1. 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.

  2. The Illusion of Housing Wealth

    There is nothing quite so comforting as financial security. For a good night sleep or having bright sunny attitude toward life, having a fat financial cushion is pretty awesome.

    For about 62 million American families, financial security comes in owning their own home. Of course there is that monthly mortgage, continuing maintenance and property taxes. There is no way of avoiding these little nuisances.

    For most families, their home is their biggest investment and one that appreciates in value. If you bought your home anytime in the last decade you are doing well. Government data shows that in the last six years average housing prices have risen just about 50%.

    The Millionaires Hood

    The online real estate firm Zillow has even created a new category: the million-dollar neighborhood. In the opinion of many, Zillow may be overreaching in the name of publicity. Their definition of a million-dollar neighborhood is where just 10% of the homes in a zip code have such value.

    Zillow calculates the total to be 1280 zip codes am impressive 37% gain over the past year. We have all come to understand why this is happening. The inventory of unsold homes, recently reported to by 1.9% is the second lowest in 30 years.

    So if you are one of the lucky 60+ million American families who are well ensconced take joy in the fact that if your home is just average, it is appreciating better than 5% annually and that beats the sox off of a bank saving account: pretty nifty.

    One particularly cynical financial advisor I ran into recently described a house as “nothing more than a money sponge on a foundation”. When your money sponge is adding more than 5% a year that will quiet even the most cynical.

    The Flip Side Could Put The Breaks on The Economy

    Housing is one of the key drivers to the US economy. During the years following the financial crisis, rental construction served as the driver of the housing market. Millennials by the bazillions grabbed up new rental units as soon as a leasing office opened.
    The economics of housing are changing. Growing demand is not producing enough supply.

    Millennials are having children. That is a plus for housing ownership. Colleges are still graduating bright young members of the next wave waiting to strike out on their own. That is another plus.

    However, wages are stuck in neutral even though the unemployment rate around 4.3% is low and certain skilled jobs are going unfilled.

    Each of these factors when combined with ultra low interest rates should add up to record days for the home construction industry. Unfortunately this is not happening.

    The Commerce Department report for July showed new home sales declined 9.4 percent to a seasonally adjusted annual rate of 571,000 units last month, the lowest level since December 2016. The percentage drop was the largest since August 2016. Consensus expectations were for a 0.3 percent gain.

    New home sales, account for 9.4 percent of overall housing sales, are volatile month-to-month. Nevertheless sales declined 8.9 percent on a year-on-year basis, the first annual drop since February 2016.

    Economists are now taking note of the number of stay at home kids. This includes everyone over the age of 18 that are still living with their parents. This translates into a decline in the category “family formations”. This has been particularly noticeable over the past two years. This reverses a rising trend in family formations following the financial crisis.

    The Data Doesn’t Add Up

    It doesn’t take Robert Shiller, the Nobel Prize winning economist to see that the data is pointing in different directions.

    In a low interest rate environment with heavy demand and record high prices, home construction should be humming at a record pace. With unemployment at a 10-year low, wages should be moving up. Instead we have declining family formations, home prices that continue to rise rapidly and lots of millennials driving mammoth distances to find affordable housing.

    The US economy is barely hitting 2% annual growth while the stock market seems to be priced for something much more. Keep cozy in your home and enjoy the security.

  3. 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.

  4. 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.

  5. BitCoin or BitCon?

    It has to be the giddiest feeling in the world. Better than a day at Disney World, maybe even better than sex. What we’re dealing with here is the thrill of victory by having had the brilliance to invest in BitCoin at the beginning of this year. Bingo, you just quadrupled your money.

    If you put enough dough into the BitCoin basket, you will rank as one of the top investors of 2017. At least so far in 2017, who knows what follows?

    The value of all 21 million BitCoins at roundly $4000 each works out to over $70 billion. Everywhere news headlines are explaining how this miraculous invention of technology is worth more the value of Netflix and PayPal. Together these two companies have over $10 billion in revenues, tangible assets in the billions and profits as well.

    If you invested in Netflix or PayPal this year, you’ve haven’t suffered with each gaining over 50%. But, with BitCoin, you shot out the lights: a quadruple. Everywhere from water coolers to Board Rooms to Country Clubs everybody is talking about the BitCoin phenomenon. It appears that most of the chatter is about the price performance more than Bitcoins potential to disrupt the world of banking and finance.

    Is The Past Prologue?

    There is no question in the past three years Bitcoin has gone from a nifty technology to acceptance among a surprising number of mainstream financial industry players including JP Morgan Chase.

    There is also no question that the underlying blockchain technology is a work of genius proportions and has lasting value. The question will always remain, how much value is there in Bitcoin. It is worth $70 billion, $7 billion or 7cents. There are no metrics to value the company. Faith is perhaps the single most important reason to account for the highly elevated price.

    We see this phenomenon elsewhere: Amazon, Netflix and Tesla. Unfortunately there is another example: the dotcom bubble. That was the era when companies that did little more than creating and hosting websites were routinely valued in the stratosphere.

    What Do The Critics Have To Say

    The glow around Bitcoin seems to be the fascination behind the spectacular raise in price, but is this really a good thing for broadening it acceptance? Most likely it is a deterrent.

    If you are a business making and receiving a large number of frequent payments, no matter in which currency, you want predictability. How can there be any degree of predictability when prices are rising dramatically on a daily basis. This argument may be weak in a rising price market but what happens, if and when Bitcoin prices take a dramatic dive? It is hard to imagine a situation where there is no harm.

    Here is one possibility that could at least temporarily burst the bubble. What if government agencies like The United States Treasury Department start making noises about taxing transactions or worst applying onerous reporting regulations? There is nothing more sobering than government intervention to challenge the almighty faith in Bitcoin.

    A New Dot Com Every Minute

    One of the distinguishing features of the bubble in 2000 was the proliferation of dotcoms to fill every imaginable service. The cryptocurrency situation is shaping up pretty much the same way. At mid year, one self-proclaimed crypto expert noted there were 847 competitors. More recently the number quoted was 1059. How could there possibly be a need for this many?

    More to the point, if market entry is this easy, how can such an astronomical value be placed on Bitcoin and Ethereum: it can’t, there is no justification whatsoever.

  6. Concubines of An Unusual Kind

    When the mass media isn’t responding to President Trump’s venom with its own venom, they can actually produce some thought provoking stuff. Take the New York Times for example.

    The paper is doing a video focus piece with the bland title: Life on Mars. The project is a NASA backed 8 month long test of “team cohesion” using six young scientists and engineers, four men and two women.

    The group is ensconced in a tightly configured space capsule built into a volcanic mountain in Hawaii. The idea is to simulate the Mars environment in everyway possible. For example anytime any of the crew leaves the capsule, they are required to wear awkward protective suits that make them look more like firefighters than space cadets. The terrain is bleak at best, totally lacking in vegetation.

    The 8-month project corresponds to the approximate 228 days it took the spacecraft Mariner 4 to make the trip. The difference: Mariner 4 had no humans aboard.

    The experiment has been underway for a while and some initial impressions have been given to questions presented by NYT readers. Mission biologist Josh Ehrlich mentioned missing the feel of wind and the smell of grass.

    When mission specialist Brian Ramos was asked a question “about romance” he quickly insisted how they were all professionals, there was much work to be done and they were all very busy.

    This seems like a very relevant question given all the publicity these days about sexual harassment. Brian’s answer: not so much.

    Are You Kidding Me

    But if it takes 8 months to get to Mars, it takes the same amount to return and that is only if you are the bus driver dropping off passengers. That’s lots of Saturday nights without Boogie Nights. After all, we are dealing with human beings.

    Comedian Jerry Seinfeld claims a man cannot go more than two minutes without thinking about sex. Do the arithmetic, how many two-minute intervals are there in 8 months?

    If you were the husband of one of only two female mission specialists, how would you feel about sending your spouse to live with four men?

    Vice President Mike Pense won’t even have dinner with any women other than his wife.

    Big Issue For Employers

    Team cohesion as NASA terms it, is not just an issue for Mars travel; it is a big time headline-making news. Men and women work side-by-side, sometimes shoulder-to-shoulder in today’s modern workspaces.

    By itself, that can make an uncomfortable situation. But in light of the harassment scandals at Fox News things have gone to a whole new level. It has people scared.

    More than 25% of office workers are afraid to even have a one-on-one private meeting in the office with a member of the opposite sex; things are getting really scary.

    A recent survey conducted by Morning Consult for the New York Times makes exactly this point. What is causing the fear? Are women becoming concerned that harassment is around every corner? Are men fearful of being accused of harassment every bit as much? Or worse yet, is harassment pervasive?

    Almost half of the survey takers believed it is not appropriate to even have lunch together. That is usually a pretty safe venue and common in many companies. When it came down to having a drink or dinner, there was overwhelming negative response.

    But in some pretty innocent things like riding in a car together nearly 40% deemed this inappropriate. It seems a long way from the world of the anything goes 1960’s.

    The NASA project is just getting started so it will be revealing if the same set of questions could be presented around New Years Eve. That is when the true test of cohesion can be measured. In the meantime, until Artificial Intelligence comes up with a real solution, stay safe.

    This fact underlies the entire basis of ESPN. It is shear genius that SportCenter schedules programming and commercials in perfect sequence to accommodate this phenomenon. But even in this increasingly mobile world, what happens when there is no ESPN?

  7. Oh The Fantasy Of College Graduation

    It’s that time of year when kids graduate from college. Parents swell with pride and sigh with relief. The most expensive parts of child rearing are behind. Bedrooms once filled with little league participation trophies get converted into man caves and vacations, long delayed, now get launched. All is well in Pleasantville.

    With the exception of a small percentage of America, this image of course is a fantasy. In the real world sons and daughters stick around the house while searching for their first real jobs and trying to figure out how to budget for their first apartment and the burden of paying off their student debt.

    There is a lot written about the Student Loan crisis in America these days, but precious little actually being done. Here are some of the ugly facts behind this crippling problem.

    In 2010, student loan debt exceeded credit card debt for the first time ever. By 2011, student debt exceeded auto loans. Various estimates place student loans in excess of $1.2 trillion.

    By our calculation, the average student loan is over three times (per capita) that of credit card debt. This is bad for the health of America.

    There are over 37 million students in hock up to their ears according to government numbers. As of 2015 over half were in deferral, delinquency or default.

    Here is a key point. For every borrower who defaults, at least two more become delinquent. In other words, the trend is going in the wrong direction.

    Since Student Loan default can result in all types of legal action including wage garnishment for anyone who signed or cosigned for their child or for a relative of the child, this is far more serious than a delinquent credit card account. It can drain the assets and wealth of the nation.

    Agreement Everywhere, , , Action Nowhere

    Virtually everyone agrees there is a massive problem. Imagine, what would be the affect on credit markets and the whole US economy from a $600+ billion default? That would be more than a little ugly.

    For all the talk, almost nothing is being done. Government aid to education isn’t going up. Tuition is increasing faster than inflation. A college education is less and less affordable every year.

    Watch Out: The Piranha Fish Will Eat You

    The one area where a need for change exists, but is being largely ignored is in the Student Loan servicing field. What we are referring to are those telemarketers that promise to renegotiate or even slash loan principal or monthly payments.

    This is one industry where increased government regulation would be a good thing.

    We are talking about fraudulent debt relief companies that charge subscription fees of $200-$350 per month using high-pressure tactics employing dozens of unqualified telemarketers.

    Various sources place the number of student loan debt relief Piranha’s between 125-140. We are not suggesting these are all crooks. Some are but either way; most are not able to deliver on the results they promise.

    Of the total number of these operators, less than 7% have been closed down. There are at least two agencies responsible: The Consumer Financial Protection Bureau CFPB and the Federal Trade Commission. The CFPB is the group set up after the 2008 financial crisis to protect everyday consumers. So far neither agency has accomplished anything.

    The nature of these Piranha fish, with their online and call center selling techniques, makes it hard to prosecute the worst offenders. Often call centers are equipped with non-traceable numbers. If one is closed, the same people can pop up elsewhere with a new website.

    Monies thrown into these fraudulent schemes means even less going into actual debt repayment. When default takes place it does great harm to a students ability to establish credit and to have the funds for that first apartment.

    It can be every bit as crippling to relatives who cosigned for student loans. There are horror stories of asset garnishments from grandparents living on fixed income who have lost parts of their social security income. If Donald Trump wants to make America great again, it’s time to appoint some attach dogs at the CFPB.

  8. Telecommunications: its Days Are Numbered

    Telecom stocks are the worst group in the history of the world. Well maybe that is offensive. So like Kathy Griffin, Bill Maher and Stephen Colbert, I will apologize. I used the politically incorrect term, world. Let’s start over.

    Telecom stocks are the worst group in the history of the first half of 2017. The S&P 500 Telecom Sector is down 10%. Ok, there now that’s better. Still, a 10% drop in a market that has risen 9%, I am sorry but that just sucks.

    Things are so bad that The Standard & Poor’s Corporation is actually thinking of eliminating the Telecom Index altogether. So let’s take a look at why this is happening and see if we can find some hidden values that investors are overlooking.

    Going, Going Almost Gone

    S&P’s consideration in eliminating the Telecom Index is based on the reality that it isn’t worth saving. To be an Index, there has to be stocks. All the way back in the 1990’s there were 17 stocks in the Index. Today there are only 4 and that may be reduced further in the coming months.

    If so, it would leave AT&T, Verizon and Century Link as its only members. Mergers over the past 25 years have whittled the numbers. S&P might consider adding T-Mobile to the index, but Japan’s SoftBank is already pursuing it.

    The very monopoly that the United States Congress broke up in 1984 (AT&T) has come full circle in 2017.

    Wireless Pressures: The Squeeze Is On

    In the final analysis, just AT&T and Verizon are the big factors in how the S&P Telecom Index performs. The common thread here is the health of the wireless business. It been great for years but now new forces are at work.

    Cord cutting, the act of shifting from fixed location viewing on cable TV to the Internet and mobile devices is pushing demand for AT&T/Verizon mobile services to record levels.

    Add to that the public’s entire fixation on texting not to mention the upsurge from SnapChat, Instagram, as well as the enhanced video sharing capabilities of Twitter and Facbook and you have demand that is exploding.

    In telecom language that means there is a shortage of bandwidth and that spells the need for big investment bucks at the AT&T/Verizon duopoly. Ok, no big deal, it just a matter of money and then getting a return on that investment. Not so fast, here is where the squeeze comes in.

    After researching the topic we learned that wireless prices have fallen 13% over the last year. Seems like those “Unlimited Plans” have been wildly popular with everybody but company profit margins and the investors that have been watching.

    Ouch! Was this an economic faux pas? In the short run, it may turn out to be but there may have been other considerations like competing against the big cable giants.

    On one side of the coin, people have abandoning cable because of its high cost. Yet, under their old plans, for AT&T/VZ to provide enough bandwidth for all that incremental video would certainly have run the average consumer bill through the roof. Either way, the short-term focused stock market isn’t exactly thrilled.

    The Hidden Nuggets

    If the S&P Telecom Index does go the way of the Sony Walkman, the rules committee at Standard & Poor’s will probably merge it into the Utility Index where it properly belongs. This is where investors will find greater joy.

    This is when the overlooked value of AT&T/Verizon will receive greater attention. The value is in the dividends. Both stocks sport hefty 5% dividend yields. And they have enough cash to continue growing the payout in the years ahead.

    These two stocks may not be as risk free as the 10 Year US Government Note but these days the government is only offering about 2.2% and the government is over $20 trillion in debt.

    We aren’t in the business of making investment recommendations, just observations. You can, and should, consult a qualified investment advisor for their recommendation. With a new unlimited plan, you can talk to them all you want. You can even share photos.

  9. Housing: Stalled Or Billion Dollar Bust?

    Home ownership is at a modern low of 63%. This measures all families. Among millennials, it is even less: 34%. This second figure and the sheer number of young families is what has homebuilders and lots of real estate agents buzzing.

    For the past few years the young generation has been having kids about as fast as Pampers can make diapers. With ever more bodies crammed together, tiny rental apartments don’t cut it anymore. So there is seemingly plenty of demand for real adult type homes.

    But is this enough to translate into actual home buying? There are some serious people who uncovered a problem that could be a deal killer.

    Warning Signs

    The housing market hasn’t exactly been looking good lately. Pending Home Sales fell in March and again in April. Altogether the index is down 3.3% from April 2016.

    If you listen to the propaganda, the weakness is all about a lack of supply. There is more to it, however. It is all about money. Those who want a shinny new home with granite counters and stainless steel appliances don’t have the dough to make it happen.

    Savings Anyone?

    According to the always-reliable US government figures, the saving rate has recently been increasing and now stands at 6.0% its highest level since 2012. That makes for good headlines for CNN and USA Today. Unfortunately, this headline is tricky and deceptive. In other words, it’s truly fake news.

    The truth is that for a very long time Americans have been saving less and less. But how much less required some independent searching and calculating.

    Free Spirited Savers

    After some effort, it became clear that those free spirited hippies back in the 1970’s had the right idea about saving. In fact, those dudes were stashing away upwards of 18% of their average income. Incomes back then were only about $14,000 so roundly $2350 went into the bank.

    Advance to the digital age of 2017 and incomes have quadrupled to $56,000 but with a saving rate of 6%, the average family is putting away less than $3400. This doesn’t get you very far.

    Translation

    If you are a speculative homebuilder this should be scary news. The average home price in America these days stands at $256,000. A standard 20% down payment for a conventional 30-year mortgage is $51,200. Fortunately several new FHA programs permit down payments as low as 3% or about $7700.

    Even at the 3% level, this means it takes at least two years average savings to meet even the lowest down payment in just the average neighborhood. But now comes the big surprise.

     

    Most First Time Home Buyers Have Nada

    The real estate website Apartments.com recently released a survey of millennials who visited their site.

    What they found was not good news.

    Almost 50% of people under 30 years old, had saved nothing at all, zip! Over 90% of survey takers had saved between zero and $8,000 toward a down payment.

    This is a measure of historic behavior, what about the future?

    When asked, how much of your current income are you now saving for use as a future down payment, 40% said zero while 40% were saving less the $600 per month.

    Truth or Survey Error

    Surveys and averages have one thing in common. They can both be very deceiving. Online consumer surveys can be especially deceptive because there is no way of assuring the quality of the sample. Some people take surveys to earn extra money for example. So it is reasonable to question the validity of the results.

    Similar criticism can be thrown at averages especially when it comes to incomes.

    Silicon Valley and Wall Street starting jobs are many times greater than average. But, there is a reason for that. The cost of housing is many times greater than average.

    Real estate experts claim the problem with rapidly rising home prices is a shortage of supply. It is possible we are seeing the economic anomaly of a shortage of both supply and demand.

  10. Note To The Press: Stop Picking On Donny

    It was inevitable after verbal nuclear war broke out between the candidate Donald Trump, and the news media. It was particularly short sighted, if not stupid, for Trump to personally insult the New York Times.

    But in the context of nuclear history, if the Japanese knew the consequences of Pearl Harbor things might have turned out differently. Once you start a war, there are causalities.

    Trumps take no prisoners approach to the press makes the late comedian Don Rickles look like an amateur.

    The provincial thinkers at the NYT deserve Trump’s vitriol but these guys and others like them are the ones with much of the power. And they have no intention of letting anyone forget that.

    The “upper flap” as it was known before online journalism took over, is the place reserved for the publisher to place the day’s most important events. Since Election Day, the upper flap has had nothing but sensational headlines related to The Donald.

    Not since the late days of the Nixon administration has the press been in such attack mode. In a White House press conference an NBC report claims the following question was asked. How many impeachable offences has the President committed since being in office?

    Nobody ask Nixon that question until the infamous “smoking gun” tape was discovered. By that time Nixon was well into his second term.

    No More Political Correctness

    The press claims that POTUS is constantly shifting positions and drifting away from campaign promises. Well one promise he made was to put an end to political correctness. That promise has been entirely fulfilled.

    If Trumps recent shoving of Prime Minister Dusko Markovic of Montenegro at the recent NATO meetings or his trash talking of Angela Merkel you get the feeling that maybe Donald thinks he still dealing with the New York Generals of the World Football League.

    Yes, we all know, Trump is a bully and brings more misery to his doorstep that is necessary. He can’t help it; he is a narcissist and that the way that narcissistic thinking operates.

    The Russians Are Coming: Who Cares?

    Political correctness is out of style and nowhere has the fall out been more damaging than with the mess over Russia. The public felt the last Congress accomplished almost nothing. By the time partisan investigations are through with this topic it may be presidential election time once again.

    The conspiracy theories have sold more newspapers and filled more television news than all 50 SuperBowls.

    There are several questions that have eluded observers. There is a conspiracy mania without anyone asking if there is anything seriously illegal to prosecute?

    In the 2016 cyber world of spying it would be unthinkable for the Russians to not try to influence the outcome of the American election to a candidate they favor. There is hardly any doubt that American Intelligence has done the same thing during the Russian elections. The Russian system is more difficult to influence since it is basically rigged in favor of Putin.

    The only difference with the past is that the level of cyber spying has become more sophisticated but in the end it is a game that is played out on a world scale. Trump continuously attacked the Trans Pacific Trade Agreement and the Chinese in particular during the election. So there is practically a guarantee that the Chinese were working to the benefit of the Clinton campaign.

    What Laws Have Been Broken 

    For all the noise, what laws have been broken? If former National Security advisor Michael Flynn failed to register as an advisor to a foreign government, ok, that is a crime: a misdemeanor.

    Now the focus in on contacts made between the Trump transition team and the Russians. According to the White House version, Jared Kushner attempted to establish a back channel with the Russians, presumably to help accelerate communication when the Trump administration took over on January 20.

    There is no law that prevents a private citizen from communicating with a citizen of another country. It is part of the First Amendment. Other than political fodder, what is the reason for FBI and Congressional hearings?

    Intuitively, we know the answer, this is the way Washington DC operates. The swamp still needs to be drained. It is filling up faster than anyone expected.

  11. Narcissism Sells Newspapers

    It has gotten totally out of hand. Nary a day passes when the “upper fold” of The New York Times isn’t smothered with headlines about Donald Trump. It’s not about policy, the Times attacks are personal.

    It is POTUS’ own fault for picking a fight with the media in the first place. Since this uncivil war started, the slogan “all the news that’s fit to print” has become More Opinions Than You Care to Hear.

    This sort of thing might be expected from the Washington Post. After all, they cover the political capital of the world.

    In true narcissistic fashion, the world attention has been centered on and monopolized by one person. Since Election Day the stock price of the New York Times Co. (NYT) has gone up over 49%! That is far better than the 7% rate of the general market, confirming that narcissism sells newspapers.

    There is a whole other world out there that is getting largely ignored while the FBI figures out the real news from the fake stuff. Thank goodness they are on the case.

    What Has Happened With The Fed

    Take the banking industry for example. Theses are the stocks that comprise the S&P 500 Financial Sector. In the 30 days following Election Day 2016 the group shot up 22% leading the charge in the so-called Trump Rally.

    Since then, they have been absolute duds increasing only about 1%. If you’re like me and got caught up The White House nonsense, you probably forgot that the United States Federal Reserve still exists.

    A lot is going on there that they want to keep quiet.

    A year ago at this time the investment world was glued to each and every FOMC meeting. The battle of wills between Fed Chair Janet Yellen and descenting opinions by various Fed Governors over the need to raise interest rates.

    Interest rate hawks believed that all the liquidity, about $4 trillion, Quantitative Easing added to the monetary system since 2009 was inevitably going to create massive inflation. The other side of the interest rate debate claimed that economic uncertainty was still great and that was enough to keep rates low.

    Economic reports so far this year have somewhere between luke warm and sucky.

    But there is a lot more to the story than just economic growth.

    Is The Fed In A Corner

    The Fed is in an awkward spot that promises to keep rates artificially low for the next year no matter what the economic reports reveal.

    Bankers and investors in bank stocks cheered the idea of higher rates for several reasons. Bankers love a steep sloping yield curve. For example, if they could pay their depositors 1% and turn around and invest that money at 5%, they would be happy campers.

    Problem has been, for the last several years, the yield curve has been skinny and that has hurt profits and stock prices.

    The other reason banks would welcome higher rates is they get paid more on their “excess reserves”. This was a new little feature that was thrown into some of banking reform legislation after 2008.

    One source at Forbes Magazine estimated that if the Fed increased rates to 3.5% for example, they would owe companies like JPMorgan Chase and Citibank as much as $100 billion. That could cause a lot of political as well as financial problems.

    Of course, when investors pieced together the idea that the Trump Administration would roll back a lot of the stifling regulations enacted in 2009 plus higher rates, whamo, higher stock prices.

    Everyone knew that the Fed had amassed trillions ($4 trillion at latest count). Their balance sheet was out of whack, way too much debt. Some day a rebalancing had to take place. Most investors put of the day of reckoning until sometime much later in 2018.

    The position of the Federal Reserve is quite odd. On the one hand, there is a case for multiple rate increases this year. Yet an increase of anything more than a token amount could hurt their efforts to restructure their balance sheet.

    What is likely to happen? Well the fact that bank stocks that would benefit from higher rates have been almost unchanged since the start of 2017 tells you pretty much how market professionals view things. So if you are of the mind the rates are heading substantially higher than the beleaguered banking group may be worth taking a peak at. Sometimes betting against the crowd can work out and this time the crowd is definitely against you.

  12. The Market At Mid Year: What You Need To Consider

    How is it possible that the first half of 2017 is near the end? How did it happen so quickly? It seems like yesterday we were inaugurating a brand new President of the United States and whamo; already there is talk of impeachment.

    You’ll not hear of word of that impeachment tslk from investors. For these folks, life could hardly be better.

    The market is setting next records. Traders are still calling it the Trump rally in spite of all the troubles and public controversy at The White House. You have to go back to 2000 when the NASDAQ was at 5000 to find both high stock prices and unbridled investment optimism.

    The Nobel Prize winning economist Robert Shiller recently stated, “ With a little help from President Donald Trump’s pro-business proposals, it’s not hard to see the market surge 50%”. Wow, that would be truly huge.

    This is no off the cuff remark. In 2000 Shiller published the book “Irrational Exuberance” that correctly warned of the overvaluation of stocks and the pending crash. So there is some gravitas here.

    Caveat Emptor: Keep in mind Shiller’s most important qualification: the need for Trumps pro-business proposals. There is a world of difference between Trumps proposals and getting any of them through Congress. So far POTUS doesn’t have much of a batting average. 

    If you follow Shiller’s advice you will be holding on to your stocks. With still a little time to go before the first half is over, the S&P 500 has provided a return of just over 7% so far. This is almost as good as the market does in a full year.

    Technology Good, Oil . . . . Not So Much

    And what have been the top performers? By far it has been technology (18%). Consumer Discretionary and Healthcare tied for second at a distant (9%).

    For so long the four FANG stocks, (Facebook, Amazon, Netflex and Google, dominated sector performance. But this year it has been semiconductor companies getting the attention. This includes stalwarts like Advanced Micro Devices and Micron Technology as well as names like Qorvo.

    Just when you thought everything you touched contained some sort of tiny computer chip, along comes the Internet of Things and autonomous vehicles. These miracles use even more semiconductors that ever.

    With all the public awareness of cyber security, names like Symantec, Palo Alto Networks and that entire genre of stocks is making a run for the top. No wonder the group has been a standout for investors.

    On the other end of the performance spectrum, investors have been deeply disappointed by energy (-10%) and telecom stocks (- 11%). It is one thing to underperform on a relative basis in a rising market. It is another thing altogether to loose money in one of the more dynamic periods for the market in a while.

    The most surprising results come from the financial sector that has risen only a bit more than 1% so far. What makes this so disappointing is the combination of Trump pro growth; anti regulatory rhetoric and the expected increase in interest rates expected this year. Financial stocks have been in the dog house for a long time.

    Which Way To 2018

    So the next question is, what to do from here. Should you press forward with your brilliant decision back in January to overweight your portfolio with technology or should you finally pull the trigger on some of those deeply distressed bank stocks?

    It’s not our business to dish out investment advice so we turned to one group that does: UBS Wealth Management. They are in the camp of market optimists at least for the rest of this year. They think it is time to shift from growth type stocks (like tech) to value type stuff. And guess what, they are particularly keen on energy and financials.

    We pass this information along with the reminder that there is always more than one opinion to consider. But when the market is setting record highs on a frequent basis, it is easy to get caught up in the excitement and chase the biggest winning stocks. This is where value investing can save you lots of headaches in the event of a market correction.

  13. U.S. GDP Growth Slows to a Crawl as Consumer Spending Cools

    The U.S. economy barely expanded in the first quarter, as consumer spending slowed to multi-year lows in an apparent setback to President Trump’s plan to boost the economy.

    Gross domestic product (GDP) expanded at an annual rate of 0.7% in the March quarter, the weakest in three years, the Commerce Department said in a preliminary estimate on Friday. The reading fell short of modest forecasts calling for a 1% increase.
    The economy grew at a disappointing 2.1% annual pace in the fourth quarter.

    Consumer spending, which accounts for more than two-thirds of economic output, expanded just 0.3% in the first quarter. That was the weakest since 2009. Although the milder winter weather was partly to blame for the slowdown, rising inflation also hit consumers’ wallets. Inflation, as measured by the consumer price index (CPI), averaged 2.4% on the quarter – the highest since 2011.[1]

    The weak GDP added to skepticism over President Trump’s plan to grow the economy up to 4% annually. The Republican administration, which marks its 100th day in office on Saturday, has experienced multiple setbacks getting its agenda off the ground.

    On Wednesday, White House officials presented a preliminary sketch of a proposed tax-cut plan that was billed as the largest in U.S. history.

    “This is going to be the biggest tax cut and the largest tax reform in the history of our country and we are committed to seeing this through,” Secretary of State Steven Mnuchin said Wednesday in outlining the proposed reforms.

    Under the new guidelines, the top corporate tax rate will be reduced by 20 percentage points to 15% and a one-time levy will be placed on the $2.6 trillion in corporate profits held overseas. The reforms would also adopt a territorial tax system, which means most international profits earned by U.S. companies would not be subject to domestic taxes.[2]

    Personal income taxes will also be streamlined under the proposed plan by reducing the number of brackets from seven to three.

    Though good for business, the plan will run into stiff opposition from congressional Democrats, who are no doubt wondering about how the cuts will impact the deficit. Analysts say the tax plan would result in a massive revenue shortfall that the administration believes can be filled by stronger economic growth. Given the current state of the economy, expecting such a large pickup in GDP growth is difficult to justify.

    In its most recent projections, the Federal Reserve forecast GDP growth of 2.1% in 2017 and 2018, followed by 1.9% the year after that. Policymakers said the long-run average is likely to be 1.8%. Those estimates are around half of what Trump is banking on.[3]

    ________________________________________
    [1] Reuters (April 28, 2017). “US first-quarter growth weakest in three years, as consumer spending falters.” CNBC.
    [2] Sam Bourgi (April 26, 2017). “White House Announces “Biggest Tax Cut” in U.S. History.” Economic Calendar.
    [3] Federal Open Market Committee (March 15, 2017). March 15, 2017: FOMC Projections materials.

  14. Retirement Heaven: Are You Kidding

    Retirement Heaven: Are You Kidding

    The legendary comedian Groucho Marx once said, “ I would never want to be part of any organization that would have me.” The back-story to this quip is even more amusing than the line itself, but that story will be saved for another occasion.

    A survey by the Insurance giant Allianz Life reported the other day by CNBC revealed that almost half of Americans said the were “very concerned” or “terrified” about where is the best place to live in retirement. We noted in a recent article how many baby boomers are choosing to simply stay put in their own homes. This is especially true if the mortgage is paid off.

    Government numbers tell us that inflation has been practically non-existent for years, but we all know better. The mortgage may be paid off but in many locations, property taxes keep going up far faster than the general index of prices. Then there are things like the ever-higher cost of food and prescription drugs etc, Oy vey!

    To your rescue comes WalletHub.com that compared the retirement-friendliness of all 50 states ranking each on the basis of Affordability, Quality of Life and Health Care. Guess what state was number 1? Of course, it was Florida.

    To paraphrase the late Mr. Marx, there is no place that you could afford to live that is suitable for human existence. We don’t wish to offend anyone; we’ll just let the numbers speak for themselves.

    How about the great state of Texas? It ranks 3rd highest in affordability, 36th in quality of life and 44th in healthcare. With no offence to the lone star state, Texas offers a variety of temperatures from wintertime snow and ice to summer time parching heat. Oh yes, and then there are those delightful springtime tornadoes.

    We don’t need to mess with Texas because nearby Oklahoma is just as bad on quality of life and healthcare, it just costs more than Texas.

    Then there is other side in states like Massachusetts and California. In the land of Plymouth Rock you will find the 3rd highest quality of life and 10th best healthcare. You may also have to sell a kidney every once in a while to afford the nations 3rd highest cost of living. Ditto that for California but at least there is surfing and recreational weed is legal. (The weed factor was not considered in the WalletHub survey possibly explaining why California quality of life ranked way down at 8th.)

    Thinking of Going Global?

    There are lots of folks that would apply Groucho Marx’s adage to living outside the US. Sure it’s ok to go on a wild international vacation to foreign speaking places like Puerto Rico but to actually stay in a foreign country. . . . Nunca! Jamais! Nie! Mai!

    On the other hand, if you like the Florida climate but prefer greater demographic variety, InternationalLiving.com has a list of the Worlds 10 Best Places To Retire.

    Not a single name on the list comes from a US location. That could be because most of the places on their list have a lower cost of living than Florida and in some cases the healthcare comes at high quality levels and very affordable prices. For example, in the 10th ranked location, Malta, the cost of a general practitioner visit usually costs around $20 while a specialist may run up to $65.

    Great weather seems to be the common denominator with 7 of InternationalLiving’s top picks in Central and South American locations like Panama and Ecuador. However, if Europe is in your thoughts Spain ranks 7th with great scores for healthcare and giving expats a sense of fitting in. Closely behind is Portugal in the number 9 spot.

    With all the unrest in the world you may have second thoughts when it comes to safety. The image of Americans in certain parts of the world isn’t exactly favorable and friendly. And then there are some countries that just have an unsafe reputation. So when it comes to the country that ranks #1 on IL’s, it is none other than Mexico edging out Panama by the slightest of margins. So if you aren’t a drug dealer or get involved with one, and gravitate toward popular tourist areas, safety risks are pretty minimal.

    So if you are ready to toss aside old notions and looking for something that even Mr. Marx might consider, you can check out the full details at InternationalLiving.com.*

    * We have no financial or other interest in any publication we reference.

  15. Millennial Baby Bumps Are Bringing Changes

    We have made the observation lately on the growing number of millennial mothers pushing baby carriages while proudly displaying their latest baby bump. This can only mean one thing. It’s time to move out of the overcrowded apartment and into a real home. Great idea but as first time home buyers with loads of student debt and not much cash in the bank for a down payment, that’s two strikes against you even before you contact your favorite real estate agent.

    It’s springtime and that is prime home buying season. Everybody engaged in real estate is standing by with their list of helpful hints. No matter what your needs are somebody has a top 10 list for the best and worst of everything.

    The website Niche.com recently compiled their list of the best and worst cities for Millennials. Their criteria are supposedly based on availability of good jobs and affordable housing. It is a bit of a stretch putting these two features together. For example, their top 10 places include the likes of San Francisco, Cambridge Mass, Arlington and Alexandria Virginia. These cities had better offer great jobs because they are among America’s most expensive cities. In fact ultra high cost applies to 7 of Niche.com’s top 10 cities. Good luck following these recommendations.

    Housing In Short Supply:

    In the period following The Great Recession, housing has been in short supply and no matter where you want to buy, that is a bummer. If you take away the number of housing units that hit in the post 2008 foreclosure wave, housing supply is dictated by turnover for reasons like job changes that require relocation and new home construction.

    For homebuyers neither of these two forces have helped their cause. Connor Dougherty at the New York Times authored an informative article recently. The title tells the whole story. It reads, “Real Estate’s New Normal: Homeowners Staying Put”.

    New home construction has picked up more recently after developers have had a love affaire with rental housing construction for the previous six years. At the moment, there is a lot of catching up before any equilibrium is achieved.

    Don’t Loose Hope

    If all this so far sounds depressing, well it is. But not to loose hope for some things are happening to make first time home buying work for you.

    The government is finally getting around to providing details of a plan first put together several years back. What this does is to lower down payments for certain first time homebuyers from 20% to as little as 3%. This program is controversial coming in the shadow of the 2008 financial crisis but then we are talking about a government that has a short memory.

    The lowest cost way to finance is the 30-year FHA insured mortgage. The FHA has a cap on the amount they will insure. In the past the limit was a fixed amount of roundly $417,000. But new more flexible rules have been adopted. The new limits are based on prevailing market prices in each state. This is an important and welcome change especially in those top 10 cities in the Niche.com rankings.

    It finally appears as though government policy is out to help stimulate the economy realizing the key role that housing plays in GDP. Is the ultimate solution? No but something is usually better than what their attitude has been since 2008.

    Another hopeful sign is that the labor market is definitely getting much tighter especially for high skilled jobs in engineering and other technology related areas. Companies recognize that finding affordable housing can play an important role in landing prized talent. One real estate agent we spoke with claimed that Google was cutting deals with major developers in southern California to provide ultra low cost housing to employees and may even be considering moving some of it’s high cost workers from Silicon Valley to Silicon Beach. So don’t get discouraged first time home buyers.

  16. CyberSecurity: The Best Job In The World

    I remember it like it was yesterday. There I was about to finish high school sitting at the breakfast table wondering aloud what to do about college and life thereafter. My mother blurted out ‘dermatology’. I was thinking something far more glamorous like a Wall Street titan. But I politely demurred asking what in the world possessed her to come up with a life filled with skin rashes for her youngest son?

    Well, she started; doctors make lots of money. Dermatology is a very clean business, no yucky blood like you have with surgery. Nobody ever dies so you don’t get sued. You treat skin rashes that never seem to go away so when you treat a patient one time, they are yours for life. I had to admit, she had a point, but I found my way the Wall Street anyway.

    Fast Forward

    Today my advice would be different. Not that dermatology is bad, but there is something that is even better: CyberSecurity. The recent global attacks underscore how CyberSecurity is the dermatology of the present and the future. Cyber War is unending, just like a skin rash. The battle continually escalates but never ends. There is likely be a cure for Eczema before the Cyber War ends.

    CyberSecurity has been around for as long as the Internet. After more than 25 years, a few giants usually dominate a technology sector. Not CyberSecurity. If you Google the topic, you will find a list of no less than 500 that are considered to be the worlds hottest and most innovative companies.

    Money doesn’t seem much to matter considering the first really big cap company on the list, Lockheed Martin is ranked #7 and long time giant Symantec barely makes it into the top 10 whereas IBM ranks #12 and Cisco #13. This means anybody with enough computer skills and a creative mind can get into the game. Remember, you never have to fix anything, just treat the symptoms.

    For those interested, the full list of companies and how they are rated can be found on www.cybersecurityventures.com. There are a good number of public companies that offer investment opportunities. Be sure to check out the list soon, with the cyber attacks, investor interest in the group is sure to spike.

    The obvious conclusion to be made here is that there are so many nooks and crannies in CyberSecurity equation that there is plenty of room for all, large and small. Not even dermatology can offer that many opportunities.

    One of the more perplexing questions raised is the role the cloud is playing in CyberSecurity. The idea of transferring massive amounts of dispersed data from millions of computers into a few gynourmous data storage centers, referred to as “the cloud” is comparable to people taking their money out from under the mattress and putting it into banks. It’s easier to rob a bank than to disturb each of their customers.

    Big cloud providers that include Microsoft, Amazon and many more will be quick to call my concerns stupid. After all their CyberSecurity team consists of the most advanced software on the planet.

    And we should not forget the United States Federal Government agencies that not only have to ability to hire and train some of the brightest tech minds but the budget to test fly any CyberSecurity software.

    But then, wasn’t it our very own NSA whose computers were hacked and malware filched in creating the latest global attack? Turns out the NSA was using an old versions of Windows that is no longer supported by Microsoft. Whoops’, well we would have all been better off if the government had all of it secret stuff stored on an Apple II. Now it is time to upgrade the government system.

    So to all you geeks out there that have been wasting time on developing the latest variation of Game of Thrones or developing another new app, think CyberSecurity, it really spells JobSecurity.

  17. Veritone, Inc. (VERI)

    Is there anyone, anywhere who doubts that Artificial Intelligence (AI) holds the most transformative potential the world has yet to record? That may be a bit of hyperbole but time will likely prove this to be a pretty accurate statement. For investors today, AI is the lightning in a bottle that gets instant attention.

    Take the case of Veritone Inc. the Newport Beach California software company.

    The company claims to have developed a proprietary AI platform that can take raw audio and video data, analyze it and in almost real time generate “actionable intelligence”. In other words, it makes fast business decisions that provide the user with a competitive advantage.

    Veritone March S-1 filings make the point that their AI platform incorporates proprietary software that mimics human cognitive functions such as perception, reasoning, prediction and problem solving in order to quickly, efficiently and cost effectively transform raw data into an actionable outcome.

    The Forecast: Clouds Everywhere

     Veritone is a cloud based open ecosystem. This is technobable for software that can work with any company anywhere, no matter what operating system is in place. Veritone also offers a group of applications that enable corporate customers the opportunity to customize the platform to match specific needs.

    Before singing the laurels of AI or Veritone any further, one important thing needs mentioning. Now only is AI evolving rapidly but the history of companies in the software business claiming to have proprietary software is hardly unique. The technology graveyard is filled with them. Remember Sun Microsystems and Java?

    Targeting The World

    Veritone has some big ambitions. Their mission is to deploy a Software-as-a-Service (SaaS) business model for enterprises of virtually any size using the benefits of a cloud-based platform that integrates “multiple cognitive engine capabilities into a single platform”. Even if you are not a techno-geek, you must admit, they make it sound like they have all the bases covered.

    From the viewpoint of an objective observer, one of the nice little features of the SaaS business model is the recurring nature of the revenue stream. When combined with the normally high profitability of software, there are a few things to like about Veritone even though the company has only been in business since 2014 and has all the business operating challenges of any fledgling company.

    Not only is Veritone aiming for customers in virtually any size category, they believe their software can be tailored to a broad range of industries that capture or use audio and video data, including, without limitation, media, politics, legal, law enforcement, retail, and other vertical markets. That includes a lot of the economy. Competition Is Pretty Formidable When you think AI, names like IBM, Google, Amazon and Microsoft jump out right away. The AI prize is just that attractive. AI is also rapidly evolving so today’s SaaS based solutions are very likely to morph into something totally new and different in the coming decade. So does Veritone have enough to get through the next few years and then get gobbled up by a larger entity? Let’s take a look at some facts and some recent events. In 2016, Veritone achieved just under $9 million in revenues of which 82% of that was gross profit. This at least shows that Veritone has a good amount of traction and that the company is cash flow positive until costs like marketing and development come into play. That is where the red ink starts to flow rather freely. Veritone needs additional capital and that is why they filed for a public offering back on March 15, 2017. However, as we mentioned at the start AI is a very hot area right now and Veritone may have arrived in just the right time. On May 9th the company announced it was doubling the size of it proposed offering to $38 million. As always, we don’t make investment recommendations, it is neither our style nor our expertise. What we love to do is to find things that entrepreneurs are doing to make the world more interesting and bring them to your attention.

  18. The Apprentice Rewind

    Trump to Comey: Your Fired!

    There’s so much going on in Donald Trump’s Washington: draining the swamp, perfecting healthcare, hiring a Supreme Court Judge, firing an FBI Director. It has been a stressful year for our new president.

    Unfortunately mistakes were made, journalistic mistakes. What we are talking about is fake news. Fortunately, we are here to straighten out some of the most glaring distortions in the mass media. There is nothing fake in what you are about to read.

    As usual the media completely mislead America with their portrayal of the Comey firing. My sources, deep inside sources, revealed the truth.

    What Really Happened

    First of all the fake story from the White House was that Comey was being fired for his alleged mishandling of last years investigation into the Clinton email mess. Comey got his pink slip while traveling in Los Angeles. According to sources, Comey made an irreconcilable blunder by booking a reservation at The JW Marriott Hotel in Downtown LA. That really threw POTUS into a tizzy.

    Trump has had a secret long-standing distaste for Bill Marriott and everybody knows how Trump values loyalty. In Comeys defense, there are no Trump Hotels in Los Angeles anyway, only the Trump National Golf Club of LA.

    Think of it this way, Trump has not been in charge of his old company since January 20th. Maybe he just forgot. More than 100 days is a long time to test the memory of any 71 year old. Who knew being President was so complicated?

    Of course there was the issue of Comey’s alleged request for greater FBI resources to investigate Russian involvement in last years election. And yes there was the possibility that the investigation could lead to the White House. And yes there was the possibility that this could severely damage Republican chances for healthcare reform, tax reform and even the future of the Republican Party. But rules are rules and when Comey checked into The JW Marriott, the Donald had enough.

    HUGE Overreaction

    The mass media overacted to the Comey axing big time. CNN denounced the President for “ a grotesque abuse of power” and “the kind of thing that goes on in non-democracies”.

    This just shows how little some people know. There are plenty of presidents for Trumps action. On October 21, 1973 Special Prosecutor Archibald Cox was fired by then president Richard Nixon. I know that is only one example but we can’t spend all day dwelling on the past if we are going to make America Great Again!

    Yes Mr. Cox was investigating things that nearly lead to the impeachment of Nixon and yes Comedy was investigating a thing that might lead to who knows what with Trump. But as White House Press Secretary Sean Spicer said, “that is where the comparison ends”.

    The facts totally validate this point. For example: Nixon had brown hair; Trump’s is more tangerine. Nixon used the over the head two finger victory sign; Trump prefers a waist high two thumbs up approach. And most importantly, Pat Nixon and Melania Trump have different names.

    Don’t Be Mislead By Fake News

    Another completely fake peace came from The New York Times. Their headline on the day of Comey’s firing was “With Awkward Timing, Trump Meets Top Russian Official”. There was nothing awkward what so ever. If anything, the timing was perfect. Sources close to people who claim to always be in the loop explain it this way.

    The meeting between Russian foreign minister Sergey V. Lavrov and US Secretary Rex W. Tillerson took place at the State Department right on schedule. Pictures only showed the two gentlemen together. But that was only the upfront stuff.

    Behind the scene my sources told me that POTUS’ adrenaline got so pumped up pretending he was back on The Apprentice saying “You’re Fired” to Comedy that he fell back into The Art of The Deal mode with the Russians.

    You may think this is silly and juvenile on the part of POTUS but remember, it had been a rough first 100 days. All of us even POTUS regress a little when frustrated and tired. It isn’t like he could just go home and take it out on Don Jr, Eric or Melania. He is the only member of the family that lives in the White House so cut the lonely guy a little slack.

    According to sources, Trump got on the phone with Lavrov and artfully laid out the deal. This is what actually took place. Trump said, ok Sergey, I just gave you Comey and in return we want Edward Snowden. We talked about this deal 50 times before the Republican Convention. We even shook on it but you Sovietskis keep jerkin us around.

    So now in addition, we want a compensatory second round draft pick from the Baltic national team. The ultimate prize: Trump was really after a 7’8” Latvian with three point shooting skills like Kristaps Porzingis. Its all part of Trumps secret plan the Make The New York Knicks Great Again. This information is so secret, not a single word has leaked out.

    So now you know the truth. Stay tuned as America Becomes Great Once Again.

  19. Healthcare: Dying Beyond Our Means

    Everybody that is not focused on President Trumps Twitter ramblings is talking about healthcare: the skyrocketing premiums, who is getting the shaft by repeal of Obamacare, is anybody doing anything about the cost of prescription drugs, and on it goes. Who knew healthcare could be so complicated?

    One thing is absolutely certain, given the chance, everyone would love to have totally free healthcare that would enable each person to live a healthy, pain free existence. Then on the day of their choosing, the lights get turned out; in other words, death.

    This description of a utopian existence is what the American system has been promoting since the war on cancer began more than 50 years ago. No one has yet discovered the cure for cancer, just treatments that lower death rates. There is even a new cancer treatment that avoids chemotherapy. Beautifully executed video commercials offer cancer suffers the opportunity to extend your life. In exchange for a few thousand dollars a month you get to celebrate one last 4th of July. Science is not curing illness, just momentarily delaying the last curtain call.

    The name of this drug has intentionally been left out because there is more than enough drug advertising in the world already.

    Charlie Munger States the Case

    Warren Buffett’s long time sidekick at Berkshire Hathaway recently participated in an extended interview following the company’s annual meeting. Other distinguished participants included Warren and former Microsoft Chairman Bill Gates. These guys know how to cut through the froth and zero in on reality.

    According to data sighted by Warren Buffett, it is healthcare, not taxes that is America’s far bigger problem. Compared with 50+ years ago, income taxes take a far smaller share of the economy (about 5%) whereas healthcare is almost three times this level at 14% of Gross Domestic Product. Every year healthcare eats up a larger share; it is now bigger than national defense.

    Munger, who happens to be Chairman of Good Samaritan Hospital in Los Angeles has some well-founded opinions on healthcare. He is a big advocate of a single payer system. Unfortunately, the US is one of the only countries in the world that attempts to maximize health benefits while minimizing costs and still allow healthcare providers to reap massive profits. Sound crazy: it is.

    Another thing Munger mentions without going into much detail was his reference to over treatment of the dying. There is real truth the notion that America is dying beyond it means. Consider the following.

    The Healthcare 1 Percenters

    A study published in 2012 by the US Department of Health and Human Services more thoroughly explains Munger’s position. Roundly, 1% of the US population consumes 20% of healthcare expenditures. Just 5% consume 50% and 10% eat up about two thirds.

    Surprise, surprise, much of the top 5% consist of the elderly; those above the age of 75. The medical profession is creating nothing more than a series of human museums euphemistically called Senior Living Centers. Is it the responsibility of society to set a Guinness Book of World Records for the most people living beyond 110 years old?

    From the patient’s point of view, why shouldn’t they have choices? It may be a grisly thought to many but why should people have the right to have a say in their final days? The pharmaceutical industry would be hurt by less demand for drugs that would extend life by a few days or weeks but it could change the direction of the healthcare discussion.

    A few states like Oregon are pioneering in the effort and Canada has adopted an even more comprehensive policy nationwide. There is nothing more sensitive than the subject life’s end. On the other hand, there are few things more costly. As the boomer generation takes up an ever-larger share of the healthcare budget, the question is likely to take center stage in the healthcare discussion.

  20. The Business of Baseball: “Bean Berry Berry Good”

    Let’s Do An IPO

    Give me a major league baseball team, any team and if it were a publically traded stock, I’d buy the stock in a heartbeat. Why you ask? Who wouldn’t want to invest in a business where revenues are rising faster than inflation and costs are dropping? Yes, you heard that right. Costs in baseball are dropping.

    Baseball may not generate the fan mania of the NFL but 162 baseball games in a regular season compared with only 16 in football, baseball is the advertising Mecca of America.

    The current FOX/TBS/ESPN contract with MLB worth $12.4 billion is an eight-year deal that extends into 2021. This represents more than a 100% increase from the previous contract.

    In 2016 the Los Angeles Dodgers doled out over $253 million in player salaries with the top five teams adding to a tidy $1.05 billion. That covers about 200 players, several of which collected over $25 million and one who was fired in mid season and is still collecting over $25 million in 2017.

    Market Forces Are Correcting The Extremes

    Since day one of free agency in 1974, baseball, to quote the Saturday Night Live character, has “bean berry berry good” to player’s salaries. In the last decade inflated annual salaries of $25-$33 million have been accompanied by contracts that extend well beyond a players prime.

    Just look at the failed 10-year deal with aging New York Yankee Alex Rodriguez or Los Angeles Angels first baseman Alpert Pujols. The world watches to see the outcome of the Seattle Mariners decade long $240 million contract with Robinson Cano. He will be 42 years old when his contract expires in 2023.

    The new business model has been tested and proven both by the Chicago Cubs and Cleveland Indians, last years World Series winner and runner up.

    The Houston Astros are devotees of the new model as well. Over the past few seasons they have been drafting and developing young talent. Houston’s payroll at $118 million is about one half that of the Yankees. Last year Houston made it into the playoffs, New York did not.

    Organic Growth Is The New Mantra

    It is a whole lot cheaper for teams to find, sign and develop budding young stars. Baseball fans are reacting with excitement. Here is some simple math. The top five highest salaried teams in 2016 paid out an average of nearly $1 million per player.

    Averages are often misleading. The top six players six players that happen to play on the teams with the highest salaries were paid over $30 million each. None of these players appeared in last years World Series.

    The point here is the both the Cubs and the Indians committed themselves to a youth movement that is proving both cost effective and positively impacting outcomes. Others are smart enough to see the writing on the scoreboard.

    For example look at this years youth infused New York Yankees. Throughout spring training and the first full month of the season, the Yankees had the leagues best won/lost percentage. There are the most players under 25 year old in the starting line up in several decades.

    Better Than A Job At Google; And More Fun Too

    The youth movement seems to be catching on and fans appear to be responding favorably. Look that the results in Chicago and Cleveland. Last year Cleveland spent less than $100 million to field their American League Championship team. Chicago was a bigger spender but that is because they blew the budget on several veteran free agent pitchers. So far this year, they are paying the price for all their Methuselah madness.

    Yes it also costs to sign young talent as well and there is the risk that players will fail along the way. But the cost makes the risk worth taking. The 2012 draft class is now beginning to make their mark. The average cost of signing a first round draft player from 2012 averaged roughly $522, 000 per year over the life of their minor league careers.

    From a business stand point this is a home run proposition. Any business that can cut labor costs in half and still keep jobs in America has a business model that attracts capital. So let’s get together and buy a team (the Miami Marlins are up for sale) or at least take one public.

  21. U.S. Investors Gear Up for Active Week in the Financial Markets

    A deluge of market-moving events will make their way through the financial markets this week, giving U.S. investors a chance to reflect on the health of the domestic economy. President Donald Trump is also scheduled to deliver a speech that will be closely monitored for clues about the new administration’s economic policies.

    The data dump begins on Monday with a report on January U.S. durable goods orders, a gauge of manufacturing activity that is also associated with economic growth. Orders for manufactured goods meant to last three years or more are forecast to have risen 1.9% in January, following a 0.5% drop the previous month.

    Later in the day, the Federal Reserve Bank of Dallas will release its monthly report on manufacturing.

    On Tuesday, the Commerce Department will release revised fourth quarter GDP figures that are expected to show a slightly faster pace of expansion. Last month, Commerce economists said GDP expanded just 1.9% annually in October-December. The revised reading is expected to show growth of 2.1%.

    Other reports scheduled for Tuesday include the Conference Board’s consumer confidence index and the S&P/Case-Shiller Home Price Indices.

    President Trump will address a joint session of Congress Tuesday evening that investors hope will provide a blueprint of the administration’s tax policies. Trump spurred another record-setting rally on Wall Street earlier this month by announcing that “big league” tax cuts are on the way. The president has also announced plans to begin loosening regulations on the financial markets and renegotiate existing trade deals.

    The economic calendar heats up on Wednesday with data on personal income and outlays. U.S. personal income from all sources is forecast to rise 0.3% in January. Personal spending is expected to rise by a similar amount.

    Separately, the Institute for Supply Management (ISM) will release its closely watched manufacturing purchasing managers’ index (PMI). Although the February PMI is expected to weaken slightly, the underlying trend will likely point to sustained growth in the sector.

    Oil traders on Wednesday will also be monitoring the U.S. Energy Information Administration’s weekly inventory report.

    The Labor Department’s weekly report on initial jobless claims will make its way through the financial markets on Thursday. Claims have been below 300,000 – a threshold commonly associated with a stronger labor market – for 103 consecutive weeks. The four-week average for claims, which weeds out volatility, recently fell to tis lowest level since 1973.[1]

    ISM will round out the week with its official gauge of services activity. The non-manufacturing PMI is expected to give a similar reading for February as it did the previous month. Meanwhile, oilfield services provider Baker Hughes Inc. will release its weekly rig-count data in the final session of the week. Last Friday, the company said the active rig count rose for the sixth straight week, a sign U.S. shale producers were ramping up capacity.[2]

    Federal Reserve Chair Janet Yellen and Vice Chair Stanley Fischer will also deliver speeches on Friday that will be closely monitored by the markets. The minutes of the Fed’s latest meetings, which were released February 22, signaled that interest rates will rise soon. Encouraged by faster inflation and a stronger jobs recovery, the U.S. central bank is expected to raise rates on three occasions this year. Its next policy meeting is scheduled March 14-15.

    [1] Reuters (February 23, 2017). “U.S. jobless claims up, four-week average lowest since 1973.” CNBC.

    [2] Akin Oyedele (February 24, 2017). “Baker Hughes oil rig count rises for 6th straight week.” Business Insider.

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  22. 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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  23. Oil Prices Break Out to New 19-Month Highs

    Oil prices rose on Thursday, with the U.S. futures contracting hitting its highest level in 19 months after government data showed a smaller than expected rise in weekly crude inventories.

    The West Texas Intermediate (WTI) benchmark for U.S. crude futures reached a session high of $54.94 a barrel on Thursday. That would have marked the highest settlement on the New York Mercantile Exchange since July 2015. Prices consolidated at $54.36 a barrel, having gained 77 cents, or 1.4%.

    Brent crude, the international futures benchmark, reached a session high of $57.26 a barrel, which would have also been the highest settlement in 19 months. Prices rose 67 cents, or 1.2%, to $56.51 a barrel.

    The U.S. Energy Information Administration (EIA) reported Thursday that crude inventories rose by 564,000 barrels to a total of 518.7 million barrels in the week ended February 17. That was only a fraction of the 3.5 million-barrel increase forecast by analysts.

    Separate data from the American Petroleum Institute (API) on Wednesday showed stockpiles fell by 884,000 barrels in the latest week.

    Gasoline inventories fell by 2.6 million barrels, and distillate fuel stocks decreased by 4.9 million barrels, EIA data showed.

    Crude prices have been well supported above $50 a barrel since late November, when the Organization of the Petroleum Exporting Countries (OPEC) agreed to reduce output by 1.2 million barrels per day beginning in January. A few weeks later, nearly a dozen non-OPEC producers led by Russia pledged to lower supplies by 558,000 barrels per day. The coordinated effort to rebalance the market came after a devastating two-year price collapse brought on by record production and weaker demand growth.

    Members of the 13-member OPEC cartel have achieved an initial compliance rate of 90% with their agreed production cuts, the Paris-based International Energy Agency (EIA) reported earlier this month. Saudi Arabia has led in the rebalancing of the market after plunging prices contributed to the kingdom’s worst budget deficit on record.

    The IEA also boosted its outlook on crude demand for the remainder of the year, a positive sign for a market that is slowly regaining momentum.[1]

    However, investors preparing for an even bigger rally in crude prices could be disappointed now that the U.S. shale industry is back in expansion mode. Encouraged by stabilizing prices, American producers are ramping up production and exploration plans. Analysts say the return of U.S shale oil to the market could offset OPEC’s efforts to rein in supplies. This means priced have nowhere to go but back down.

    The number of active oil rigs operating on U.S. soil has increased at an accelerated pace since last spring. The total number of active oil and gas rigs currently stands at 751, according to data from oilfield services provider Baker Hughes. That’s an increase of 237 from a year ago.[2] The rig count has surged since the November 30 OPEC output agreement, and appears poised to continue higher in the near future.

    [1] Gillian Rich (February 10, 2017). “IEA Finds 90% Compliance On OPEC Output Deal, Sees Higher Oil Demand.” Investor’s Business Daily.

    [2] Julianne Geiger (February 17, 2017). “U.S. Rig Count Rises As Crude Inventory Levels Hit Record High.” Oilprice.com.

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  24. Trump Treasury Secretary Mnuchin in No Rush to Label China Currency Manipulator

    Treasury Secretary Steven Mnuchin said on Thursday he’s in no rush to label China a currency manipulator, pouring cold water on speculation the Trump administration would pursue a more aggressive stance toward the world’s second largest economy.

    “We have a process within Treasury where we go through and look at currency manipulation across the board and we’ll go through that process,” Mnuchin told CNBC on Thursday.

    In a separate interview with Bloomberg, the Treasury Secretary confirmed there would be “no announcement” of any currency manipulation before his department concludes its next biannual report on exchange rates in April.[1]

    While campaigning, President Donald Trump vowed to confront China’s trade dominance by implementing tariffs on its U.S.-bound products. He also pledged to declare Beijing a currency manipulator on “Day 1” of his presidency.

    The Chinese yuan has been at the center of global volatility over the past two years after regulators began aggressively devaluing the currency. This People’s Bank of China (PBOC) cut the yuan’s reference rate against the dollar by nearly 2% in August 2015, triggering the currency’s biggest one-day drop since 1994. Since then, the yuan’s value has continued to deteriorate, as China seeks to raise export competitiveness and boost the role of market pricing in the domestic economy.[2]

    Although the Republican administration appears to have softened its stance on China’s yuan intervention, there is growing bipartisan support in Congress to recognize Beijing as a currency manipulator. That was the key message Republican Senator Lindsey Graham delivered to a panel at the Munich Security Conference earlier this month.

    “I don’t want a war with China; I want a better relationship. But what they’re doing needs to be pushed back against – and I think currency manipulation will be an issue that may unite Congress,” Graham said, as quoted by Bloomberg.[3]

    Graham’s position was firmly backed by New Hampshire Democrat Jeanne Shaheen.

    The yuan has weakened 13% against the U.S. dollar over the past three years. Beijing guided its currency higher at the start of the year in an effort to curb gyrations in the global financial markets.

    The U.S. dollar has been on a tear since the November 8 election, having reached nearly 13-year highs against a basket of other major currencies excluding the yuan. After a volatile start to the year, the dollar index has rebounded sharply in February, gaining ground on the euro and British pound.

    The gains have been spurred on by expectations that Trump’s pro-growth policies would lead to faster inflation, which could prompt the Federal Reserve to raise interest rates at an accelerated pace.

    The Fed’s latest policy minutes on Wednesday signaled that higher rates may be on the horizon very soon. The central bank’s next policy meeting is scheduled March 14-15.

    [1] Gregg Robb (February 23, 2017). “Mnuchin in no rush to label China a currency manipulator.” Market Watch.

    [2] Bloomberg News (August 10, 2015). “China Rattles Markets With Yuan Devaluation.”

    [3] Patrick Donahue (February 19, 2017). “Trump Seen Having Support Of He Dubs China Yuan Manipulator.” Bloomberg Politics.

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  25. Dow Jones Industrial Average Extends Record-Setting Rally to Nine Days

    Dow industrials advanced for a ninth straight session on Wednesday on route to another record high, as materials blue-chip DuPont (NYSE: DD) moved one step closer to merging with Dow Chemical (NYSE: DOW).

    The Dow Jones Industrial Average advanced 32.60 points, or 0.2%, to close at 20,775.60. That was the index’s ninth straight record close – the longest stretch of its kind since 1987.[1]

    Gains were driven largely by DuPont, the Delaware-based conglomerate that moved one step closer to merging with Dow Chemical on Wednesday. Regulators at the European Union (EU) have reportedly approved the so-called “merger of equals” in a deal worth $130 billion. Both companies won favor with antitrust regulators earlier this month by offering to sell core businesses over competition concerns. The EU has until April 4 to issue a final decision on the deal, although analysts say a green light may be given before the deadline.[2]

    DuPont shares climbed 3.4% to lead the Dow Jones index higher. Dow Chemical, which isn’t listed on the price-weighted average, also rose 4%.

    Fifteen of 30 Dow blue-chips finished in positive territory on Wednesday. Sports apparel maker Nike Inc. (NYSE: NKE) and industrial 3M Co (NYSE: MMM) each rose 1.5%. IBM Corp (NYSE: IBM) and Verizon Communications Inc. (NYSE: VZ) rounded out the top five, gaining 0.5% apiece.

    On the other side of the ledger, chipmaker Intel Corp (NASDAQ: INTC) declined 1.2%. Energy companies Chevron Corp (NYSE: CVX) and Exxon Mobil Corp (NYSE: XOM) each fell 1.2%.

    Elsewhere on Wall Street, the S&P 500 Index fell from record highs, closing down 0.1% at 2,363.82. The technology heavy Nasdaq Composite Index also settled 0.1% lower at 5,860.63.

    U.S. stocks have been riding a wave of optimism since the November 8 election, as investors rallied behind expectations of stronger economic growth under Donald Trump. Earlier this month, President Trump promised to unveil “big league” tax reforms in the coming weeks, spurring another massive rally in equities.

    Wall Street is wrapping up another successful quarter of earnings. Based on 82% of S&P 500 companies that have reported so far, two-thirds have exceeded profit expectations and slightly more than half have beat on revenues.[3]

    U.S. equity futures were little changed Wednesday evening, as global investors continued to speculate about the pace and timing of future Federal Reserve rate adjustments. The minutes of the latest Fed meeting revealed on Wednesday that a rate hike might be appropriate “fairly soon,” in light of recent progress on inflation and the labor market. Fed officials are keeping close tabs on inflation now that Trump is in the White House. That’s because the President has vowed to spend up to $1 trillion on infrastructure over the next ten years, a policy that could stoke faster price growth. Faster inflation would necessitate a more aggressive response from the Fed in terms of monetary policy.

    The central bank is scheduled to hold its next policy meeting March 14-15 in Washington. The March decision will be accompanied by a revised summary of economic projections covering GDP, employment and inflation.

    [1] Sue Chang and Anora Mahmudova (February 22, 2017). “Dow notches best record-setting streak in 30 years.” Market Watch.

    [2] Natalia Drozdiak (February 22, 2017). “Dow, DuPont merger on track to be cleared by EU regulators.” Market Watch.

    [3] FactSet. Earnings Insight.

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  26. Federal Reserve Expects Rates to rise “Fairly Soon”

    U.S. interest rates may be on course to rise even faster than initially expected, a sign that President Trump’s pro-growth agenda was keeping policymakers on high alert, the minutes of the Federal Reserve’s latest policy meeting showed on Wednesday.

    The Federal Open Market Committee (FOMC) discussed at length the impact of President Donald Trump’s economic policies on inflation during its first policy meeting of the year. Officials were increasingly under the view that rates may need to rise soon to keep pace with stronger inflationary pressures.

    “Many participants expressed the view that it might be appropriate to raise the federal funds rate “fairly soon” if the economic indicators are “in line or stronger than their current expectations,” the official transcript of the January 31-February 1 FOMC meeting showed on Wednesday.[1]

    However, the minutes confirmed that only “a few” members expect rates to rise at the upcoming meeting in March.

    The Fed voted to leave interest rates on hold at 0.75% in its first policy meeting of the year. The decision was widely anticipated by the markets.

    Steady job creation has been a central tenant of the U.S. economic recovery over the last three years. The latest data on inflation reinforced the view that the economy was beginning to fire on all cylinders. The January consumer price index (CPI) rose at an annualized 2.5%, the highest in nearly four years.

    The U.S. central bank voted to raise interest rates in December for only the second time since the financial crisis. Officials in December said they expect rates to rise three times in 2017, followed by two or three increases in 2018.[2] The FOMC will unveil its next quarterly projections at the upcoming meeting in March.

    Investors have raised their bets on a May interest rate hike to nearly 50%, according to the CME FedWatch Tool, which has long been used to express the market’s views on monetary policy. The likelihood jumps to around 70% in June.[3]

    Although the Fed struck a decidedly hawkish tone on Wednesday, central bankers noted there was “heightened uncertainty” regarding the size and scope of President Trump’s fiscal stimulus. The GOP leader has pledged to spend up to $1 trillion on infrastructure over the next ten years, a move that could stoke faster inflation in the economy. Trump has also promised massive tax cuts and deregulation of key industries, such as finance and energy.

    The U.S. dollar lost some momentum after the minutes were released, but remained well supported near six-week highs. The dollar index was last seen hovering at 101.27, virtually unchanged from its previous close. The index was up 0.3% earlier in the day.

    U.S. stock markets were largely unaffected by the Fed minutes, with the Dow Jones Industrial Average rising to a new record high for the ninth straight session. That was the longest run of record closes in 30 years.[4]

    [1] Jeff Cox (February 22, 2017). “Fed minutes: Trump policies could lead to rate hike ‘fairly soon’” CNBC.

    [2] Harriet Torry (December 15, 2016). “Fed Raises Rates for First Time in 2016, Anticipates 3 Increases in 2017.” The Wall Street Journal.

    [3] CME Group.  FedWatch Tool.

    [4] Sue Chang and Anora Mahmudova (February 22, 2017). “Dow notches best record-setting streak in 30 years.” Market Watch.

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  27. U.S. Home Sales Climb as Job Growth Offsets Higher Mortgage Rates

    The U.S. housing sector strengthened at the start of 2017, a sign that pent-up demand and strong job creation were offsetting a steep rise in mortgage rates since November.

    The sale of existing homes rose 3.3% to a seasonally adjusted annual rate of 5.69 million in January, the National Association of Realtors (NAR) said in a report on Wednesday. That was higher than the median estimate, which called for a gain of 1.1%.

    The median sales price for existing homes rose 7.1% year-over-year to $228,900. That was the fastest increase since last January, marking the 59th consecutive month of gains. December sales were revised to reflect a 1.6% drop compared to the 2.8% decline reported previously.

    Housing inventory, which measures the number of homes available for sale, rose 2.4% to 1.69 million. Despite the gain, inventories are down 7.1% from a year earlier. Tight inventories have been largely responsible for the strong uptrend in prices recently.

    “Much of the country saw robust sales activity last month as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home,” Lawrence Yun, NAR chief economist, said in a statement. “Market challenges remain, but the housing market is off to a prosperous start.”[1]

    U.S. mortgage rates have risen sharply since Donald Trump was elected President on November 8. Rates climbed to more than two-year highs in December after the Federal Reserve raised interest rates for only the second time in a decade.[2] The average rate on a fixed 30-year mortgage spiked to 4.32% in the week ended December 29, according to Freddie Mac. Rates were as low as 3.41% earlier in the year.

    Mortgage rates averaged 4.15% in the latest week, Freddie Mac said in its most recent report.

    Mortgage rates are being pulled higher by expectations of faster policy tightening by the Fed. The U.S. central bank voted against raising rates in its first meeting of 2017, but is widely expected to raise again in the summer. Policymakers are keeping a close eye on inflation now that Trump is President.

    Steady home sales in a rising interest rate environment points to a resilient economy that is benefiting from plentiful jobs and higher wages. That was the key takeaway from last month’s official nonfarm payrolls report, which showed the creation of 227,000 jobs in January. Investors were expecting a gain of around 175,000. Average hourly earnings climbed 2.5% annually.

    Earlier this month, the Labor Department also said consumer inflation surged to nearly four-year highs at the start of 2017, a sign earnings are also accelerating.

    A separate measure of layoffs in the labor market also suggests wages could be headed higher. Initial jobless claims approached 43-year lows earlier this month, and have now remained below 300,000 for 102 consecutive weeks. That’s the longest stretch since 1970.[3]

    [1] National Association of Realtors (February 22, 2017). Existing Home Sales Jump in January.

    [2] Preshant Gopal (December 22, 2016). “U.S. Mortgage Rates Jump to More Than 2-Year High After Fed Hike.” Bloomberg.

    [3] Reuters (February 9, 2017). “US jobless claims drop to near 43-year low.” CNBC.

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  28. U.S. Corporate Earnings Surprise to the Upside in Q4

    After years of dismal growth, U.S. corporate earnings are back in positive territory, a sign that improving economic conditions were finally translating into a stronger bottom-line for publicly-listed companies.

    As of February 17, companies listed on the S&P 500 were on track for a blended earnings growth rate of 4.6% in the fourth quarter of 2016, according to financial research firm FactSet. That’s based on 82% of S&P 500 companies that have reported actual results to date. FactSet says 66% of companies have reported earnings that were above the median estimate, while 53% have beaten on revenue forecasts.

    Back in December, the firm predicted blended earnings growth of 3.1% in the fourth quarter.[1]

    If the numbers hold, Q4 would mark Wall Street’s second consecutive quarter of year-over-year earnings growth. That followed five straight quarters of year-over-year decline – Wall Street’s worst earnings recession since the financial crisis.[2]

    While clearly in recovery mode, U.S. corporations are benefiting from a low-base effect, where small absolute changes are reflected as big percentage gains due to lower comparative figures.[3] For years, companies have struggled with weak economic growth and a stronger U.S. dollar. Both factors have hurt profitability, especially for multinationals conducting the bulk of their business abroad.

    U.S. President Donald Trump has promised businesses “phenomenal” tax cuts in an effort to get more of them to repatriate profits and reinvest in American operations. The new administration has also pledged sweeping deregulation and up to $1 trillion in infrastructure spending over the next ten years. These promises have sent U.S. equities to record highs, with financial and materials stocks among the biggest gainers.

    The outlook on the global economy is also improving, although growth remains uneven in many parts of the world. Last month, the International Monetary Fund (IMF) predicted the world economy to expand 3.4% in 2017, following 3.1% growth last year. The Washington-based lending institution raised its 2017 growth outlook on advanced economies to 1.9% from 1.8%.[4]

    The U.S. economy expanded at a slower than expected 1.9% year-over-year rate in the fourth quarter, the Commerce Department said last month. However, recent data on manufacturing, jobs and consumer spending suggest the economy is gaining momentum at the start of 2017. Consumer inflation also rose in January to its highest level in nearly four years, underscoring the economy’s resilience.[5]

    A stronger domestic economy benefits businesses that are tied to the American consumer, making sectors like consumer discretionary, consumer staples and financial services especially attractive from an investing perspective. Consumer spending accounts for more than two-thirds of U.S. economic output.

    Corporate earnings results continue next week, although the attention will be mostly on European banks. Barclays (BCS), HSBC Holdings (HSBC), Lloyds Bank Group (LYG) and Royal Bank Scotland (RBS) are all scheduled to report.

    [1] FactSet (February 2017). Earnings Insight: Key Metrics.

    [2] John Butters (August 26, 2016). “S&P 500 Earnings Decline for Fifth Consecutive Quarter.” FactSet.

    [3] Yvonne Tan (February 18, 2017). “Corporate earnings to recover this year.” The Star.

    [4] International Monetary Fund (January 16, 2017). World Economic Outlook Update: A Shifting Global Economic Landscape.

    [5] Aaron Hankin (February 15, 2017). “U.S. Inflation Hits Four-Year High.” Investopedia.

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  29. Rising Gold Prices Signal Risk is Afoot

    Despite the recent equities rally on Wall Street, gold prices are up nearly 8% this year, as political uncertainty fuels fresh demand for the safe-haven commodity.

    Gold for April delivery settled at $1,239.10 a troy ounce on February 17, just below the prior session’s three-month high. The futures contract nudged up 0.3% for the week and has advanced 2.3% since the start of February.

    May silver futures closed at $17.98 a troy ounce on Friday, extending its winning streak to seven consecutive weeks. Silver has outperformed gold in percentage terms, having gained 12.4% since the start of the year. One ounce of gold is now worth less than 69 ounces of silver. This ratio was as high as 72.5 earlier this year.

    Precious metals are widely viewed as hedges against inflation and geopolitical risks. The threat of the latter has sparked renewed buying interest among investors worried about a more protectionist White House under President Donald Trump. Since being inaugurated on January 20, President Trump has adopted a much more protectionist stance than his predecessors. This included signing an executive degree that withdrew the United States from the Trans-Pacific Partnership (TPP), a bilateral trade agreement involving 12 countries.

    In a more controversial move, Trump issued an executive order temporarily banning immigration from seven-Muslim majority countries. The decree was eventually overruled by appellate judges.

    The Trump administration is also considering a broad crackdown on America’s temporary foreign worker program, fueling fresh worries about labor shortages in key industries like information technology.

    The Trump administration isn’t the only source of political risk driving investors to gold and other haven assets.The United Kingdom is moving closer to exiting the European Union (EU) after Parliament voted in favor of starting the Brexit process. On February 1, Members of Parliament voted 498 to 114 to advance a bill that gives Prime Minister Theresa May the authority to trigger Article 50 of the Lisbon Treaty – the formal mechanism for leaving the EU.[1] Invoking Article 50 gives the UK and Brussels two years to negotiate a new bilateral trade agreement. For investors, that’s two years of potential uncertainty.

    Brexit has strengthened right-wing populism across Europe, with anti-EU parties gaining momentum in France, Germany and the Netherlands. Each of these three countries will vote in federal election this year. Euroscepticism is also gaining ground in Italy after Prime Minister Matteo Renzi resigned following a failed referendum to reform the constitution. This leaves the door wide open to the Five Star Movement, another anti-EU party, to make significant inroads in the 2018 elections.

    Gold prices have also been pulled higher buy a sputtering U.S. dollar, which until recently, faced strong downward pressure. The dollar index, which tracks the performance of the U.S. currency against a basket of global peers, fell to three-month lows at the end of January. Gold is priced in dollars, and is therefore highly sensitive to fluctuations in the currency.

    The dollar has rebounded sharply in February, but this has failed to weaken demand for gold. This suggests investors are hedging against an increasingly volatile global political climate.

    [1] Laura Smith-Spark (February 1, 2017). “Article 50: UK parliament votes in favor of starting Brexit process.” CNN.

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  30. 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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  31. Fed’s Yellen Keeps March Rate Hike on the Table

    Federal Reserve Chairwoman Janet Yellen had one message for investors this week: get ready for higher interest rates.

    America’s top central banker told Congress that waiting too long to raise interest rates would be “unwise,” given the recent pick up in economic growth and inflation. In Yellen’s view, the economy continues to make progress, with job creation and consumer prices moving up at an accelerated pace.[1]

    Yellen’s views were vindicated this week by multiple government reports pointing to a strengthening U.S. economy. On Wednesday, the Commerce Department said retail sales rose 0.4% in January, well above forecasts calling for 0.1% growth. Retail sales are considered a proxy for consumer spending, which accounts for more than two-thirds of U.S. economic activity.

    Separately on Wednesday, the Labor Department said consumer inflation surged 2.5% in the 12 months through January, the highest in nearly four years. So-called core inflation, which excludes volatile goods such as food and energy, strengthened 2.3%.

    The Fed targets inflation at 2%, and is more likely to raise interest rates if price growth exceeds that threshold.

    Meanwhile, the domestic labor market continues to fire on all cylinders, as evidenced by the combination of steady job creation and lower layoffs. On Thursday Labor economists said jobless claims rose less than expected last week and continued to hold near 43-year lows.

    Yellen, who wrapped up two days of congressional testimony on Wednesday, has given investors more reason to be hawkish. Investors now see an 18% probability of a rate hike at the Fed’s next policy meeting in March, according to the CME Group’s FedWatch Tool. That probability jumps to around 46% in May and over 70% in June.[2]

    On Wall Street, America’s biggest lenders have also raised their expectations for tighter monetary policy. Banks JPMorgan Chase and Goldman Sachs expect rates to rise by June, and say there’s a distinct possibility the Fed moves earlier than that. Goldman analysts say there’s a 90% chance “of at least one rate increase by mid-year.”[3]

    Investors, who are normally weary of changes to monetary policy, cheered Yellen’s surprisingly hawkish commentary as a sign policymakers were more confident in the health of the economy.

    Stocks set multiple records this week on expectations President Donald Trump will announce deep tax cuts in the coming weeks. In a meeting with U.S. executives last Thursday, Trump told American businesses to expect a “phenomenal” tax plan in the not-too-distant future.[4] Wall Street has been on a tear ever since.

    U.S. stocks have gained more than 10% since Trump was elected on November 8, as investors rallied behind the promise of pro-growth policies under the new Republican administration. Trump has not only promised massive tax cuts, he has also vowed to deregulate the financial sector and spend up to $1 trillion on infrastructure. At the same time, he vowed to renegotiate free trade deals to bring manufacturing jobs back to American soil. In his first month in office, the President has issued more than a dozen executive orders in pursuit of this mandate

    [1] Greg Robb (February 14, 2017). “Fed likely to raise interest rates at coming meetings, Yellen says.” Market Watch.

    [2] CME Group. FedWatch Tool.

    [3] Patti Domm (February 15, 2017). ‘Goldman, JPMorgan boost rate hike expectations on hotter inflation.” CNBC.

    [4] Sam Bourgi (February 10, 2017). “S&P 500 Futures Extend Record Highs on Trump Tax Talk.” Economic Calendar.

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  32. Top tech IPOs to watch for in 2017

    Last year was a dog for initial public offerings on U.S. soil. It was so bad it achieved the double whammy of having the fewest IPOs (105) since 2009 and for the lowest dollar volume ($18.8 billion) since 2003.

    But don’t lose hope investors; President Trump is here to Make IPOs Great Again. If all bodes well this year could easily surpass 2015’s total of $30 billion with some big tech companies preparing to go public.

    With that in mind, here’s a look at some of the most anticipated IPOs for 2017.

    Snapchat

    The wildly popular messaging app’s parent – Snap Inc – is poised to be the first big fish to hit the market, reportedly offering 200 million shares at between $14 and $16 per share. That would give it a valuation between $19.5 billion and $22.3 billion, easily making it the largest IPO since Alibaba in 2014 ($25 billion).

    While Wall Street is generally high on Snapchat and its 160 million daily users, doubters flag the social network’s unprofitability and decelerating user growth. The company reportedly earned more than $400 million in 2016, but costs were upwards of $500 million. It’s attempting to find new revenue streams by rebranding itself as a “camera company” and making virtual reality glasses a la Google, but faces some stiff competition.

    Some analysts, such as Eric Schiffer of private equity firm Patriarch Organization, are decidedly down, telling Vanity Fair: “Snapchat will be the greatest investment loser of the 21st century.”

    When Facebook (FB) went public in May 2012 it had annual revenues of $1 billion and listed at $42. Still the social media giant’s stock price tumbled over the ensuing months to $18, before rebounding and incrementally rising to more than $130 today.

    Ultimately, says The Economist, how well Snapchat fares as a public company will “serve as a litmus test of whether it is possible to prosper in the shadow of digital behemoths like Facebook and Google.”

    Uber

    The ride-hailing darling whose name is now used as a verb among its key millennial base, as in to “Uber over,” will likely wait until after the Snapchat IPO to gauge investor appetite for its own public offering. Despite raising more than $11 billion as a private company, giving it a monstrous valuation close to $70 billion, Uber hemorrhages money. It was on track to lose more than $3 billion in 2016, forcing it to ditch its China operation. The market is also wary of looming legal battles over whether Uber’s drivers are employees or independent contractors and its plans to eventually convert to self-driving cars.

    Uber has historically revealed little in regards to its financials, which it would be forced to do with a public offering. It could likely keep raising money privately for the foreseeable future, but may bow to early-stage investors who will be agitating to see a return.

    Palantir

    The data-mining company was founded way back in 2004 and, like Uber, will have some very anxious investors looking to cash out. Palantir, valued at $20 billion, boasts a number of high-profile security clients, including the U.S. military. Chief executive Alex Karp has already met with President Trump and has indicated the company will turn a profit this year, putting it in a position to go public.

    Spotify

    As a condition of its $1-billion funding round last year, the music-streaming site agreed to go public this year or pay greater interest on its debt. With about 100 million subscribers – 40 percent of which are paying – Spotify has been valued at more than $8 billion. However, recent reports indicate the company may hold off its IPO until 2018 in order to improve its margins.

    That may be wise, as competitor Pandora (P) went public in 2011 at $16 a share, but the music service now trades around $13.

    Dropbox

    The cloud storage startup is reportedly mulling an IPO this year. Last year saw several competitors go public, most notably Coupa Software (COUP). Dropbox, which has more than 400 million users and boasts Spotify and News Corp as clients, has far better brand recognition and lower customer acquisition costs. Founded a decade ago, Dropbox was valued at $10 billion after its last funding round in 2014. That’s far greater than competitor Carbonite Inc (CARB), which went public in 2011 at $10 a share and is now trading at double that price.

    Pinterest

    The craft-oriented social network has a similar valuation to Dropbox and looks primed for an IPO after poaching former Twitter finance exec Todd Morgenfeld to be its chief financial officer. Another thing it has going for it is a fast-growing user base, jumping from 100 million to 150 million users from 2015 to 2016. Revenues also tripled during that same span, rising to $300 million from $100 million in 2015. CEO Ben Silbermann, however, says there are no imminent IPO plans.

    Slack

    The messaging app is growing even faster than Pinterest, quadrupling its daily active users from 1 million to 4 million in an 18-month period between mid-2015 and the end of 2016. But erstwhile investors will need to be patient after chief executive Stewart Butterfield threw some shade on an IPO, suggesting it will be “a while” until it happens.

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  33. Trump Rally: Is it for Real?

    Jim O’Sullivan being surprised by some economic event is in itself a big event. He is no ordinary man. For someone who has won competitions for forecasting economic events, to be surprised by turn of events not once but twice in a matter of two months appears to be unusual. In November, Jim was surprised by the election of Donald Trump. His second surprise was the manner in which markets responded to this event. Prices of stocks surged initially, and later, instead of tapering off, they continued to move up after a brief period of lull.

     

    This surge in prices has taken for a time period that is long enough to be referred to as a rally. Jim says it ought to be called Trump rally in honor of the man who triggered it with his election as POTUS. In a little over 3 months, Trump rally has increased indices of stocks by nearly 10%. Dow Jones has gone past 20000 and S&P has grown in size by nearly $2 trillion.

     

    It all started with a surge in prices of banking stocks but later spread to diverse industries. The reasons behind Trump rally are positive economic indicators and certain optimism about change in taxation and regulation policies under the new regime. There is a new found confidence among the people in the new Republican government, especially in the business community.

     

    One needs to be cautious

    The data concerning Dow and S&P is real but Jim cautions against his own growth predictions for the year. He says that there might be a correction as Donald Trump might not be able to deliver on his promises in the area of tax cuts and international trade. It may also be the other way round. Trump may deliver on his tax cut promises but these changes might not initiate the kind of growth that is expected by the market. There are also fears that any stimulus triggered by tax cuts announced by Trump might get off set rise in interest rates introduced by Federal Reserve. Then there is always the risk of trade war with other countries like Mexico and China because of the threats issued by Trump himself to annul treaties and levy tariffs.

     

    Trump is using figures to brag about his administration

    Jim says that Wall Street is perhaps ignoring all these signals and the only casualties are going to be investors. He feels that hopes have risen pretty high but fears that the bubble is going to burst sooner or later. Even Trump has started to boast about the progress that his administration has made in just 4 weeks, citing the upswing in the stock markets. He talks about optimism in the business community everywhere he goes and never forgets to mention stock market high to support his claims. Even some of the Democrats have started to credit Trump for the rise in stock markets.

     

    Talking about Dow, the story of Goldman Sachs is indeed incredible. The stocks of this investment bank have risen by 40% since November 8. Goldman Sachs happens to be the alma mater of many of Trump advisors like Steve Bannon, Gary Cohn, and Steven Mnuchin. There is a general feeling among the investors that Trump will make their lives easier. Many Wall Street firms came under heavy regulation with the introduction of the infamous bill called Dodd Frank in 2008 in Obama administration. These firms are today expecting higher profits for them with deregulation they believe would be ushered under Trump administration.

     

    The gains in the stock market are spread across many industries though they kicked off with a surge in financial stocks. But even today, the prices of financial stocks are up by 6% while non financial stocks are up by only 3%.

     

    Investors have turned a blind eye to logic and reasoning, and they are not ready to look at the reasons why Trump might not deliver on his poll promises. This is precisely why Trump rally is continuing. However, it may not last long. But even when it bursts, it is not going to harm the growth of economy as it is expected to grow by 2.7% this year. This is a much better growth than attained in any of the 8 years during which Obama was President.

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  34. The Test of Keystone XL

    President Donald Trump has signed two executive orders giving the go-ahead to build the Keystone XL and Dakota access pipeline, rolling back the decisions of former President Barack Obama’s administration to reject the Keystone XL pipeline and block the Dakota Access pipeline in December.

    Donald Trump issued the permits within days of taking office, stipulating only that American steel be used in the work. The controversial pipelines have become well-known as symbols of a conflict between environmentalists and pro-oil developers in the US. The latter are winning, but at what cost?

    The usual argument given in favor of the pipelines is that it will create jobs, something that Mr Trump, a key promise of the Trump campaign. According to the CNN Crossfire host Van Jones the actual numbers are 3,900 temporary jobs in the construction sector and 35 permanent jobs. A report by the US State Department says the project will create 42,000 temporary jobs. In signing the order approving Keystone XL, Trump said the pipeline would create 28,000 jobs.

    An important cause for concern is the misinformation about the actual economic impact of these projects; something the Trump administration cannot be trusted to clarify, considering its short but prolific history of fudging the facts. The polarisation of the opinions over the project is a result of this, and without objective facts on the job creation and environmental and community impact, the project will always be controversial, and a thorn the President’s side. The Dakota pipline was halted last year in April because an assessment of environmental impact had not been done by the contracted companies. Even if the pipelines end up creating long-term economic benefits, they will be viewed as just another one of Mr Trump’s obsessive ideas that he went ahead with, hell or high water.

    In a sense then, the American public and political power holders have lost all sense of objectivity, which means that those with power will always get their way, as they have the most resources to manipulate data and public opinion. In this case it is powerful business interests, a group that will always have the backing of the businessman turned president.

    The pro-business proclivities of the US government are nothing new, and have especially been round since President Reagan fully endorsed the neoliberal model in the 70s. That environmentalists would lose out on this deal was a no-brainer. The fault lies not with Trump and his supporters, the current trajectory was put in place decades ago. The fault lies in the American populace and leadership in the last four decades, who did not balance rampant capitalism with regulation that could protect labor interests, communal interests and environment.

    For Mr Trump this project was probably never really about the jobs, it was about the corporations. Money will be made, the economy will perform, but equal distributions, fair wages, and job security is something Mr Trump will never be advocating- now will any Republicans and even Democrats for that matter. “More jobs” is always code for “big business” in the US.

    The real casualty is the unravelling of the policy structure left by former President Obama, who made climate change policy a priority. These projects reinforce American dependence on carbon-emitting fossil fuels. Mr. Trump has made clear that he sees Mr. Obama’s environmental policies as a threat to the economy and he has called climate change a hoax. Myron Ebell, a climate change denier, has been chosen to head Mr. Trump’s Environmental Protection Agency transition team, has drafted a 50-page blueprint for how he could eliminate Mr. Obama’s climate change policies.

    Conventional wisdom suggests that an increased supply of oil from Canada would mean a decreased dependency on Middle Eastern supplies. According to market principles, increased availability of oil means lower prices for consumers. If the projects are not good for the environment, at least they should be able to help the US becoming self-sufficient for its energy needs, but the pundits are not so sure.

    There are predictions that the Dakota pipeline will not spur domestic production enough to measurably offset the 5.2 million barrels of oil the United States imports each day. Keystone XL’s completion would similarly do little to protect the United States from the volatility of global oil prices. The Environmental Protection Agency (EPA) advised Mr Obama not to approve the pipeline and the former president himself had said that the project would not lower petrol prices, create long-term jobs or affect energy dependence.

    Yet, the situation is not static. The pipeline means a commitment to developing Alberta’s oil sands in Canada. By developing the oil sands, fossil fuels will be readily available and the trend toward warming of the atmosphere won’t be curbed.

    However, as the situation currently stands, more energy is required to extract oil from the Alberta oil sands than in traditional drilling. Additionally, Environment Canada says it has found industry chemicals seeping into ground water and the Athabasca River. The pipeline’s route also puts the Ogallala Aquifer at risk in the event of a spill. The Ogallala Aquifer is used more than any other aquifer in the US, and is larger than the state of California, stretches beneath Nebraska, South Dakota, Wyoming, Colorado, Kansas, Oklahoma, Texas, and New Mexico. More than three-quarters of the people living in Nebraska depend on it for drinking water, and it provides the vast majority of water used for irrigation in the state.

    Since the Trump Administration does not believe in climate change, the protest of environmentalist groups will fall on deaf ears. The American people can be assured of new jobs, but these will be only for the duration of construction, as all construction jobs usually are. We cannot even be sure that this is the cheapest investment the US can make in the energy sector, when solar power is basically going unexplored. In the end, it is the corporations in the US and Canada that will make a nifty profit.

    The Keystone and Dakota pipelines provided Mr. Trump with visible ways to demonstrate action, and the victories and defeats are more symbolic than physical. This is a show of force from Mr Trump, and a test of the resilience of environmental activists. Big business has always done well in the US, and will continue to do so.

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  35. WHAT’S THE DEAL WITH UNEMPLOYMENT?

    For decades, the state of the American economy has often been judged by the official unemployment rate as put out by the U.S. Labor Department on the first Friday of every month.

    There has been a lot of talk about the unemployment rate, especially as the Great Recession peaked in 2009 and all through the rest of President Obama’s administration, especially as the official number slowly came down from a peak of 10.0 percent to the most recent posting at the end of Obama’s term of 4.8 percent in January 2017.

    There has been much ado in the press on both the left and the right about the legitimacy of the official unemployment figure. Why? Because there are all kinds of numbers that can alter the number and give a different picture as to what is really going on.

    U-3 vs. U-6

    No, these are not two rival bands to U2. These are two column headings you may find when you look at the actual unemployment report instead of the articles produced from the report. The U-3 number is the official unemployment number, which is the percentage of people actively in the workforce but are not working (in other words, actively seeking work and who have been unemployed for at least three months). The U-6 number, which some will claim is the “actual” unemployment number, takes into account those who have been out of work for at least six months.

    The Workforce

    What is the really key number here is not the U-3 or U-6 percentages, but rather the size of the workforce. As that number changes, the unemployment numbers change. The workforce number is not static, and it especially has not been during the Great Recession and its aftermath.

    The unemployment rate is based on the size of the workforce pool, which is determined by the number of people eligible to work, the number of people actually working, those in part-time and full-time employment and those not working but actively searching for employment.

    What will you will notice as you add those numbers up and look through the unemployment report over the last seven or eight years, you will find that the size of the workforce has dwindled downward, meaning that more and more people are quitting the workforce altogether – even to the point of not searching for jobs anymore. There were months where the math didn’t add up – the number of jobs created in a month didn’t meet the number required to send the unemployment rate down 0.1 percentage point if the workforce number had remained steady, and yet the number would go down.

    Over recent years, the number has dropped more because the workforce (or labor participation) population has dropped and is not as much a result of jobs being created at any dramatic pace.

    The “Missing Workers”

    The phenomenon with the workforce is a subset of workers called the “missing workers” by the Economic Policy Institute. The group has been tracking unemployment and making a connection with this group of workers, which the EPI defines as workers who “due to weak job opportunities” are neither employed nor actively searching for work.

    What the EPI has noted is the the number of “missing workers” spiked during the Great Recession, and has not returned anywhere near the pre-Recession numbers. The EPI’s data set shows that at the end of 2006, there were an estimated 660,000 “missing workers” while the unemployment rate sat at 4.6 percent. As of January 2017, the unemployment rate was at 4.8 percent, but the number of “missing workers” was estimated at 1.85 million – nearly three times the 2006 level.

    In August 2009, the missing worker number was 410,000. The very next moth it shot up to 1.22 million, and that number has remained at more than 1 million every month since, except for one (the number dropped to 770,000 in March of 2010) – and this includes nine of 10 months in 2015 in which the number topped 3 million. All the while, the official unemployment rate continued to trickle downward.

    By the way, the 1.85 million “missing workers” in January was the first month the number was below 2 million since August of 2010 – more than six years.

    If you add in “missing workers’ to the unemployment equation, the “real” unemployment rate, according to EPI data, would be 5.9 percent, not 4.8 percent.

    Healthy Skepticism

    When the next unemployment report come out, look deeper into the numbers and don’t take them on face value. When you read about how many non-farm jobs were created in a month, take a look at the unemployment rate and the workforce participation number. A sign of strengthening is actually if the jobs created number goes up, but so does the workforce number. In that sense, the unemployment may not drop and might actually stabilize or move higher temporarily.

    If you notice the workforce participation number ticking up, then you should eventually notice the jobs-created number go up as well. If that number does not seem to go up at a similar rate to the workforce, then there may still be weakness in the market that will have to work itself out. It is possible that workforce optimism may precede the actual strengthening of the economy, but if there is anyting the last 10 years have taught us is – never take your news with a single bite. Always chew more information before digesting.

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  36. STOCKS vs. BONDS: THE CIVIL WAR

    Many of us are or were taught in economics about the counterrelationship between stocks and bonds in investments. Usually when an investor is seeking diversity, a portfolio will include a mix of stocks and bonds for this traditional adversarial relationship.

    Traditional Market Roles

    The story usually goes that when the stock market is in a bull run, the bonds go bearish, meaning that the demands for bonds goes down as stocks rise, making prices for the bonds g down and yields go up in an attempt to attract business.

    The opposite is (usually) true in a bearish stock market. When there is uncertainty or it looks like the market is taking a negative turn due to poor economic news, investors tend to invest more in bonds, which drive the prices up and sends yields down.

    However, for at least the last two to three years of the Obama administration, there have been some mixed messages to the point that tradition was broken and the stock and bond markets both trended the same – bear to bull and back again. The question is often whether to buy stock in private (but publicly traded) companies, or to buy bonds created from federal or state governments?

    About Stocks

    It makes sense that stocks and bonds would be adversarial in a yin-and-yang sort of way. Stocks are shares of a company – a person who invest in Apple, for instance, essentially owns a piece of the company. If you own Apple stock, you are a co-owner of that company. And if you own the company or want to buy some ownership, that usually means you are bullish about that company. You are betting that your optimism in that company will be well-founded and that you will make money on that bet.

    When the company is doing well, more and more people will want that stock, and as there is no unlimited supply of stakes, the shares that are on the market become fewer and the price goes up. And if you hold your stake long enough and then sell at or near the peak, you can make yourself some money.

    About Bonds

    While companies also sell bonds, stories about stocks vs. bonds usually deal with U.S. government bonds – that which the government puts out to bring in money to pay its bills every year – as the country is averaging an annual deficit of nearly $1 trillion. Bonds are essentially IOUs from the government to those who buy them – it is a promise that if you give the government money on this bond, the government will pay you interest on a regular schedule based on the coupon (interest rate) posted on the bond, until the date that the bond matures. And you get your initial investment returned to you at that time, provided you hold the bond at the date of maturity.

    While taxpayers may not like the federal government offering so much debt every year, investors in a way love it. Federal debt is backed by the federal government, so it is a very reliable investment. It doesn’t make a lot of money (current yields are in the 2-2.5 percent range) for an investor, but as most bonds are 10- or 20-year notes, it can be a reliable source of income over time, whereas even dividend-bearing stocks don’t offer dividends every quarter nor always at the same or higher amounts each time.

    The Trump Economy – When, and How High?

    With Donald Trump now President of the United States for the last month, there has been much talk about what might happen to the economy, based on Trump’s rhetoric and the reality of the molasses-in-winter movement of Congress. The current argument is not really about whether the economy will grow under Trump – the overwhelming consensus is that it will, based on his call for fewer regulations and lower taxes, never mind the sticky tax-reform talk – it is about how fast that growth will come.

    Those on the bond side say the growth will be a little farther down the road, and in fact thre may be more bond-buying opportunities in the next 12 to 18 months, because reduced regulations will take a little while to appear in the economy, and taxes at this point do not seem to be changing much and the effect may not be felt until later this year at the earliest. Even newly minted Treasury Secretary Steve Mnuchin is quoted to essentially say that it’s best to lower expectations at this point.

    On the stock side, the stock market has previously “baked in” Hillary Clinton’s “impending” electoral victory last November, and since Elction Day, the markets have shot out of a cannon upward, trusting that the Trump economy just has to be better than the Clinton econoy would have been. Any glimmer of optimism is enough to push stocks higher – the market is more of an optimism gauge for the future than a current state of the economy. Some say that stocks should be bought now in preparation because there is a sense that this could be another Regan economic boom – and that one didn’t take hold until a couple years into his first term. They think it will be the same with Trump, and jump on board now!

    Who Will Win?

    That is a difficult question to answer. There is no crystal ball, and with the way the economy has transformed and evolved over the last 20 years, what has traditionally been true in the markets and the economy could be completely obsolete and off-base this time. There seems to be optimism on the whole that the economy will improve (could it get worse, honestly?), and both the bond and stock markets are preparing for it. But how fast will the turnaround happen remains to be seen, and how large will the growth be is also hard to predict.

    From an investing perspective, you should have both stocks and bonds in your portfolio if you want to be truly diversified, but if you agree that growth will happen soon, then stocks are a good way to go. If you are more pessimistic, then stick with bonds – they take away much of the risk of stocks and at least give you some modest returns even in down times, which is something you won’t get from stocks in a bear market.

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  37. Is Your Behavior Sabotaging Your Investment Results?

    How often have we all heard the cliché, if it isn’t broke, don’t try to fix it? This refers to the tendency within many of us to fuss, fiddle and otherwise totally mess with something under the misguided belief that somehow we can single handedly create perfection. This is a subtle ego driven form of greed. It exists in all of us, often in hiding.

    Of course the other side of this are things like panic and fear that investors are forced to deal with every so often when some totally unexpected news- a black swan event greets us on a Monday morning. We can all agree that making life-changing decisions during either of these periods is absolutely a no-no. Unfortunately, these are times when investor emotions force actions to be taken. Having a systematic approach really helps.

    If this were truly so simple, why doesn’t it show up in any of the long-term studies? Not long ago, Forbes head honcho, Steve Forbes sat down with Columbia University professor Michael Mauboussin. Over a bottle or two of vintage spring water, they discussed how human behavioral tendencies are sabotaging investment performance.

    When the meeting was all over we learned there was far more than fear and greed that is screwing up individual investment performance. Here are some of the fascinating facts that you may have never considered.

    Conventional Wisdom Is Stupid

    The first is a bit of conventional wisdom. To avoid emotional bias, individuals should turn their hard earned assets over to professional money managers. The record shows long-term stock market returns run around 10% while mutual funds have produced just 5.5%. This shows the cost of paying for someone to worry for you. That may be acceptable to some investors, but we can all agree, paying for professional managers, does not offer superior results.

    But lets just accept luck for the moment. That doesn’t change the fact that in any given period, somebody ends up with the best results. The question is, what yardstick to use in your search for the world’s greatest manager. One of the most common ways is to inspect the investment record. But how long is appropriate and what about other issues like investment consistency?

    The Superior Performance Trap 

    Here is where the biggest human bias takes over. It is a variation of the buy high, sell low mistake we tend to use in picking stocks. Starting with a benchmark of 10% annual target rate of return, we naturally look for a manager with a superior performance. It can be even more tempting when the manager’s most recent performance has been spectacular. Who would disagree that this is far better than investing with some idiot that just lost money for his clients. The answer of course is that in an investment world controlled by chance, there are not geniuses or idiots, just lucky and unlucky players.

    Is this why there is such a deep conviction that the stock market is nothing more than a giant casino? Remember, the long-term return on stocks is a positive 10%. In Vegas, that 10% is about what is called the “vig”. That is what pays for all the buffet food. The legendary economist Milton Freedman stated, in Wall Street there is no free lunch.

    Reality Investing Takes Understanding 

    So what criteria to use in looking at investment performance? It is easier than you might think and can be applied to virtually any manager. The higher the target rates of return on investment, the greater the volatility. This may not be genius advise but if it so simple why does it so seldom get applied in real life. Taking this one step further, the higher the target rate of return, the longer the time period you need to commit. Think in long term chunks of time.

    For example, your looking for super max returns and that means peaking into the world of hedge funds. You find a candidate like hedge fund star John Paulson who in 2008 produced a total return of more than 40%. You extrapolate this performance over the next ten years and your next decision is how big of private jet will be needed to meet your billionaire lifestyle. Big mistake, in 2009 Paulson had big negative returns.

    So if your boggy is hedge fund type returns you are better off meeting with a manager whose approach is consistently applied but who just went through a down period of one or even two years. The odds are in your favor and for high return investing a 10-year period may work best.

    The opposite can be said the further down the return spectrum. A manager who promotes capital preservation and seeks to simply match the performance of the S&P 500 and has not delivered that performance anytime in the last 3 years is hardly in need of a 10 year period to show his or her stripes.

    Once this decision is made, the lack of patience is a quality that so often trips up investors. Consistency may be the hallmark of a boring personality but it is the key to investment success.

    After consuming copious amounts of vintage spring water, Steve Forbes and Michael Mauboussin agreed that for many investors shooting for market rates of return using Electronic Traded Funds (EFT) was the low cost way to match the best of the conservative investment pros. But if this is your choice do what Warren Buffett does with great consistency. Wait for fear to capture the market headlines before pouncing. Buy with a long-term horizon and fret when others are high fiving it. Always remember, only Star Trek’s Spock was totally free from bias. The rest of us are human.

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  38. THE OIL OF GLADNESS … OR SADNESS?

    Oil is everywhere. Besides food items, it is a commodity that is used every day throughout the world, and is invested in by the billions every year as an opportunity to make and grow wealth.

    Unlike food, however, it is perhaps the most maligned commodity in the world as well, not just for what is supposedly does to the environment but also the ways in which companies extract the commodity to put it into the market.

    Most food comes out of the ground too, but we digress.

    The Prevalence of Oil

    Oil is not just about jet fuel and car fuel. Oil is even more prevalent than that, as much of it not only powers engines, but it is also used in cosmetics, some hair products, lubricants and building materials, just to name a few. In just one day, the world consumes about 87 million barrels of oil, which translates into 3.65 million gallons. Per day.

    That is just the demand side. There is the supply side too, which is not entirely a zero-sum game. At least, it’s not in the current market, as prices are looking to find an equilibrium point since OPEC (the Organization of Petroleum Exporting Countries) cut back its daily production recently in order to send market prices higher.

    The Supply vs. Demand Dance

    Because so much oil is consumed each day, oil is arguably the most volatile commodity in the market. Oil essentially works on margin, meaning that prices will quickly spike or depress on any rumors of increased or decreased supply or demand, disruptions in transit or trade, and even economic factors having to do with various oil companies and their oil-exploration successes or failures.

    With that as a backdrop, it makes perfect sense why the Keystone XL and Dakota Access pipelines have gotten so much attention int eh news and in the markets. With technologies allowing oil companies in the U.S. and Canada to extract more oil from the ground than was thought possible 20 years ago, there is a surplus of oil in the markets, and that drove prices down to levels that were not sustainable for many oil-exporting countries (we’re talking $30-$35 for a 42-gallon barrel at one point).

    When that happens, some countries are forced to draw back the amount of oil they produce and export to other countries in the hopes of depressing the supply so prices will go up. They would much rather see more demand, but in the current environment they are seeing less demand partly because of increased domestic production of oil in the U.S. and Canada, which is collectively the largest region of the world in oil consumption.

    In the Pipeline

    One of the challenges of oil is getting the oil from the ground to refineries where it is turned into various oil products, such as several grades of jet and automobile fuel and lubricating or base oil for cosmetics, lubricants and even some cooking oils. Transporting oil can be a pricey endeavor, whether the oil is shipped by boat, train or truck.

    Pipelines have become all the rage lately as a way to have oil extracted in North America and sent along a pipeline to refineries in the southern part of the U.S., where the finished products are then shipped to ports domestic and international. Pipelines take a large initial investment in permitting, environmental anf financial feasibility studies as well as construction, but over time they are expected to greatly reduce transportation costs and essentially provide more oil to the refineries and increase the supply in the market, which keeps the price affordable for consumers.

    Oil as a commodity is volatile anyway, but it has especially ridden a roller-coaster with all of the stops and starts to Keystone and Dakota Access pipelines in recent years. As they say, time is money, and the longer these pipelines take to be completed, the more expensive oil becomes for everyone.

    Investing in Oil

    If you are looking for a commodity in which to invest a portion of your portfolio for the sake of diversification, oil may be a good choice if you don’t mind the volatility. As long as oil has been around in the market, it has never been worthless, but its price fluctuates on the tiniest of rumors of anything involving supply or demand.

    If you want to invest in oil, never take a short-term approach. And pay close attention to companies involved in the oil industry, from production companies like Exxon Mobil to oil exploration equipment companies. As the market ticks upward, these companies will all benefit because increases in price means an increase in profit, as many operational costs stay relatively steady regardless of the supply or demand.

    However, if demand continues to increase and a company decides to open more exploration, that company may see its stock drop because the profits that may be gained by higher oil prices will be spent on the expense of a new exploration that may or may not prove fruitful.

    The Bottom Line

    Oil is a commodity that is interwoven in all parts of the economy, as there are very few industry verticals that don’t consume some oil to operate. Paying attention to oil supply and demand notes that come out weekly can be a hint as to where to look to invest. But don’t look for a quick buck in oil; it’s far too volatile to really time the market and be able to jump in and out as you see fit. Ride out its volatility and see it smooth out over a long period of time. There is a supply in the ground that may last the world a couple of centuries, and while alternative energy sources are trying to gain traction in the market, oil will still be needed in many economies for the foreseeable future, so there will always be a reason to be bullish on oil.

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  39. WHAT HAS THE TRUMP RALLY LOOKED LIKE? HISTORIC

    If you can indicate the political mood of the country by the stock market, then there is a case to be made that Donald Trump’s presidential victory rates as truly one of the big upsets in presidential election history.

    And this because 2016 became the Dewey defeats Truman moment for the polls.

    Dewey Defeats Truman, Redux

    For months leading up to the 2016 election, 90 percent of all the polls that were released in the media showed Hillary Clinton poised to win over Donald Trump. The polls were all over the map, but on average in the week leading up to Election Day, Clinton was holding about a 2-4 percentage-point lead in the polls.

    The only problem for the polls was that America is a republic, not a direct democracy. The polls essentially were right in that Clinton did win the popular vote but Trump won more states in the Electoral College, making it the second time in the last five presidential elections (and only the fourth time ever) that the candidate which finished second in the popular vote won the presidency.

    What can be said about the stock market in the wake of this election?

    Pop It Loose!

    It seemed that the market believed the polls, and had baked in a Clinton win – or, as the markets seemed to indicate, policies that amounted to a third term of Barack Obama. As markets seem to be a snapshot of future sentiment, a Clinton win was seemingly depressing the markets heading up to Election Day.

    But since early November, the upset win of Trump has sent the market in a reverse trend, a bull market that has not been seen post-election in a very long time – and it has been sustained for more than three months now. Three major indices – the Dow Jones Industrial Average (DJIA), the NASDAQ Composite (NASDAQ) and the Russell 2000 (RUT) are all way up over the last three months, and their trajectories have not flattened. Let us take a quick look at all three of these averages over the last three months.

    Dow Jones Industrial Average (DJIA)

    The Dow is often noted as the broad market snapshot in the media, and before the election it was not sniffing any significant milestones. In fact, the average was hovering between 17,500 and 18,500 for more than four months leading up to Election Day. Those were the months just before the two major party nominating conventions and on through the heart of the general-election campaign. Clinton was leading most polls during this time, and many of them by significant margins.

    At the close of business on Friday, November 4 – the last Friday before the elections – the Dow Jones Industrial Average (DJIA) was at 17,888.28, well within the range it was hovering for the four months prior to the election.

    In the three months since, the market has spiked like it was spring-loaded. Over the last 100 days, the market has skyrocketed 15.2 percent, zooming past the all-time high milestone of 20,000 and closing at 20,611.86 Wednesday, February 15th.

    In fact, Trump’s stock-market rally from Election Day to his inauguration challenged Dwight Eisenhower’s in 1953 of 6.3 percent – but Trump’s rally has more than doubled in size in the month since he was sworn in. The largest election-to-inauguration rally recorded was Herbert Hoover’s, as the market went up 13.3 percent from his election in November until his inauguration – in March, two months later than all inaugurations since.

    NASDAQ Composite (NASDAQ)

    In the tech-heavy NASDAQ Composite Index, the story is pretty much the same as with the DJIA. The Clinton “inevitable win” seemed to be baked in in the months leading up to the election, with the NASDAQ in the 5,000-5,500 range from early July until the week before the election, a range consistent with the Dow.

    For four months it went virtually nowhere and finally bottomed at 5,046.37 on November 4th, the Friday before Election Day. In the three months since, the NASDAQ has soared 15.3 percent, closing at at a record 5,819.44 Wednesday, February 15th.

    The Russell 2000 Index (RUT)

    With Donald Trump talking much about reducing regulations and easing demands on businesses, it would seem to be logical that Trump’s win would spur similar growth in the small-cap market as it has in the broader market indexes like the DJIA nd NASDAQ.

    And with Trump’s win assured, that positive momentum has come to pass on the belief that small- and mid-size businesses will be able to grow faster with Trump’s promises of deregulation and the repeal and replacement of ObamaCare. And based on the Russell 2000 Index (RUT), which tracks 2,000 small-cap stocks, the small businesses seem to be even more enthused about the Trump presidency.

    The Russell 2000 Index (RUT) was at about 1,089 in late June before making a small rally into the 1,200 range in early July, and it stayed between 1,200 and 1,270 for most of the next three months. Just before the election, as polls seemed to show Clinton winning, the small caps took a downward turn, settling at 1,156.885 at the close of business Thursday, November 3rd.

    But in the three-plus months since that upset, the small caps have taken off, jumping a remarkable 21.4 percent to close at 1,404.207 Wednesday, February 15th.

    If this rally holds for two more weeks, Trump’s post-election market bump will be the highest in recorded history for any inauguration, whether in January or March. The current pace will eclipse Hoover’s upward move by more than 2 percentage points, or about 15 percent.

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  40. AN INVESTOR’S GUIDE TO M&A

    Mergers and acquisitions (also called M&A) are a very important tool in a business toolbox for rapid growth of a business, improved shareholder value and gaining a vital edge on competition.

    At least, those are always the motivations for such a move, but amazingly many of these don’t pan out that way.

    But, if an investor like you were to read the financial papers and read about rumors of mergers and acquisitions (weeks before they actually happen), you could find some great opportunities to make some money in the markets if you make the right moves.

    Let’s first take a look at the anatomy of an M&A from an investing perspective. This may help us see what might be possible amid the talk surrounding Verizon Communications buying Yahoo! Inc. for nearly $4.5 billion in the latest telecommunications salvo in the war between Verizon and AT&T, Inc.

    The Newest Cycle

    It seems that M&As have their own trends, like clothing trends. Back in the late 1990s, a lot of mergers and acquisitions took place in the dot-com space and resulted in several megacompanies that survived the crash of 1999-2000 – including Yahoo!, Google (now called Alphabet), Apple and Hewlett-Packard. In the mid-2000s the big sector that saw much of this M&A work was in the oil and gas industries, ten earlier this decade a lot of biotech companies were in the M&A crosshairs. Lately, it has been telecommunications.

    From buying up Dish Network and DirecTV, AT&T and Verizon have dominated the telecommunications landscape for the last decade-plus, and every so often one or the other company does something to fend off not so much the other, but possible competition among Sprint, T-Mobile, MetroPCS and others.

    The cycle is firmly in telecom now, and this Verizon purchase would be a huge effort when and if it gets regulatory approval to absorb Yahoo’s core business.

    M&As in a Nutshell

    So what’s the big deal about mergers and acquisitions? And why should you, as an investor, care?

    Here are the main reasons that a merger or acquisition takes place:

    • A company can grow organically, but it takes much longer – years instead of months or weeks with an acquisition or merger. And if you are in a competitive industry ormarket, growing quickly can make the difference between survival and extinction.
    • Starve competition. One great motivator for an M&A imay not be so much for the acquiring company to get the target firm for itself, but it’s more to deny that target firm’s assets from getting in the hands of the competition. This can be especially true if the target firm has a unique and attractive set of assets that may not be easily replaced by another company.
    • Lead the league. Maybe a well-placed acquisition moves your company to the top of the heap in your industry or geographic location. If the No. 1 market-hare company were to buy the No. 3 company in an area and be much larger than the No. 2, that may contribute to snuffing out competition and leading that company into domination of that area.

    You can see that there are some compelling reasons for M&As to occur. However, it is estimated that nearly half of all M&As don’t quite work as they were supposed to – and in fact, a large percentage of them actually fail. Why?

    • Pay too much. Maybe a target company looks very attractive to an acquiring company, and perhaps that acquiring company pays far more than the target company is actually worth, just for the sake of making sure no one else wins the bid. If something happens with the target company – such as it is found to have “cooked the books” or had fraudulent activities that adversely impact its reputation and value, the acquiring company winds up getting far less in return on its investment.
    • Salad, not melting pot. Two company cultures have to come together in an M%A, and oftentimes you’ll find that their business cultures and models may be radically different in that the new company can’t find an identity and can’t blend together into a harmouious whole. Divergent approaches, personalities can keep the companies separate and thsu they cannot provide the desired efficiency sought from the merger in the first place.

    How to Play an M&A as an Investor

    Mergers and acquisitions are tricky, but they can be played to great success if you understand the reasons for the rumors and what both companies involved in the rumor will gain. But you have to be careful; not all rumors end up being true, and not all rumors that seem true end up working out – either because one of the firms backs out at the last minute for some reason or a regulatory entity shoots down the deal perhaps on monopolistic grounds.

    If you wanted to play a merger, keep an eye on M&A rumors in the financial papers. A rumor that stays in the headlines for more than a couple days probably has some teeth to it, and think of the play this way:

    The acquiring company’s stock normally goes down in the days prior to a merger or acquisition happening, and may stay down for a time afterward before moving up. Why? The company offered a premium price for the target firm’s stock, which depresses the stock because there is less capital in the company.

    On the other side, the target firm’s stock usually goes up upon news of an impending buyout or merger, as the acquiring company paid signficantly more than the stock is worth on the open market in order to secure the merger and motivate target-firm stockholders to sell. With that premium price, the stock goes up to better reflect the price offered by the acquiring company.

    Once the merger or acquisition goes through, as long as everything works smoothly, over time the acquiring firm’s stock price will eventually go up to reflect the increased value of the company with the new assets, especially if the acquisition does improve market share of the company while increasing efficiency internally.

    In other words, with the right advice, you can buy the target firm and sell the acquiring firm at first, then buy the acquiring firm once the merger takes place.

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  41. UNCERTAINTY AS A COMMODITY

    In the world economy, there will always be times of uncertainty. If uncertainty was a commodity, you would be buying and selling it often, because at least one part of the world will have some uncertainty attached to it at some point.

    The United States is more than $20 trillion in debt.

    England will be leaving the European Union.

    Greece is months away from bankruptcy and getting itself kicked out of the EU by force.

    Three European countries (Netherlands, Germany and France) are having national elections soon, with each country putting forth candidates that are campaigning to get their countries out of the European alliance.

    China continues to manipulate its currency. North Korea keeps testing missiles. Japan is on its second Lost Decade.

    Investment is About Directions

    Notice the word “directions,” plural. No matter where you have uncertainty, you can and should never invest in only one direction – one country, one industry, one investment vehicle. Even when the weather-vane of the markets is pointing in one direction, one should always have a multi-directional weather vane so you are prepared for the winds to change.

    Because they will change. What you were certain about this month, you will be uncertain about next month. And it is always said to never invest when you are uncertain.

    But it is also always said, once you are in a market, it is never a good idea to get out of the market entirely when uncertainty hits. So what to do when your multi-directional weather vane is reading the winds in no direction whatsoever?

    A Golden Opportunity

    If you are thinking of investing in uncertainty, because there will always be a supply of it and enough willing people to buy it, then you won’t have to get out of commodities altogether if and when uncertainty hits, as it tends to do when the Middle East explodes.

    To follow the advice of not pulling entirely out of a market in times of uncertainty – every market whether it’s a region of the world, an industry or an investment vehicle, has a “safe haven” for just these times.

    For the commodities markets, that safe haven is gold.

    Gold gets into the headlines every time there is uncertainty, especially in the U.S. markets. When the stock market corrects or crashes, gold-buying commercials are rampant.

    But that goes against the “buy low, sell high” investment mantra. If you were to invest in gold, you would do it when you were ready to sell at your peak and use gold as a protection from the correction or crash.

    Gold can be a valuable asset when you are not just confused, but also when you’re scared. Why? While gold can be volatile, it is not nearly as volatile as other commodities such as oil or natural gas, or even some food items. Gold is generally stable, though it does have bull and bear runs – but it’s rarely in a very short amount of time like days or weeks. If you are a little late getting in on a bull run, you can usually hop on the train and still ride it because fear takes time to work its way through a market and sometimes even longer to be relieved.

    Trump and the Gold Bulls

    As with many markets leading up to the U.S. presidential election in 2016, commodities like gold had a Hillary Clinton win “baked” into its pricing. With many thinking that Clinton would win and press forward with many of the policies of the last administration, there was a bit less uncertainty in the markets among investors. For the most part, they pretty much had an idea what they were going to get in a Clinton administration, so markets were somewhat stable.

    Then November 8th happened.

    While the stock market has rallied feverishly in the last three months (up more than 15 percent since Election Day after being flat in the four months prior), gold has also rallied.

    That doesn’t make much sense, usually. Buying into a stock market is usually a sign of certainty, while buying into gold is a sign of uncertainty or fear. So what gives?

    It’s a two-edged sword. The stock market is optimistic about the future growth of the American economy, while gold is uncertain with the world economy. All the “fires” that are burning right now, mentioned earlier in this piece, are the factors that are driving more investment in gold, and have driven a bull market that perhaps not even a Fed interest rate hike (or two) will change.

    Trump is being blamed or credited for the bull market because while Clinton was “baked” into gold prices, Trump’s apparent like for more government spending (at least based on some of his stated policy positions) has surprised some into thinking that at least some of Clinton’s policies may be implemented after all. And with the debt number already unsustainable, Trump’s rhetoric before he submits his first budget has created an extra level of uncertainty, if not outright fear, about how sound American fiscal and monetary policy are in the coming years.

    When it comes to gold, make sure to stick to the same philosophy as with stocks or most other investment vehicles: Buy low, sell high. Buy the uncertainty, sell the fear.

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  42. SHELTER YOUR INVESTMENT IN HOUSING?

    On the one hand, you want to be bold in your investing. Other the other hand, you would love to shelter it from heavy risk, especially risk that is unnecessary for the returns you seek.

    Would housing be a good shelter for investment money, like it is for your family?

    About Real Estate: The Good

    Among the various investment vehicles, real estate is a unique vehicle because it is one of the few tangible assets, and it is about the only investment in which the owner or investor can have control over the valuation of the property – such as, whether to maintain the property, replace roofs, get new tenants, evict bad ones, etc.

    Real estate can add diversity to your portfolio, whether you buy a single property in which you will reside, or whether you will buy one or several buildings to rent or lease. There are some advantages in getting involved in real estate as a part of your overall portfolio:

    1. Less risk on yields. With real estate in your portfolio, you can maintain any current yields you’re receiving with decreased risk, as real estate is a bit more stable than most vehicles (stocks and commodities, for example) and rarely becomes worthless. Real estate could also maintain your risk level but increase your yields, especially rental properties that remain rented consistently.
    2. A hedge. No, we don’t mean the bush being a shelter, but rather that real estate can be a hedge on inflation. Many rental properties have stipulations in their rental agreements that allow the owner to increase rent with each new lease according to an increase in inflation, so as long as the property remains rented, the income received will always be a step ahead of the cost-of-living increase.
    3. While housing markets have their bull and bear runs like other investments (the existing-home market is running at a high pace nationally of late), real estate is never worthless and as a long-term investment it can average 4-5 percent growth annually, which keeps pace with inflation. It makes sense to park some of your nest egg in case inflation saps your buing power later.
    4. Unlike stocks or other commodities, where market forces tend to dictate price and value, with real estate you own you have some control over the value of your property in the market. If you maintain it properly, keep up good curb appeal and have reasonable rents where it is rented regularly and you have a good vetting process for quality tenants, you can increase the value of the property regardless of the market. When you don’t do these things, your property can drop in value regardless of the market.

    About Real Estate: The No-so-good

    Also, you should know that while real estate has a lot of upside, there is also some downside just like with other investments. Before you decide to get into real estate, you will have to weigh the pros mentioned above with these cons:

    1. As you might imagine, getting into real estate involves a heavy initial investment (unless you get into a REIT, which will be explained in a minute). Not only that, but the time and cost to maintain and operate it, and potential cost when a tenant doesn’t pay the rent, can also be expensive.
    2. No liquidity. If you need money quickly, don’t put that money in real estate. Real estate is very difficult to buy and to sell, and any money you might need from a real estate investment can’t be taken out until you sell the property. Your money is locked in, as the property can take weeks or months to sell.
    3. Market timing. Because it is so hard to buy and sell properties, trying to time the market to take advantage of bull or bear runs is a matter of luck, hoping that the run lasts long enough for you to get in or out accordingly in the weeks or months it takes to buy or sell. And any run doesn’t happen quickly, so you could miss the beginning of it because the movement is subtle over months – and by the time you notice it may be too late.

    What about REITs?

    A low-cost option for getting into real estate is via an indirect route called a REIT, or a real-estate investment trust. A REIT is an investment vehicle that is traded in a similar fashion to a stock. To invest in a REIT is to invest in a company or association that owns and operates rent-bearing properties such as apartment buildings, shopping centers, commercial or industrial facilities, and residential properties.

    The advantages of a REIT as a real-estate investment are that a REIT is like a stock, so the money invested is fairly liquid and you can get money by selling your shares in minutes with a phone call to your broker. Also, like a stock or bond, to invest in real estate through a REIT takes a minimal up-front investment of $500 or $1,000, instead of six-figures like an actual real property. Also, REITs can provide better returns on your investment as an annualized percentage over time, that far exceeds that of inflation in some cases.

    The downsides to investing in REITs are that with such a small investment, it will be hard to make significant monetary returns. Though you have a much larger initial investment in real property, it can be a shorter time to make $25,000 on that investment than if you invested $5,000 in a REIT. Also, with a REIT you don’t own any property yourself, so you are not in control of increasing the value of your investment. REITs also have the risk of being worthless and have volatility that is more significant than direct real property.

    In Summation

    Real estate can be a wonderful investment, whether you buy real property or go into a REIT. However, because of its various pros and cons, it should never be a large portion of your portfolio but instead should be part of a diversified group of assets that can provide some shelter for your nest egg, stability in the long-term and beat inflation to allow you to have more buying power when you sell.

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  43. A LITTLE STORY ABOUT BITCOIN

    In a digital world such as ours, currency is almost becoming obsolete. With so many smartphones and debit- and credit-card readers being used for point-of-sale transactions these days, the paper and metal currency and coins that we have used for more than two centuries have now become quaint.

    In a digital world, money has moved from cotton paper to a series of zeroes and ones. It would make sense that in this new world, a new currency for online and digital transactions would be formed for these specific purposes. But there are a lot of questions about this new currency, called Bitcoin – namely, what is it really, and how prevalent can it be in an economic universe in the tens of trillions of dollars when there is less than $20 billion worth currently in circulation? (Two billion is 0.2 percent of 1 trillion. Just so you get a picture of the small universe we’re talking about here.)

    What is Bitcoin, Anyway?

    How to define Bitcoin is pretty dependent on who you ask. According to the “official” Bitcoin website, Bitcoin is actually a “consensus,” decentralized, peer-to-peer payment system that uses digital money. Bitcoins are used in this system for transactions much like cash would be used in brick-and-mortar stores. There is one government agency that considers Bitcoin a commodity (we’ll look at that in a minute), and there are others in the financial world that see it as a currency. Commodities and currencies have different regulations for their use, so the distinction is important.

    The Bitcoin Market

    As Bitcoin soars to a new high in value (nearing $1,200 per coin), the market for bitcoins is pretty expansive for it being a small universe. At last count, there were more than 100,000 merchants that accept Bitcoin as a valid form of payment for online and web-based transactions. The currency and the payment system have been growing slowly since its inception in 2008 and it currently has a universe worth about $18 billion. At the current valuation, that means there are about 15 million bitcoins currently in “circulation” – a sort of misnomer, as bitcoins are not circulated in the public monetary system but just within the Bitcoin system.

    Bitcoins in some ways are a lot like foreign currencies compared to the U.S. dollar. The U.S. dollar is generally stable in value inside its national borders, and it compares to other currencies in exchange according to the market supply and demand of the various currencies in each country. With that, bitcoins will fluctuate in value, which means if you were to buy something with a bitcoin, it doesn’t have a stable rate of exchange like a $100 bill does. It is almost like selling the bitcoin for cash according to the value of the bitcoin at the time of the transaction.

    Currency or Commodity?

    That is a very good question, because it’s not as obvious one way or the other. On the one hand, bitcoins are used to pay for goods and services online and in an exclusively digital environment. In that sense it is a currency. On the other hand, Bitcoin is a decentralized payment network that does not have a central bank or central processing, so it’s like using a commodity like gold bars in a sort of barter system, where one trades bitcoins for a good or service that another possesses.

    And because bitcoins do not have a face value on them like regular currency, it can be thought of as a commodity because the value of a bitcoin fluctuates wildly according to market forces within the Bitcoin network. While a bitcoin may be worth nearly $1,200 today and was worth about $1,100 in 2013, in between the value plummeted as low as $200.

    An Investor’s Take

    While an institutional investor like Goldman Sachs is on the record as investing in Bitcoin, it doesn’t mean that you, as an individual investor, should do it. The bitcoin market is very small in relation to the overall economic universe, and because it is small, the value of bitcoins will be perhaps the most volatile of any currency or commodity on the markets. And if you want to think of it as a commodity, that means you will want to invest and hold the bitcoins, which means you would be reluctant to engage in the Bitcoin system and network.

    And with only 15 million bitcoins in “existence,” holding a few of them can cause the value of the bitcoins to ebb and flow according to how many others hold it like you would, or how many will use and spend them freely in the network.

    Bitcoins are treated like a currency, but are looked upon as a commodity in need of regulation according to the Commodity Futures Trading Commission (CFTC), which wants to provide regulatory oversight of the Bitcoin network. Bitcoin is an interesting concept, but getting involved in such a small universe as an investor would involve an awful lot of risk – perhaps too much for all but the most daring individuals who may have some money to gamble, when the casino or the horse track aren’t interesting.

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  44. POTUS TRUMP: IS THE RALLY BIGGER THAN THE REALITY

    If I were a government employee ensconced deep in the bowels of the Interior Department, FBI or The IRS, I’d be embarrassed. It has only been a little over three weeks since Inauguration Day and the new POTUS (a.k.a. The Donald) has accomplished more than many Washington DC 9-to-5’ers did in all of 2016.

    But is all the hype being matched with reality? In the new world of Presidential conduct, nobody wants to incur the wrath of a Trump Tweet. There is a clear incentive for business to at least give the appearance that the Trump rally is genuine.

    Corporations like General Motors to General Electric are busy making splashy headlines about manufacturing projects that will create US jobs. Even House Speaker Paul Ryan seems to be falling into line. The new administration got off to a rousting start, but Washington is a muddy swamp that is hard to drain.

    Mr. President is out to embarrass every politician since BT Barnum by actually living up to his campaign promises. Democrats may roll there eyes when ever the Trump name is mentioned, but you got to respect any politician who seeks to tell the truth and deliver on their promises. But can he do it?

    As a lifelong Republican, I hate to acknowledge, the odds are stacked against it. All the evidence suggests lower taxes will stimulate the economy but do little for the staggering $20 trillion (and growing) national debt.

    The United States has enjoyed an extended period of very low inflation. Bringing jobs back to the US where wages are 10-20 times higher than in places like India will bring with it sizable inflationary pressures. Then there is that sticky issue of getting Congress to fall in line with hostile trade legislation.

    Considering how unorthodox and even scary Trump’s campaign promises were, it is amazing how the financial markets have reacted. Just look at US stocks. Since Election Day, the NASDAQ is up over 15%, and the S&P 500 by nearly 13%. The bellwether Dow Jones recently closed above 20,611 marking an all time high.

    The often ignored CBOE Volatility Index (VIX) fell like a stone from over 22 back in November to just a smidge over 10. Translating this into English, the market psychology went from OMG (Oh My Gosh!) to OMG (Oh My Goodness). This single measure tells the whole story about investor expectations.

    The last few months market appreciation has been 50% greater than a full year average. And, it has occurred in the face the Fed raising interest rates in December and the yield on the 10 year Treasury Note increasing an astonishing 44% hitting 2.6% before retreating slightly.

    Putting this into perspective, raising stock prices of this magnitude accompanied by rising interest rates of that magnitude has simply never happened before.

    Here is an important distinction between a stock market rally and true economic reality. Mr. POTUS’s growth rate target contained in his campaign and one that this stock market rally leans on is 4%. This is a long way from fourth quarter 2016 GDP growth of only 1.9% and 1.6% for all of 2016.

    The New York Times called the 4% target, . . .”audacious at best and fanciful at worst especially given the 2% rate or so growth that has prevailed since the current recovery began in 2009.”

    Granted one would expect the New York Times to be the loudest naysayer. Nevertheless, many economists share this point of view. They argue with some authority that demographics and stagnating productivity make the 4% target a higher wall to climb than the one Mexico is going to pay for.

    With such a gap between current and projected economic growth, with multiple interest rate increases very likely in 2017, it would be reasonable to expect investor psychology to be brimming with angst. Instead the VIX around 10 suggests just the opposite.

    The current trailing 12-month value on the S&P 500 is 26.31 times earnings. This is the third highest valuation going all the way back to 1880. About the only time valuations were so inflated was in 2000 during the dot COM bubble. We know how that turned out.

    It would be unfair to end here without giving credit to the list of business friendly plans President Trump is likely to get through Congress. If his ambitious agenda is only half successful, “America Will Be Great Again”. That is why the years ahead are exciting. This is why the market will draw investment capital.

    The reality today is a more somber story. It is just a matter of time before this reality sets in, probably before Melania and Baron move into the White House. So keep your seat belts on and your buy tickets ready.

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  45. My High Price Ego: Don’t Let This Happen To You!

    Ego is both a powerful force and a deadly weapon. Without huge egos there would be no Tiffany & Co. on Fifth Ave, no Harry Winston or Anna Wintor. There would be no such thing as a G6. Instead of marble and gold, Trump Tower would be simply a pile of steel, glass and sheet rock. Thank heaven big egos are here blazing a path to boundless materialism. What, pray tell, would the world be without them?

    The problem is egos and common sense are in constant conflict. For most of us, myself included, the conflict never ends. There is no better example of this then when it comes to making a decision on what size, type and model of car to buy.

    Car companies spend hundreds of millions of dollars in design and market research. Every model is carefully sculpted to the ego of virtually every identifiable buyer type (Ego). Insecure males with the need for validation are offered the Dodge Challenger with the option of either a 393 horsepower overhead cam engine or a $3000 optional 595 horsepower super charged power plant.

    Directionally challenged women seeking security and protection in a pretty package are offered a cherry red Lexus RX SUV with a $3000 optional navigation package. Notice how politically correct we have been by not guessing how few of the expensive packages ever get used.

    We see this scenario-taking place all the time. Does anyone really believe that the $3000 option actually costs the car manufacturer anywhere near that much? Of course it doesn’t. It is called ego marketing and it works. I know this for a fact because I have fallen victim.

    Some things in our daily lives are nice little luxuries. One of my little indulgences is the CuisinArt 12 cup coffee maker that grinds the beans and brews the coffee in one simple step. It is a beautifully designed work of art that I display prominently in the kitchen. It cost $400 and I know some day it will break and need to be replaced. The thought of ever buying a used model never crosses my mind.

    But a car is totally different. With the exception of our homes, cars are the next biggest item to suck up our bank account. That is where Ego and common sense come into conflict. Most of the time, ego wins out. Imagine how much satisfaction there is to derive in knowing that the neighbor hates your guts for owning a $126,000 Testla Model X.

    If we are ever able to create real financial security we have to know when following our Ego will lead us in the direction of poverty. That’s why the automobile is a dangerous weapon of mass destruction.

    Rule 1: Never buy a new car. If a purchase must be made, look for a model that is at least 2-3 years old, preferable with mileage of no more than 10,000 miles per year. Cars depreciate faster than any other asset of their size so let the original buyer be on the loosing side.

    Rule 2: If at all possible pick a car that you can pay for in cash. Financing a depreciating asset is simply a loosing idea from the start.

    Rule 3: If you can’t live without a new car, give serious thought to leasing. With a little bit of work, you will find it is cheaper the purchasing. Never put money down on a lease. You’re better off making a $3999.00 donation to your favorite charity.

    Rule 4: Unless you live in Silicon Valley or Beverly Hills where people are judged more by their brand than their brain, buy the cheapest model of whatever brand you choose. Leather seats and navigation systems are for people who don’t mind working until their last minute of life and then leaving lots of debt behind. The rest of us have better ways of living. Friends don’t let friends drive with leather seats.

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  46. Smart Financial Planning: Make Saving Your Craving

    I have a confession. I love cookies particularly oatmeal raisin. I have one with my mid morning coffee, another in mid afternoon. Then, if no one is watching, I slither into the kitchen late at night. That’s where all restraint gets tossed out the window.

    If you have the impression that I am some obese character totally lacking in will power, not to mention, common sense, you would be wrong. I am the same 180 pounds that I was in high school. I am also an avid fitness freak running 15-25 miles a week and spending the rest of the time in the gym. My heart rate is an amazing 55. The primary care doctor in my last physical described me as “the poster boy for good health”.

    So what do oatmeal cookies have to do with successful financial planning? The answer is habit. My intimate relationship with oatmeal cookies started about five years ago with only one. Slowly it built until today I am a five-a-day oatmeal junkie.

    When not eating them, I am thinking about them: smooth, delicious and so chocolaty.

    Successful financial planning is no different than developing addictions to something like delicious sugar filled raisin infested oatmeal cookies.

    Getting started is the hardest part but it doesn’t have to be. For many the stumbling block is between their wishes and dreams (translation: having huge wealth) and the process of getting there. Starbucks is a prime example.

    Most people will not think twice about spending $5 for coffee each day so why not start putting $5 aside every time you go to Starbucks. If you have an online bank account, simply open a savings account that is connected to the main account. While you sip away at your super Grande Latte just make a $5 transfer into your savings account.

    The irrefutable law of addictive behavior states that as some point you will see your savings becoming more meaningful and you will keep putting the $5 in everyday with or without the help of a Starbucks booster. That is when the craving for savings takes over; bingo you’re hooked.

    Lets say your present age is 25 and your addiction lasts for 30 years during which you open a tax-deferred account like an IRA. Over time there will be good years and bad but on average your yield is 10%. It all adds up to over a $120,000 of cash from your addiction. And that if you start with just $5. Believe me, that ends up being a lot of oatmeal cookies!

    The idea is to find a pain free technique to get started. If you are over 25 it doesn’t matter. Instead of putting in $5 start with $6 or $7. Wherever you start, there is a very good chance that you will see the money piling up and become obsessed with making more, faster.

    From experience, I think of this as the Marathon Training syndrome. You start out with a pain free easy distance like one mile. Before long you are competing in 5K and 10K races and after that it is straight to the big 26.2 mile run. Ok, so get on your running shoes and let’s head out to Starbucks.

    Why is all this lecturing about savings so important? America is a country whose personal finances are in worse shape than the Federal Government. Yes, it’s that bad. Quoting the February 15, 2017 Wall Street Journal, “Americas 75 million baby boomers have piled up more debt while holding less savings than generations before them…”. The average savings of this group has fallen to a paltry $14,500 compared with almost $100,000 in debt. There are actually people in this advanced age group that are still paying off student loans!

    In the past these issues were less important. Nearly half of the households in America in 1985 were covered by things like the company pension plan. We all know where that has gone. Today less than a third of retiring family receive income from a pension fund.

    This is a wake up call to all millennials, don’t let this happen to you. If you think you can outsmart the system by earning more, working until you draw you last breath or marry a rich old spouse with a bad heart, the odds of your strategy succeeding are pretty low. No matter how blissful the present may appear, imagine yourself 50 years from now when your skills are obsolete and you find yourself in a blue Wal-Mart vest greeting shoppers in Omaha Nebraska at $12 per hour. Take the first step today and at least open an IRA account. If you do, I promise to share my wife’s oatmeal chocolate chip cookie recipe. Start the habit.

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  47. Making America Great BT (Before Trump)

    We have been carrying on lately about robots, the poor return on investment from a high priced private college education and even the idea of placing an income tax on robots. It’s time for some truly inspiring example of people working together to address economic problems. Former Speaker of the US House of Representatives, Tip O’Neill is credited with the saying “All politics is local”.

    The Trump administration approach to our structural economic weakness is to drain the swamp in Washington and in the process, change the system.

    The cry for changing the system is a great vote getter, as our President well knows. Who, after all, wouldn’t like to send the infamous order, “You’re Fired” to the IRS or to get rid of the Department of Energy like Rick Perry thought of doing? As desirable a goal as that is the unintended consequences can be as painful as the solution. And fighting to get Congress to go along is no cakewalk.

    So what about a solution that starts with the acceptance of the government being a fixed piece of cement? Our goal is not to change it just simply stop it from getting worse. Better yet, work to create solutions that work within the present structure.

    The Story of Dunwoody

     As reported by Stephanie Clifford in The New York Times, the Minneapolis-based Airtex Design Group wanted to shift an increasing amount of its production from China to the U.S. because customers were asking for more American-made goods. Their issue was finding cut-and-sew workers, with 77% of US labor force lost since 1990. So Artex formed a coalition of manufacturers along with Dunwoody College of Technology in Minneapolis to train a group of 20-somethings over a six-month period. The cost: a mere $3,695 per person. And the tuition was paid for by local charities.

    The result? Airtex pays its workers about $13 an hour plus benefits. That’s a hell of an improvement over $8 per hour flipping burgers at Burger King. Overall wages in this sector have increased 13.2%, adjusted for inflation, since 2008. That’s a hell of an improvement compared to the average American household, where wages remain largely stagnant.

    Talk about a win-win situation! Look at what Airtex was facing: wages for its Chinese workers more than quadrupled in recent years, to just under $12 per hour. That was another reason they brought jobs back to the U.S., too.

    And let’s say those local charities hadn’t paid that tuition. In other words, let’s do the math: tuition of $3,695 spread out over 30 years at 5% interest equals a little less than $200 per month. Based on a pay scale of $13 per hour, that is less than 10% of monthly income. Bravo Dunwoody College of Technology!

    The Airtex-Dunwoody coalition is a model for the rest of our economy. It’s the kind of idea that the Obama administration totally overlooked throughout his time in office.

    Interestingly, none of the Dunwoody experiment relied on a government program or federal job training. It resulted from groups of like-minded people working together for the common good. Just imagine if they needed government approval or an Act of Congress to go forward.

    Technology is changing the needs of the workplace faster than our educational system can keep pace. Even online courses have a short life cycle. Institutions working with business provided a cost effective difference.

    We can only imagine what might happen if other communities, in other parts of the country, put their creative juices toward solving our economic problems. Remember the government shutdown a couple of years ago? If more communities and business got together, maybe we would shut down the government more often.

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  48. The Emergence of Techno Socialism- A Modest Proposal

    The Future Will Never Be The Same

    Fast forward to the year 2033 and imagine for a moment receiving your copy of The Virtual Wall Street Journal. It is early February and the government is about to release the latest figures on the state of the US economy.

    Based on the action of the futures market, the Virtual Dow Jones Industrial Average is set to open at 20752. Veteran UBS market pundit Art Cashin poetically noted how the Dow has not changed in value since February 2017. At this point candles are lit in celebration of Art’s 108th birthday. Unfortunately, the legendary voice at CNBC is the last living floor trader on the New York Stock Exchange, so no one was present for the festivities.

    When asked to explain how it was possible that the value of the Dow Industrial Average could be unchanged for such a lengthy period, Art thought for a minute, scratched what was left of his comb over and remembered that after February 2018 there weren’t any industrial companies left in America. Stock exchange officials had decided to continue posting the meaningless average as a patriotic tribute. Said Art, all the action is now in the Dow Jones 30 Stock Technology Average.

    At 10:00AM EST, the Labor Department is set to unveil the first edition of its new measure of employment. The new index has been in the development stage since 2024 when Congress, after another failed attempt to abolish assault weapons, outlawed unemployment instead.

    Under the old employment measurement system, an individual was required to be seeking full time work in order to be counted as unemployed. The old system was never more than an idiot’s guess at what was going on in the real world in the first place. However, in 2018 the last living US job seeker gave up looking for work, which meant the labor force had effectively fallen to zero. After that any notion of an unemployment rate seemed dumber than ever.

    The Labor Department’s new measure was dubbed the Holistic Accounting of Happiness or HAH for short. It measures the percent of the population employed directly in government jobs (GAHAH) or receiving full HAH government compensation (FUHAH).

    For those of you that don’t see where this is going, look at it this way. The higher the HAH, the better off we are. Of course GAHAH’s get paid for doing nothing while FUHAH’s just hang out at Starbucks. The actual cost of HAH is buried somewhere deep in the Defense Budget.

    Everyone I know will want to be a FUHAH. Trouble is who is going to pay for the FUHAH’s not the mention the GAHAH’s?

    There Is A Solution- A Modest Proposal: 2017

    One thing appears totally clear, man cannot exist solely on playing golf for an entire lifetime nor can he afford the green fees. The government cannot afford the green fees either. Right now the federal government cannot even afford the current 10 million unemployed, the 47 million on food stamps, not to mention the 60+ million retiring baby boomers.

    So what is the long-term solution? TAX ROBOTS: what else could be more logical. By 2033 robots using Artificial Intelligence will control all the world’s money anyway. If we start to think of robots and other machines of labor as if they were human, we can begin the process in a calm and logical fashion.

    In Europe and other parts of the world there is a VAT, or Value Added Tax. We could call ours a JET for Jobs Eliminated Tax. Start by assigning Tax ID numbers then establish tax rates based on rates of output, hell, we could even create a Medicare system to repair older robots that breakdown. There is no limit to the possibilities; we just need to get our creative juices flowing. We must begin now. Let’s not treat this with the same denial we treated the thinning of the ozone layer over Antarctica.

    If we do this right, not only can we have all the time in the world for golf but also we can eliminate green fees forever.

    Reality Check-An Admission

    If all of this sounds a bit goofy, believe me it’s not. It is even less absurd today then it was nearly 4 years ago when I originally made this modest proposal in 2013. Why am I restating the premise again in 2017? The future arrived sooner than expected. Over my morning coffee, I opened the CNBC app to find a lead story featuring Mark Cuban, Elon Musk and Bill Gates. The topic was the future impact of technology on the labor force. After acknowledging how technology is looming problem for labor, what was their solution? An income tax on robots, what else? What a brilliant idea.

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  49. Is There A Mini Bubble In Housing?

    To paraphrase the late comedian Groucho Marx, I would never want to live in a place that I could afford. Recently, the website Areavibes.com published a list of Americas most affordable cities. It read like a list where bad people are sent for punishment, the type of place where prisons are located. Here is the list.

    • Laredo, Texas                          6.) Lubbock, Texas
    • Buffalo, New York                 7.) Birmingham, Alabama
    • Detroit, Michigan                   8.) Des Moines, Iowa
    • Wayne, Indiana                 9.) Shreveport, Louisiana
    • Memphis, Tennessee         10.) San Antonio, Texas

    With no insult intended to the fine citizens of these communities, these are pretty bleak choices. About the only name missing are the jungles of Nicaragua, but then that is a different part of America.

    What this list tells us is that for the average family earning $53,046 a year to get a break on the cost of housing, they can choose to live where most people would not want to live even when they can afford it. Then there is the question of jobs, education etc. There is a reason why prices are at rock bottom levels.

    Meanwhile, in the rest of the country, real estate has made a full-blown recovery from the 2008 financial crisis and that makes lots of people from bankers to investors very happy.

    It was a long slow process but prices in many key cities are at all time highs and continue to rise. According to the latest Case-Shiller index, home price have been rising about 5.5% over the past 2½ years. That is the same rate as prescription drug prices! There seems to be no stopping real estate price inflation unless, of course, you live in Ft. Wayne.

    There is a point to be made here and the point is that real estate prices in this country leave out most families. The fact is that home ownership in America at 63.7% is the lowest in over a decade.

    How can this happen in an economy that fosters free market supply/ demand allocation of resources. How is it possible for fewer owners resulting in higher prices? It makes no sense, or does it?

    Normally when you see prices rising, it is because demand has improved or because of a shortage of supply. For American families, demand hasn’t translated into ownership. The real estate industry sites a shortage of supply as the reason, but the figures on building permits and construction activity paint a picture of lots of building activity

    It is no secret that much building has been aimed at the millennial demographic. In other words, tiny little 2 bedrooms of 600-900 square feet rental units that are priced in the stratosphere. The key takeaway here is the rental prices are measurable higher than the cost of ownership.

    This has happened in the past but the current distortion relates to the free flow of capital. The financing comes from non-bank institutional sources including deep pocket foreigners looking for a safe place to stash their cash.

    The Trump Administration spends much time on the topic of low-income people immigrating to America and taking away jobs. What about high-income capital flowing seamlessly into this country taking away affordable housing?

    For foreign investors, Swiss banks are no longer safe now that the US Treasury Department cracked down several years back. Russian Oligarchs aren’t looking at investment returns; their primary interest is in hiding their stash. This means investment decisions are not being subjected to serious due diligence.

    For example, there is a potential serious oversupply in rental housing in Americas largest cities. It began showing up last spring in New York and San Francisco. Huge operators like Sam Zell, one of the nations big residential real estate operators began feeling the impact. It is our guess Sam Zell is not alone.

    The aging of the millennial demographic cannot be ignored. Family formations cannot be delayed and who can raise a family of three or four in 650 square feet. Thus the exodus is on. So, could all those investors in residential rental properties be left holding the bag? Hard to imagine a smart dude like Sam Zell is getting stumped, but strange things sometimes happen.

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  50. Disrupting The Gridlock in Tax Reform

    Artificial Intelligence Will Set Your Free

    Whoopee it’s income tax time once again! This year kind of snuck up faster than usual. Maybe that’s what I get for spending so much time and energy sorting fake news from real news, watching Presidential news conferences and trying to decide if the Chicago Cubs can repeat in 2017. Wow, there are just so many hours to go around.

    But when the first 1040’s and 1099’s started showing up in the mailbox, the fun was about to begin. I was reminded once again that it was time for me to write another check so our United States government can support worthwhile causes like sending planeloads of cash to the leaders in Afghanistan and other acts of to spread goodwill worldwide.

    What is great about this year is that it is the last year of complicated tax preparation. Our new President is going to reform, simplify and turn the whole experience of tax paying into a day at Disneyland. Tax reform is top priority, right?

    Don’t count on that ever-taking place, here is why. In 2014 the IRS, counted about 800,000 people employed in the business of helping people prepare taxes. The data is a couple years old so it is even higher today. The average tax preparer earns $60,000 a year according to the Department of Labor. About a quarter of these people are CPA’s making a whole lot more than the average. Our guess is that it all adds up to a $60+ billion a year industry.

    This is chump change however when compared with what the IRS calls “the cost of tax compliance” which is placed at a staggering $400 billion. Nobody knows how many salaries are contained in this number, but you can count on it being large.

    So our guess is that there are well over 1 million employed and that is one swamp that is going to be very hard if not impossible to drain. Tax regulations are more likely to remain ever changing and ever more complicated.

    But there is hope in the form of Artificial Intelligence. The term AI has been written and talked about for a long while. Way back in 2001 Steven Spielberg and Stanly Kubrick teamed up to make a forward thinking production: A.I. Artificial Intelligence. Even today, the truth is very few people are certain of its potential or exactly how it works. IBM is generally considered the leader with Watson and there is lot’s more players to enter the field.

    We may have to accept that the IRS is beyond repair but that doesn’t mean we have to sit still and do nothing. In a world of technology that is disrupting industry after industry, the fat cat tax preparation business is a sitting duck and duck-hunting season is underway.

    The day of reckoning is coming. AI doesn’t simply store and recall reams of data; AI can be programmed to be intuitive. The earliest signs showed up in platforms like Turbo Tax and others where one could conveniently fill out their taxes using a menu driven tutorial for little cost. This is a step in the right direction and has proven popular with many taxpayers with relatively simple income. However, it can get stalled as the composition of income becomes more complex.

    But its biggest shortcoming is its lack of human experience and wisdom. For example I know of one tax preparer that routinely files for an extension for his most aggressive clients postponing the filing deadline from April to October 15th. Somehow, the genius has learned that there is a much smaller chance of being audited on returns filed in October.

    This year tax preparer H&R Block is moving the rock up the hill. Yes, these are the same folks that you’ve laughed for so long. Like so many others, I have always viewed going to H&R Block in the same why as going to a Barber College to get a haircut. But at least with the Barber College, your hair can grow back!

    So what is different this year? This year IBM’s Watson was integrated with that marginally skilled bow tie wearing Block employee. Artificial Intelligence adds a level of firepower never before available. Every year, Watson will get reprogrammed not only with the changes in the tax codes but also with reams of statistics about optimizing deductions without enhancing the risk of being audited.

    I have never been a customer of Block nor is there any compensation for this plug. But honestly, these guys are on the vanguard of something pretty special. It is easy to envision Amazon, Google or maybe even Apple having an AI devise that incorporates an AI App to act as your tax advisor coming up with low risk ways for you to take all kinds of deductions you never dreamed of. Artificial Intelligence is here and it’s going to set you free.

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  51. Over Performance of Dividend Stocks: Can It Continue?

    Dividends, dividends, dividends, with the exception of the election, it seems that was one of the big investment themes of 2016. But what about now with a Fed interest rate increase(s) more than likely in the coming months.

    Here is why dividend investing has been the way to go. Just look at this chart.

    What this says is that if you invested solely in the S&P 500 over a recent 10-year period, your total return, which includes dividends, would have been nearly four times greater than from capital appreciation alone.

    If that doesn’t make your eyes light up, consider that this is just an average. If you happen to be a particularly good stock picker, wham! I grant that any data pool can be manipulated to demonstrate just about any point so you may not want to put full faith in the data on dividend stocks. But results on the S&P 500 offer strong proof, at least about history. But, is there still a case for dividend investing today?

    Excess financial returns can be lasting so long as there is an abundance of supply and a shortage of smart investors. To appreciate why it appears that dividend investing has taken on mania proportions while still offering perfectly logical economic reasoning requires an understanding of the deeply rooted forces.

    The stock market correction in 2000 ushered the current over performance of dividend stocks. Global deflation produced ever-lower interest rates. The US Treasury 10 Year Note for example yielded 2.43% in January 2003 and 2.38% four years later in 2007. At it’s 2016 low, the yield was a meager 1.42%.

    As recently as 2004 dividend yields on S&P 500 companies offered a comparatively less miniscule 1.60% yield compared with the US Treasure 10 Year Note at 4.18%. This all changed in 2008 when the financial crisis drove investors to the 10 Year Note driving yields to new lows. The two rates intersected about that time igniting the most resent over performance of dividend based stock investing.

    But history notes that no financial trend can provide superior performance forever. Even Bernie Midoff’s unique methods finally came to an end. So let’s take a few things into account.

    Dividends are paid to shareholders for one simple reason. Corporate management can’t find a better place to put the money. Apple may be able to keep shareholders content with a bazillion dollars in the bank but most other company owners want to grab some of the loot. So putting money away for a rainy day is not an option.

    Since the 2008 financial crisis, investing capital on plant and equipment has gone nowhere. Companies have been buying up their own stock and paying out dividends using very low cost borrowed money. It is a common sense approach to financial management and it is one of the bigger factors in helping the stock markets recovery going for nearly a decade now.

    Outsourcing of manufacturing is one important explanation for reduced US capital investing. High taxes and excessive regulation are another. Changing this is the mantra of POTUS 45.

    If you are betting on Mr. T making US manufacturing great again, that is going to take a heap of capital and that means the habit of buying in stock and boosting the dividend will be affected. How much? It’s too early to speculate, but it will happen.

    Total return investors will shrug their shoulders and point out that any reduction in dividends or dividend growth will be offset by gains through capital appreciation. That is entirely true. But income investors banking on year after year of superior dividend growth will want to adjust their budgets.

    The one question that remains a true mystery is this. If the Fed increases interest rates multiple times this year will dividend-yielding stocks over or under perform? Since the market has reached record levels during the December rate increase and multiple rate increases have about a 40% chance in 2017, it is hard to know the answer. In this case, there is a risk to equities in general and when the when the market corrects, it tends to take everything with it. Stay tuned.

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  52. All That Loud Noise Is Democracy Calling

    Totally Divided We Stand Together

    For all of the political divisiveness, my guess is the at least 75% of the American voting population are Democans, or if you prefer Repubicats. Most people see themselves fitting neither into one political party or the other. They see themselves as a touch of free market Republican but with a Democrats sense of concern for their fellow citizens. There are Bernie Sanders style Democrats that are members of the NRA.

    Americas beef is not against their fellow Americans; it is against their do nothing, overly complex, dishonest no good government. In the recent Presidential election, voter distrust of their government was the biggest domestic issue on voter’s minds.

    There are lots of contributors to this. After eight years of Congressional gridlock during the Obama years, voters were fed up with nothing getting done. You might even conclude that some people forgot how Congress works, it has been so long since it worked much at all.

    The Noise Obscures Some Important Issues

    The news headlines and the Twitter tweets make lots of noise easily obscuring the fact that democracy is returning to the legislative branch of government. The good news also is that more people seemed to be getting involved in the process. For all the vitriol over President Trump, the result is that more voices are being heard. This is a good thing.

    The White House proposal to replace Obamacare is a wonderful example. Even though it passed the House committee, it is hard to imagine there is any real support for this bill on either side of the aisle. But look how many voices of disagreement that have been heard. There hasn’t been anything like this since the days of protest over the Vietnam War. This is good.

    When Obamacare was passed in 2010, it contained over 2700 pages. No one alive read the entire document cover to cover. Most people had no idea what was in the bill. Even the proponents admitted that only time would expose the details. That is no way for us to be governed.

    The negotiations over the Affordable Care Act replacement have only begun. This brings us to the recent White House meeting between POTUS and Elijah Cummings (D-Maryland) and Peter Welch (D-Vermont).

    These gentlemen have a proposal to control the raising cost of prescription drugs. This involves having the Federal government negotiate drug pricing using the same system it uses for the VA and other government health agencies. This could be a powerful force in changing the healthcare equation. Why didn’t the Obama team consider this?

    Another sign that democracy is returning to America is over at the EPA. Not since its formation in the 1970’s has there been a more controversial head than the POTUS’s choice of Scott Pruitt.

    Here is a guy that takes the scientific conclusions of experts on global warming collected over decades and simply states, more research needs to be done. Perhaps so, but when should we draw the line and say enough is enough? When the banks of the Mississippi river reach New Mexico? A good guess is that the EPA under Pruitt’s leadership will bring more citizens, not just environmentalist, into the public discussion.

    Everybody: Hug Hybrids And Plug In Vehicles  

    And here is a great example where more public awareness and involvement could make a difference. Under the Presidents commitment to reduce regulations comes the likelihood the Obama era auto industry fuel standards will be changed. The current regulations call for average fleet mileage to hit 50.7 mpg by 2025. The auto industry is kissing up to POTUS by announcing big job creating investments in the United States. In return they want President Trump to relax the 2025 standards.

    At first this conflicts sharply with most hard-core Democratic values. Are the money-grubbing auto companies trying to use their economic clout at the public expense? Here is their side of the story.

    The average mpg for hybrids and plug in electric vehicles either matches or exceeds the 50-mpg target for 2025. These are great cars with amazing acceleration. Trouble is not enough people are buying them. In fact, the drop in oil prices that started back in 2015 has been a blessing for SUV’s and other gas-guzzlers. No one can blame the auto companies for producing products the public demands.

    In the Presidential election of 2016, some 65,844,954 socially conscious Democrats voted for Hillary Clinton. No more than a small percent of the folks are owners of hybrids of plug in electric vehicles. It’s time for everybody to be part of the solution.

    In conclusion, we don’t need some EPA administrator to agree that global warming is real or not. We all have the right to choose. But if you are really concerned about the bounders of the Mississippi river, buy a car the already offers 50+mpg’s.

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  53. The Sad Saga of Adeptus Health

    Editorial Board  |  April 2, 2017

    For every success story, there are many more failures. The business news tends to focus on spectacular success stories like Facebook or the recent $24 billion IPO of Snapchat. Business readers don’t like to read or even think about failure. There is nothing illegal, immoral or obscene about failure: stuff happens.

    But this is a story about one of the more suspicious flops of 2016. It is the story of Adeptus Health. It may be too early to declare Adeptus a total flop. You can judge that for yourself. By itself, the rise and fall of Adeptus stock provides the graphic details. The suspicious parts require a closer look at the details.

    Adeptus Health was founded in 2002 in a Dallas suburb by Thomas Hall using money supplied by certain friends and investors. Hall’s business plan was appealing to anyone who had ever spent hours in a hospital emergency room waiting for care.

    Hall formed First Choice Emergency Room and quickly became the largest network of freestanding emergency rooms in the United States. The company set out to change things with a simple formula: quality, clean and fast professional service.

    Each of facility was staffed 24/7 with board certified doctors armed with a full range of equipment: CT scanners, full radiology suites, the works. They even have onsite labs that cut the turnaround time down to only 20 minutes.

    While conventional hospitals are shrinking ER services, Adeptus was adding. Over 80% of their business was 3rd party reimbursed.   Hospital ER’s loose money, Adeptus financial records showed they earned a tidy sum.

    By June 2014 when Thomas Hall and his partners launched a $108 million initial public offering, the company was already the industry leader ready to expand from a base in 3 states western, nationwide.

    Obamacare Loved Adeptus

     How is the Adeptus model different? Hospital admittances from Adeptus are less than 4% compared with the national average for ER’s of 11%. And that supported the whole purpose of the Affordable Care Act: better care for more people at a lower cost. 

    Infant Industry: Opportunities Appeared Open Ended

    The freestanding ER trend was just getting started. There are only 500 nationwide. Compare that to 2,800 retail clinics, 5,500 ambulatory surgery centers and 10,000 urgent care centers and you get some perspective.   In the next decade, the number of freestanding ER’s could easily increase ten fold. There is a world of untapped opportunity here.

    Fast Forward: The Winds Have Shifted

    Adeptus seemed to have the wind at it back. In April 2016 Adeptus was even named one of the 20 Best Workplaces in Healthcare by Fortune Magazine. The company that went public less the 24 months earlier at a value of just under $400 million had risen to $1,254 billion. The Dom Perignon was beginning to flow.

    Today Adeptus has a different a different story. The price of the common stock is just a little over $2.30 per share or a market value of less the $50 million.

    What Went Wrong?

    The company’s business model is failing. There is concern about the company’s ability to continue as an ongoing entity.  The question of what went wrong at Adeptus may be less important than who did wrong at Adaptus. Here is what is truly offensive.

    In June of last year, just as the company stock was reaching an all time high of $72, Adeptus management issues increased guidance for the full year 2016. The old guidance of $635-$665 million in revenues and per share earnings of $2.50-$2.60 was raised to $640-$670 million and $2.55-$2.65 per share. Though not monumental changes, the changes sent a signal to Wall Street that things were solid.

    Eight months later, earnings are missing and the stock is down over 90%.

    Who Knew What and When Did They Know It

    Now here comes the killer. About the same time the rosy outlook was being issued, the company registered a stock offering of 2.75 million shares. Around $72, the stock was at an all time high so you would have to say that management was smart raising money to expand their business. The offering netted about $190 million. That’s enough capital to keep the engines of Adeptus growth going for quite a while.

    But wait Adeptus wasn’t getting the money. Founding investors were selling nearly all of their stock pocketing an estimate profit of over $175 million. There are two things wrong with this transaction. First if the original investors saw a great future in Adeptus growth, why did they sell their stock?

    And then, what was management’s motive in boosting guidance at the same time of the stock offering? What did they know and when did they know it? You have to admit, the Adeptus story is a litigation attorneys dream. In theory, investors have lost over $1 billion since Thomas Hall issued his glowing guidance. Class action law suites are inevitable. Stay tuned.

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  54. The Organic Food Fight

    The world is no longer going Organic; it has arrived. Sales of organic food and non-food products in the United States total more than $50 billion growing at double-digit rates.

    Organics are supposed to be good for the health of consumers and just as good for purveyors of organic goods: but just how good and at what price?

    The Organic Food Myth

    America is flocking to organics like pilgrims to Mecca in the belief of living a healthy lifestyle. If this were true, why are 70% of Americans either grossly overweight or obese? How healthy is early onset diabetes? I guess it takes a lot of Kale to maintain a 350-pound body.

    The second myth is that organic foods are somehow grown in pristine fields untouched by pesticides. The earth is covered with pesticides. Organic foods are grown where fewer pesticides are found in the soil.

    The third myth is the more you pay the more purity you get. There are a limited number of organic growers that supply to the supermarket and restaurant industry. What you get is what you get from these folks. They don’t have a higher price for Whole Foods than for Kroger’s. If anything, the shear volume of purchasing would tend to favor Kroger’s. As we will soon see, these guys offer the lowest prices.

    So lets have a look at what you get for what you pay for in the organic food fight by looking at the three major players.

    Whole Foods  

    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.

    Everything clicks and that is a big reason why Whole Foods Market is the leading retailer of natural and organic foods. They claim to be America’s Healthiest Grocery Store ™ and for good reason. Whole Foods was the first national “Certified Organic” grocer. What started in 1979 as a single store located in Austin, Texas has grown to over 467 stores in 42 states. Co-CEO John Mackey has a target of over 1200 stores in the years ahead.

    Sprouts Farmers Market

    Organic Food For The Masses

    If you are seeking a transformative experience in Organic grocery shopping, there is no better place than Whole Foods Market. However, if $2 for an Organic apple leaves you with indigestion, you need to look no further than Sprouts Farmers Market. That Organic apple is still going to cost $1.25, but that is simply the cost of healthy living. Pour ta santé!

    Shopping at a Sprouts Farmers Market presents a bit of a challenge. A majority of the stores are concentrated in California and four other western states. The first store was opened in Phoenix in 2002 and since has grown to more than 245 stores in 15 states.

    While both Whole Foods and Sprouts specialize in Organics and healthy lifestyles, and great service, that is about where the comparison ends. The average Sprouts is 30,000 square feet, far smaller than Whole Foods (50.000+) or for that matter, the average Kroger store. Sprouts focus is more limited, concentrating on fresh foods, produce, meat and seafood, grocery and vitamins and body care. The emphasis is on products where inventory turnover is high.

    Now here is a surprise, Sprouts is the most profitable of the three leading grocery chains. The limited product selection and higher inventory turns enables Sprouts to change lower prices and still achieve outstanding profit margins. Just look at the table below.

    Sprouts may have half the locations of Whole Foods, but there presence is being felt. Last year, Whole Foods began testing smaller stores under the 365-brand logo. If the test succeeds, you can expect to see more of these popping up in the years ahead.

    Kroger’s

    The organic food fight gets a little more complex when we look at the nations largest grocery chain. That, of course is because Kroger is not a purely organics operation. Over time Kroger has been developing and broadening it organic offerings and without charging outrageous price premiums. This is where customers will get the best organic bang for their Kale colored buck.

    The Moral To The Story

    Long ago, department store retailers found they could sell the same Levi Dockers Kaki pants for 20% more at Bloomingdales than at Macy’s. Some people simply preferred the ambiance of Bloomies. The organic food fight is much the same. Personally, I hate Kale.

     

    Leading Grocery Chains
    Whole Foods Sprouts Kroger’s
    Sales 100% 100% 100%
    Cost of Sales 66% 71% 79%
    Gross Margin 34% 29% 21%
    SG&A 29% 22% 17%
    Operating Margin 5% 7% 4%

     

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  55. Splunk Inc. A Silly Name For A Serious Company

    The term Artificial Intelligence has been in our lexicon for a while now and it’ future is hard to underestimate. Today, however, we are going to focus on a different bread of intelligence and a company that has been a quiet success story.

    Operational Intelligence: Cyber Security and Much More

    Imagine your title is Chief of Cyber Security for The United States Department of State. Everyone in the world is trying to break into your highly classified servers 24/7 using world-class hackers and their most devious schemes.

    Your job is not just to patch security breaches but also to prevent them from gaining entry. Billions of data bits are flying around your network every day. The challenge before you is to determine which ones represent a cyber security risk. So much data is out there needs to be absorbed and organized. This is where Operational Intelligence steps in identifying aberrant data patterns at the earliest moment.

    The explosion of data is threatening to cripple the economy. We are talking about data from everyone and from everywhere: personal, business, government, social media, entertainment etc. Every mobile phone call, every tweet, every online purchase, every retail transaction creates more data. The much talked about “Internet of Things”, insures this volume will keep growing exponentially. This is what “big data” is all about. The trick is organizing the information and turning it into bits of actionable information.

    Getting Traction: Cyber Security Is Key 

    Splunk is the fastest growing company in the Operational Intelligence market place.

    Cyber Security is basically how Splunk got into business. Today, it is 40% of company and the fastest growing segment.   It would be far higher piece of the pie were it not for the phenomenon of “Unintended Use Cases”. Here is a quick explanation.

    Once the Splunk platform is downloaded, Cyber Security customers discover many unexpected practical uses that lead to purchases of additional licenses. That leads to more and more business in areas like business analytics, corporate infrastructure management as well as general analytics. Recently, management stated that 30% of their new business resulted from Unintended Use Cases.

    Critical Elements For Success Are Present

    Splunk security solutions offer leading edge technology providing the capability to deliver a real-time detection. Investments in these key technologies provide significant competitive advantage. Specifically, technologies are designed to support large volumes of machine data on a massive scale with minimal overhead.

    Competition 

    Splunk competes against a number of different companies many of whom are much larger. The list includes BMC Software, CA Technologies, HP, IBM, Intel, Microsoft, Dell Software and VMware IBM and Oracle. The strength of Splunks competitiveness is illustrated by their customer list that includes a “who’s who list of global corporations and government entities.

    Splunk innovations and marketing strategy have opened the door to over 11,000 total customers including more than 79 Fortune 100 companies, various military and agencies of the United States government. 

    Splunk: Breakdown of The Business

    Splunk divides it business into two channels. Sales of software lead to demand for maintenance and service to support its product offerings.   Software is targeted to a variety of verticals including financial services, government, healthcare, industrial, media/entertainment, and retail including ecommerce, technology and telecommunications. More than 60% of Splunk’s business comes from software.

    Pricing Based on Usage

    Splunk pricing is based on a downward sliding scale of actual usage starting as little as 1 Gigabit to over 100 Gigabits of data per day. In other words, there are no preset amounts, the more you use the more you pay.

    Core Products include Splunk Enterprise, Splunk Cloud and Splunk Light and Hunk. Each of these products performs the essential function of dramatically reducing search and assembly of information, reducing costs by using less hardware, detecting data anomalies and producing high resolution data visualizations.

    Zero to 60 in 3.5 Seconds 

    As the current decade began, revenues stood at a paltry $18 million. The current year will see revenues coming in near the $900 million level. This would make Splunk the fastest to reach $500 million and one of the very few companies to consistently achieve 50% annual growth. Indeed, the wind has been at the company’s back and Splunk is at the right place at the right time.

    Will the silly sounding company named Splunk continue to rocket forward? Technology is a treacherous business with the carcasses of companies littering the back alleys of Silicon Valley. One thing is absolutely certain. The growth of data is accelerating and this is the key driver of demand.

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  56. Long Island Iced Tea poised for growth in hot market

    As the bell rang out over the floor of the NASDAQ exchange, the journey was foremost on the mind of Philip Thomas.

    From helping unload trucks as a six­year­old at his dad’s Long Island, NY beverage distribution business, to opening and selling his first restaurant before he was 25, and then to taking his own beverage company public, Thomas has packed a lot into his 41 years.

    “Ringing the bell and celebrating with all the people who helped get us there was truly a great moment for the business,” confessed Thomas about the day last July that Long Island Iced Tea Corp. (LTEA) was listed on the ticker. “Seeing your dad who’s worked hard his whole life trying to build a small business and taking that to the next level to a public company is no small feat.”

    Thomas’s next goal is growing the business into one of the top three premium iced tea brands in the United States, joining a select group that includes name brands such as Arizona, Lipton and Snapple. But he has a long way to go.

    Long Island Iced Tea, which Thomas launched in 2011, has yet to turn a profit and has yet to top $5 million in annual sales. That’s light years away from industry leader Arizona, which racked up nearly $680 million in sales in 2015. However, Arizona’s market share has been declining for more than a decade, as consumers have become more health conscious and concerned about the amount of artificial ingredients and sugar they are ingesting.

    This has opened the door for smaller players like Honest Tea ­ bought by Coca­Cola in 2011 ­ that offer a healthier all­natural premium product.

    “The whole Whole Food craze with non­GMO and people looking at what they put in their bodies has become more important to the consumer,” said Thomas, who last year poached former Arizona national sales director Joseph Caramele. Long Island also boasts former Snapple CFO Richard Allen.

    A former competitive athlete, Thomas has always been ahead of the curve on health trends. He stayed away from sugary sodas, but has maintained a lifelong iced­tea addiction. “I was the kid who used to go to soccer practice with iced tea in my thermos,” he confided.

    After leaving college, where he ran a high­end restaurant while finishing his courses, Thomas returned to New York and turned around the family beverage business. In addition, he also started KarbonEx, an environmental firm that sets up carbon offset programs for businesses, and Capital Link, an ATM­processing business.

    The transition from athlete to entrepreneur was complete. “I knew I was never going pro; my new passion became business. For me, it’s competitive, it’s exciting ­­ everything I was missing from not playing soccer anymore.”

    Noticing that nobody owned the Long Island Iced Tea brand, Thomas saw an opportunity to create a healthy, non­alcoholic beverage utilizing the iconic label.

    “We already have that immediate brand recognition,” said Thomas, referring to the infamous alcoholic version that mixes five kinds of booze and was created by a Long Island native in the ‘70s. “If I had a dime for every person who said to me: ‘I can’t believe somebody didn’t have that name already,’ I’d be a very rich man.”

    Thomas borrowed $250,000 to create the first batch, personally guaranteeing he’d pay back investors if it didn’t sell. It took just two months. The first year he eclipsed the all­important $1­million barrier with no employees or marketing. He leveraged his knowledge of the industry to convince local grocery store chains to give him shelf space. When the tea would sell out Thomas was able to make bigger orders. He also sold right off the pallet at Costco, providing free samples directly to consumers.

    Since helping his father as a child, the beverage business model has changed. Where it used to be get your product in corner stores, delis, and restaurants, now the focus is on placing it first in supermarkets.

    “Now you can go to one store and buy pharmacies, diapers, surfboards, and a gallon of milk all under one roof. So we turned the model,” said Thomas, who last year inked a deal to get Long Island in Food Lion’s 1,000 grocery stores, making it the company’s largest partner.

    The company also made its first acquisition, buying Korean beverage company Alo Juice, and expanding into new international markets in Canada, South America and the Caribbean.

    Domestically the non­carbonated ready­to­drink (NARTD) beverage market is estimated at $5.3 billion, but internationally it’s 10 times that size.

    “We want this to be a global brand. We believe the Americana name has the ability to sell better than here domestically,” said Thomas, who is also contemplating a move into alcohol markets where the Long Island Iced Tea brand is especially well known. “I had too many of those that one night in college and blacked out. That’s the conversation piece whereby we engage consumers.”

    The biggest obstacle to growth is consolidation. Large conglomerates such as PepsiCo and Coca­cola have been buying upstarts to increase or hold market share as their carbonated beverage sales decline. This has also happened on the distribution end, which has had the knock­on effect of forcing distributors to carry more brands to keep afloat.

    “Every day for some of these distributors it’s getting more difficult to survive,” said Thomas. “They’re carrying more and more brands to fill their trucks which dilutes their attention to their core brands.”

    Thomas added a lot of his time is spent convincing people to be as passionate about his product as he is. In the end he doesn’t worry about being squeezed out by the giants, as Thomas believes healthier offerings like theirs are adding value by bringing new consumers to the market.

    And time is on their side, with compound annual growth in the ready­to­drink tea sector expected to increase by more than 8 percent over the next few years. Liquid tea products also experienced 20 percent growth in grocery stores last year, according to a recent Nielsen study.

    This gives Thomas further proof of concept: “I was very confident that we were going to fill a void in the marketplace and in a growing category. Here we are six years later.”

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  57. Robotic Surgery is Here: The Spine And The Brain Are Next

    Minimally invasive surgery has been around for a while. Intuitive Surgical pioneered the wave with its Da Vince robotic suite designed for urological procedures like prostatectomies and hysterectomies.

    New innovations in medical technology can be tricky. It took 10 years

    before the Da Vince system became the standard surgical technique.

    Here is a company that would like to be the next Intuitive Surgical. The name is Mazor Robotics. This company, founded in 2000 is focused on minimally invasive robotic surgery for the spine and the brain.

    The Mazor Renaissance Surgical System has regulatory approval for use in the United States and most everywhere else in the world. There are already 149 systems in place worldwide with 94 in the United States. The order backlog as of December 2016 increased 138% year over year to 62 systems. Mazor is starting to catch on.

    The Renaissance System simplifies the complicated nature of spinal surgery. The system is 98%-99% accurate, reduces complications by more than two-thirds and reduces exposure to harmful radiation by 35%-50%. Finally, it reduces recovery time and that makes for happy patients. When it comes to alleviating back pain a satisfied customer is a walking endorsement for the Renaissance System.

    Promising Agreement with Medtronic

    Not long ago, Mazor signed a marketing and distribution agreement with Medtronic that represents a breakthrough for the Renaissance System. Mazor is an Israeli company strong on technology but weak in global distribution.

    The selling and distribution of surgical suites like Renaissance is long and involves entire project teams of medical experts and IT professionals to train hospital physicians and their surgical teams. Once trained, it practically takes an Act of Congress to force doctors to change their habits. So the long selling cycle tends to lead to long-term customer relationships.

    How Mazor Makes Money

    The company makes money from three sources. The Renaissance Surgical suite sells for $850,000. With the sale, Mazor offers maintenance and service under contracts. This is like annuity income that is highly profitable. Disposables at a cost of $1,500 per operation are the second most important revenue stream. The gross profit on these items is over $1350.

    Blade & Razor Business Model

    The interesting thing about Mazors business model is the disposables business. One only needs to consider the potential 100,000 US procedures and 500,000 worldwide might do for the company. Of course there is a lot of blue sky thinking here. For example, not every surgical procedure will be appropriate. Sometime, patient characteristics like obesity etc. preclude the use of various surgical techniques. Also cost and reimbursement issues have to be taken into consideration. Having stated all these caveats the opportunities for Mazor are interesting, so say the least.

    Constant Comparisons

    Along the way Mazor’s potential will constantly be compared with Intuitive Surgical.

    The most recent data shows Da Vinci was used in over 650,000 procedures last year employing 3597 machines. That works out to one surgery suite for every 180 procedures. If we use this as a proxy, Mazor will need to sell roundly 2800 Renaissance Systems to service 500,000, and that is just half the global market.

    Will Mazor succeed or will something trip them up along the way. The healthcare business is littered with promising companies that flamed out so the risks are high. For all their success, Intuitive Surgical’s path encountered a few bumps.

    We are neither doctors nor investment advisors so we won’t give you advice on your aching back or you financial portfolio. However, we will keep you informed as more information on Mazor becomes available about this fascinating new technology.

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  58. Apple: Americas Most Valuable Asset

    Apple Corp and Donald Trump share one thing in common. Everybody in the world has opinion about them: some good, some bad. There is no indifference. These opinionated folks have just the answer on how to go about improving what they don’t like in both of these characters.

    With Apples stock price hitting new all time highs, the favorable opinions seem to have sway. With Donald, the jury is always deliberating.

    As for Apple it seems like far too much attention is on the minutia of what features the next iPhone will have. Will there be an earphone jack or no jack? Will the new $139 ear buds get easily lost? Or, how is the Apple Watch selling? What about Apple Pay or the autonomous driving project?

    iPhone Myopia

     Don’t get me wrong, these are all relevant questions, it just seems they are being repeated with the frequency of an annoying television commercial. There is nothing new or interesting here. But then the frequency of the questions could be caused by an overabundance of Apple followers in relation to the number of exciting products on which to focus.

    We all know the iPhone accounts for about two-thirds of the company’s roundly one quarter of a trillion dollars in revenues. This product has been so over analyzed it is ridiculous. Things like the Apple Watch face limited potential. The volume of watches will never come close to Smartphone’s. I love Apple Pay if there were only somewhere to use it! Sometime in 2040 it could be a huge contributor. Apple seems to have lost its mojo in autonomous vehicles. iMacs and MacBooks are great but how much more millage is left. Competitors are slowly catching up.

    We Love You Apple, Oh Yes We Do

    The world fell in love with Apple because of it’s technologically innovative, aesthetically pleasing and widely admired devices. To this Apple added an ecosystem tied together by its iOS and OSX operating systems etc. that made it unthinkable for anyone to uncouple their iPhones, iPads and iPod Touches from their iMacs and MacBooks.

    The technology landscape is littered with the corporate caucuses of those who have failed to adapt. The once mighty Hewlett Packard Corp has been wrestling with these issues for several years now and results are still hard to prove. But at least effort is being made.

    Apple: Don’t Make The Same Mistake

    The Apple ecosystem that holds together so many tech users is a reminder of another era in technology. The long gone name Eastman Kodak stands out. In it’s prime Kodak controlled the photographic ecosystem. The bright yellow film box dominated retail store shelves. Kodak paper and chemicals controlled the photofinishing market. Dominance turned to complacency. The personal computer seriously wounded Kodak’s paper and chemical business and the 2004 introduction of iPhone did the rest. Eastman Kodak filed bankruptcy in 2012.

    Both Kodak and Apple are tied to a single very profitable product surrounded by barriers to competitors that are referred to as an ecosystem. Kodak’s belated response to competition was a weak and failed diversification into the point and shot camera business. They simply sat on their hoard of cash unable to find any diversification opportunity to match the profitability of those bright yellow boxes. The rest is history.

    2011: The Death of Innovation

    The days of brilliant innovative risk taking ended with the death of Steven Jobs. In his place Jobs promoted an engineer Tim Cook. Engineers are not innovators. If anything they are the polar opposite: cautious, risk adverse soles always seeking statistical confirmation. The irony of course is that Apple has never been in a better place to take risks. Today, Apple has more cash on its balance sheet than the United States Treasury Department according to former OMB Director David Stockman.

    In the middle of 2016 when iPhone sales were slipping and the shares of Apple stock was languishing in the low 90’s, the criticisms just noted could be heard up and down Wall Street’s analytical community. The superior performance of the stock raising more than 50% have quieted the noise but what has really changed?

    Since then we have witnessed the exploding Galaxy Note 7 that produced a massive Samsung recall. This opened the door to the iPhone 7 taking big chunks to market share when it was launched in September last year. So here we are today with even more of Apples business resting on iPhone and even more cash in the bank.

    Rising Tides. . . 

     The price of Apple stock today is at an all time high so nobody can complain. At $732 billion, Apple is the most valuable corporation in the United States and one of the biggest in the world. But in 1973, one of the most valuable corporations in America was Eastman Kodak.

    This shouldn’t be allowed to happen to Apple. It’s time to bring risk taking and innovation back to this prized American asset.

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  59. The Boeing Company – Start With Strong Leadership

    Dennis Mullenburg must be one very bright and powerful guy. In an age of splitting executive responsibilities, Dennis is Chairman, President and CEO of The Boeing Company. His appointment as Chairman came in 2016. He has been with the company for over 30 years and yet is still just 52 years old.

    His compensation last year was only a little over $5 million in salary and bonus making Dennis less costly than the average major league baseball player. Other than that little drawback, it is entirely possible he has one of the best jobs in corporate America. Here is why.

    Everyone Knows The Boeing Brand

    If anyone has ever flown on a commercial airline in the United States, there is better than an 80% chance it was on a Boeing aircraft. Yea, there are those other guys like Airbus Industries but they represent no major threat to Boeings dominance.

    Commercial aircraft is the cornerstone of Boeing representing 68% of business. But Military Aircraft (14%), Network and Space Systems (8%) and Global Services and Support (10%) carry their share of the revenue load. The United States Defense Department accounts for about 60% of the non-commercial aircraft business.

    Boeing’s leadership position in the global aircraft industry has never been better.   The company manufacturers from a $473 billion order backlog that has grown 47% over the past few years. This amounts to 5700 aircraft on backlog. At last years rate of 762 deliveries, Boeing workers will be at it nonstop for the next 7.5 years. And that assumes no growth in the current backlog.

    How Do They Do It

    Boeings record makes the airline and aerospace business look easy. Quite to the contrary, it is one of the most complex on planet earth. Increasing fuel efficiency is one of the most important objectives in designing a new jetliner. This often requires the creation of new materials that are strong yet lighter and then sourced from a highly complex supply chain. Any screw-ups and production can easily get shut down. Boeing management has been quite successful increasing production rates and that is a sure sign of outstanding management

    The Outlook Is Pretty Predictable

    How does management view the outlook for commercial aviation? Their public reports talk about an addressable market over the next 10 years of $3.7 trillion. Boeing finished off last year with $95 billion in total revenues so there is a lot more market potential.

    Military spending has leveled off from peak 2008 levels and so have Boeings order backlogs with the Defense Department. But that, of course could change if President Trump’s budget request for a $54 billion bump up in military spending gets through Congress.

    Other areas such as global positioning services and related projects are keeping Boeing engineers busy. Whenever you instruct your Smartphone to route you to an unfamiliar location, Boeing is involved.

    Boeing By The Numbers

    Boeing’s operating margins of 7.9% are about average for a heavy manufacturing business. Return on invested capital and equity are, however, very strong at 81% on equity and 34% on invested capital. And these returns have been achieved without excessive leverage. Long-term debt is 58% of total capital.

    Happy Campers

    With all these things going for it, you would imagine that Boeing is a great place to work. You would be right. They employ over 160,000 skilled workers who know their jobs are secure from competitive threats and major business recession. Just as importantly, Dennis Mullenburg knows the importance of keeping a labor force happy.

    Dividend investors also have lots to be happy about. Boeings annual payout of $5.68 per share works out to a 3.21% yield. Dividend growth has been accelerating from a compound 13.8% rate over the past 10 years to 16.7% over the last 5 to 27.4% in the most recent 3-year period. Even so, the payout ratio is still a modest 38% of Free Cash Flow.

    These days it is hard to find anyone with a nice word for the airline travel with all the endless security hassles, weather delays, smaller seats and extra charges. But it is just as hard to find a bad word for Boeing.

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  60. The Trump Rally, A Psychic Shift

    The stock market rally has to end sometime. If we only knew the answer to when and how it will end, we could make a fortune. Unfortunately, we don’t. We could turn to the reams of statistical data the highly paid Wall Street economists and market strategist use to forecast the future. There is only one problem with this approach. It isn’t working.

    Let’s be clear, we are not dishing out investment advice we’re talking about a cosmic shift, a perceived change in the winds. Some things are based in facts; this is about emotion and what that involves.

    Generally speaking, economists agree that the data is flashing warning signs. In response they shrug their collective shoulders and note how hard facts don’t matter, the market keeps going up.

    In the guide to stupid sayings, the four most dangerous words are: this time it’s different. When pretty much normal, sane, rational people with knowledge and experience look at any set of facts and conclude: this time it’s different, huge red flags appear.

    Similar red flags appeared during the dot COM bubble when people were really partying because it was 1999. (Thank you Prince). The tech laden Nasdaq shot from 4000 to 5000 in a matter of a few weeks. That’s a 25% move in no time. Back then there were lots of pundits waiving green flags claiming, this time it’s different.

    The post election euphoria is starting to give way to cold reality. As hard willed and stubborn the President may be to keep all of his campaign promises, it isn’t going to happen. As exuberant as the investment and business community was just after the election, reality is setting in.

    When President Trump recently said, “Who knew healthcare could be so complicated”, he could have applied the same logic to Washington in general. At the time of the election, who knew that a Republican majority in both houses of Congress could be so complicated? Congressional Republicans are no more a unified team than last year’s edition of the Cleveland Browns. That spells trouble of President Trump’s legislative agenda.

    Here are a few points to consider. According to former White House budget director David Stockman, the budget deficit has accelerated dramatically since the first of the New Year. Not Donald Trumps fault but still a problem. Stockman estimates the cash on the Treasury Department balance sheet will run out this month. Maybe not the end of the world, Congress can approve a new debt ceiling. But this is not good for stock market psychology. Remember, positive psychology is about the only thing holding the market up.

    Wall Street lemmings are finally beginning to raise concerns. The news media is the Presidents biggest enemy so any Wall Street criticism will get prominent coverage in The New York Times and elsewhere. Case in point is a headline in CNBC that appeared this week: “Economists think Trump is wrong on budget, trade, Obamacare and immigration.”   That is pretty much Trump’s entire platform except for energy. That is practically an indictment from one of the most pro business outfits this side of the Hudson River.

    The interest rate situation doesn’t make the sock market predicament any easier. Many Fed watchers expect a rate increase shortly when the FOMC meets on March 15th. This might not be the only increase this year according to those people who spend their nights and weekends watching Janet Yellen speeches on YouTube.

    Stock market investors have never been comfortable with rising interest rates. The “it’s different this time” crowd will point out that rates are way below normal and a few ticks up won’t matter that much. Others disagree. There is a school of thought that much of the global economy remains weak and that any boost in US interest will send the value of the dollar higher and disrupt global trade.

    The future is quickly approaching and we will all find out if, “this time it’s different”.

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  61. Your Investments: Are You Getting Clipped By Your Hedge Fund Manager?

    Over a recent weekend, Warren Buffett posted his much loved and religiously followed annual letter to Berkshire Hathaway shareholders. After Mr. B’s ultimate demise, some enterprising sole is going to publish the entire compendium (now totaling 50). It is a guaranteed New York Times best seller.

    One of the topics this year was hedge funds. As a one-time hedge fund founder with a 7-year track record of over 24% rate of return, I am naturally a little hypersensitive to attack. But after soothing hurt feelings with some Sees Candies (a Berkshire Hathaway company), I took a fresh look. Lots of things in the hedge fund business have changed since my maiden adventure more than 20 years ago.

    Mine was considered one of the pioneering hedge funds. The focus was on corporate merger arbitrage. At the time there were fewer than 100 hedge funds and we were competing against veterans with 10 year records of 35%+ compound annual average returns. The consistency of these returns, year after year was truly humbling.

    This was the golden age from the standpoint of investors. Only the best and the brightest bothered to set up shop. There were severe SEC restrictions on advertising and marketing so most hedge funds were small. Even the big guys managed no more than a couple hundred million dollars.

    The small size and heavy brainpower made it possible for a few geniuses to beat the market year in and year out.

    The standard hedge fund compensation called for the client to pay a 2% management fee and then another 20% of all profits went to the manager. So during those days of 35% total return, the client was taking home roughly 25%. Remember, the average stock market return is around 8%-10%. So in spite of the high fees, the hedge fund investor was getting a pretty good deal.

    As the name implies, hedge fund means investment positions on the long side of the market are to be hedged by natural or synthetic shorts or “hedges” to reduce the overall risk of loss.

    Fast-forward to today and we see a very different picture in all but one respect. Some hedge funds have lowered their management fees below 2% but still cling to the 20% profit share. It is now more common to have so called “claw backs”. These rules apply to years following investment losses where the hedge fund manager does not get paid until all losses are fully recovered. The reason for this feature is pretty obvious. More funds are loosing money.

    Today, there is so little hedging done by hedge funds that it is misleading to use the term. For example, today there are Private Equity hedge funds and Real Estate hedge funds. How do you hedge these investments? You don’t and that leaves the investor at risk.

    Since the Securities & Exchange Commission lifted the marketing and advertising restrictions on hedge funds, the industry has seen boom times in capital raising. Instead of a couple hundred million, the giants have a couple dozen billion. If that were not enough to kill performance, the fat fees have attracted everybody and their uncle into the business.

    The law of averages eventually had to catch up with hedge funds. In 2016 more hedge funds folded up than anytime since 2008. I recently had the chance to speak with one of the managers still practicing the art of corporate deal arbitrage. When asked what rates of return he was achieving (before fees and profit share) he confidently replied 12%. That means the investor return is a little over 9%. What kind of a joke is a high-risk equity investment with a 9% return?

    In his investor letter Mr. Buffett was more critical of hedge funds than he was of Donald Trump. (There was nary a mention of POTUS). Buffett is right, why should investors pay a dear price for mediocre performance. In the past decade most investors would have been better served investing in Electronically Traded Funds (ETF’s) that sought to mimic the performance of the S&P 500. We totally agree.

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  62. Hydrogen Power Is Coming Car Dealer Near You

    Who wouldn’t want to own a Tesla? They are nothing but pure sex on four wheels going from 0 to 60 in almost zero seconds. Every model from the original S to the hyper cool X is designed to make you want to spend the rest of your life behind the wheel. With autonomous driving, soon enough, you won’t even need the wheel. Then when you are stuck in traffic, you can spend endless hours playing video games on the super cool dashboard mounted screen. All of these joys and you never again have to buy a gallon of gas.

    Elon Musk gets much of the credit for today’s electric powered vehicles but we can’t forget other pioneers like Toyota and Honda. The Tesla is just a more hip, slick and totally cooler car than any other. And Musk the visionary is also doing a good job building recharging stations to keep his Tesla’s moving.

    The legions of Musk followers know his energy vision extends deep into solar and the application of giant solar energy storage units both for business and residential use. Nothing seems to stop this guy. In the past 10 years he has made huge progress and, hell, one day his plan for creating an entirely new US energy grid based on solar power might become reality.

    But let’s not get to far off the point. One of the weaknesses of the entire electric auto and solar energy storage business model is the battery. Anybody who have followed these developments knows that everything from Smartphone’s to the Testla and the Prius knows that these babies use precious rare earth elements. Sometimes those rare earth elements explode catch fire and burn people. Dangerous and unstable places in Africa are a big source of many of these key materials. I would list each one individually but I am the world’s worst speller. So you will just have to take my word. These elements are hard to find and impossible to spell.

    The answer is Hydrogen and fortunately easy enough to spell. It seems that Hydrogen as a source of power for vehicles has been in development forever. The Federal government, I recall, started getting involved almost 20 years ago. But alas, Honda Motors finally introduced its first hydrogen model in 2015. The crossover version was in very limited supply and leased for $600 per month. The relatively high cost was not the biggest cause for fewer than 200 cars sold. The problem is that there were almost no hydrogen refueling stations: whoops!

    That small issue isn’t stopping Toyota who is in the process of launching it’s own hydrogen version. It’s not entirely clear how Toyota is planning to create hydrogen-refueling stations in large numbers to provide refueling but we expect more information to be revealed.

    For those who have had been other things to do than reading up on hydrogen, here is why it is the real deal. Using electrolysis it is easy to split water molecules to create pure hydrogen. The process can be done virtually anywhere, in your garage, in the backyard, anywhere there is a water tap. What is more, you can use it to fuel anything. Instead of producing the carbon intensive emissions common with fossil fuels, the exhaust emission is water.

    If it has taken nearly 20 years to get the first hydrogen-powered car on the road only the Lord knows when mass appeal will be reached. Hybrid cars have been around over 15 years and plug in hybrids together still amount to less than 5% of the total car market. Nevertheless Toyota has made it clear, a hydrogen-powered vehicle is coming to a car dealer near you.

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  63. Damn The Economists, Full Speed Ahead

    When I graduated from high school my father offered sound advice. He said, the world is getting more complicated, learn a foreign language. So I took economics. Since that time I have added mightily to my list including, French, a little Italian and some Spanish. Dads advise turned into a life long work effort but I feel I am at my prime right this very minute.

    You can only imagine how disappointed I was to read in The New York Times that “Economists Have Been Demoted in Washington” The President has eliminated the Chairman of the Council of Economic Advisors from his cabinet. Why now and why at all? Just when I was getting every bit as fluent in economic theory as in the future perfect tense of French verb: to disrupt, somebody does something like this.

    What this all means in Washington is that the members of President Trump’s cabinet, the people he really trusts, will not include some really deep thinkers. Names in the past like Martin Feldstein and Alan Greenspan will not have their economic prodigy available at the highest level of our leadership.

    In a way it should not be a surprise. President Trump is a businessman through and through. He likes his questions answered in clean crisp one-word responses like: Yes or maybe Yes Sir. It’s acceptable to use the word no but it must be done clearly. Economists have never said or done anything clearly often sounding like Rosanne Rosannadana on the original Saturday Night Live.

    To keep the tweets to a minimum we need to add that the President welcomes decent in his administration as long as it Makes America Great Again. But, there is a real dilemma here between POTUS’s goals and the academic community. It is not a small issue either; you could say the success or failure of the Trump administration hinges on it.

    Part of the administration’s tax reform strategy includes lowering tax rates for business and individuals across the board. To help make this happen, Paul Ryan insists the tax code will be simplified by eliminating loads of deductions.

    Assuming Speaker Ryan gets his wish, the idea is to accelerate economic growth to 4% from the 1.6% of 2016. Republican leaders argue that 4% growth will produce such a flood of tax revenues it will overwhelm the IRS and start to pay down our $20 trillion in national debt. This plan might just work even though there is scant evidence to support the notion.

    Now, here is some contrarian opinions on economic thinking from those people who live in think tanks. This group believes the single most likely outcome is for 2.5% growth this year. One scholarly chap paused, and then carefully calculated that if 4% turns out to be right, his 2.5% rate would be reached by the Fourth of July. This amazing conclusion shows the benefits of an advanced degree calculus.

    But here is where the economic fog starts to take over. The difference between these two forecasts has everything to do with “potential GDP”. This term refers to the amount of so-called economic slack in the system. In other words, how many manufacturing plants are idle or could produce more goods without adding more capacity. And then there is the question of labor productivity.

    The US Labor Department created the data series E6 that measures the total number of unemployed both short and long term. We know E6 contains millions of workers over 50 whose skills need updating. But for enough money, could these folks be put to work.

    There is one looming complication. The 25 members of the Council of Economic Advisors as well as the database of the entire United States federal government does not have a way of measuring “potential GDP”. The government created a concept but doesn’t have a clue how to use it.

    So what does any good economist do when a concise answer is missing? They turn to good old Rosanne Rosannadana for help. Maybe Trump has the right idea after all, banish the fog makers and let the economic chips fall where they may.

    If tax cuts don’t stimulate growth, our $20 trillion debt will get much bigger. If growth stimulus is applied but the labor pool doesn’t increase, boom inflation kicks in at a most unpleasant way.   Maybe by summer the fog will clear.

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  64. Dear Mr. President: Turn Your Tweets on Big Pharma

    In recent days, Joaquin “el Chapo” Guzman, the infamous leader of the Sinaloa drug cartel was extradited from Mexico. Finally, el Chapo, the evildoer is in custody for good. Over the years, Chapo lead a drug distribution chain that brought billions of dollars into its coffers. The proceeds were then stashed in hiding places out of the reach of American authorities. What happened in Mexico with all the loot is a whole other story.

    The extradition was a huge victory but it hasn’t stopped Americans from numbing out on illegal weed, heroin and other drugs at a record pace. It is a tragedy of epic proportions.

    But then, Americans can also turn to Oxy Contin and other opiate based “pain management” treatments or just for good old numbing out. Oxy Contin is every bit as addictive as heroin and evildoer; Perdue Pharma has paid $600 million in fines for mislabeling the drug. Its leaders were personally fined $34.5 million. But did these guys go to jail. No, these cartel Capos were merely charged with a misdemeanor and released.

    The American drug industry has a more effective way of creating hiding places for cash then the Sinaloa cartel. It is called the tax inversion merger and it is the perfect way to keep cash of the reach of American authorities.

    Are we starting to see the irony here?

    The American drug cartel is bigger, stronger and more powerful than Sanaloa or el Chapo. Bernie Sanders speaks the truth; Americans spend more on prescription drugs than any other nation, why?

    Case in point: a 30-day supply of the blood thinner Xarelto is advertised by super discounter Wal-Mart at $392.41. I recently priced a thirty-day supply of the identical drug in Canada and Mexico for roundly $80.00. Of course, there is always the risk of counterfeit drugs for foreign sources, but when you think about it the risk is actually greater in the US. The market is so much bigger here; there is more markup than anywhere else.

    Heather Bresch, CEO of Mylan Labs, maker of the $600 EpiPen blamed the number of hands that touch the product on the way to the consumer. Claimed Bresch, each of these adds to the cost. If there are intelligent people out there who actually believe this crap, here are some mind-altering facts.

    The United States has one of the most efficient distribution systems anywhere in the world. To reach the highest paying retail consumer, manufacturers either sell directly to a chain retailer like CVS or through a wholesale distributor like McKesson or AmeriSource Bergen. The wholesale markup is only about 10%-12%; that’s peanuts. Mexico has a much less efficient system yet still manages to deliver drugs far more cheaply.

    Prescription pharmaceutical pricing in the US, however, is as byzantine as any you can imagine. There are prices for retail, different ones for hospitals, a third if the product is destine of countries outside the US and one for the Veterans Administration. By far the biggest supply of drugs goes though retail and that happens to be where prices are the highest.

    There is no other industry in America that is so needlessly complex. How does this happen? Manufacturing costs are typically only 5%-10% of manufacturers selling price. This means they are less than 1%-2% of what the consumer pays. Research and development costs run about 10% of MSP. There is no reason any of these facts suggest drug prices need to be so high even if you through in the vastly inflated cost of Washington lobbyist.

    The load of lies and distortions goes beyond Mylan and extends to the entire pharma industry. The trouble is, America keeps buying into it, acting like a helpless victim.

    What this country truly needs is a really mean nasty SOB that wouldn’t hesitate for a minute to insult, berate, demean and otherwise rip the pharmaceutical makers to pieces all in the name of getting his own narcissistic way. Now if there were only such a person in the government, our biggest healthcare problem would be solved.

    If anyone knows where such a person can be found, please let us know.

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  65. The Abuse of The NCAA

    Recently we looked at the absurd practices of the NFL. If you think these guys are bad, well at least they pay their players to have their minds and bodies wrecked by head on collisions. The NCAA embarrasses the NFL business model by taking all the same liberties with student athletes but insists they get these services without paying a penny in salaries. In fact, if you are a student athlete and take a little spiff from somebody like Nike, Under Armour or Addidas, you get thrown out.

    At some schools, football revenues pay a huge portion of the schools total budget. College football is electric, fans are passionate and the popularity is growing thanks in part to the formation of the BCS (Bowl Championship Series). Revenues from lucrative TV contracts are great and expanding audiences via mobile delivery make it even better.

    You are entitled to conclude with all of these growing streams of capital that college tuition costs must be falling like a stone. Yea right! College tuition is going up even faster than prescription drug prices. In fairness to both sides, colleges are spending in lots of important ways trying to keep relevant in a time of rapidly changing technology.

    Nevertheless the value of a four-year bachelors degree in business, arts or whatever is diminishing due the speed of change in the job market. Experts like Elon Musk and Jeff Zuckerberg warn that Artificial Intelligence, the next big thing will only make the pressure on colleges even more intense.

    That’s a shame but not your problem if you are the parents of seriously talented kid that is certifiable insane about playing college football. College administrators and other right wing radicals claim that the player is compensated with a four-year tuition free scholarship and the value of that amounts to $100,000 to as much as $200,000 depending on the school.

    This logic carries several debatable points. The marginal cost of a college adding an extra student to a classroom is near zero. The building is there, the professor is in place and a desk has already been added. So from the standpoint of cost, how much is does the free scholarship actually cost. Almost nothing; well maybe a little if room and board are included.

    But are the student athletes getting a full time education or majoring in easy to complete but useless areas? This is a difficult question to answer. In the past there was lots of antidotal evidence that things like Group Communication Dynamics or worst of all Basket Weaving were being selected as majors. We suspect that much of this is because football players get a bad rap about their intelligence. In reality though, smart, dumb or average everybody has to earn a living and it is the job of colleges to prepare students for this responsibility.

    We argue that all NCAA athletes should be paid and that football players should earn the most based on their risk of injury. Right now the single most important economic reason for playing college football is to reach the NFL. At anytime a college player could experience a career threatening injury. If that happens, his career is down the drain and no degree in Communications is going to help.

    Imagine for a moment the situation for a top ranked Heisman Trophy candidate. On the final play of the season he is tackled tearing his ACL. He wins the Heisman Trophy but drops in the draft from the first round to the third round. It winds up costing him $1 million in bonus money. This is hardly an absurd scenario. It is time to pay up and make things right.

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  66. Hydraulic Fracking: Setting The Record Crocked

    If your goal in life is to spend a few minutes listening to a double dose of gibberish, just ask a petroleum engineer or environmental scientist for an explanation of the pros and cons of Hydraulic Fracking. Before you do that though, make a quick stop for a triple espresso shot at your closest Starbucks because you are going to need it.

    Hydraulic Fracking, as we all know involves the process of injecting massive amounts of water deep in the ground under intense pressure to dislodge oil and gas deposits inside of rocks. The benefits of fracking are easy to explain. The consequences are far more difficult.

    Such difficulties are why the experts qualify virtually every statement with further qualifications. Like marriage and income taxes, fracking is complicated.

    First the benefits: increased supply of domestically produced energy both oil and gas. Halleluiah this means less dependence on politically volatile places like the Middle East. In turn this produces more US jobs and income and helps virtually every part of the American economy. It also reduces Russia’s role in the world energy equation. Goodie, goodie, goodie, but before declaring energy independence, there is the other side.

    In the early days of fracking there was really only one major draw back: ground water contamination. The massive amounts of water required for fracking was, by the industry insistence well below the standard water table at thus the various chemicals mixed with the water during fracking poised no risk to the population. This dirty little lie turned out to be a big one.

    An obscure documentary titled Gas Land, produced in 2011 and featured on 60 Minutes, showed just how big a risk actually existed. Cameras recorded homeowners taking a match and lighting fire to running tap water. The video revealed cows and other farm animals sickened after drinking the chemical infected water from the farmers well. There was methane, butane all kind of poisonous stuff and that was just the start.

    Oklahoma is the fracking center of the energy universe. It has become the global leader in earthquakes. Here is a rough perspective. In 2008 Oklahoma had roundly 1000 gas wells in operation; by 2012 it was 11,000. Our guess is that by 2015 there were closer to 15,000.

    As for Oklahoma earthquakes, the most recent data starts in 2010 when just 41 tremors of 3+ magnitude occurred. Fast-forward to 2015 and wham, a record 903 quakes were recorded. Is there a connection here?

    You will recall that oil prices collapsed starting in 2015 and even today remains at half the previous high. This of course resulted in a drastic reduction in Oklahoma’s fracking business. By no small coincidence, 2016 quakes fell by more than one third. Again, is there a connection here?

    In 2015 there were more earthquakes recorded in Oklahoma than ever before. In fact more earthquakes than in notorious quake zones in California and Alaska combined.

    Since the 60 Minutes focus on Gas Land documentary, environmental scientists, engineers and about everybody else who gives a crap about the planet earth has offered their analysis and opinion. They have every right to do so even in the new normal times of Donald Trump. The one draw back is that it adds more to the confusion than necessary.

    Here is a quote from one environmental scientist that illustrates what we are talking about, “While the increased gas supply reduces air pollution in US cities downwind from coal-fired power plants, we still don’t know whether methane losses from well pads and pipelines outweigh the lower carbon dioxide emissions,” And this is from the new experts. Please Doctor, just tell me if I am going to live or die!

    Any solution has to start by not polluting, poisoning and otherwise killing the poor farmers and their livestock nearby to the fracking operations. That means not allowing the polluting chemicals into the food chain. Whether you love fracking or not, this is the biggest issue and public danger #1.

    The only known remedy at present is water filtration techniques. Having studied this issue back in 2012, I was hopeful that an entirely new branch of the water treatment industry would respond to this opportunity. It has been years now with very little change. In my judgment, the inertia is the result of the same industry stonewalling and denial vividly depicted in Gas Land. The industry members have the power to control ground water contamination but not enough pressure is being exerted to force change. We the people must force it on them.

    It is high time work with the industry to make money without poisoning the population. As for the Oklahoma earthquakes, it’s just one more reason to move to Texas.

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  67. Turning Donkey Work Into Dollars

    Imagine it is 1986 and your cable TV connection just went out. You call the 800 number for you provider. After about 15 minutes of waiting and some person takes your call from Billing. Oh you have a connection problem she says, well you’ve got the wrong number. There is a different 800 number for Technical Support. After another 10-minute wait for Technical Support, you give up and read a book instead.

    This scenario may sound like a view of the Paleolithic era, but it’s not. Today of course the world is different. But if you think of each 800 call as a separate App, then you will begin to get an idea of what Mulesoft is all about.

    What Does An API Do

    What we have just described above starts an API or Application Programming Interface. There are bazillions of applications today with more added all the time. Making them all work together is a mind bogglingly tedious process. That’s where Mulesoft comes in.

    Blame it all on things like mobile and the cloud that is turning API’s into a big and rapidly growing business. To understand why a company with a funny name like Mulesoft should be taken seriously, we have to step back almost 15 years.

    It was in 2003 the Mulesoft founder Ross Masons day job involved integrating different corporate IT systems. The work was drudgery. He dubbed his chores as “donkey work” and set out to develop open source software to solve the problem. Voila, Mulesoft was born.

    Big Name Early Backers

    Like everybody else, Mulesoft needed money to translate its vision into reality. This is where most startups fail to sell investors on the so-called proof of concept. Apparently Mason did not have this problem as he managed to get early funding from the likes of Cisco, Salesforce.com and ServiceNow.

    Either Mason was one super salesman or his Anypoint Platform had some real potential. The company raised $259 million prior to any public equity offering. That as they say, is no chump change.

    Application software is extremely tricky to understand. You can’t really see it. So the litmus test for a complex software startup company is the pedigree of early stage backers. Mulesoft not only got the smart industry money but the research analyst as well.

    Various market research reports envision the global enterprise application integration market nearly doubling in size over a five-year period reaching $13.4 billion by 2019. That is a pretty solid outlook for the business and Mason aims for Mulesoft to outgrow the industry’s 11% average annual rate.

    Mulesoft is no one trick pony. Today it serves 7 industries from financial services, government, healthcare, insurance, education, media/telecom and retail. More will be added over time. This is just part of Mulesoft’s plan.

    We are dealing here with the management of big data and the Internet of Things. The names on Mulesoft’s customer list reads like the “Who’s Who” in these two fields including Operational Intelligence Company Splunk. The well regarded technology research organization; Gartner named Mulesoft the leader in “Full Lifecycle API management.

    Mulesoft must be doing something right. It is not like they have the field to themselves. Big names like IBM and Oracle dot the list of nearly a dozen players in the field. Then there are more specialized operations like Informatics, Jitterbit that deal with information management and cloud integration solutions. The fact is the business category is huge and no single company can do it all.

    Mulesoft Files IPO

    On a recent February day, the company filed a Preliminary Prospectus for it’s intended IPO. This provides the first real insight into the financials. The numbers are interesting.

    The company is trying to go public at a proposed valuation of $1.8 billion. For this sum, here is what investors are looking at. In 2016, Mulesoft revenues grew a whooping 70% to $188 million but the company lost about $50 million. Last years loss however was less than the $65 million recorded in 2015.

    Should investors be concerned about the sizeable losses? That types of advise is not what we do. This we can say with certainty. Software can be a highly profitable business, just look at Microsoft, Oracle and others. The cost of marketing software is where big costs come into play and this appears where Mulesoft is spending some dough. Mulesoft has the attention of Wall Street as a gage of the IPO market following the recent Snapchat offering, so we will be watching also. If all goes on schedule, sometime around Memorial Day, the offering could become effective.

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  68. Tocagen Inc (TOCA) Files Preliminary Prospectus

    “No One Should Die Of Cancer”

    Tocagen’s founding vision several years ago was “No One Should Die Of Cancer” because they believed the immune system could be safely activated to fight a patient’s cancer.

    It seems forever that medical researchers have been after the silver bullet that cures

    Cancer. After more than 50 years deaths from cancer are down, life expectancy has improved and yet many patients continue to be treated with harsh chemotherapy. We have all seen how this antiquated method leaves the patient weak, ill with miserable side effects and the telltale hair loss.

    Immunotherapy: Slowly Breaking Through

    In the last 20 years immunotherapies have become an approach that holds great promise. Here again, no silver bullet has been discovered but results are encouraging up to a point: the side effects. Here is Tocagen and how their approach is overcoming this problem and could lead the way in immunotherapy.

    By their own description, Tocagen is a clinical-stage, cancer-selective gene therapy company focused on developing first-in-class, broadly-applicable product candidates designed to activate a patient’s immune system against their own cancer from within.

    Tocagen’s cancer-selective gene therapy platform is built on something they term retroviral replicating vectors (RRVs). The idea is to selectively deliver therapeutic genes into the DNA of cancer cells.

    Tocagen’s approach is designed to fight cancer without the autoimmune toxicities commonly experienced with many other immunotherapies. Until now the side effects of many immunotherapies has been as lethal as the disease.

    Toca 511 and Toca FC Could Make A Difference

    Tocagen seeks to change that. They believe they have a way to activate the immune system safely to fight the patient’s cancer. They are moving along with two products: Toca 511 and Toca FC. Initially these are being tested on patients with cancerous brain tumors where there is a significant unmet medical need.

    In November 2015, Toca 511 and Toca FC began Phase 2 portion of a randomized, controlled Phase 2/3 clinical trials. Enrollment of the Phase 2 portion with 187 patients was completed in February 2017. Tocagen plans to report top line results in the first half of 2018.

    In February 2017, the U.S. Food and Drug Administration granted Toca 511 & Toca FC Breakthrough Therapy Designation for the treatment of patients with recurrent HGG. Breakthrough Therapy Designation indicates that preliminary clinical evidence demonstrates the drug may have substantial improvement on one or more clinically significant endpoints over available therapy.

    As of May 31, 2016, Tocagen had treated 126 recurrent HGG patients with Toca 511 & Toca FC. In these trials, researchers observed potential benefits that extended overall survival and safety profile. Most importantly, to date, they have not reached a dose-limiting toxicity.

    What is Next?

    Tocagen has a way to go before being pronounced the answer to cancer. More testing TOCA 511 and TOCA FC will be required. Overcoming the big hurdle, the high toxicity of most immunotherapies is very promising and even achievable in the foreseeable future. The FDA cooperation thus far could be a sign for optimism.

    In the meantime, the company will require capital to fund high cost research and that is the main reason for the IPO that was filed just recently on March 9, 2017. The company is hoping to raise $86,250,000. Proceeds are targeted for two principal areas. The first is to build manufacturing facilities for TOCA 511 and TOCA FC followed by funding to fund phase 2 and phase 3 research trials for these two products and other products under study.

    In the IPO world of multi billion offerings like Snapchat, companies that come along with an $86+ million offering sometimes get ignored. Who knows, Tocagen may be worth taking a look.

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  69. Silver Run Acquisition Corporation II-IPO

    Will The Sequel Be The Equal


    As a long time Wall Street investment banker, I have learned there is a message in every financial offering be it debt or equity. Each offering is a measure of the public appetite for some specific business or a new twist to an existing business. In the prospectus there are facts, future looking statements, assets, balance sheets even income statements that give some perspective on the company.

    And then there is Silver Run Acquisition Corp. Management of Silver Run is seeking to raise $460,000,000. Here is a direct quote from the prospectus filed just a few days ago on March 2, 2017 by underwriters CitiGroup, Deutsche Bank and Credit Suisse.

    “Silver Run Acquisition Corporation II is a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses, which we refer to throughout this prospectus as our initial business combination. We have not identified any business combination target and we have not, nor has anyone on our behalf, initiated any substantive discussions, directly or indirectly, with any business combination target. We intend to focus our search for a target business in the energy industry.”

    And then there is this section on how Silver Run Acquisition Corp II is doing these days:

    Results of Operations and Known Trends or Future Events

    “We have neither engaged in any operations nor generated any revenues to date. Our only activities since inception have been organizational activities and those necessary to prepare for this offering.”

    Honestly folks, would you sign a check to buy a unit or two of Silver Run? Well you would if you had invested in Silver Run Acquisition Corp I in February of last year on the initial public offering. Last years offering was priced at $10 and is currently trading over $17 having reached an all time high of $19.16. Not bad at all.

    The prospectus back then didn’t look or read much different than Silver Run II. Even the $450,000,000 offering size was about the same.

    Lots of Happy Investors

    Last years offering turned out to be particularly propitious coming very near the $26 per barrel low in oil prices. The price of energy assets dropped at just as fast in the face of fading cash flow and looming debt burdens. It may have been bad times for the energy business, but it was party time for Silver Run Acquisition Corp.

    And with the performance of Silver Run Acquisition Corp I so much better than the average stock in or outside the energy area investor appetites are probably ready for the sequel with Silver Run Acquisition Corp II.

    Proven Leadership Really Helps

    Silver Run’s chief executive officer is Mark Papa, a guy who has been in the oil and gas industry over 45 years. Fifteen of those years he was CEO of EOG Resources Inc. a one-time division of Enron. The company credits Mark with transforming EOG into one of America’s biggest oil companies. This may sound like so much oil industry bravado considering we are talking about the infamous Enron Corp. One thing is certain, Mark’s timing with Silver Run Acquisition Corp I was flawless. Now, can he repeat his performance of last year? Something tells you that for all the legal denials in the prospectus, Mark has plenty of ideas on his mind how to put almost a half billion dollars to work.

    Oil prices may have nearly doubled from their 2016 lows around $26 per barrel but they are still miles away from the 2015 levels above $100. This means there are still deals to be done.

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  70. Self-Managed Real Estate REIT

    Excess Capacity in A Supply Constrained Market 

    Before getting started, I have a confession. I hate companies like Invitation Homes. During the financial crisis and the period that followed, investment funds like Blackstone Group and others went about buying up foreclosed and short-sell homes on the cheap. That is proving to be a very smart move.

    The reason why I hate these characters is that they kept the real estate markets in some places like California from totally collapsing. With their huge army bidders at property auctions and large open checkbooks, they gobbled up all the best values. Where once that was a glut of homes, there is now a shortage. This spells only one thing: raising prices.

    Blackstone and others had the cash to execute the largest institutional acquisition of residential real estate ever. The 2008 financial crisis and the years immediately after meant that individuals seeking to purchase homes using most any form of mortgage financing were out of luck. Banks were pretty much out of the business of lending.

    Having Cash When Others Are Going Broke

    So the hatred for Invitation Homes is born out of pure jealousy. Witnessing the residential real estate history of the past decade and being powerless to get into the game will do this even to a kind and generous soul like myself. Though many had the clarity to see what was happening, only a few were able to capitalize on it. Invitation Homes was one of them.

    In December, Blackstone filed a Preliminary Prospectus for an IPO if Invitation Homes. Here are some of the choice details.

    Invitation owns over 50,000 homes in 14 choice areas where population is growing and housing demand is rising. This includes Seattle, Los Angeles (including the Inland Empire), South Florida and Atlanta.

    Invitations strategy is playing out brilliantly. Unlike much of the industry that has been building apartment complexes for nearly a decade, Invitation has concentrating on housings. Granted, there was far greater demand for trendy new rental housing especially among the booming millennial population during the early years, things are changing. Many of those couples are now having families pushing the limits of apartment living. These folks are screaming for homes with green space. This is where Invitation Homes has an interesting future.

    REIT’s Offer High Yields

    Invitation Homes is organized as a self managed real estate REIT. This means the company must dole out at least 90% of its income to shareholders to avoid paying Federal Income Taxes. This arrangement suits a lot of investors seeking above average yielding income. Is this a good option for you? The answer depends on your investment objectives but here are some thoughts.

    Real Estate REIT’s lately have been under stock market price pressure. In fact during 2016 there were only two IPO’s in the REIT sector raising only about $1.5 billion.

    There may be several reasons. The first is that many are apartment REITs like Equity REAL Estate owned by legendary developer Sam Zell are beginning to see the shift of millennials from apartment dwellers to home buyers. This has been happening for almost a year now. The second and obvious factor is interest rate levels in general.

    When the Federal Funds rate was near zero over the past couple of years, investors were attracted to and rewarded by Real Estate REIT’s yielding 5%-8% and in some cases even more. Today, with interest rate increases likely the market is adjusting.

    Looking For A Bargain

    As investors, we will hope these factors will have an affect on the pricing of the Invitation Homes IPO. In other words, it’s time for the average citizen to get a break. I may hate companies like Invitation Homes, but for the right price on the IPO, I’m willing to bury the hachet. As a real estate REIT, Invitation Homes looks to be rather uniquely position relative to others in the field. They have excess capacity in a supply-constrained market: nice.

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  71. YEXT: The Emerging Force In Intelligent Search

    “Eco, order a 12” Pizza with pepperoni from Stromboli’s and have it delivered”.

    Most of us have watched this commercial on TV more than once. Eco is one way Artificial Intelligence is making an impact. Eco uses something called Intelligent Search and this is what software company YEXT does for a living.

    Today the vast majority of online searches go through third-party sources such as data aggregators, governmental agencies and consumers. The net result of this third party sourcing has been to produce “best guess” data that can often miss or misstate the target data field.

    YEXT developed a better way to source critical digital knowledge. They built their software platform on the premise that the best source of accurate and timely digital knowledge about a business is the business itself.  So far with 110 corporate clients and almost $90 million in revenue, YEXT could be the next big thing.

    How YEXT Works

    Most of us are familiar with big time search engines like Google, Google Maps, Facebook, Instagram, Bing, Cortana, Apple Maps, Siri and Yelp. These pioneering companies are the major drivers in information search today. However, we also know, their accuracy is not exactly ideal.

    This is where YEXT steps in. Their knowledge engine platform lets business manage their digital knowledge in the cloud and sync it to over 100 services including the kingpins of search noted above.

    Intelligent Search is the structured information that a business wants to make publicly accessible. In food service it could be the address, phone number or menu details of a restaurant; in healthcare, the health insurances accepted by a physician or the precise drop-off point of the emergency room at a hospital campus; or in finance, the ATM locations, retail bank holiday hours or insurance agent biographies.

    Artificial Intelligence Offers a Potential $10 Billion Market

    Improving search results in general is nice but not very sexy. It doesn’t make you want to beg for more information. However, when you consider the role of Artificial Intelligence (AI) in our evermore data intense world, the importance of Intelligent Search and the opportunities for YEXT becomes a compelling story.

    The AI trend is already underway as YEXT is increasingly using the structured data on their platform to expand or add new integrations with vertically specialized applications, voice-based search and AI engines.

    Just Right For Big Data Applications

    According to their preliminary prospectus, YEXT customers use their platform to manage their digital knowledge covering over 17 million attributes and nearly one million locations. These customers include leading businesses in a diverse set of industries, such as healthcare and pharmaceuticals, retail, financial services, manufacturing and technology.

    Major customers include: AutoZone, Ben & Jerry’s, Best Buy, Citibank, Denny’s, Farmers Insurance Group, H&R Block, HCA, Infiniti, Marriott, Michael’s, McDonald’s, Rite Aid, Steward Health Care and others. The list is growing.

    Management believes the market for digital knowledge management is large and mostly untapped with over 100 million potential business locations and points of interest in the world equaling over $10 billion.

    Designed For Acquisitions and Broad AI Penetration 

    If you are into AI at all, you got to love YEXT’s business model. Founded in 2006 by serial entrepreneurs Howard Lerman (CEO) and Brian Distelburger, President these two are typical software guys whose vision appears much more broad based the their current focus with YEXT. Here is where their recent prospectus offers some mystery and excitement to the story.

    After reviewing the document, here is what I discovered. Unlike most rapid growth tech companies YEXT does not have an urgent need to go public. They generated almost $60 million in gross profit in 2016 before heavy marketing costs resulted in a loss of $26.5 million. Even so, they still ended the year with $20 million in cash. That’s a long way from being destitute.

    The company’s sole reason for the IPO is to establish a liquid public market for the stock. They expect to raise about $100 million, all of which will go into the bank. The company is debt free and there are no insiders selling stock. Very interesting.

    All of this adds up to a business plan that is likely to see some important acquisition activity in the future that will build and broaden the current YEXT platform making the company a much bigger player in the field of AI.

    The preliminary prospectus was just filed on March 13, 2017 so it will be a while before the world is exposed to YEXT. The list of underwriters that includes JP Morgan, Morgan Stanley and RBC Capital Markets, suggests this will be a well marketed offering with a cool and memorable name to go with it.

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  72. Benjamin Graham’s, Simple Way Investment Strategy

    Information Revelation

    As a career long analyst of stocks, markets, economies and just about everything else that contained data, I spent years digging through microfiche and old newspapers seeking any tidbit of information that would provide an edge to my investment selection. No detail was too small, no place in the world too remote. Unfortunately, I kept running into a whole lot of other data freaks doing the same thing. We all had the notion that information, by itself, was as sacred as Sergeant Pepper.

    Hail To The Chief

    Benjamin Graham was interviewed in the September 20, 1976 edition of Medical Economics. It was a revelation. In the interview he pointed out how conventional tools such as market share or projected earnings were of little practical use in deciding what price to pay for stocks or when to sell them.

    In the 1970’s growth stocks were the rage and 5-10 year earning projections were common. Institutional investors focused on 50 of America’s fastest growing corporations. It was not unusual for these stocks to sport price earnings ratios of 50. Thus, Grahams 1976 observations amounted to heresy. But, results of institutional investors proved him right. In this 10-year period many of the most well informed institutional investors seriously underperformed leaving corporate pensions materially underfunded.   Obviously, very few people understood what price to pay for a stock or when to sell it.

    The Ground Rules

    The mantra of Graham & Dodd was “Security analysis is the discipline of comparative selection”. But without at least an earnings projection or a PE based on profits 5 years away, where does one start? Graham’s answer was simple. Start with a definite rule for purchasing that shows that you’re are buying stocks for less than they are worth. Next there needs to be a large enough number of stocks to make for a valid sample size. Finally, there must be a definite rule for selling. Well, none of this is exactly proprietary wisdom. It sounds a lot like always “buy low and sell high”. So, how does it all work

    The Buck Starts Here

    Valuation begins with interest rates. All investments involve some degree of risk. Bonds backed by the full faith and credit of the US government carry the lowest followed by America’s strongest corporations. Interest rates and stock values have an inverted relationship. Rising interest rates translate into lower stock valuations while the reverse is true when interest rates are falling.

    For sake of illustration, imagine the highest ranked AAA Corporation is willing to pay you 8% interest to buy their bonds. Stockholders face higher risks and need to be compensated with a higher return. That makes sense. Here is where Graham’s magic begins. His approach is to search out those stocks who’s earnings to price ratio is more than twice the interest rate paid on AAA corporate bonds. We’re talking about earnings to price ratios, not the conventional PE so lets take a hypothetical example.

    Intergalactic Enterprises has EPS of $3.00 and a stock price of $10. Earnings equal 30% of the stocks price so the ratio of earnings to price is 30. For the moment let’s assume AAA bonds are yielding 8%. Given the two options, Graham buys the stock since the EP ratio of 30 on Intergalactic stock is more than twice the 8% yield on AAA bonds.

    For those who are tradition bound and love math, Mr. Graham offers an alternative way to come to the solution. First take the 8% AAA bond yield in our example, double it and divide by 100. Using this method gives you and answer of 6.25. This is this is a benchmark PE ratio so any stock selling for less than 6.25 is good value.

    If AAA bond yields fell to only 5% the PE benchmark for stocks rises to 10. Conversely if AAA yields rise to 10%, the PE benchmark falls to just 5.

    Graham maintains for most investors, these criteria alone should supply plenty of candidates for a diverse portfolio of at least 30 stocks.

    According to Mr. G, simply look at balance sheets. When you find companies where shareholder equity that is at least 50% of total assets, you have located a financially sound company at an attractive value. An accounting degree is not necessary. Just read the major balance sheet headings Shareholder Equity and divide by Total Assets.

    For those truly uncomfortable with financial statements but feel comfy with your laptop here are two other options. Find a low cost (free) App that offers

    a screening function allowing you to sort companies by pre selected balance sheet characteristics.

    Setting Goals

    OK what’s next? The goal is to take our list of candidates and develop a portfolio of at least 30 companies. This creates just enough diversification to be effective without becoming a burden. Now, it’s time for the best part. Be prepared to commit to this list for 2-3 years and set a price object. Your goal should be a 50% return. Wow, who wouldn’t be satisfied with 50% return over 24-36 months? Well there are no guarantees so what should be done after 24 months if a stock hasn’t made major progress toward that 50% return? According to the Simple Way Investment Strategy, sell it and reinvest the money in a different stock that meets the value criteria.

    That is the essence of Grahams Simple Way approach. It is not purely mechanical however. Some human interpretation helps so long emotions like fear and greed can be kept in check. Not every stock is going to produce a 50% return and having the objectivity to sell is important.

    Practiced with dedication over a long enough period provided Graham with returns averaging 15%. Compared with the general market at 10% that is big time stuff to feather your investment nest.

    The beauty of Ben Grahams Simple Way strategy is taking the guesswork out of investing. No more forecasting the future, predicting interest and cap rates, trying to nail down EPS, none of that.

    Warren Buffett has long been a value-investing disciple, carrying the banner after Grahams death in 1976 adding a few of his own tricks along the way. Most importantly, Bentham Graham’s Simple Way Investment Strategy opens the door to a level playing field we can all share.

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  73. Personal Finance: Scoring Some Credit

    When it comes to scoring some credit, the world breaks down squarely into two camps. The first group has none at all and no credit history but harbors a desperate desire for access to credit so they can start collecting mass quantities of material goods and begin living the blissful life of their neighbors, the Tanenbaums.

    In the other camp are the Tanenbaums that are in hock up to their asses with no clue how they got there in the first place and no idea whatsoever how to escape. The Tanenbaums just want to live a simple blissful life like their neighbors the Ratcliffs.

    There are no other types of people. The perfectly content family with no debt and whose income is exactly to three times their cost of housing doesn’t exist. The last family to fit this description went out of existence in 1993 when the first 48” flat panel television was introduced at $5000.00 a pop. And, of course, every home needs more than one.

    Even though both sets burned out long ago, the once perfectly content family is still paying the monthly minimum of $24.58.

    American families owe over $11 trillion in credit card debt and that averages just about $105,000 per household. The average household income in America is only $53,046. Because America has more Tanenbaums then it has Ratcliffs it makes it much more difficult for President Trump to hit the 4% GDP growth he promised in his election campaign. But that’s another story for another day.

    Being the American free enterprise system there is always somebody willing, for a price, to help the Ratcilffs and the Tanenbaums. Here are some free suggestions.

    Say you are just out of school and no credit history. This familiar condition means you won’t be qualified for any credit card, bank loan or mortgage. Here is how you get started.

    Go to the closest supermarket and purchase a prepaid Master or Visa card. There will be a small fee attached but that’s life. You load up the card in the same way you put money onto your debit card account. If you like, you can do it right at the supermarket or drug store. This sends a signal to the credit rating agencies that you are alive.

    After a few months of loading and spending one of two things will happen. Some prepaid card issuers are beginning to extend limited credit to the regular prepaid customers. They have enticing names like “Credit Builder”. When this happens, you are on your way. Caution: the interest charged will jar your teeth so you must pay off your account immediately.

    The other possibility is that companies like Capital One who specialize in people with low or limited credit history will send you a credit card offer in the mail. Again the rates are steep so always pay the balance as fast as possible. Before you know it you will be on your way to the lifestyle of the Tanenbaums!

    Once you have reached the $104,761.91 US average in credit card debt, the next question, what do you have to show for your overwhelming burden? You can’t ask with the Tanenbaums, they had to sell their house and move to Mississippi.

    Google has used their proprietary algorithms to figure access your financial straights and starts sending pop up ads for debt settlement companies, debt-counseling services and maybe even a meeting list for debtors anonymous.

    The debt settlement companies will gladly take whatever cash you have left. A very professional sounding telephone sales people will promise to negotiate you debts down by 50% and schedule easy, affordable monthly payments that fit your budget.

    Why are these guys worthless? When you take this route, all your credit card accounts get closed and that places a big hit on you credit score anyway. More importantly, you can accomplish the same 50% reduction by calling the credit card company and honestly explaining that you can’t afford to pay your account on time and make them an offer that works for you.

    If your offer is declined, you have the option of letting the account go into collection. Agencies who specialize in collecting these debts have already discounted your obligation at least 50%. Yes, most of us were raised to be responsible citizens and to take our financial responsibilities seriously.

    Here is something to keep in mind. If your credit card debt is anywhere near $100,000 and your income is only $53,000, chances are you credit score is probably already shot to begin with. Forget about having a healthy credit score that’s what enabled you to get into trouble in the first place.

    Debt counseling companies are also standing by and for a fee will provide you with the following sound advise: stop spending money.

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  74. Baseball: Investing In The Evil Empire

    I have a confession to make. In some towns there is a danger to this. In other places lies ridicule and harassment. But I don’t care because I have long been a fan of the New York Yankees. I am not talking about the championship years that featured the core four of Jeter, Posada, Pettitte and Rivera. My interest began over 45 years ago and it goes to the heart of what it means to be a New Yorker and a businessman.

    When I started my business career as a junior Wall Street investment analyst the state of New York City was a mess with financial Armageddon looming. The New York Yankees were in the same miserable shape, a forgotten part of a corporate parent named CBS. The core four of that era: Mickey Mantle, Yogi Berra and Whitey Ford and Elston Howard were long gone. CBS couldn’t figure out what to do and worse yet could not find anyone wanting to buy the team.

    And then from a bankrupt shipping business in Cleveland came this guy George Steinbrenner with a bid. Reports have since place a $4 million price on the sale but my recollection was a much lower amount. Either way, what was Steinbrenner getting for his money?

    First off, he didn’t get ownership of Yankee Stadium. Instead he inherited a long-term high cost lease on an aging depleted structure that dearly needed major work. In the aftermath of his bankruptcy George wasn’t exactly flush with cash.

    In addition, he inherited a roster of players that weren’t much better than their cross-town rivals the miserable New York Mets. So in the final assessment, Steinbrenner was paying for the rights to the New York Yankees name, the uniforms, bats and balls in the locker room and not a lot more.

    To take on risks of this magnitude requires more than a bold vision and loads of luck. It helps to be totally insane and that is what many thought at the time. This image of madman followed him for the next three decades. George was bold, brash, demanding and threatening in his manner. George was Donald Trump before Donald Trump was Donald Trump. George invented the term “Your fired”.

    He was part businessman, part showman, a regular PT Barnum.

    One of his first bold steps was to take full advantage of the newly created business of free agency signing Jim “Catfish” Hunter to a contract that paid an astonishing $500,000 a year (today the league minimum is over $510,000). His free agent deals were often on field disasters but were great at getting advertising and filling seats in Yankee Stadium. After all, who wouldn’t want to see Danny Tartabull? The more bluster, the more news headlines and that intern filled more seats. George had just the right formula. He demanded a World Series Championship every year but was building the long-term franchisee on smoke and mirrors.

    Using his threatening tactics he forced New York City into a major two-year renovation of Yankee Stadium at a princely cost at that time of $74 million.

    The real plumb for revenues was turning the Yankees into a worldwide-recognized brand. The plan began with setting up a cable TV YES network that had the ability to broadcast Yankee games about anywhere in the world. When the core four arrived in 1995, everything was set.

    Yankee fans started popping up everywhere. Subscriptions to the YES Network and merchandise sales went through the roof. George was no longer borrowing and threatening; he was living off the houses money. And that money was flowing big time.

    Today the New York Yankees are valued at $3.2 billion representing one humongous return on investment for the initial investors. In 1975, Catfish Hunter earned about $2932.09 (after agent fees) for each of 162 games. In 2017 it will cost approximately $2500 for a single game seat behind home plate.

    Today the Yankees are baseballs most valuable franchise and the third most valuable sports team in the world. Not bad for a four million investment. Love him or hate him George build one magnificent evil empire.

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  75. Retirement Options: The Other Side of the Mini Bubble In Housing

    Recently we put electronic pen to virtual paper raising the question, is there a mini bubble in housing? In that piece we cited the contradiction between falling home ownership now at around 63% and the fact that only prescription drug prices are rising faster than the price of shelter. Some of the distortion in housing prices can be blamed on excess capital in the hands of speculators, drug lords, foreign potentates and others who could not give four-letter word for ordinary folks looking to live the American dream.

    But what if you are one of those ordinary folks and are stuck in an ugly and overpriced rental property, your FICO score still not flashing green lights, your bank account is lean and your age working against you? Or what if you own your home but can’t keep up with soaring property taxes because some Russian oligarch blew up prices in your neighborhood?

    For 60 million Americans baby boomers, these are not absurd scenarios. What we know about this group from what insights the US government tells us is eye opening. We have previously noted how some 40% of this group has an average savings of less than $20,000. Nearly 8 million of this group is part of what the US Labor Department classifies as E6 or the total of people looking for jobs plus those who have all but given up hope of finding a job.

    So if you are one of these millions of people, what are you suppose to do? When you can neither find adequate work but cannot finance your retirement, the outlook can get a little discouraging.

    If you don’t live there already, you might consider moving to one of 10 lowest cost cities in America that we mentioned last week. To be polite, most of those cities are not going to appeal to everyone. In fact, the reason they are so cheep is because they appeal to practically no one. How many times have you fallen a sleep at night dreaming of living in Lubbock Texas or shoveling snow in Buffalo? My guess is not many.

    The solution more and more boomers are turning to is living outside the United States. I know it sounds un American but it may be totally American. When you consider pure supply/demand economics, it is pure American.

    A key quality at the outset is open mindedness. Remember, it is not like you are being exiled from the United States, never to return. Nothing is permanent. For example, you could take a year or more just exploring different locations to find just your vibe. Even after you find the right spot, there is nothing dictating anything being permanent.

    You may even be surprised to know that you are not the first consider the benefits of leaving high cost spots in the United States. There are millions of English speaking expatiates with organized groups all over the world, there is a probably a website for everyone.

    Virtual jobs make it possible to take your work wherever you go. Some travel websites will even pay you real money to write a Yelp like reviews of the places you visit and the restaurants you like. Everybody has an opinion, why not get paid?

    Unless you really want, there is no need to go half way round the world to find attractive economics combined with quality of life benefits. Each year International Living, the online magazine has their experts list the 10 best places to retire (or simply to run away). Usually all are in the Western Hemisphere in places like Mexico, Ecuador, Peru, Costa Rica and other places.

    Now here is some great news. You can live like at least a prince and often like a king depending on your location. We are talking about renting a modern two bedroom condo in a great location for $500-$1000 per month and a total cost of living that takes less than $2000 per month. But instead of trimming sagebrush in Lubbock Texas, you are hiking the hills of Cuenca Ecuador or roaming the many beaches of Mexico. Yes, it stinks when the price of housing in the United States is inflated by foreign capital but there are some really cool options. Check it out.

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  76. Fine Tuning The Fed: Many Questions, Where Are The Answers?

    Some time ago I gave up Fed Watching in favor of fish watching. Both are equally boring but at least you know the fish will always come to the source of food. The Fed is less predictable and beside, for the better part of the last five years, not much has been happening.

    That is unless you ignore their first Fed induced interest rate increase in December 2015. Even though widely anticipated, the first increase in seven years sent the US equity markets into a tailspin. Yes, a quick recovery did begin in February of 2016. Today the S&P 500 and other market indices keep busting into record territory.

    In a very real sense Janet Yellen and her Fed cohorts presented investors with an early Christmas present in 2015; one very big buying opportunity for stocks. Long live Her Majesty.

    December 2015 and the early part of last year, however, marked the end of a bull market in bonds that dates back to the early years of the Reagan administration when short rates peaked out at more than 20% and when new issue 20 year AAA corporate bonds were priced in the 12%-13% range.

    Just as the bad old days of high interest rates and inflation are behind, so is really cheap money. This is not startling news. Speculation of multiple rate increases in 2016 persisted throughout last year and indeed the Fed bumped rates again in December.

    During much of this time, Fed members were divided on the need for higher rates. Several governors even spoke openly in disagreement with Fed Chair Yellen. The main issue was over how much monetary stimulus was possible before setting in motion a major new wave of inflation. Unemployment was falling but real wages were still in the doghouse, so there was precious little evidence of inflationary pressure.

    Fast forward to February 22, 2017, minutes of the January FOMC meeting are released and now the opinion appears to be heavily favoring multiple rate increases this year. Well as least team Yellen is playing like a strong professional team (not to be mistaken for the Cleveland Browns).

    If you read between the lines, we suspect the change of Fed mood has more to do with qualitative things like vibe, spirit, feeling and pure guessing that hard economic facts. The Fed feels the economy may not be falling victim to the same first quarter lull of the past two years. They gage the attitudes of business to be improving in anticipation of the new Trump administration plans for tax reform and other pro business policies.

    Here is the bottom line question. The Fed has already made two rate increases that have been met with a surprisingly favorable stock market response. Interest rates and stock prices are negatively correlated. One goes up, the other goes down.

    So far, this hasn’t happened, leading some investors to believe things are different this time around. That logic has killed more investors than the Black Plague. But when the news headlines tell a story of record stock market prices, it makes people feel well off and comfortable.

    This question is made relevant by the most important mood indicator I know, the VIX Volatility Index. The index remains at a languid 10-12 area down almost 50% from election time levels last November. This is not normal. Optimism is a necessary ingredient for a health economy but blind optimism adds an element of risk. Is the Trump aura lulling everyone into a coma? With the stock market hitting new highs it is important to keep your eyes open.

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  77. Momma Don’t Let You Sons Grow Up to Be Dallas Cowboys

    Without men, where would organized sports be? Comedian Jerry Seinfeld says that man cannot go more than 2 minutes without thinking of sex. That still leaves at least 30 minutes out of every hour when something else has to fill the void. It simply cannot take 30 minutes to take out the garbage. There has to be something more.

    Seinfeld maintains the men are not creative in the least. Without direction, they would walk around aimlessly, hands in pocket staring blankly into space. This is where Sports fills a vital role. It provides the creative direction for grown men to drink excessive amounts of alcoholic beverages, eat nachos yell insane thoughts and otherwise ignore their spouses.

    All of which naturally leads to professional football, the king of big money sports. There are no officially released figures so the facts we are about to reveal are not facts at all, just guesses. Some experts claim the NFL annually pulls in $9 billion others place the number between $11 and nearly $15 billion depending on Superbowl opponents and other factors. Advertising revenues from just the Superbowl alone are placed at a whopping $275 million. And then there is all that merchandise as well.

    Do you think this is a good business to be in? Well consider this thought. The Green Bay Packers are the only publically own NFL franchise and that stock trades about as frequently as a solar eclipse. So there is darn little hard evidence to go on. However, start by looking at the ownership list and the private valuations placed on the teams (a guaranteed low ball number) and you get the idea.

    Virtually every team has at least one billionaire owner. Some teams even have more than one. They are not the least interested in sharing any of the perks and financial rewards with anyone. That tells a lot.

    The NFL owners want you solely for your fan value. That means they want you to pay $314.94 for the Direct TV Sunday Ticket or lord knows how much for season tickets and fan paraphernalia. Oh yes, there is one other tinny, tiny item. The NFL owners humbly request that you Mr. Sports Fanatic pay for the $1-$1.5 billion cost to build a state of the art new stadium that no one short of a seven figure income could ever afford to attend.

    If you fail to pony up, then you get the same treatment Alex Spanos gave the San Diego Charger fans. Wow, who would ever have guessed that filling 30 minutes of vacant brain time would turn out to be so costly?

    This last item is just one of the things that is so reprehensible about the NFL. The fact that the public is so often willing to pay for the debt on stadium financing relieves ownership of sharing the profits through something like a public equity traded on the New York Stock Exchange. Thanks to a willing, if not gullible public, they get to keep it all for themselves. That’s pure greed.

    The other major blemish on the NFL is their treatment of professional athletes. Much attention has been drawn of late to concussions and related head injuries. But head injuries are not going to stop young kids (overwhelmingly from poor and under privileged backgrounds) from playing the sport.

    Compensation of the athletes by the NFL is a legal only by the grace of God and the antitrust exemption granted by the United States Congress. Salary caps represent blatant collusion. How else can you explain that star quarterback Tony Roma, in his prime signed a six year contract extension with only $55 million guaranteed while all start closing baseball pitcher Aroldis Chapman, also with a six year contract giving him an $11 signing bonus and then $15 million annually. These days’ professional sports are a year around commitment for athletes so both of these guys are totally devoted to hard work.

    Tony Romo, during his career thus far, has had two broken collarbones and two major back injuries leading to additional surgeries. Aroldis Chapman has only broken a sweat. The average life expectancy of an NFL play is five years less than the US average.

    While both Chapman and Romo are exceptional athletes at the top of the profession, what about the others? In 2016 the median contract salary for an NFL player was $770,000 compared with $4.25 million for an average MLB player. And the average MLB pine rider’s career will amount to 5.6 years compared with just 3.5 years for the NFL. There is only one conclusion to draw. If you play in a sport so violent that it threatens your health and shortens your life, you should be paid appropriately.

    And speaking of being paid appropriately, NFL Commissioner Roger Goodell hauled in over $33 million in salary and bonus last year that is more than 40 times the medium pay of one of his NFL players. We don’t know how much MLB Commissioner Rob Manfred gets paid. When he took the job in 2015, his entire net worth was estimated to equal what Goodell gets in about 7 months and not much more than 5 times the average MLB player compensation.

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  78. Baseball: The Silent Spring

    Ah, it’s that time of year again when the most of us are locked in the frozen tundra of winter, dark and gloomy skies, all hope for joy long gone. This year on February 14, thoughts turn to Valentines Day with flowers, candy and a night out for a nice dinner.

    But not me: February 14th is the day pitchers and catchers report for Spring Training. The official start of spring may be a month or more away but I could care less. Hope has arrived, to hell with the ice and snow.

    Say what you will about baseball, it is slow, often boring, tradition bound or all of the above. There is just so much excitement about the start of spring training that all of these shortcomings are overlooked. There will be plenty of time for complaining around mid August when your favorite team is hopelessly locked in last place 22 games back of the second wild card spot.

    Of all sports, baseball is unique. Players are paid what the open market determines they are worth. Yes there is this thing called a luxury tax that punishes any team owner who spends more than $187 million on player salaries. But even this threshold that still works out to an average of $7.19 million per player. So what if 5% goes for agent fees and another 25% for taxes, that still leaves a bundle for the players to take home. Hooray for free enterprise.

    Keep in mind $7.9 million is just the taxable income. What about the other benefits like first class travel on private jets, the best hotels, rock star status and all those plump after game buffets? Just as part time baseball star and full time gourmand Pablo Sandoval for details.

    There is a lot of complaining about baseball salaries being so inflated they don’t relate to the value received. There is even a baseball statistic to measure this; it is called Wins Above Replacement or WAR. I don’t have a clue how exactly it is calculated. I think it is something like the NFL Quarterback rating system that I don’t understand either.

    Critics are all so short sighted never taking into account raw talent and the years of work and dedication it takes to make the major leagues. In addition to hitting, fielding and throwing, a top-level player also must learn how to spit incessantly, chew bags of sunflower seeds and adjust his protective cup only when in frame of a television camera. When a player is being interviewed and refers to his dedication to working hard everyday, this is what he is referring to: spitting, chewing and adjusting.

    Baseball’s business model is changing dramatically thanks to Theo Epstein and the Chicago Cubs. Over the past few years, Theo amassed a pool of highly talented and cheep (a little over $510,000 per year) players winning a World Series in the process.

    The Cubs success has not been ignored. Every team is now chasing young talent. It is no surprise that the high priced free agent market took a dive this last off-season. The people to feel sorry for are the players between 30-35 who are becoming free agent eligible for the first time seeking the big Robinson Cano 10 year $247 million contract. Sorry, it isn’t happening any longer. Even Bryce Harper may be in for a surprise come 2018.

    This holds huge implications for talented young high school and college players. The doors to major league baseball are about to open wider than ever before. Imagine any team fully staffed with players making the league minimum. Their payroll could be under $30 million. So kids, time is short, start working on your spitting, crewing and adjusting today. The future is yours if you are willing to work hard.

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  79. The Energy Option: Filler Up With DC

    Las Vegas, Kansas City, Raleigh, Denver and Miami.  Slowly, EV sightings are taking place most everywhere.

    There is one other thing that EV’s all have in common.  They need to be recharged.  Even the most durable model, the Chevy Volt can only run 420 miles without some recharging.  For most of the 10 top selling EV’s, 100 miles on a charge is about the average.

    When you buy or lease an EV the standard package offers the 110 Volt home plug in recharger.  This method takes about 16 hours to bring on a 100% dose of juice.  It takes less than 2 hours to drive 100 miles so this creates a real bummer, slowing the appeal of EV’s

    A second choice is a $400-$600 option that brings 240 Volts of jolt into your garage. That reduces the waiting time to 4 hours.  That’s a big improvement but you have to get an electrician involved and that complicates things.

    Elon Musk came up with one very good answer. He created recharging stations and located them near places like shopping malls.  By converting AC power to DC, Tesla vehicles can be brought to 80% capacity in less time than it takes for a mannie-peddie (guys think a quick trip to Best Buy).  We are talking only about 30 minutes.  That’s great but what if you don’t own a Tesla?

    There is another solution that has been quietly evolving over time. Enter ChargePoint, high speed recharges for the EV masses.  The company is private having been founded nearly 10 years ago.  Unless you drive one of the non-Tesla vehicles, and live in San Francisco, LA or San Diego chances are you never heard of the company.

    Here is what they claim: the largest collection of EV recharging stations in the US with over 33,250 in 13 states.  All stations are fast AC to DC units that can get you back on the road within 30 minutes.  Unlike Tesla, ChargePoint stations are capable of juicing up any type of EV.

    The list of ChargePoint partners supports the notion that this company has a chance at success.  They include Schneider Electric, Leviton, BMW, Fuji Electric and Nissan.

    The product line extends into single and multifamily residential markets where the company claims it has a 110 Volt juice box that is 6 times faster than the average home charger.  If true, this would bring the recharge time down to less than 4 hours and without the need for an electrician.

    There are other companies in this business but it appears most are in segments like electricity conversion hardware and the like.  We looked but could not find any with the size depth and number of stations that ChargePoint claims.

    From the start we mentioned the company was privately owned so unless you know someone that owns a piece and who is willing to part with a piece, we can only stand back and watch.  Eventually, this is a natural for a public offering and when that day happens, be ready.  This is a business where the cash will flow as freely as the electricity.

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