing in cramped rental spaces, 2017 was the year to make a house a home.

    So far it isn’t turning out to be this way. Fewer people than ever believe that it is a good time to buy a home according the Fannie Mae monthly survey. The cause appears to be housing affordability. Homes are in short supply and accordingly very pricy. But wait, something isn’t making sense.

    The index of National Home Prices is up 5.75% over the last year*. Reports abound of a shortage of homes for sale especially in regions like Silicon Valley where job creation is best.

    Now mortgage rates are heading higher and that is going to put a further pinch on demand. But if a shortage of homes is pushing prices up, new home construction should be booming.

    All Is Quiet On The Construction Site

    That’s not happening. Housing starts for the last three consecutive months have been falling including 7.7% in March and 2.7% in April. The recently released May figure was down 5.5%. Folks, we talking about the spring time when these numbers should be humming.

    What’s up with these numbers, the higher prices should be stimulating construction. Home building giant, Beazer Homes is raising $500 million in a highly complex public financing so there is plenty of money for developers to build new homes.

    Occasionally data on the economy can defy logic in the very short term. Lots of reasons account for this. In this case, the economic logic may be less obvious.

    Rental Obsession

    Since the financial crisis in 2008, housing construction has been in the hands of developers obsessed with building rental communities. In several major cities like New York and San Francisco occupancy rates peaked about two years ago.

    Since then construction activity has outpaced the growth in demand resulting a softening in the rate of rent inflation. Nobody is taking up a collection for builders of rental properties; it is just that the bloom may finally be off the rose for these guys.

    Rational Thinking Attempts To Explain The Situation

    Ask virtually any real estate agent, what is the single most important factor that goes into making a home buying decision and the answer will be emotion. In the first five minutes, if the potential buyers eyes light up, there is a deal to be made. It is all about feelings.

    Imagine the feelings of a young family of four living in 950 square feet of space walking into 2000+ square feet of stainless steel, hardwood floors and granite.

    Leave it to academics like the real estate department at Florida Atlantic University to quantify the buying process. They approach home buying in the same way an investor would approach putting dough in an oil well. As students of business know, investment analysis is the discipline of comparative selection.

    Another Index To The Rescue

    FAU has created an index with the idea of creating maximum wealth accumulation over time. Actually, when you think of all the challenges to creating wealth, the FAU index makes sense.

    What it shows is interesting but not particularly helpful in explanting anything. For example in exceptionally high rent markets like New York, Boston and San Francisco, the comparison between renting owning favors owning.

    If you live in places like Cincinnati, Chicago or Cleveland owning is clearly your best choice. The only major markets where renting is the best economic choice is Denver and Dallas.

    Mass Misinterpretation

    When the FAU Index was released the mass media news headlines read, Don’t Buy A House. In reality, most of the key metropolitan areas that lead the nation in job growth favor home ownership. Areas on the East and West Coast are where the millennials are concentrating. It is also where housing prices are the highest and rising fastest.

    So for all the academic contribution, we are back to the start; what’s up with housing? Housing is a key to the total economy so let’s keep watch as the summer progresses.

  44. Fed Speaks: Are The Markets Listening?

    Some things in the world just aren’t normal. Yes there is that catchy phrase going around about “the new normal” but in the laws of economics and finance there is no “new normal”. To even think such a thought would be like saying 2+2=17. That just doesn’t happen.

    But something is happening in the financial markets that is weird enough to have everybody wondering what is going on. It is all about the Fed and the behavior of stock prices and interest rates.

    At the June Federal Open Market Committee meeting, interest rates were increased 0.25% to a range of 1.00%-1.25%. The move has been talked about and expected for a long while. Translation: There were no surprises.

    At the same meeting Fed Chair Janet Yellen laid out a map that plots the Feds intention to further raise rates over the 2018-2019 period. That could mean more than 3.0%. Obviously, that is triple the current level.

    At the same meeting, it was announced that the Fed could begin liquidating its balance sheet of $4.5 trillion in bond holdings “relatively soon”.

    Economic law and common sense dictates that this news is sure to send long-term bond yields and stock prices tumbling.

    Aux contrar mon ami, stock prices rose and the yield on the 10-Year Treasury Note was stable on the day and actually below recent highs of March. What does this mean? Is everybody asleep or am I missing something?

    I am not the only puzzled soul. Following the Fed announcement, all the morning financial talk shows were asking the same question. Nobody had an answer.

    Thoughts From The Super Brain

    The Nobel Prize winning Economist Robert Schiller probably summed up the situation. From his view investors should stay in the stock market. He reasons that if the Fed unloads it bond portfolio the current 2.1% approximate yield on the 10-Year Treasury is going to fall substantially.

    He is absolutely right of that score but his response overlooks the effect on stock prices.

    We have been in a near decade long bull market, fuel more by ultra low interest rates than economic growth. The valuation on the S&P 500 is the second highest level since 2000.

    If the Fed 3%+ rate target comes to past it runs the risk of slowing future economic growth. If the Fed unloads much of it’s massive bond portfolio, rates will fall and stock investors will demand a higher return. That means lower stock prices.

    Just the possibility of much higher interest rates should create a new level of respect for risk.

    Conundrums and Flawed Thinking

    The Fed has itself in a bit of a conundrum. Unless they maintain the status quo, somebody is going to pay a price. When Robert Schiller advised investors to stay in stocks he was making a classic mistake that investors make that is symptomatic of flawed bull market thinking.

    What we are talking about is greed. When greed takes over, investors become more fixated on how much they plan to make on their investment rather than the risks of loss.

    Safe But Is It The Right Move?

    Where is the safest place for money when long-term bonds and stocks could be headed lower? In the past, cautious investment advisors have suggested cash or short-term maturities. We refer to the advise of others for one simple reason. We are not investment advisors and therefore only seek to give you a look at both sides on this weird condition.

    Another reason we don’t provide advice is that everyone has considerations that are unique to their situation. That unique condition usually involves taxes. For those with lots of long-term capital gains, liquidating stocks could trigger capital gains. So we remain comfortable with offering these observations. Stay thirsty my friends.

  45. Taxes Are Truly Inescapable

    For all of its flaws, we love America. There is not another country like it. Long hailed as the land of opportunity where people from all over the world seek citizenship.

    The rags to riches stories portraying immigrants coming to this country with nothing and working their way to Beverly Hills mansions is fodder for Hollywood.

    People seek the prized Green Card offering permanent residency. If you fit one of the key job categories, you might be one of about 150,000 each year to get a work related card. Marrying a US citizen helps. About 250,000 family related cards are issued every year.

    Roughly 400,000 cards are issued annually. A Green Card is just a step or two from full citizenship.

    Of course there are many more than 400,000 annual applications. This makes American citizenship extremely valuable.

    Record Number of Americans Renounce Citizenship

    A surprising number of citizens however are renouncing their birthrights. Last year, the number totaled 5411; that’s not a big number. Eight years earlier, the number was just 231. This is a big increase. The numbers could quickly double.

    Blame it on the increasingly high cost of living in many retirement areas of America.

    Some studies show that about 20% of retiring baby boomers are moving to more hospitable regions. By that we mean places with nice weather and a lower cost of living.

    Rising US real estate prices are forcing many retirees to look outside. There are endless websites promoting foreign locations where for less than $2000 per month a couple can live royally.

    The IRS Can Spoil A Dream

    If you think filling out US Tax forms is unduly complex, well consider the added burden of being a US citizen living abroad. For all the benefits of cheep living on tropical beaches, there are hidden costs: a maze of tax forms.

    In addition to all of the standard forms you have used over the years the IRS has a special group just for foreign residents.

    It is called the Foreign Account Tax Compliance Act (FATCA) of 2010. If you feel the government suspects you of money laundering or simply evading taxes, you are right: guilty until proven otherwise.

    The fact that you could be just a retiree living on a limited fixed income matters not to the IRS. You are a suspicious person by virtue of your location.

    The first is Form 8938, Statement of Specified Foreign Financial Assets. The second is Form 114, Report of Foreign Bank and Financial Accounts (FBAR). If you are not ready to retire and become actively employed in a foreign country, there is something even more to consider.

    The US is one of very few countries that taxes your income no matter where it is earned. So if you teach English to elementary students in Dubrovnik, you will owe taxes in both places on your teaching income. There are foreign earning tax credits but the filing process can be time consuming and far from simple.

    No Escape: Taxed Even On The Way Out

    No matter how patriotic your leanings, it is understandable why a growing number are renouncing their US citizenship. But if you are considering such a move, those damn folks at the IRS intend to make it as unpleasant as possible.

    First, you should consider the patriotic side. You give up government protection and assistance while traveling abroad, citizenship for any children born overseas and ease of travel back into the US. There is also an involved legal process that will add further aggravation.

    But leave it to the greedy government to add a few other insults. Because of rising number of citizens seeking renunciation, the US State Department raised the cost from $450 to $2350. Then there is also something call the Expatriation Tax that is essentially a capital gains tax on your property.

    If all of this makes you shake your head in disgust, you may want to consider keeping a mailing address in the US and taking regular trips back to America. Either way, Bon Voyage!

  46. Yahoo: Verizon Finally Comes To The Rescue

    Technology can be an evil witch. Take the case of Yahoo. Once up a nanosecond, Yahoo was all the darling of Wall Street hedge funds. Venture Capitalists loved to tout the fact that they invested in Yahoo at a single digit cost. That was back in the 1990’s just as the dotcom bubble was getting going.

    That was then. Yahoo was the undisputed leader; they were early in Search, Yahoo Mail and Chat. The future seemed limitless. Everybody wanted a piece of the company.

    Back then, it didn’t matter much that Yahoo had very few ways of monetizing its business. Advertising was the main source. But, with the exception of banner ads, there wasn’t much going on.

    Only a tiny slice of retail sales were done online. YouTube was an infant. Google was nowhere. Everything was a promise wrapped in a slow speed dial up Internet connection.

    Investors valued companies like Yahoo based on the number of programmers employed that could create the network infrastructure that some day would translate into piles of cash earnings. Every programmer body counted. It didn’t matter if you were any good, there was a job waiting in Silicon Valley.

    Yahoo managed to hire their share of tech geeks. Paul Graham, an early company executive, however, claims the company never bothered to seek the best and the brightest of the hack culture. Yahoo wound up with a techno house of cards.

    Identity Crisis Comes Early To Yahoo

    According to former insiders, it was those annoying but lucrative banner ads that made Yahoo founder Jerry Yang think like a digital media company turning his back on the far greater potential of the Search business.

    Management simply blew this call big time. It seems too many people got rich fat and happy on the passing craze for banner advertising. Technology can be an evil witch.

    Now after nearly a year of waiting Yahoo becomes part of giant Verizon in a new media entity named Oath. Verizon seems to like fallen angels, having already acquired former tech star AOL several years back.

    But, if the best minds in software were not attracted to Yahoo, what will be the attraction of a giant corporation like Verizon?

    After The Deal Closes: Look What’s Left

    Verizon is paying $4.8 billion for the US digital assets of Yahoo. But this is a peanut when you consider Yahoo revenues are about $5 billion. Now instead of racing to hire more programming geeks, about 2,000 Yahoo employees will be cut.

    The public market value of Yahoo stock is just over $51 billion. This figure includes about $35 billion worth of stock in the Asian Internet Company Alibaba and nearly $10 billion in value of Yahoo Japan. The public will retain ownership of these businesses.

    The value of Yahoo’s investment in Alibaba and Yahoo Japan can be easily determined since both companies are publically traded: Alibaba Group Holding Ltd. (BABA.N) and Yahoo Japan Corp (4689.T)

    The performance of these two investments alone have made, Yahoo shareholders a winner. Over the past year the stock has increased in value nearly 45%. Yahoo US looses money and has suffered embarrassing headline making hacks to its system.

    Both of these entities have been far more successful than Yahoo US. For example,

    Alibaba has been growing big time. Company officials place the 2017 growth range between 45%-49%. The real prize is what is being left behind: Alibaba and Yahoo Japan.

    Which Would You Want to Own

    Once the Verizon acquisition of Yahoo’s US digital assets is completed, the remaining company Yahoo will be renamed Alibaba Holdings. If you were an investor would you rather own slow growing predictable Verizon or a dynamic duo of Alibaba and Yahoo Japan?

    Time will tell just how successful Verizon will be in turning around the fortunes of Yahoo. It is doubtful they will change the programming culture inherited from Yahoo needed to bring Oath into the 21st Century.

    The move will succeed in adding to Verizon’s digital advertising reach but the days are gone when Yahoo was the high growth darling that sizzled in the entrepreneurial days of the Internet.

  47. U.S. Stocks Riding Record Highs on Trump Tax Talk

    U.S. stocks set multiple record highs this week, as investors continued to rally behind President Trump’s promise of “phenomenal” tax cuts in the not-too-distant future.

    All of Wall Street’s major stock indexes settled at all-time highs on Friday. The S&P 500 Index rose 0.2% to close at 2,351.16, having gained 1.5% during the week. Eight of 11 S&P 500 sectors finished in positive territory, led by a 0.9% gain in telecommunications services and a 0.7% advance in consumer staples. The consumer discretionary sector also added 0.3%, while information technology rose by a similar amount.

    The Dow Jones Industrial Average closed at 20,624.05, having added 1.8% over the previous five days. Th technology-heavy Nasdaq Composite climbed 0.4% on Friday and 1.8% during the week to close at 5,838.58.

    Markets have been on a tear since February 9, when President Donald Trump pledged “big league” tax cuts in the coming weeks to support American businesses. Earlier this month, the President signed an executive order to begin reviewing the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed into law in 2010 in response to the financial crisis. Dodd-Frank was responsible for creating stricter financial rules regarding bank capitalization, compliance and mortgage lending. It also created multiple bodies councils and curbed excessive risk-taking in the financial markets.[1]

    Stocks have surged more than 10% since Trump was elected on November 8. After initial hesitation, investors quickly rallied behind Trump’s pro-growth policies, which include massive tax cuts, deregulation of key industries and up to $1 trillion in fiscal stimulus. To date, Trump has announced his intent to cut taxes and deregulate the financial services industry, but has not elaborated on his trillion-dollar infrastructure plan.

    Equity markets proved resilient this week in the face of political turmoil facing the Trump administration over alleged ties to Russia. Trump held a marathon news conference on Thursday, where he criticized the mainstream media of spreading fake news and undermining his administration. Trump’s National Security Adviser Michael Flynn resigned this week after it came to light he had spoken with Russian diplomats about sanctions prior to being appointed.[2] In the United States, it is illegal for private citizens to conduct diplomacy on behalf of the state.

    Despite the latest rally, analysts say political uncertainty in Washington will do little to improve stability in the financial markets. Moving forward, investors will be looking for tangible evidence that the Trump administration is following through on its campaign promises.

    The New York Stock Exchange will be closed on Monday for President’s Day. Markets will resume trading the following day.

    The economic calendar has a light release schedule next week, allowing investors to digest the latest political developments in Washington and elsewhere. With Dutch and French elections fast approaching, investors will become increasingly preoccupied with developments in Europe over the next several weeks. The Dutch general election will take place on March 15, while the first round of France’s presidential vote takes place on April 23.

    [1] Gillian B. White (February 3, 2017). “Trump Begins to Chip Away at Banking Regulations.” The Atlantic.

    [2] Sam Bourgi (February 17, 2017). “Dow Jones (DJIA) Futures Pare Losses, Gain 1.8% For Week.” Economic Calendar.

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  48. Global ETF Market Will More Than Double by 2021

    The global market for exchange-traded funds (ETFs) will more than double over the next four years, as investors look to capitalize on broad diversification and deep liquidity in an increasingly uncertain financial environment. The bulk of that activity will be concentrated in North America, creating fierce competition among ETF firms looking to differentiate themselves from an increasingly crowded market.

    By the end of 2015, global ETF assets under management (AUM) reached $2.959 trillion, according to PricewaterhouseCoopers. That represents a gain of 102% over the last five years. The market is expected to top US$7 trillion by 2021, with North America accounting for roughly 84% of total AUM. The European market is also expected to expand rapidly over the next four years to reach $US1.6 trillion by 2021.[1]

    Investors are flooding the ETF market for its apparent advantages over traditional open-ended funds. ETFs provide greater transparency, better tax efficiency and more flexible trading conditions than mutual funds and other investment classes.[2] ETFs also offer broad coverage, which allows investors to buy large sections of the market or diversify across many different sectors in a highly efficient manner. This combination has made ETFs a key driver of retirement planning and wealth generation for investors throughout the world.

    Despite these advantages, the rapid of uptake of ETFs isn’t without its drawbacks. By the end of 2015, there were well over 4,000 ETFs available on the market,[3] placing a bigger premium on due diligence and investor education. With many more ETFs in development, navigating this complex environment can be a daunting task for passive investors or new entrants into the market.

    The industry is also undergoing rapid change as successful ETF issuers embrace emerging technologies in the form of big data, artificial intelligence and social media. This has led to the growth of robo-advisors, which provide portfolio management solutions through custom software and complex algorithms. Like the name implies, robo-advisors operate with minimal or no human supervision.

    Although ETFs are generally considered to be safer alternatives to other asset classes, a certain segment of the market carries greater risk. In 2015, the U.S. Securities and Exchange Commission (SEC) sought to address those risks by introducing reforms related to derivative and leverage products. Certain ETFs are double or triple leveraged, while others offer double or triple inverse exposure. Although these assets can lead to returns that are double or triple the tracked index, they can also trigger losses of the same magnitude.

    ETFs, like other asset classes, offer a blend of opportunity and risk that investors must carefully weigh before entering the market. The growth and widespread adoption of ETFs since their inception in 1993 suggests the market will remain in expansion mode for the foreseeable future. This trend is expected to intensify thanks to globalization, technological innovation and increased volatility in the financial markets.

    [1] PricewaterhouseCoopers (2016). ETFs: A roadmap to growth.

    [2] Fidelity Investments. Benefits of ETFs.

    [3] Statista. Number of Exchange-Traded Funds (ETFs) worldwide from 2003 to 2015.

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