Weekly Cycle: Curiosity Drives Change

It’s curiosity, not conviction, that drives change. We should be fueled, not by a desire for a quick catharsis or a life hack, but by intrigue.

From Why “Dumb” Questions Are Key to Innovation by Ozan Varol.

Stock Market Outlook 05.21.2018

Each week, I review the market using a specific set of information sources to gauge the stock market rather than relying on headlines from news sources looking to generate attention. Weekly checkups give me the opportunity to spot trends, while not overreacting on a daily basis.

Performance
stock index performance 05.21.2018
  • SPY up slightly over last week and nearly 15% in last year
  • Volatility (VIX) down over 25% in last 3 months
  • HACK up 10% over last 3 months and over 23% in the last year
Technical Indicators

Based on data and info from TradingView (Click  for 30% off a pro subscription)

Scores based on the cumulative total of positive and negative technical indicators signals over three time horizons on Trading View. Scores are weighted by multiplying total as follows: daily (x 1) weekly (x 2), and monthly (x 3). 

stock market technical indicators 05.21.2018

 

  • China Tech (CQQQ) spiked last week after returning to less bullish signals this week
  • Financials (VFH) signals are very bullish
  • SPY and VTI signals remain very positive for the third consecutive week
OldProf’s Risk Analysis

Each week OldProf takes a look at a variety of sources to gauge overall market risk on both a short and long-term basis. He tracks a handful of indexes, economic indicators from respected sources, and volatility indicators. His weekly updates include a discussion of events with potential to effect markets, as well as general insight. Highly recommended reading.

This week, OldProf short-term conditions have improved significantly

The overall picture remains positive. Economic strength is reasonable, and inflation is low.


Short-term trading conditions improved dramatically.

He mentioned an increase risk of a recession in the next 9 months, though it remains relatively low.

A notable feature of the chart is that we recently increased the nine-month recession odds to a chance of 25%. While this is significantly higher than it has been during the long stock rally, it does not yet represent a real threat. Instead of thinking of the odds as higher than before, we must keep in mind the continuing evidence that a near-term recession is unlikely. The odds are only slightly higher than the long term average.

As he’s written in the past, he reminds that many financial headline are “noise”, a subject on which Daniel Kahneman discussed in an article linked below.

The current interest rate story is mostly noise. The same sources that criticized the Fed for “punishing savers” with low rates are now worried about the gentle and gradual increase. There are so many who are selling something – and therefore on a mission!

StockTrader Recap

Mark Hanna publishes a weekly Market Recap full of charts and insight on news and market trends at StockTrader.

This week, Hanna writes that after it was a relatively quiet week with some consolidation and little change to the short and long term outlook.

This was a generally quiet week in the senior indexes, consolidating some of the prior week’s move up.

Short term: The S&P 500 remains above this trend line connecting highs of 2018.

Long term: Still very positive for the “buy and never sell” crowd.

Technical Update

Hacked (subscription-only) publishes a weekly technical update on U.S. indices with a weekly analysis of the S&P 500, NASDAQ, and DJIA, as well as a general market outlook. Other posts include trade recommendations (stocks, crypto & forex markets), worldwide-market updates, ICO analysis, and much more.

This week, Hacked’s outlook is “Bullish short-term outlook as long as U.S indices remain above their respective 8 EMAs.” They are bearish whenever S&P 500 and NASDAQ break their respective intermediate-term supports.

More info on in the weekly update.

Articles of note
Noise: How to Overcome the High, Hidden Cost of Inconsistent Decision MakingThe Projected Improvement in Life Expectancy

Daniel Kaneman is working on a new book titled Noise. He’s written on the topic previously, including an HBR article in October 2016, where he makes the case for algorithms over human decision making to overcome noise.

Algorithms are also less likely to be useful for judgments or decisions that involve multiple dimensions or depend on negotiation with another party. Even when an algorithmic solution is available in principle, organizational considerations sometimes prevent implementation. The replacement of existing employees by software is a painful process that will encounter resistance unless it frees those employees up for more-enjoyable tasks.


The most radical solution to the noise problem is to replace human judgment with formal rules—known as algorithms—that use the data about a case to produce a prediction or a decision.


It is less well known that the key advantage of algorithms is that they are noise-free: Unlike humans, a formula will always return the same output for any given input. Superior consistency allows even simple and imperfect algorithms to achieve greater accuracy than human professionals. (Of course, there are times when algorithms will be operationally or politically infeasible, as we will discuss.)

Kahneman also spoke on the subject recently with Erik Brynjolfsson, where he described the problem and solution rather succinctly.

What are the bigger risks — human or the algorithmic biases?

Daniel Kahneman: It’s pretty obvious that it would be human biases, because you can trace and analyze algorithms.

….

An algorithm could really do better than humans, because it filters out noise. If you present an algorithm the same problem twice, you’ll get the same output. That’s just not true of people.

The legal sports betting arena is about to get crowded and we’re not ready

Sports betting is coming quickly to many states, and it’s likely to be chaotic, according to Greg Bettinelli, a VC familiiar with the gambling industry.

And if you haven’t been following the case, you probably don’t realize how much is about to change. Short answer: A whole lot, very quickly. And in my opinion, straight out of the gate, it’s not going to be pretty.

Sports betting is a very low-margin business. The take rate of sports wagering is around 5 percent, while it’s closer to 20 percent in horse racing. And in unregulated markets (which will occur somewhere in U.S.), the price of the product is going to get close to zero. It’s going to be hard to make any money, and customer loyalty will be basically nonexistent without pricing power.

Bettinelli also names a handful of businesses that may look to capitalize on the new opportunities.

In addition to all the sports leagues like MLB, MLS, NCAA, NFL, NHL and the PGA, keep an eye on media companies like AT&T (DirecTV), CBS, Comcast (Golf Channel), Disney (ESPN), Fox, Time Warner (Turner), Verizon (Oath) and Action Network/Barstool Sports (with the backing of the Chernin, Kerns and Jacobs dream team). Don’t be shocked if StubHub and even Ticketmaster figure out a way to get in the game, as they know the customers with high propensity to bet on sports

The Finance To Value Framework

Venture capitalist Fred Wilson wrote on the subject of how much startups should raise. In the post, he lays out his philosophies of valuing businesses that are yet to turn profitable.

The first thing you need to know is how your business will be valued by a buyer or the public markets when it is a scaled business. I like to use EBITDA and Revenue multiples for this work. And the best place to get them is from bankers who work in your sector and/or investors who are active in your sector. The key point is these multiples are what you are going to be valued at upon exit or IPO, not currently.

Revenue multiples work better for this than EBITDA because very few companies have positive EBITDA during their growth phases.

I’ve always been impressed with his commitment to investing for the long-term and how he manages to look at startups with a framework more similar to value investing than most startup investing.

“Do People Really Downsize?”

Bill McBride pulled some quotes from a post by economist Josh Lehner, at the Oregon Office of Economic Analysis on the topic.

In fact it is less common today than in decades past. However, among those that do move in their 60s and 70s, they downsize. Given the large Baby Boomer generation continues to age into their retirement years, the absolute number of such moves is expected to rise, even if it remains a relatively small share of the housing market overall.

The original study did not include state by state data. My guess is there are very few intrastate moves in California, due to tax laws that tie tax values to the purchase price, thus adding a cost even when downsizing to those that purchased homes at prices far below today’s values.

Do Long-Term Investors Need Bonds?

Ben Carlson answers a reader’s question on bonds, saying they have underperformed stocks in all but three eras. He believes they are important for investors looking for more stability:

Investing 100% of your retirement assets in stocks may seem like the right thing to do on paper but very few investors have the intestinal fortitude to pull it off in the real world. Investing all of your money in stocks sounds great until you actually have to live with seeing bone-crushing losses and volatility in your life savings.

I tend to believe bonds are not worthwhile for a relatively active investor given the small upside.

Sheep Logic – Epsilon Theory

A long, winding post on the behavior of sheeps, and what we can learn about humans, herds and investing.

Here’s the thing I’ve learned about sheep over the years. They are never out of sight of each other, and their decision making is entirely driven by what they see happening to others, not to themselves. They are extremely intelligent in this other-regarding way.

It’s not what the crowd believes. It’s what the crowd believes that the crowd believes. The power of a crowd seeing a crowd is one of the most awesome forces in human society. It topples governments. It launches Crusades. It builds cathedrals. And it darn sure moves markets.

This type of observational decision making seen from herds leads to common knowledge.

Common knowledge is information, public or private, that everyone believes is shared by everyone else.

The power source of the Common Knowledge Game is the crowd seeing the crowd, and the dynamic structure of the Common Knowledge Game is the dynamic structure of the flock.

Final Thoughts

Nothing much has changed in the short-term and we are remaining fully-invested, letting curiosity lead to new opportunities.

 

Weekly Cycle: Stay Vigilant

In 1974, near the peak of his fame, Paul Simon started taking music lessons.

Even the best don’t know what will l happen next, and it pays to stay vigilant.

Stock Market Outlook 05.14.2018

Each week, I review the market using a specific set of information sources to gauge the stock market rather than relying on headlines from news sources looking to generate attention. Weekly checkups give me the opportunity to spot trends, while not overreacting on a daily basis.

Index Performance & Technical Indicators

weekly cycle - stock market perfornace and technical indicator scores 05.14.18

Performance Observations
  • VIX is down over 11% over last 7 days
  • MJ (cannabis) up 5% in last week
  • Cybersecurity (HACK) is up nearly 15% over last 90 days
  • China Tech (CQQQ) up nearly 35% over last year
Technical Indicators Observations

Based on data and info from TradingView (Click  for 30% off a pro subscription)

Scores based on the cumulative total of positive and negative technical indicators signals over three time horizons on Trading View. Scores are weighted by multiplying total as follows: daily (x 1) weekly (x 2), and monthly (x 3). 

  • Trading signals have turned overwhelmingly positive for nearly all indexes on list
  • BKF (BRIC index), CQQQ (China Tech), MJ (cannabis) and VFH (financials) saw biggest positive changes
  • VNQ (Vanguare REIT index) has fallen the most
OldProf’s Risk Analysis

Each week OldProf takes a look at a variety of sources to gauge overall market risk on both a short and long-term basis. He tracks a handful of indexes, economic indicators from respected sources, and volatility indicators. His weekly updates include a discussion of events with potential to effect markets, as well as general insight. Highly recommended reading.

This week, OldProf short-term conditions have improved somewhat:

Short-term trading conditions have improved. The borderline rating was almost poor enough to take our trading models out of the market. A strength of our modeling approach (Thanks, Vince!) is a touch more patience than shown by many technical systems. This has a mild cost, and can reap great rewards. This week was a good example. We continue to monitor the technical health measures on a daily basis. The long-term fundamentals and outlook are little changed.

 

He also notes that the chance of a recession has increased to 25%. While not at a worrisome level, he notes:

That said, we watch this quite closely and plan to reduce position sizes if the risk grows much larger.

 

StockTrader Recap

Mark Hanna publishes a weekly Market Recap full of charts and insight on news and market trends at StockTrader.

This week, Hanna writes that after some worrisome consolidation, short-term conditions showed improvement late last week:

The indexes were looking a bit rocky the past few weeks, with a consolidation at lower levels with no real attempt at an upthrust — but the rally late in the week certainly helped prospects.   The bulk of weekly gains came Wednesday and Thursday but Thursday’s move up helped change the complexion of the S&P 500 and Russell 2000 charts which we’ll show below.

Short term: After a lot of consolidation at lower levels – which is a concern – we saw a reversal here late in the week.

Long term: Still very positive for the “buy and never sell” crowd.

Technical Update

Hacked (subscription-only) publishes a weekly technical update on U.S. indices with a weekly analysis of the S&P 500, NASDAQ, and DJIA, as well as a general market outlook. Other posts include trade recommendations (stocks, crypto & forex markets), worldwide-market updates, ICO analysis, and much more.

This week, Hacked’s outlook is “Short- and intermediate-term bullish”, which is more positive than the previous two weeks. Still, they warn “Short- and long-term bearish whenever S&P 500 and NASDAQ break their respective intermediate-term supports. Considered less likely in the short-term after this week’s price action.”

More info on in the weekly update.

Articles of note
The Projected Improvement in Life Expectancy

Bill McBride at Calculated Risk analyzed reports from the CDC and found some interesting facts on life expectancy:

Using these stats –for those born this year (in 2018) – more than two-thirds will make it to the next century.

Also the number of deaths for those younger than 20 will be very small (down to mostly accidents, guns, and drugs).  Self-driving cars might reduce the accident components of young deaths.

An amazing statistic: for those born in 1900, about 13 out of 100,000 made it to 100.  For those born in 1950, 199 are projected to make to 100 – a significant increase.   Now the CDC is projecting that 2,111 out of 100,000 born in 2014 will make it to 100.

When Intelligence Fails Miserably

Ben Carlson writes about how intelligence can backfire, citing two well known examples in Enron and Long Term Capital Management, and includes a few lessons that can apply on a much more micro level:

It’s easier to fool yourself with complexity. Complexity in business and investing makes it easier to game your own system. Enron and Long-Term Capital were run by extremely bright people who tried to implement complicated processes to run their business activities. And these complexities allowed everyone within the organizations to be fooled by randomness or turn a blind eye to what was going on.

Warner Sells Spotify Stock

Major record labels like Sony and Warner have sold off Spotify stock, and Bob Lefsetz believes it’s another example of short-term thinking, which nearly every company is guilty outside Amazon:

This is what’s wrong with the record companies, this is what’s wrong with AMERICA! The short-term thinking.

no one in corporate America is a builder other than the founder, they’re all custodians, looking to make their bonuses, playing to Wall Street.

Except for Jeff Bezos.

Tech’s Two Philosophies

Apple and Microsoft make tools for humans to use; Google aims to replace human processes, or so writes Ben Thompson in a great piece on the difference in philosphies among tech companies:

In Google’s view, computers help you get things done — and save you time — by doing things for you. Duplex was the most impressive example — a computer talking on the phone for you — but the general concept applied to many of Google’s other demonstrations, particularly those predicated on AI: Google Photos will not only sort and tag your photos, but now propose specific edits; Google News will find your news for you, and Maps will find you new restaurants and shops in your neighborhood. And, appropriately enough, the keynote closed with a presentation from Waymo, which will drive you.

This second philosophy, that computers are an aid to humans, not their replacement, is the older of the two; its greatest proponent — prophet, if you will — was Microsoft’s greatest rival, and his analogy of choice was, coincidentally enough, about transportation as well. Not a car, but a bicycle:

He notes Steve Jobs’ bicycle analogy, which I particularly like here at Bicycles&Blazers,

But fortunately someone at Scientific American was insightful enough to test a man with a bicycle, and man with a bicycle won. Twice as good as the Condor, all the way off the list. And what it showed was that man is a toolmaker, has the ability to make a tool to amplify an inherent ability that he has. And that’s exactly what we’re doing here.

Tesla is another company that appears to want to replace humans by doing the driving for them, especially compared to other companies offering self-drive assist features. Volvo requires drivers to go no more than ~10 seconds without touching the wheel using their self-drive feature.

Should our machines sound human?

Last week, Google held a presentation where they introduced Duplex, which can have human sounding conversations. The tech is impressive and it raises a number of concerns. Jason Kottke rounds up a few links on the subject and concludes:

For now, it’s probably the ethical thing to do make sure machines sound like or otherwise identify themselves as artificial. But when the machines cross the AGI threshold, they’ll be advanced enough to decide for themselves how they want to sound and act. I wonder if humans will allow them this freedom.

Final Thoughts

There’s been a lot of concern around the short-term market conditions recently. This week there’s an improvement among technical indicators and expert analysis.

 

Weekly Cycle: A negative turn?

Stock Market Outlook 05.07.2018

Each week, I review the market using my own set of information sources to gauge the market. While I’d prefer to be long-term investors and check the markets less frequently, I believe my skills in selecting enduring businesses for long-term success are lacking those of great investors.

Instead, I use a trend following strategy with regular weekly checkups for proper diligence. A weekly outlook provides relief from overreacting on a day-to-day basis, while still allowing for relative short term moves.

Index Performance & Technical Indicators

stock market technical indicators and performance 05.07.2018

Performance
  • S&P 500 (SPY) up slightly over last week
  • Cannabis (MJ) up over 10% over last 30 days
  • Tech (QQQ) up 3.5% in past week and 5.6% in last 30 days. Similarly, cybersecurity (HACK) is up over 6% in last 30 days.
  • VIX is 50% down over last 3 months and 50% up over last year
Technical Indicators

Based on data and info from TradingView (Click  for 30% off a pro subscription)

Scores based on the cumulative total of positive and negative technical indicators signals over three time horizons on Trading View. Scores are weighted by multiplying total as follows: daily (x 1) weekly (x 2), and monthly (x 3). 

  • Trading signals have turned overwhelmingly positive for wide, general indexes including SPY, VTI, VEA.
  • Tech index (QQQ) has improved significantly since last week
  • VIX has fallen further, with a negative score indicating bearish sentiment towards volatility
OldProf’s Risk Analysis

Each week OldProf takes a look at a variety of sources to gauge overall market risk on both a short and long-term basis. He tracks a handful of indexes, economic indicators from respected sources, and volatility indicators. His weekly updates include a discussion of events with potential to effect markets, as well as general insight. Highly recommended reading.

This week, OldProf indicates a negative turn for short term trading conditions, while the long-term outlook remains unchanged.

 

Short-term trading conditions have turned negative.

The long-term fundamentals and outlook are little changed. The long-term technical health is back to strongly bullish.

This comes despite genuine positive surprises in earnings reports:

Corporate earnings continue to exceed expectations. This is especially interesting because of the unusual pattern this quarter. Expectations were not reduced significantly before the reports. These are true surprises. FactSet calls it the highest beat rate since they began compiling data in 2008.”

He also discusses how volatility effects trading vs investing, mentioning:

if stocks declined another 14%, would it tempt you to buy? If so, get your shopping list ready. The forward P/E on the S&P 500 has gone from 18.6 to 16.

Most people focus on price, not value, so these “sideways corrections” often go unnoticed.

StockTrader Recap

Mark Hanna publishes a weekly Market Recap full of charts and insight on news and market trends at StockTrader.

This week, Hanna writes that short-term conditions have further worsened, with long-term conditions remaining positive.

The indexes continue to mark time range bound at lower levels (with moderately high volatility) which should be a concern for bulls until it changes. Unlike consolidation after a move up, this is consolidation after a selloff which is not usually bullish.

Short term: A lot of consolidation at lower levels. That is a concern for bulls. More tests of the 200 day moving average – also not great.

Long term: Still very positive for the “buy and never sell” crowd.

Technical Update

Hacked (subscription-only) publishes a weekly technical update on U.S. indices with a weekly analysis of the S&P 500, NASDAQ, and DJIA, as well as a general market outlook. Other posts include trade recommendations (stocks, crypto & forex markets), worldwide-market updates, ICO analysis, and much more.

This week, Hacked’s outlook is “Neutral with a bullish bias”, which is more positive than last week’s “bearish bias.” There’s short and long term concern if SPX and QQQ break immediate term supports, yet they write “Further bullish momentum likely in the short-term.” More info on support levels in the weekly update.

Articles of note
The biggest companies focus on Customer Experience

Ben Thompson writes on the differences between Apple and Amazon, two companies closing in on $1 trillion valuations.

I mean it when I say these companies are the complete opposite: Apple sells products it makes; Amazon sells products made by anyone and everyone. Apple brags about focus; Amazon calls itself “The Everything Store.” Apple is a product company that struggles at services; Amazon is a services company that struggles at product. Apple has the highest margins and profits in the world; Amazon brags that other’s margin is their opportunity, and until recently, barely registered any profits at all. And, underlying all of this, Apple is an extreme example of a functional organization, and Amazon an extreme example of a divisional one.

Despite those differences, there is a commonality in a focus on customer experience.

Both, taken together, are a reminder that there is no one right organizational structure, product focus, or development cycle: what matters is that they all fit together, with a business model to match. That is where Apple and Amazon are arguable more alike than not: both are incredibly aligned in all aspects of their business. What makes them truly similar, though, is the end goal of that alignment: the customer experience.

More VC love for Canada

Like Brad Feld, venture capitalist (and prolific blogger) Fred Wilson is very positive on Canada.

More importantly, the talent pool in Canada is rich. Canadians are well educated and there are a number of very strong engineering schools in Canada. All of our portfolio companies that have engineering teams in Canada claim they get higher quality and retention in those teams than the ones they operate in the US.

So I’m bullish on Canada and have been since we started investing here almost ten years ago. And unlike the US, Canada has the wind behind it’s back in tech right now.

Tesla is not a tech-company

Scott Galloway writes that Tesla is an automaker and shouldn’t be considered a tech company.

Tesla has an amazing product, but has been mistaken by investors as an internet firm. Tesla lacks the frictionless networking effects of a Google or Facebook and doesn’t have the Hermés-like margins of an Apple. Yet, it’s trading at a valuation more reflective of a firm that can scale like a Facebook or generate the profits of an Apple.

His outlook for the stock isn’t good:

This means by the end of the year Tesla analysts will begin wringing their hands over liquidity concerns and dilution. This fear, coupled with rising interest rates, could spook bondholders and result in the equity being the tail of the whip as enterprise value drops.

Lumber Gains

Howard Lindzon mentioned “peak lumber” in a recent post. Here are more numbers to show the change from Bill McBride at Calculated Risk.

Here is another monthly update on framing lumber prices. Early in 2013 lumber prices came close to the housing bubble highs – and now prices are well above the bubble highs.

Final Thoughts

Reports like this make me question living the SF Bay Area.

Let’s state it plainly: The Bay Area must increase its total housing stock by 50 percent over the next 20 years to bring affordability down to a reasonable level.

That’s certainly not going to happen. Even if it did, it’s hard to imagine transit would expand to accommodate that number of people.

In US, working age population is larger than ever

From Prime Working-Age Population At New Peak, First Time Since 2007 at Calculated Risk:

The U.S. prime working age population peaked in 2007, and bottomed at the end of 2012. As of January 2018, according to the BLS, for the first time since 2007, there are now more people in the 25 to 54 age group than in 2007.

Demographics is a key reason GDP growth has been slow over the last decade.

Changes in demographics are an important determinant of economic growth, and although most people focus on the aging of the “baby boomer” generation, the movement of younger cohorts into the prime working age is another key story. Here is a graph of the prime working age population (25 to 54 years old) from 1948 through January 2018.

As pointed out in the original post, the size of this group surged in the 70s, 80s, and 90s, something not always considered when comparing GDP. This could be a sign of increased GDP in the years to come, though the last time this group peaked in population was 2007.

What are the chances of a recession?

From Bill McBride’s post Is a Recession Imminent? at Calculated Risk, a look at the likelihood of a recession soon. (hint: no)

However, just because this is a long expansion, doesn’t mean the expansion will end soon. Expansions don’t die of old age!  There is a very good chance this will become the longest expansion in history.

There are several reasons this has been a long expansion. Recoveries from a financial crisis tend to be slow since it takes years to resolve all the excesses. Also, there was an early pivot during the recovery to fiscal austerity that slowed the pace of recovery. Importantly, the Federal Reserve didn’t overtighten like in the ’30s (a lesson learned). And housing, always a key cyclical sector, didn’t participate early in the recovery since there were so many foreclosures. This delayed the usual boost from housing, but housing now a key driver of the expansion.

McBride has a good track record and includes some of his key leading indicators for predicting recessions.