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.

 

Crypto Outlook: Quantity Counts

Crypto Market Update

My weekly update on the crypto market intends to look at the market from a macro perspective. With a majority of the crypto market cap concentrated on Bitcoin and a handful of other tokens, my focus is on the major coins. I check a standard set of information sources each week and include links to articles of interest.

Crypto Indexes

The Bletchley Indexes “offer the most thoughtful and consistent approach to index construction” according to CoinMetrics. 

Original “top X” indexes were launched in June 2017, followed by a market-wide index in December 2017 and sector specific indexes in February 2018. In total, there are 13 Bletchley indexes, with charts over various timetables available for each on their site.

Below is an alternate view of the performance based on the downloadable data made available by Bletchley. This view is intended to give a side-by-side snapshot of a handful of indexes.

bletchley crypto indexes 05-07-2018

Obserservations

  • The Bletchley 10 is up over 75% vs USD over last month. As has been the case historically, the even index performed even better, up nearly 100% vs the dollar.
  • The total indexes have seen similar results over the last month, both versus the dollar, as well as mirroring the improved performance of the even-index.
  • Currency Index has improved over the last week after lagging behind application and platform indexes over last month.
  • All three sectors have outperformed BTC over last 30 days, though only currency shows positive gains over last week.

Global Crypto Charts

For a quick look at the global markets from another perspective, Coinlib.io provides simple charts with a lot of info, including Bitcoin marketshare, a visualization of the top 20 currencies by volume and market cap, and more.

Total Market Cap of Cryptocurrencies

crypto total market cap 05.07.18

Market Share of Top Cryptocurrencies

Bitcoin’s market share has declined to ~38%, close to all-time lows. This continues a long-term declining trend, with new currencies such as EOS and BCH taking some of that market share.

Marketshare of top 20 cryptocurrencies

The top 20 currencies (by market cap) currently make up roughly 86% of the total crypto market share.

TradingView Technical Indicators

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

crypto tradingview technical signals 05.07.18

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). 

  • ETH has surged compared to BTC and USD over the last month. Technical indicators suggest the tide may be swinging to favor BTC in the short term.
  • USDT has outperformed USD by over 6% in the last year.

CRYPTO PERFORMANCE

crypto performance 05.07.18

  • BTC has been mostly flat the past week, while ETH has surged.
  • ETH has doubled over the last month (versus USD)

Google Trends

bitcoin google trends

Google Trends have mostly flattened out after falling significantly in February.

I’m hesitant to keep tracking this, as my assumption is that there will be less searches as the public gains knowledge and no longer needs to search for the term. However, significant price action could still lead to search volume surges.

WooBull Charts

Bitcoin NVT Ratio - 05.07.2018

NVT RatioThis long-term cycle tracking ratio has continued it’s downward trend yet remains well above the long term “normal range,” suggesting a downward turn could be imminent.

 

Bitcoin NVT Signal Chart 05.07.2018

NVT Signal – This short-term signal continued its upward trend again, reaching a recent high of 142. In the original post introducing NVT Signal, 150 was indicated as an overbought signal.

Overall, there is potential for the upward trend to continue in short-term, though NVT Ratio suggests a downturn is looming.

CoinMetrics Charts

CoinMetrics has provides great charting tools for a number of top cryptocurrencies. Kalvichkin’s NVT is a regular check for checking short term trading signals. 

Kalvichkin's NVT - BTC ETH 05.07.2018

Kalvichkin’s NVT – Similar to NVT Signal, this suggests an upward trend is likely to continue for both BTC and ETH in the short term.

Articles of Note

Is Ether a security?

I tend to overlook most regulatory concerns, assuming they’ll sort themselves out and should only be speed bumps in the long run. If the SEC determines ETH is a security, it could have repercussions for some whales. The fact that VCs have lobbied the SEC for a ‘safe harbor’ both shows how important this is, and makes me think there won’t be any major negative impact with some sort of compromise reached.

Crypto Moats

The open nature of crypto currencies allows for code to be copied or forked easily, making it much harder to establish moats (to use a Warren Buffet phrase) to protect from competitors.

Robert Miller, Director of Business Development @medical_chain, wrote on the topic and suggested some potential moats, including:

  • Superior brand
  • Superior developers
  • Partially/fully closed source code
    “Cryptocurrencies might withhold some or all of their code in the future to keep competitors from taking their code. Spencer Noon touches on this in his post The Persistent Forker but developers could put their code in a “black box” that was able to prove the code did not change over time.”
  •  Life span
    “Nassim Taleb introduces the idea of the Lindy Effect in his book Antifragile. The Lindy Effect states the future life expectancy of non-perishable assets is proportional to their current age. In other words, the longer something has been around the longer we can expect it to stay around.”
  • Network effects
  • Good governance
Fred Wilson counters Warren Buffet on Crypto Investing

Speaking of Warren Buffet, he recently made some remarks about Bitcoin and crypto, saying:

When you buy cryptocurrency, Buffett continues, “You aren’t investing when you do that. You’re speculating. There’s nothing wrong with it. If you wanna gamble somebody else will come along and pay more money tomorrow, that’s one kind of game. That is not investing.”

On AVC, Venture capitalist Fred Wilson countered by stating that he’s not looking at crypto correctly, assuming they are collectibles, rather than fuel:

But what these crypto tokens are is entirely something else. They are the fuel that powers a new form of technology infrastructure that is being built on top of the foundational internet protocols. Ethereum and EOS are smart contract platforms that allow developers to create decentralized applications (Dapps in the vernacular of crypto). Bitcoin and Zcash are stores of value that allow users to participate in this decentralized application space without the need for fiat currencies.

It’s a good counter from someone who invests more like Buffet than many might assume, given they both look to buy and hold for a long investment period.

The end of ICOs

While enormous amounts are still being raised in ICOs, with over $8 billion raised in 2018 already, it’s increasingly coming in private sales. In the Token Economy newsletter, Stefano Bernardi writes about the downside:

And I’m bored.
I’m bored because I now see startups having to spend 6 figure sums on lawyers instead of building their products.
I’m bored because I see people making a killing from being accredited investors and thus being able to access opportunities that others can’t.
And I’m bored because all of this regulatory attention and focus is necessary, given that the scammers army has found its new honeypot.
We really can’t have nice things.

And makes his prediction for the future of ICOs:

Very hard to say, but our guess is that “normal” VC rounds will become more of a norm, there will be fewer public ICOs from legit projects, and the tokens will trade on exchanges directly with the company, or its treasury unit, or some specifically chosen early investors acting as market makers.

 Why Decentralization Matters

Many of the early believers in Bitcoin and cryptocurrencies were attracted by the hope for decentralized systems. Spencer Bogart writes that the path to decentralization may be through centralization first. He cites problems with going do a decentralized model too early, as well as problems with becoming too centralized:

Either these platforms will offer strong assurances (“permissionless-ness”), in which case they will attract “sovereign-grade” attackers (and “platform-grade” censorship resistance will be insufficient) OR they will embrace censorship and permission-ing, in which case they will end up as less efficient varieties of today’s centralized platforms. Regardless, neither path appears sustainable.

The path forward: Highly decentralized base layer with increased centralization (and efficiency) on higher layers

He acknowledges a trend toward further centralization and it optimistic:

Instead, I’m most optimistic that highly decentralized networks will provide the robust foundation on top of which we can realize the efficiencies of centralization in higher layers — should it be desired. It’s a path that will likely take longer and be more difficult to build, but it might be the only viable route medium- to long-term.

Final Thoughts

A story from The Process Matters by Nick Maggiulli:

On the first day of ceramics class the teacher announced that the students would be split into two groups. One group would be graded on the quantity of the work they produced while the other group would be graded on the quality of the work they produced. The “quantity” group had to create as many clay pots as possible over the next few months while the “quality” group had to produce a single clay pot as best they could.

Months later as the students turned in their pots to be graded, the teacher came to a surprising realization — all of the highest quality pots were produced by students in the “quantity” group.

Regardless of regulatory action, crypto is here and it’s not going away. There’s a number of projects live, more in development, and even more that are just being conceived. Some projects will work, many won’t. The number of successes will increase as more projects are created. It’s early.

 

 

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.

Split the deal to reach for bigger upside

Advice on investing and splitting the deal in order to share risk and reach for rewards that may otherwise be unattainable from Fred Wilson in Splitting The Deal at A VC.  His experience comes from venture capital, but these seems applicable in any type of private investing.

I am a firm believer in splitting the deal, even when the economics (another word for ownership) suggest that there is no room for others.

My personal track record tells me that splitting the deal works. It helps you step up to something that has a lot of risk but also a lot of upside and it brings other people who can add value into the situation early on.

At a time when we are seeing venture funds get bigger and bigger, I am convinced that the hallmarks of old school early stage investing; small fund sizes, small rounds, and syndicates remain best practices