Wealth Building Strategies

People Should Know When They’re Conquered

Posted by The 10th Man - Mauldin Economics

on Thursday, 6 July 2017 14:40

wo weeks ago, I took a shot and called the top of the stock market. If you are a newsletter writer and you aren’t trying to call major turns in the market, you are not really doing your job.

If you missed that issue, I suggest you go back and take a look at it. My argument is that speculation is getting out of control. And not just on stocks—on bitcoin, comic books, all kinds of stuff.

When you have one bubble, you usually have others, concurrently.

But the one that people are most focused on is the bubble (if you want to call it that) involving Facebook, Amazon, Netflix, and Google. Throw in Apple and Tesla for good measure, and maybe a few more.

A handful of tech stocks have gone bananas. So, let’s do some basic blocking and tackling.

I actually spend almost no time on charts in The 10th Man, but I think technical analysis is really important. The quality of the analysis often depends on the abilities of the analyst, and one of the best is Frank Cappelleri at Instinet.

He has pointed out that on a short-term basis, the NDX (which largely tracks large-cap tech stocks) has formed a head-and-shoulders top and is breaking trend.

Chart 1 20170706 10th
Source: Instinet

This is the first real weakness we’ve seen in tech in a really long time…

Though Frank is quick to point out that on a longer time horizon, the trend is still firmly intact:


Source: Instinet

I don’t think it is a coincidence that the short-term breakdown is happening concurrently with tumultuous times in Silicon Valley.

Uber is disintegrating before our eyes. Unless they go public (which they can’t), they’re going to have to do a down round, and it’s not out of the question to think the company might cease to exist one day. That likely has implications for private valuations everywhere.

Also, the news broke of some pretty big sexual harassment allegations recently in tech-land. This is significant because public opinion matters—I can foresee a time when tech executives are viewed about as favorably as Wall Street was in 2011, when Occupy Wall Street began.

The Longest Bull Market… Ever

Keep in mind that Silicon Valley never really had a recession like the rest of the country did in 2008.

Sure, the VC business slowed down, but do you remember what was happening in 2008? Facebook had about a $15 billion private valuation, and it was spawning a whole ecosystem of tech startups that latched on to Facebook, like Zynga.

Silicon Valley went down the cleantech path for a few years, which was a dead end, but moved on to apps like Yo!, which apparently was not.

So Silicon Valley hasn’t had a real, honest-to-goodness downturn since the dot-com bust. That was 17 years ago! Probably less than a quarter of people currently working in the valley were even around when that happened.

That’s the funny thing about cycles—they usually repeat when nobody remembers the last one.

Most people have no idea the sorts of excesses that are happening in tech world. I don’t either, but I have spies.

About a year ago, a friend of mind visited LinkedIn headquarters, went to their cafeteria, and told me of the incredible opulence there. The types of luxuries that are available to people in Northern California—you or I cannot even conceive of it.

Quick story. I went to graduate school at the University of San Francisco, and took a Venture Capital class, which was basically a series of lectures from executives in the VC industry. These were very important people. I was surprised that they were taking time to come speak at USF. Stanford sure, but USF?

It was April of 2000. The stock market had just crested. A very senior guy from New Enterprise Associates came to talk to the class about optical networking.

He spoke of the great promise of optical networking. He drew a nearly vertical line shooting off into space, and called it “Moore’s Law Squared.”

He might have been the most bullish person I have ever seen in my entire life.

The next day I went out and bought a bunch of put spreads on optical networking stocks. They were some of the greatest trades I ever made.

Nobody believes their own bullshit quite like venture capitalists.

Having Said That

I wrote a piece a year or two ago in The 10th Man about how tech was overpriced. Tech responded by going straight up.

Plus, if you shorted tech when things started getting stupid a few years ago (think Yo!) you would have been carried out.

But it’s hard to argue that things haven’t gotten excessive, especially in startup financing (seed and pre-seed). Seems like all you need is a pitch deck and a dream, and you have yourself a $10 million valuation.

The old-timers know that’s not normal.

The old-timers know there is a cycle.

The Fed keeping interest rates at emergency levels has allowed this to go on a lot longer than it should have. The down part of this cycle will be instructive, for a lot of people.

And I hate to pick on the FANG stocks, because at least they make money (more or less).


Source: CNN Money

But dreams are always biggest on the highs. I’m sure some of you saw the patent application for Amazon’s drone beehive fulfillment center. Now, companies apply for patents for all kinds of crazy things, but come on.

Even if you’re not bearish on the overall market, I would bet strongly on tech underperformance. It seems likely that value will strongly outperform growth, for the foreseeable future.

That one is easy enough to implement.

Jared Dillian
Jared Dillian
Editor, The 10th Man
Mauldin Economics

The Opioid Abuse Epidemic: What’s The Investment Angle?

Posted by Seeking Alpha

on Tuesday, 27 June 2017 13:53

drugsSummary

The opioid abuse epidemic is destroying American lives, families and the fabric of American communities.

The action taken to address the crisis by socio-political-legal means has placed both pain patients and companies at risk of sanctions.

There are companies engaged in the development of abuse-deterrent opioids that can not only help reduce the abuse potential but also offer an opportunity for the informed investor.

The Opioid Abuse Epidemic is real and in an attempt to ameliorate the crisis, whether well-meaning or self-serving, doctors are reducing patient access to pain drugs. The evidence makes it clear that those actions are doing harm to millions of Americans who were on long-term opioids. As a result, some are seeking to buy their drugs on the black-market, risking overdose, and others have committed suicide when unable to stem the pain.

…continue reading HERE

….also from Seeking Alpha:

Dollar Turns Positive Despite Downbeat Economic Data

 

 

Marc Faber Believes in a Possible U S Stock Market Bubble in 2017

Posted by Marc Faber - Gloom Boom & Doom Report

on Thursday, 22 June 2017 22:15

 

Faber ‘s typically controversial and contrarian views have earned him the label of Dr. Doom, though even his harshest critics must admit that he’s been unerringly correct in his market forecasts over the past three decades. He also trades currencies and commodity futures like Gold, Natural Gas and Crude Oil. 

King-World-News-Marc-Faber-Unveils-The-Biggest-Surprise-For-2015-And-The-Greatest-Danger-Facing-The-World-Today

10 Steps to More Cash Flow

Posted by Eamonn Percy - The Percy Group

on Wednesday, 21 June 2017 17:42

Cash-FlowConcrete steps you can take today to improve your cash flow tomorrow!

“Business opportunities are like buses, there is always another one coming.” – Richard Branson
 

Step 1. Know your numbers. 

The best business leaders are able to describe their business, market and future plans, numerically. Exceptional growth comes from the precise understanding of all aspects of your business, including key metrics (e.g. sales funnel health, CAGR, and gross margins) and the status of current resources such as cash.  I am not suggesting you lack emotion or passion, but rather complement it with objectivity.

Step 2. Embrace low cash growth strategies.

Often a company in growth mode will get a rude awakening when the sales plan actually succeeds, only to discover cash consumption, for working capital, can vastly outstrip cash generation.  One of the better problems to have, but don’t let it become fatal. Build low cash growth strategies upfront such as: non-core outsourcing, well negotiated deal terms, low cost technology platforms, and scalable, multi-channel business models

Step 3. Maintain control of your financial systems at all times.

Build strong and robust financial systems lead by competent and trusted financial managers.  Never, ever lose control of your financial systems.  When in growth mode review your financial statements frequently (monthly) and cash position weekly.  Audit your systems regularly and keep a constant lookout for incompetence, deception, and fraud.  Leave nothing to chance here. 

Step 4. Deeply understand your sources and uses of cash.

If your understanding of accounting is weak, get up to speed fast. Learn how cash flows in your accounting system, and what drives cash generation and consumption. For instance, if revenue increases, but accounts payables or inventory increase to service that revenue, cash will initially be consumed, not produced. You run the business, not the accountants.

Step 5. Be fanatical about improving margins.

Top line growth must be converted into cash through effective margin management.  Know your margins to one decimal point, set targets for each product and sector, cull the lowest 10% margin customers per year, and constantly test and iterate your offers to improve future margins.

Step 6. Manage working capital well.

Run an aggressive accounts receivables strategy (i.e. prepayment, large deposits, automated billing, and improved collections) and mitigate payables.  Work strategically to reduce working capital through new business models, and outsourced fulfillment.

Step 7. Play cash offense by driving sales.

 Start by selling more of your current offers to existing customers, then new offers to current customers, and finally develop new offers to sell to everyone.  Selling more to your existing base is one of the best ways to juice up cash flow, since it requires modest new investment and can be ramped up quickly.

Step 8. Play cash defense through cost containment.

Implement a system like Lean, which focuses on the functions that deliver value directly to the customer.  Invest in those steps and massively reduce the non-value added activity and waste.  Reduce discretionary spending by creating a culture of frugality and always ask, “How will the customer benefit from this expenditure?”

Step 9. Be ROI driven.

Focus all your key investment and time in the areas that will give you the biggest cash return.  This usually starts with more sales, so as CEO you should be spending 50% of your time on sales. Also invest in hiring employees that create value for the customer, restructuring processes to reduce cost or cycle time, and new capital projects that build future cash streams.

Step 10. Use cash to dominate your sector.

Use your newly minted cash to dominate a sector, not just compete in it.  Sectors with too much competition will drain cash resources.  Do this by regularly reviewing your strategic growth options and ensuring cash is diverted to the most promising areas.  Don’t get complacent by the status quo and invest strategically to dominate.

About Eamonn Percy

Eamonn Percy is the Principal of The Percy Group, a business advisory + capital firm focused on helping business leaders of mid-sized companies accelerate the growth of sales and profit. Subscribe to his newsletter at www.percygroup.ca8

 

Here Comes Quantitative Tightening

Posted by Peter Schiff - Euro Pacific Capital

on Monday, 19 June 2017 15:26

Quantitative-TighteningAll of a sudden the Fed got a little tougher. Perhaps the success of the hit movie Wonder Woman has inspired Fed Chairwoman Janet Yellen to discard her prior timidity to show us how much monetary muscle she can flex when the time comes for action.
 
Although the Fed’s decision this week to raise interest rates by 25 basis points was widely expected, the surprise came in how the medicine was administered. Most observers had expected a “dovish” hike in which a slight tightening would be accompanied by an abundance of caution, exhaustive analysis of downside risks, and assurances that the Fed would think twice before proceeding any farther. But that’s not what happened. Instead Yellen adopted what should be viewed as the most hawkish policy stance of her chairmanship.
 
The dovish expectations resulted from increasing acknowledgement that the economy remains stubbornly weak. Just like most of the years in this decade, 2017 kicked off with giddy hopes of three percent growth. But as has been the case consistently, those hopes were quickly dashed. First quarter GDP came in at just 1.2%. What’s worse, second quarter estimates have been continuously reduced, offering no indication that a snap back is imminent. The very day of the Fed meeting, fresh retail sales and business inventory data surprised on the weak side, becoming just the latest in a series of bad data points (including figures on auto sales and manufacturing). By definition these reports should further depress GDP growth (much as widening trade deficits already have).
 
But despite all this Yellen came out swinging. And unlike prior policy statements that came after periods of economic disappointment, she didn’t even bother to argue that the current softness was transitory, or the result of “residual seasonality.” Instead she chose not to acknowledge any weakness at all, and kept to the tightening path that the Fed had mapped out last year. But she even went further than that.
 
For the first time, the Fed set into motion firm plans to reduce the size of its $4.5 trillion dollar “balance sheet.” Such a process has been talked about for years, but many were convinced, myself included, that it would always just be talk. The balance sheet consists of Treasury and mortgage-backed bonds that the Fed amassed during the experiment with quantitative easing between 2009 and 2014. During that time, the Fed injected liquidity into the financial markets by creating money to purchase more than $80 billion per month (at times) of such securities. These efforts pushed down long term interest rates, drove up bond and real estate prices, and set the stage for a massive stock market rally that had little to do with underlying economic fundamentals. Despite several informal hints over the years that these stockpiles were being reduced through bond maturation, the war chest has not decreased in size by one iota. However, the Fed has admitted that these ponderous holdings will limit its ability to stimulate in the event of future recessions. As a result, it wants to shrink the balance sheet down to a more manageable size now, precisely so it can expand it again during the next recession.
 
To do this, the Fed must essentially perform quantitative easing in reverse. It must sell, or force the Treasury to sell, treasuries and mortgage-backed securities into the current market. This process will reduce the Fed’s balance sheet while drawing free cash out of the economy, thereby unwinding prior stimulus. The Fed even told us how large the reductions will be…and it’s a lot. Much in the way that the Fed “tapered” out of its QE program back in 2014, gradually reducing the $85 billion of monthly purchases by about $10 billion per month, the Fed anticipates a similar approach to what is, in effect, a “quantitative tightening” campaign, or QT for short. It will start by allowing it’s balance sheet to shrink by $10 billion per month (total) of mortgage and government bonds, and will gradually increase the reductions to $50 billion per month, or $600 billion per year. Those are very big numbers that will provide very real headwinds to the economy and the financial markets.
 
But it’s important to realize that the Fed envisions doing this at a time when Federal deficits are likely to be rising steeply . In the next few years, the Congressional Budget Office estimates that Federal budget gaps will be in at the $700 – $800 billion dollar range annually (hitting $1 trillion by 2021 or 2022). These assumptions of course do not factor in any potential any tax cuts, spending increases, or recessions (I think we are likely to get all three). So this means that in a few years, the Treasury will have to sell $600 billion of additional bonds into the market annually to repay the Fed while at the same time selling $800 billion or more to finance its current deficits. That may create some traffic problems. Should we assume that there are enough buyers to step up to the plate, especially if yields stay as low as they are? It’s not likely.
 
With so much supply hitting the market at once, bond prices will have to fall (and yields rise) in order to attract buyers. This will amplify the tightening effect that these sales are meant to generate. Higher yields will also add a tremendous burden to the U.S. Treasury. With outstanding Federal debt already at $20 trillion, every percentage point rise in rates translates into approximately $200 billion more per year in debt service costs, which also must be borrowed. After the Fed announcement, Mick Mulvaney, the Director of the Office of Management and Budget admitted that quantitative tightening from the Fed had not factored into the Administration’s long-term budget projections.
 
Assuming some form of infrastructure bill and/or tax cut finally passes in 2018 causing annual budget deficits to once again rise to 1 trillion sooner rather than later, how will the government finance its own rising budget deficits and repay the Fed simultaneously? Remember the last time we had trillion dollar deficits the Fed was providing $80 billion of QE support per month. That meant the Treasury was actually doing no net borrowing, as the Fed was monetizing all the bonds it was selling. But with $50 billion per month in QT, the net borrowing could likely be in the $1.6 trillion range annually. There is no precedent for the Federal Government every legitimately borrowing this much money. An even greater problem would develop if other large holders of Treasuries, such as foreign central banks, decide they want to front run the Fed, and start unloading some of their stash as well before prices fall further. A Fed actually committed to QT could turn a bond bear market into an outright crash very quickly.
 
Of course the federal government is not the only borrower that will feel the sting of higher rates. Thanks to the Fed having kept them so low for so long, state governments and households are also loaded up with debt. What will happen to the auto and housing markets when higher borrowing costs make purchases more expensive to finance? What about the impact of higher interest payments on student loans?
 
If Yellen’s confidence is based on her belief that the markets will tolerate QT, she may have gotten her signals crossed. Although U.S. markets continue to test all-time highs, in recent days the ascent has slowed and the technology stocks that have been some of the Street’s best performers since at least 2013 have instead led other sectors to the downside. If markets are in fact nearing a top, you would expect traders to shift out of the high flyers into the more defensive sectors. If the Fed thinks that unexpected QT can occur without a meaningful drop in asset prices, it may be badly mistaken. Since the Fed itself often credits its QE program for lifting both asset prices and the economy, wouldn’t QT have the opposite effect on both?
 
Also, if the markets react to the beginning of QT the way they did to the first rate hike of this cycle the Fed has another problem on its hands. Remember the 8% rout that occurred in the first two weeks of January 2016. At that point markets were reacting to the Fed’s first rate hike in nearly a decade (which had occurred in mid-December of 2015). When weakening economic data surprised the markets in January, traders had to digest the possibility of rising rates coming at the wrong time. The slide continued for two weeks until the Fed shifted to solidly dovish policies by mid-January. Imagine what could happen this time around if the economy continues softening in the face of QT? If that ship actually sales it will be a short journey, with her sister ship, the QE4, following closely behind.
 
Politics provides one explanation for the Fed’s newfound forcefulness in the face of these risks. Since his election in November, President Trump has continually cited stock market gains as proof that his policies, or intended policies, are working to improve the economy. (Never mind that during the campaign he consistently called the stock market a bubble and downplayed its economic significance.) But even Trump may not be able to get away with saying the gains are his doing but the declines are not. As a result, President Trump owns this market, and it could easily turn around and bite him as badly as his ill-advised tweets. A five percent decline in the Dow would be enough to seriously undercut his claims of economic success. A ten percent correction could completely change the narrative.
 
Perhaps the Fed sees an opportunity? Although they may have wanted to spare the Obama administration from the economic turmoil that would have accompanied a hawkish policy, they likely feel no such charity towards Trump. In that sense, Janet Yellen may be a bigger danger to Trump than Robert Mueller could ever be. Wonder Woman indeed.