Sunday, April 28, 2013

Global, Mobile and Extraterrestrial

Last week, as many global markets continued a multi-week process of positive and negative swings (last week was mostly positive), investors sought to balance generally soft economic data against economic stimulus efforts. Reinforcing the mixed economic environment, Fed Chairman Ben Bernanke said: "While employment and housing show signs of improving for the nation as a whole, conditions in lower-income neighborhoods remain difficult by many measures," and "Substantial coordination and dedication are needed to break through silos to simultaneously improve housing, connect residents to jobs, and help ensure access to adequate nutrition, health care, education, and day care.”

Several major smartphone firms shared their views of the changing dynamics of mobile computing as they reported earnings results. Samsung Electronics, the provider of the Galaxy S3, Note 2 and over 150 other mobile devices, suggested that smartphone sales may be flat for the second quarter and margins may decline. Apple’s revenue growth was in-line with expectations, but earnings growth declined for the first time in about 10 years – management was cautious about the second quarter, but more optimistic about trends in future quarters. Also, Bloomberg News reported that China Wireless Technologies (the number three player in China, behind Samsung and Lenovo) is demonstrating increased sales momentum, particularly in the low end of the mobile market.

Separately, the U.S. space agency NASA sent three smartphones into orbit to determine if these devices can be used as low-cost satellites. The mission, called PhoneSat, uses 2 HTC Nexus One and 1 Samsung Nexus S devices running Google’s Android operating system. Since the launch last Sunday, these devices have been taking pictures of Earth and transmitting the images to amateur radio operators around the world.

  • Regarding global economic weakness – As bullish investors have benefited from the strong positive move in risk assets in recent months, several seasoned investors including Seth Klarman (Baupost), Paul Singer (Elliot Management) and Stanley Druckenmiller (Duquesne Capital) remain cautious about economic fundamentals. In addition, Bernanke’s comments highlight the broadening divide between the haves and the have-nots in our society.
  • Regarding the mobile device market – the decline in Apple’s stock price since last September reinforce how the business dynamic are changing in this market. Increased penetration of the Android platform and demand for lower priced devices in emerging markets, are benefiting consumers while challenging growth investors. Value investors with a good understanding of these changes should benefit from these trends.
  • Regarding smartphones in space – this experiment is another example of how the increasing power and declining cost of smartphones continue to change the computing and communications landscape.

Sunday, April 21, 2013

Gold, Stocks and the Search for Value

Last week, Gold, considered a safe investment for over a decade, had its largest single day drop in 30 years. The price fell below $1,400 per ounce and was down 5.1% for the week and down 16.2% for the year. These moves triggered market chatter such as “there’s blood in the water”, “it’s now a risky asset” and “don’t catch a falling knife” and caused some investors to question the rationale for owning gold, which includes providing protection against inflation or as a hedge against economic disaster.
In addition, during a week of strong, but mostly negative market swings, stock performance of several firms reporting better than expected earnings results included Google – up 1.2%, Honeywell - down 0.1% and Microsoft - up 3.3%. Firms with weaker than expected results and/or guidance included EBay – down 8.5%, General Electric – down 7.9%, IBM - down 10.1%, and McDonald's - down 3.5% for the week.

Additionally, Apple continued to test the conviction of loyal investors, as its stock dropped 9.1% for the week, driven by concerns of increased competition and slowing product demand.

Regarding the value of gold – While concerns that potential gold sales by European governments including Cyprus, may have led to the sell-off (with hopes that purchases by central bankers, along with consumers in India and China, will support its price from further declines), this comment from the Economist (April 19, 2013) provides a good assessment of the situation:
"Gold, having no yield or earnings, is hard to value. That was a help when the price was rising, since the sky seemed to be the limit. But now that the metal is falling, the lack of valuation support is a curse. Like the government-backed paper money that gold bugs despise, gold is precious only so long as enough people agree that it is."
Regarding stock moves and equity valuation –the strong rebound of global equities in recent years has been driven by:
  • Significant “intervention” by global central bankers - their money printing efforts have devalued many currencies, 
  • Weak employment trends - which provide businesses access to favorable labor rates and 
  • Declining prices for commodities such as copper and oil - which reduce the input cost of many manufactured goods. 
Going forward, it is likely that fundamental economic growth and improving employment trends, rather than the efforts of central bankers, will be needed to support addition advances in equity valuations.

Sunday, April 14, 2013

Thomas Edison, Bitcoin and the Evolution of Digital Currency

As many global central bankers continue to hit the “print money” button to resolve varied financial problems, some investors have promoted a return to a gold-based monetary system to increase market integrity. Over the centuries, societies have continually sought better ways to store and trade units of value in exchange for produces and services. 

Interestingly, inventor Thomas Edison provided an alternative view in the early 1920s when he said, “Gold is a relic of Julius Caesar, and interest is an invention of Satan” and he suggested that commodities should be used to back the financial system.

This past March, as the government of Cyprus closed its banks to stabilize a faltering financial system, market interest significantly increased in Bitcoin, a digital form of currency. The objective of Bitcoin, which was developed in 2009 and is based on computer-generated algorithms, is to provide a decentralized and international payment system that leverages a distributed technology infrastructure while providing low transaction costs. 

Last week, Bitcoin had more media exposure as the value of a single Bitcoin rose to $266 on Wednesday, up about 100% from the prior week, and then traded down to $54 and finished the week at $93. Amid this media frenzy, venture capital firm Andreessen Horowitz announced an investment in a new digital currency firm OpenCoin, which also promises to be open, distributed, integrated with other payment systems and provide an “almost free” fee structure.

Last week's broad moves in the value of Bitcoin were likely driven by a mix of speculation, limited liquidity and issues related to an immature infrastructure. However, the increasing interest in digital currencies is setting the stage for serious consideration of alternative forms of exchange. While Bitcoin’s early days are likely to be viewed as the “gold for geeks” libertarian era, it is likely that:
  • Many venture capital firms are following Andreessen Horowitz in the pursuit of digital currency based investments,
  • Major commercial banks are trying to figure out how to participate in this market,
  • Organizations such as MasterCard, Visa and PayPal are committing business development resources in this area and 
  • Central bankers and regulators are gearing up to control it.
The evolution of digital currency is also likely to reshape digital wallet efforts such as Google Wallet and Square, as well as various microfinance initiatives such as Cash-Lite. Bottom Line: This market is still early stage – expect innovations and mistakes, as well as challenges from governments and other incumbent players.

Sunday, April 7, 2013

For Economic Growth, It's All About Job Growth

Last week, the U.S. Department of Labor reported that the unemployment rate for March fell to 7.6%, from 7.7%, and payrolls had a disappointing increase of 88,000 jobs in March (190,000 was expected). Job growth occurred in professional and business services, health care, construction and hospitality, while the retail and government sectors had declines. In addition, results for January and February were revised upward.

At the same time, the labor force participation rate (the number of people in the U.S. either working or looking for work - 16 years and older) dropped to 63.3% - the lowest level since May 1979 (see chart on page 2). Also, wage growth continues to be muted.

In Europe, Eurostat reported that the Eurozone’s unemployment rate increased to 12.0%. Austria had the lowest rate at 4.8%, while Spain was 26.3%, Greece was 26.4%, Cyprus was 14.0%, France was 10.8%, Britain was 7.7% and Germany was 5.4%.

  • Regarding the U.S. - the continuing decline in the labor participation rate coupled with muted wage growth suggest that a longer-term structural change in employment and personal income trends is underway.
  • Regarding the Eurozone – until cohesion among its member countries improves, this economic structure will likely continue to be challenged.
  • More broadly - it is likely that the challenging employment market will continue to reshape debates about austerity, government debt, monetary policy and macroeconomic dynamics among policy makers.
  • Economist Joseph Stiglitz provided a plain spoken explanation of potential solutions for economic growth in his article ‘The Book of Jobs’ (Vanity Fair, January 2012) where he states: “monetary policy is not going to help us out of this mess" and he recommends a massive investment program in the U.S. focusing on 1) education - “a highly educated population is a fundamental driver of economic growth”, 2) basic research to “fuel the next spurt of innovation” such as cleaner, more efficient energy production and 3) improving “our decaying infrastructure, from roads and railroads to levees and power plants”.