Sunday, December 13, 2015

Intercepting Terrorists, Hacking Donald Trump and Protecting Healthcare Data

  • Last week, FBI director James Comey (during Congressional testimony about the challenges of intercepting terrorist communications) said, “Post-Snowden, encryption [security technology] has gone from being something that was only available to sophisticated bad guys to becoming the default. It affects every criminal investigation we deal with.”
  • Note: during July 2015, Mike McConnell (former Director of the National Security Agency and Director of National Intelligence) said, “If law enforcement starts to change the way they think about this [encryption technology], I think there are many, many ways to carry out the mission [of law enforcement], given that you are faced with a situation where technology is not going to be reversed.”
  • Separately, on Wednesday activist group Anonymous (in an Internet video) said, “Donald Trump, it has come to our attention that you want to ban all Muslims to enter the United States. This policy is going to have a huge impact. This is what ISIS wants. The more Muslims feel upset, the more ISIS feels that they can recruit them. The more the United States appears to be targeting Muslims, not just radical Muslims, you can be sure that ISIS will be putting that on their social media campaign. Donald Trump, think twice before you speak anything.” On Friday, the Trump Towers website was knocked offline for about an hour. 
  • Finally, Lynne Dunbrack, research vice president for IDC's Health Insights said, “healthcare data is really valuable from a cyber-criminal standpoint. It could be 5, 10 or even 50 times more valuable than other forms of data" and estimated that 3% - 10% of U.S. healthcare expenditures each year results from fraudulent billing.
 
MY TAKE
  • Regarding terrorists and encryption – While law enforcement organizations are frustrated by encryption and policy makers want to restrict its use, adapting to the presence of this technology seems like the best approach.
  • Regarding Anonymous and Trump – Anonymous’ actions are a reminder of the vulnerabilities of the internet.
  • Regarding healthcare data – Reversing the data breach trend will require better 1) systems planning, 2) education of healthcare providers on the impact of data security issues and 3) data security solutions

Sunday, December 6, 2015

NYC, Porsche, Cold Weather and Electric Vehicles

  • Last week, when announcing “NYC Clean Fleet”, Mayor Bill de Blasio said, “A cleaner, greener fleet is yet another step toward our ambitious but necessary sustainability goals, including an 80 percent reduction in all emissions by 2050.” Note: the plan includes replacing about 2,000 fossil fuel sedans with plug-in electric vehicles, which would mean EVs would make up half of the City’s non-emergency sedans (police and fire vehicles are currently not part of the plan).
  • In addition, when Porsche announced plans to bring its Mission E electric concept car into production by 2020, Dr. Wolfgang Porsche, Chairman of the Supervisory Board said, “With Mission E, we are making a clear statement about the future of the brand. Even in a greatly changing motoring world, Porsche will maintain its front-row position with this fascinating sports car." Note: The vehicle should have more than 600 horsepower, a range of over 500 km (310 mile) and reach 80% of full-charge in 15 minutes.  
  • Finally, the Bloomberg BusinessWeek article “Electric Cars Can’t Take the Cold” noted that electric vehicles perform better in temperate areas such as California, but “the batteries used by the greener cars generate electricity from chemical reactions that work less efficiently as temperatures drop. In tests conducted by the American Automobile Association, an electric car that ran for 105 miles at 75F went only 43 miles at 20F—a 60% reduction in range.
MY TAKE
  • Regarding New York City – It is likely that many innovations in alternative energy and transportation systems will occur before the city’s 2050 target date – which will change how it will meet its “sustainability” objectives.
  • Regarding Porsche – Given that significant torque can be achieved with electric vehicles, it is likely that Porsche’s Mission E offering will be well received in the high-performance auto market.
  • Regarding cold batteries – Many electric vehicle owners are likely aware of the impact cold weather can have on mileage, however prospective purchasers may be surprised by this news.  Note: mileage for gas/electric hybrids can drop by about 31% below 20 degrees – for conventional gas vehicles, the mileage drop is about 12%. 

Sunday, November 29, 2015

Bill Gates, Pope Francis and the Challenge of Climate Change

  • This week, at a climate change summit in Paris,  Bill Gates will announce a multibillion-dollar fund to support clean energy research and development (+130  global leaders will attend including Barack Obama - U.S, Xi Jinping - China, Angela Merkel - Germany and David Cameron - U.K.)
  • Gates said in a July blog post, “I think this issue is especially important because, of all the people who will be affected by climate change, those in poor countries will suffer the mostHigher temperatures and less-predictable weather would hurt poor farmers, most of whom live on the edge and can be devastated by a single bad crop. Food supplies could decline. Hunger and malnutrition could rise. It would be a terrible injustice to let climate change undo any of the past half-century’s progress against poverty and disease—and doubly unfair because the people who will be hurt the most are the ones doing the least to cause the problem.“
  • Separately, Pope Francis said the Paris summit “represents an important stage in the process of developing a new energy system which depends on a minimal use of fossil fuels, aims at energy efficiency and makes use of energy sources with little or no carbon content … It would be sad, and I dare say even catastrophic, were particular interests to prevail over the common good … we are confronted with a choice which cannot be ignored: either to improve or destroy the environment."
  • Note: the National Oceanic and Atmospheric Administration recently reported that, “the first 10 months of 2015 comprised the warmest such period on record across the world's land and ocean surfaces.” 
MY TAKE
  • Climate change summits often result in watered-down resolutions or unmet objectives, but Gates' funding effort (which puts his money where his mouth is) could drive improved momentum for sustainable solutions.
  • While many climate change efforts focus on energy alternatives such as windsolar and geothermal, addressing the challenges of fossil fuels will likely require 1) advances in new technologies (lithium batteryhydrogen fuel cell, etc.), 2) reconsidering the nuclear power option and 3) various forms of carbon taxes.
  • Given the broad use (and economic appeal) of fossil fuels, climate change efforts will continue to confront many challenges - including differentiating between "feel good projects" and projects that make sense.  

Sunday, November 22, 2015

As Growth and Regulation of Drones in the U.S. Increase

  • Last week, Intel Corp. senior vice president for new technology Joshua Walden provided testimony to the U.S House Energy and Commerce Subcommittee on Commerce, Manufacturing and Trade that included “It has become increasingly clear to us that UAVs [Unmanned Aircraft Vehicles], like cars and watches, are a computing platform of the future. Applications and services enabled by this new connected UAV ecosystem will spur significant economic growth and will be driven by innovations in UAV technology … [however] a federal government approach that is overly prescriptive regarding the deployment of new hardware and software will deter the private sector’s ability to invent and compete in the marketplace.”
  • Testimony by Association for Unmanned Vehicle Systems International CEO Brian Wynne included "[Unmanned Aircraft Systems] will have a significant impact on our economy, as the industry is poised to be one of the fastest-growing in American history. Our economic impact study found that during the first decade following UAS integration into the National Airspace System, the industry will create more than 100,000 high-paying jobs and provide more than $82 billion in positive impact to the nation’s economy. Under the right regulatory environment, there’s no question these numbers could go even higher.”
  • Finally, a Federal Aviation Administration (FAA) task force submitted recommendations for registering drones that could help manage the increase in drone usage in U.S. air space.
MY TAKE
  • With drone growth expected to exceed 1 million units sold in the United States this year, the FAA and other regulators will likely face many challenges as they seek to manage the growth of commercial and recreational drone operator, while minimizing the potential of collisions and privacy violations.
  • Many new solutions will leverage robotic, augmented reality, geospatial and communication technologies – this process will likely drive a convergence among “smart” land, air and sea transportation services.
  • Because many new drone purchasers will have minimal aviation experience, there will be many post-sales business opportunities including training and repair/maintenance services.

Sunday, November 15, 2015

The Impact of On-Line Trade

  • Last week, comments from select business leaders during their quarterly conference calls included Terry J. Lundgren, CEO of Macy - “we had a very tough quarter, and we are clearly disappointed … we believe that the retail industry is going through a tough period that we seem to experience something like this every five years to seven years or so, and this one feels familiar in that regard….this is a management team that has navigated through difficult times in the past and we've done so successfully…we use these times to reset our ambitions and determine how we're going to win and where we're going to play.”
  • Nordstrom co-president Blake Nordstrom -”Beginning in August, we experienced a slowdown across our full-price and off-price businesses…While we haven't seen a meaningful change to our customer growth metrics, we did see a decline in our transaction growth relative to the first half of the year. As this softness continued, we've been able to quickly respond, ending the third quarter with inventory aligned with our expected sales plans. As we head into holiday, we don't anticipate a measurable change in current trends and we've made appropriate adjustments to our operating plans.”
  • Cisco Systems CEO Charles Robbins -” Q1 was a very strong quarter across the board… [but] I recognize that our Q2 guidance … is below what the market had expected. In Q1 we saw lower than expected order growth, driven largely by uncertainty from macro and currency impacts, primarily outside the U.S.”
MY TAKE
  • Regarding U.S. retail sales – While U.S. consumer spending may be slowingMacy’sNordstrom and other traditional retailers are likely facing increased competition from on-line retailers.
  • Notably. on Friday, the U.S Commerce Department reported that retail trade sales increased by 1.2% from last year, but nonstore retailers (on-line) increased by 7.1% As traditional retailers increase their on-line presence to compete with Amazon and other on-line retailersoperators of shopping malls will have to continue to adapt to these changing market dynamics as well.
  • Regarding Cisco Systems – The firm has significant global presence and market reach, but it must adapt to: 1) increased foreign competition – including China, 2) consolidation of networked resources into data centers managed by GoogleFacebook, AmazonMicrosoftIBM and others, and 3) the management approaches of its new CEO.   

Sunday, November 8, 2015

The Reality of Virtual Reality

  • Last week, as the New York Times launched its virtual reality application NYT VRmagazine editor-in-chief Jake Silverstein said, "By creating a 360-degree environment that encircles the viewer, virtual reality creates the experience of being present within distant worlds, making it uniquely suited to projects … that speak to our senses of empathy and community." (Note: the content was developed using Immersion Media’s IM360 platform and is accessible via the websmartphones and the Google Cardboard viewer.
  • Separately, when announcing a virtual reality collaborationAssociated Press Director of Interactive and Digital News Production Paul Cheung said, "Virtual reality is an intimate platform that allows the audience to experience the journalist's unique perspective of the story” and RYOT Chief Operating Officer Molly Swenson said, "We see the future of news as immersive and action-oriented. Philosophically and technologically, virtual reality is the best tool we've found for helping people really understand and connect with the headlines they read every day.” (Note: RYOT's media efforts include creating documentary-style virtual reality films.)
  • In addition, while discussing corporate earnings, Facebook CEO Mark Zuckerberg said, “Virtual reality has the potential to be the next computing platform that changes all of our lives. It's important also to recognize that this is going to grow slowly, like computers and mobile phones when they first arrived. So we're committed to Oculus and virtual reality for the long-term … and with Oculus, we're in a great position to begin delivering a new generation of shared immersive experiences, we plan to ship the Rift headset early next year” 
  • and Nvidia Corp. CEO Jen-Hsun Huang said, "We built the premier platform for VR for both PC gaming as well as professional graphics. As far as financial is concerned, realize that the shipment hasn't really started yet and I think it's prudent to wait and see. But my expectation long-term is that VR is going to be a very powerful growth driver for us."
MY TAKE
  • Virtual reality technology often is associated with computer games, will increasingly be applied in many other areas including educationentertainmentscientific research and communication.
  • The complex nature of developing and delivering virtual reality content will require new types of hardwaresoftware and content creation skills – some are in limited supply, some do not exist yet.
  • While Facebook’s Zuckerberg and Nvidia’s Huang suggested that initial growth may be slow, the business opportunities are likely significant – and will attract many investors and innovators.     

Sunday, November 1, 2015

The City of San Francisco and the "Internet of Things"

  • Last week, the City of San Francisco announced a one-year pilot project with France-based SIGFOX to deploy a low-cost, low power Internet of Things (IoT) network.  This environment should connect various devices (streetlightssmoke detectorsparking meters, etc.) to the Internet and allow them to communicate with each other.
  • San Francisco Mayor Ed Lee said, “Creating a network of this kind, the City will be able to attract new startup companies, strengthen existing businesses and provide more jobs, economic growth and continuing prosperity for our residents.”
  • San Francisco chief information officer and executive director of the Department of Technology Miguel A. Gamiño Jr., said, “We’ve built a citywide network that’s intended for IoT applications, but it’s not driven by a specific use case. Our approach is to build the environment, a living, breathing, IoT-ready city that can then be taken advantage of by really great creative minds that are working in this area.”
  • San Francisco’s chief innovation officer Jay Nath, said “The pilot is two-fold: One is for the city government to understand how this technology can be incorporated. Two, is this a great tool for entrepreneurs? Are they able to build new products and services? Those are the two things we'll be looking at.”
  • Note: SIGFOX’s technology, which is extensively used in France and Spain, is expected to be deployed in New YorkBostonLos AngelesChicagoAustinHoustonAtlantaDallas and San Jose in the coming months
MY TAKE
  • As the Internet expands beyond a mix of desktop/laptop computerssmartphones and tablets accessing webstreaming and other cloud based services, there will be many new types of applications (addressing agriculturehealthsecuritylogistics, etc.)  which will incorporate many new devices.
  • Connecting these new IoT devices (home appliancestransportation vehiclescomponents on the energy grid, etc.) will likely raise concerns about privacy - the “Big Brother” effect, cost effective network management and data security.
  • Bottom line – IoT innovation will likely be brisk and the biggest challenge may simply be keeping up with the pace of change.  

Saturday, October 24, 2015

Taming the Commercial and Recreational Drone Market

  • Last week, the U.S. Department of Transportation and the Federal Aviation Administration (FAA) announced the creation of a task force to develop recommendations for a registration process for Unmanned Aircraft Systems (UAS) aka “drones” and said, “Pilot sightings of UAS doubled between 2014 and 2015.  The reports ranged from incidents at major sporting events and flights near manned aircraft, to interference with wildfire operations.”
  • FAA Administrator Michael Huerta said “These reports signal a troubling trend … registration will help make sure that operators know the rules and remain accountable to the public for flying their unmanned aircraft responsibly.  When they don’t fly safely, they’ll know there will be consequences.” 
  • Transportation Secretary AnthonY Foxx said “Registering unmanned aircraft will help build a culture of accountability and responsibility, especially with new users who have no experience operating in the U.S. aviation system … It will help protect public safety in the air and on the ground.” Note: Between April 2014 and August 2015, the FAA said that passenger planes have reported 891 violations of FAA rules by drone operators.
  • Senator Dianne Feinstein of California said “The FAA’s decision to require registration is a key step, but the agency should have additional authorities to require safety features and set rules on when and where drones can fly. Congress must pass the Consumer Drone Safety Act to ensure drone safety is addressed in a comprehensive way.” 
  • Note: 1) Feinstein, along with Senator Charles Schumer of New York, is sponsoring of the Consumer Drone Safety Act and 2) California has the highest number of FAA drone violations with 189 sightings.
MY TAKE
  • Regarding the drone taskforce – Given the increasing number of violations, there is a great need for education and oversight, to manage the pace of market growth as commercial firms and do-it-yourself (DIY) players introduce new products.
  • Regarding Feinstein’s efforts – Because of the significant use of drones in California, the state will likely be a legal trendsetter in the drone market. For example, the state recently passed a law addressing invasion of privacy when a drone knowingly enters the airspace above another person.  
  • Bottom line – Dronesrobots and hybrid devices will create 1) new market opportunities, 2) novel legal disputes and 3) regulatory oversight challenges

Sunday, October 18, 2015

The Continuing Challenges of Cyber-Security

  • Last week, the Wall Street Journal’s article “Cataloging the World’s Cyberforces” said, “More than 60 countries have or are developing tools for computer espionage and attacks. The world is shrouded in secrecy, and the hackers involved are notoriously difficult to track, making certainty and comprehensiveness impossible … [some] have formal military or intelligence units dedicated to offensive cyberefforts … [some] have bought off-the-shelf hacking software … {most] use cybertools for surveillance, either domestically or internationally.” 
  • Separately, the Washington Post cited an Oct. 15, 2015 report by citizenlab.org which said “Our results indicate 32 countries where at least one government entity is likely using the [FinFisher} spyware suite, and we are further able to identify 10 entities by name [Bangladesh, Egypt, Indonesia, Italy, Kenya, Mongolia, Morocco, Nigeria and Serbia] … FinFisher is a sophisticated computer spyware suite and ...  [is] sold exclusively to governments for intelligence and law enforcement purposes.  Although marketed as a tool for fighting crime, the spyware has been involved in a number of high-profile surveillance abuses.  Between 2010 and 2012, Bahrain’s government used FinFisher to monitor some of the country’s top law firms, journalists, activists, and opposition political leaders. Ethiopian dissidents in exile in the United Kingdom and the United States have also been infected with FinFisher spyware.”
  • In addition, the Computer & Communications Industry Association (whose members include AmazonGoogleFacebookNetflixMicrosoftPayPalRedhatT-Mobile and Yahoo) said “The Cybersecurity Information Sharing Act (CISA) is again due for consideration in the Senate in the coming weeks.  The bill primarily aims to facilitate the timely sharing of cyber threat indicators between and among the private sector and government, with the goal of improving overall domestic Internet and infrastructure security … However, CCIA is unable to support CISA as it is currently written. CISA’s prescribed mechanism for sharing of cyber threat information does not sufficiently protect users’ privacy or appropriately limit the permissible uses of information shared with the government.  In addition, the bill authorizes entities to employ network defense measures that might cause collateral harm to the systems of innocent third parties."

MY TAKE

  • Regarding cybeforces – As hackers increasingly access personal data on corporate services, the comments by the Wall Street Journal and the Washington Post / citizenslab.org are reminders that cyber efforts include the participation of governments of all sizes.
  • Regarding the views of the CCIA – In the post Edward Snowden era, concerns about how governments use personal data remain high.
  • Bottom line – Regardless of the outcome of debates about how personal data is shared, a broad set of physical and digital assets will continue to be compromised by cybercrime and cyberespionage.  

Sunday, October 4, 2015

As Renewables Transform the Energy Market

  • Last week, as G-20 energy ministers met in IstanbulFatih Birol, Executive Director of the International Energy Agency (IEA) said "We expect 2015 global oil investments to be 20% less than 2014 … this is the biggest decline in oil history” and “In 2014 the renewable energy investment in China was bigger than the investments in the U.S. plus all European countries all put together … Governments must remove the question marks over renewables if these technologies are to achieve their full potential and put our energy system on a more secure, sustainable path.”
  • IEA also released its Renewable Energy - Market Analysis and Forecasts to 2020 report, which said, “renewables are expected to be the largest source of net additions to power capacity over the medium term … Onshore wind leads the global renewable growth, accounting for over one-third of the renewable capacity and generation increase. Solar PV is the second-largest source of new capacity, another third of deployment. Hydropower accounts for one-fifth of new renewable additions.”
  • Separately, Former Vice President Al Gore, at the Washington Ideas Forum, said "The most exciting source of hope is that the engineers and scientists and business investors have come up with a stunning cost-down curve for electricity from solar energy."
  • Finally, Solar City CEO Lyndon Rive, at a product introduction in New York City, said the firm was introducing the “Most Efficient Rooftop Panel on Earth." 
MY TAKE
  • Regarding oil investments – Oil price declines have negatively impacted a broad ecosystem of businessescommunities and investors involved with in the energy sector and it is unclear how long the “market rebalancing” process will take. (Note: the oil prices are driven by a complex mix of economic AND geopolitical dynamics.
  • Regarding demand for renewable energy – Successful deployments will be driven by providing better economics than incumbent energy sources,  as well as alignment with environmentally friendly initiatives – which may be supported with government subsidies.
  • Regarding Gore’s comments – Innovation should drive down costs and broaden adoption – but depressed oil prices may present headwinds for renewable adoption.
  • Regarding Solar City – It is unclear if their “efficient" product is also a “cost effective” product.The firm will likely continue to use panels from providers such as Canadian SolarTrina Solar and Yingli Green Energy.

Sunday, September 27, 2015

Focusing on the Pope, a Catepillar and some Beetles

  • Last week, during Pope Francis’s U.S. visit, his comments included “It goes without saying that part of this great effort [to address poverty] is the creation and distribution of wealth. The right use of natural resources, the proper application of technology and the harnessing of the spirit of enterprise are essential elements of an economy which seeks to be modern, inclusive and sustainable … Business is a noble vocation, directed to producing wealth and improving the world. It can be a fruitful source of prosperity for the area in which it operates, especially if it sees the creation of jobs as an essential part of its service to the common good."
  • Separately, as industrial equipment manufacturer Caterpillar, Inc. announced it would reduce its staff by 9% over the next four years, CEO Doug Oberhelman said "We are facing a convergence of challenging marketplace conditions in key regions and industry sectors – namely in mining and energy … we have to manage through what can be considerable and sometimes prolonged downturns … as these market conditions have emerged, we are taking even more decisive actions now.
  • In addition, responding to Volkswagen’s diesel emission scandal, its newly appointed CEO Matthias Müller said “My most urgent task is to win back trust for the Volkswagen Group – by leaving no stone unturned and with maximum transparency, as well as drawing the right conclusions from the current situation.” 
  • Note: the diesel problem 1) was identified in a May 2014 study “In-Use Emissions Testing of Light-Duty Diesel Vehicles in the United States” at West Virginia University, 2) likely involved 11 million JettaPassatSportWagenBeetle and Audi A3 diesel engine vehicles worldwide, and 3) could result in up to $18 billion in fines by the U.S. Environmental Protection Agency; as well as other regulatory, criminal and civil actions around the world.
MY TAKE
  • Regarding the Pope – While there have been concerns that the Pope has a negative view of capitalism, his message seems more focused on the potential for business, government and community leaders to address the challenges of income inequality and job creation.
  • Regarding Caterpillar – The company’s actions are another indication of a fragile global economy.
  • Regarding Volkswagen – This problem will likely result in significant business disruption at VW in the short/medium term, but a focused management response could result in a stronger business franchise (although the diesel car market may be permanently impaired.)

Sunday, September 20, 2015

As Global Cross-Currents Increase... Part 2

  • Last week, after the U.S. Federal Reserve announced it would not increase interest rates in September, Chair Janet Yellen said ”the [U.S.] economy has been performing well and we expect it to continue to do so … The outlook abroad appears to have become more uncertain of late and heightened concerns about growth in China and other emerging market economies have led to volatility in financial markets … There are "very high levels of part-time, involuntary employment and labor force participation suggests that at least to some extent the standard on employment rate understates the degree of slack in the labor market.” 
  • Separately, as Hewlett-Packard announced plans to cut another 25,000 to 30,000 jobs, CEO Meg Whitman said this action will "enable a more competitive, sustainable cost structure." In addition, about 60% of the firm’s U.S. and Western Europe services staff will be replaced by workers in Costa RicaManila, the Philippines; Sofia, Bulgaria; and Bangalore and Chennai in India by 2018.
  • As Qualcomm cut 1,314 jobs in San Diego and hundreds elsewhere because of slowing smartphone growthPresident Derek Aberle said “A workforce reduction is never easy …The company is providing [support] for those employees affected during this difficult time.” Note: Qualcomm plans to cut its 31,300 global workforce by 15 % over the next year.  
  • As Union Pacific Railroad began to cut several hundred jobs in Omaha and other locations, CEO Lance Fritz said “this is an extremely difficult decision to make because of the impact it will have on all our employees … However, for our company’s long-term success we must take these painful actions to balance workforce levels with today’s business demands.”
MY TAKE
  • Regarding China – Yellen’s comments about China surprised some market observers (because the Fed has historically not publicly commented about other governments); but her concerns validate the view that global markets are increasingly interconnected.
  • Regarding a slack labor market – Confronted with weak economic growth, business managers continue to increase profitability by replacing “high cost” staff with outsourced and/or automated alternatives – a process that can result in stagnant wage growth and continued income inequality.
  • Regarding maintaining low interest rates – The global economy remains fragile, expect more market volatility.



Sunday, September 13, 2015

As Global Cross-Currents Increase ...

  • Last week, in the Washington Post article “Why the Fed must stand still on rates”, former U.S. treasury secretary Larry Summers said, “the data flow suggests a slowing in the U.S. and global economies and reduced inflationary pressuresEmployment growth appears to have slowed downcommodity prices have fallen further, and the general data flow has been on the soft side … when people argue that a 0.25 % hike will have little impact … my head spins a bit … I believe that conventional wisdom substantially underestimates the risks in the current moment. It bears emphasis that not a single postwar recession was predicted a year in advance by the Fed, the federal government, the International Monetary Fund or a consensus of forecasters … now is the time for the Fed to do what is often hardest for policymakers. Stand still.”  
  • Citibank chief global economist Willem Buiter said “We consider China to be at high and rapidly rising risk of a cyclical hard landing … should China enter recession – and with Russia and Brazil already in recession – we believe that many other emerging markets, already weakened, will follow, driven in part by the effects of China’s downturn on the demand for their exports, and, for the commodity exporters, on commodity prices … We believe that a moderate global recession scenario has become the most likely global macroeconomic scenario for the next two years or so.”  
  • As Standard & Poor’s cut Brazil’s investment grade credit rating to junk, it said   “We find that the ongoing investigations of corruption allegations against high-profile individuals and companies — in both the private and public sectors and across political parties — have led to increased near-term political uncertainty.” 
MY TAKE
  • Regarding Summers’ comments – There has been significant debate about how an interest rate increase by the U.S. Federal Reserve would affect the economy. Historically, there is little evidence that a rate increase would avoid at least some market turbulence.  
  • Regarding Buiter’s comments – With global markets increasingly interconnectedweakness in any major economy will likely have broad global impact.
  • Regarding Brazil’s downgrade – In recent years, improving economic trends in the BRIC countries (BrazilRussiaIndia and China) attracted significant investment capital. Today's economic challenges in emerging markets suggest pursuing more prudent investment approaches.

Sunday, August 30, 2015

Volatility and the Debate about Market Direction

  • Last week, asset prices around the world had broad swings, with strong declines in equities and commodities on Monday, followed by positive moves later in the week.
  • The S&P 500 Volatility Index (VIX) rose to 53.29 on Monday – its highest level since the 2008-2009 financial crisis.  By Friday, the VIX dropped to 26.  Note: The VIX is a measure of uncertainty and higher values suggest broad positive and negative price swings.
  • Market commentary included - Esther George, President of Kansas City Federal Reserve President, during a Bloomberg interview: “We should expect volatility, I think, from time to time, we are in a period of some uncertainty – [there are] questions about China, questions about global growth …  What it means for monetary policy I think is not yet clear. It’s a complication, it’s something we watch.”
  • Graham Secker and Matthew Garman of Morgan Stanley’s Research strategy team: “We do not believe that the ongoing economic weakness in EM and China will significantly drag down the European economy. Consequently, we feel that the current volatility in equity markets is likely to be temporary rather than the start of a long and painful bear market.” 
  • Andrew Lapthorne, Head of Quantitative Equity Research at Societe Generale: “Quality is now essentially price momentum and vice versa, and history tells us when these two strategies collide the omens are not usually good, as it is a phenomena usually associated with equity markets turning bearish.”
MY TAKE
  • With only 147 stocks in the S&P 500 trading about their 200 day moving average, investors are likely “crowding” into stocks with positive price momentum such as GoogleFacebookAmazonJP Morgan, VisaMasterCardStarbuckPriceline and Netflix – a process that may support Andrew Lapthorne’s view.
  • In addition, while the prices of many commodities (and related stocks) had a strong positive reversal last weekstability in these assets is likely needed to avoid additional market volatility.
  • Finally, many factors drive market direction but the increased use of automated systems by both high frequency traders and longer term institutional investors is likely increasing the speed of overall market action.