Normalization is coming
January 10, 2019

Blain's Morning Porridge

"A day wasted on others is not wasted on one's self.."

 A tale of two halves yesterday – very busy talking to clients about a new UK secured property-related deal in the morning, before some space aliens kidnapped me for "lunch". We kept it dry - as in Dry White Wine - which rather banjaxed the afternoon despite a rather superb discussion on how markets are undergoing a fundamental paradigm value shift – if only I could remember our conclusions… As they say..no one to blame but myself. (But, it was a proper start to the new year!) 

Yesterday afternoon, therefore, the world kept turning without my interference. Trump threw a strop and walked out a meeting meaning the US government stays closed. Critical US data aren't coming in the regular cycle – but US Federal Reserves minutes yesterday made it clear the US central bank was already cautious ahead of the December hike, but nothing like demonstrating independence. A new short-term (we think) oil bull market emerged. We wonder what UK Prime Minister Theresa May's plan B might be…(check out the cover of the current Private Eye…)

It does feel like the post-holiday, post-Apple-reversal/Powell-patience-gab stock rally peaked yesterday – although the chartists are still screaming the market looks overbought.  I found myself talking about Apple and the chances of global recession yesterday morning on the gogglebox – and came to the conclusion we're in a completely new market that bodes ill for last year's stock market darlings.

There are two reasons. The first is to do with company-life-cycles; the natural evolution of companies competing in markets. Let me try to explain by using Apple as an example:

Apple's future value problem is simple: it commanded a premium because it was seen to dominate sectors of the consumer tech space through brand, design, and, let's be honest, the Steve Jobs magic pixie dust. Because markets have no memory, and forget it's an evolving competitive jungle out there, the assumption is the base case of Apple being the leading tech stock will last forever. Wrong. Look up my works ye mighty and despair...

Apple is constantly challenged across its space. In occidental markets consumers are reacting to high prices by not upcycling products as rapidly – using a phone for 36 months instead of 24 before replacing it. In the mega-important China market (because so many people each need a phone) they are buying patriotic domestic products that are cheaper and better suited to China's digital ecosystem. In India – soon to be 1.3 billion potential Apple users – iPhone is nowhere because Apple won't produce a cheap phone the masses will buy. 

Many of my generation still think Mac is "cool" and justify buying Apple toys because we say we're familiar with IOS… but we are ageing and I seem to get by perfectly well with Microsoft in the office. Apple hasn't innovated anything since Jobs passed. My kids don't understand why I don't buy something cheaper and better. Where is Apple's next must-have product? Sorry, but a more powerful iPad with enhanced retina scanning isn't needed. iWatch? My last one fell apart and they wouldn't fix it. In terms of "services", I recently dumped Spotify to use iTunes, but I can switch any time between them and others. To be brutally honest – Spotify is better.

On the basis iPhone demand is saturated and it can't really change its marketing without further cannibalizing its own customer base, the company isn't making must-have new products, it's expensive, and everyone else can do design as well… what stock premium should it command? Apple trades at a PE of nearly 13. Sony at 9 (and that's a highly distorted Japan stock.)

Apple should be an "Emperor's New Clothes" lightbulb moment for the market. It's just another stock – worth something (significant because of its huge cash pile). Figure out what that is. Yet, many stock analysts still produce hold and buy recommendations on Apple and other tech names.. almost no one rates them a sell…

Let's then extend a similar hard pragmatic look to other stock market darlings. It's easy to find lots to be worried about. For instance, Amazon's Jeff Bezos is about to be massively distracted by divorce (and who gets the shares…), Tesla is admitting it doesn't have the capacity to build cheap cars, its autonomous driving system is dodgy and it's being sued for fire deaths.

But, the real threat is the competitive evolution of companies, markets and consumer demand. Netflix is on my what on earth list – spending too much money buying customers at a time when competition is rising. Disney is not a supplier of Netflix content – it intends to be a dominant competitor in the streaming market! Again, consider who you could buy your music streaming service from?

Spend five minutes perusing this infographic from Visual Capitalist – The 20 Internet Giants The Rule the Web:  https://www.visualcapitalist.com/20-internet-giants-rule-web/.

I leave you to draw your own conclusions about competition in the Tech jungle...

Meanwhile, my second issue is the interest rate and tax structure of markets. For the last ten years we've seen distorted interest rates, enabling companies to borrow at zero cost, making the rich richer and maintaining competitive advantage without necessarily doing anything better. Trump's tax cuts simply extended the false financial reality. Now, as the Fed minutes show, we're back into a normal financial market.

While the Fed might not hike this year, normalization is coming.. and that will have profound implications for many stocks addicted to cheap money – if I had time, I'd probably launch into WeWork and Softbank at this point – but I'm sure you get the drift. 

Out of time! Back to the day job!

Bill Blain

Strategist

Shard Capital





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Blain's Morning Porridge

"A day wasted on others is not wasted on one's self.."

 A tale of two halves yesterday – very busy talking to clients about a new UK secured property-related deal in the morning, before some space aliens kidnapped me for "lunch". We kept it dry - as in Dry White Wine - which rather banjaxed the afternoon despite a rather superb discussion on how markets are undergoing a fundamental paradigm value shift – if only I could remember our conclusions… As they say..no one to blame but myself. (But, it was a proper start to the new year!) 

Yesterday afternoon, therefore, the world kept turning without my interference. Trump threw a strop and walked out a meeting meaning the US government stays closed. Critical US data aren't coming in the regular cycle – but US Federal Reserves minutes yesterday made it clear the US central bank was already cautious ahead of the December hike, but nothing like demonstrating independence. A new short-term (we think) oil bull market emerged. We wonder what UK Prime Minister Theresa May's plan B might be…(check out the cover of the current Private Eye…)

It does feel like the post-holiday, post-Apple-reversal/Powell-patience-gab stock rally peaked yesterday – although the chartists are still screaming the market looks overbought.  I found myself talking about Apple and the chances of global recession yesterday morning on the gogglebox – and came to the conclusion we're in a completely new market that bodes ill for last year's stock market darlings.

There are two reasons. The first is to do with company-life-cycles; the natural evolution of companies competing in markets. Let me try to explain by using Apple as an example:

Apple's future value problem is simple: it commanded a premium because it was seen to dominate sectors of the consumer tech space through brand, design, and, let's be honest, the Steve Jobs magic pixie dust. Because markets have no memory, and forget it's an evolving competitive jungle out there, the assumption is the base case of Apple being the leading tech stock will last forever. Wrong. Look up my works ye mighty and despair...

Apple is constantly challenged across its space. In occidental markets consumers are reacting to high prices by not upcycling products as rapidly – using a phone for 36 months instead of 24 before replacing it. In the mega-important China market (because so many people each need a phone) they are buying patriotic domestic products that are cheaper and better suited to China's digital ecosystem. In India – soon to be 1.3 billion potential Apple users – iPhone is nowhere because Apple won't produce a cheap phone the masses will buy. 

Many of my generation still think Mac is "cool" and justify buying Apple toys because we say we're familiar with IOS… but we are ageing and I seem to get by perfectly well with Microsoft in the office. Apple hasn't innovated anything since Jobs passed. My kids don't understand why I don't buy something cheaper and better. Where is Apple's next must-have product? Sorry, but a more powerful iPad with enhanced retina scanning isn't needed. iWatch? My last one fell apart and they wouldn't fix it. In terms of "services", I recently dumped Spotify to use iTunes, but I can switch any time between them and others. To be brutally honest – Spotify is better.

On the basis iPhone demand is saturated and it can't really change its marketing without further cannibalizing its own customer base, the company isn't making must-have new products, it's expensive, and everyone else can do design as well… what stock premium should it command? Apple trades at a PE of nearly 13. Sony at 9 (and that's a highly distorted Japan stock.)

Apple should be an "Emperor's New Clothes" lightbulb moment for the market. It's just another stock – worth something (significant because of its huge cash pile). Figure out what that is. Yet, many stock analysts still produce hold and buy recommendations on Apple and other tech names.. almost no one rates them a sell…

Let's then extend a similar hard pragmatic look to other stock market darlings. It's easy to find lots to be worried about. For instance, Amazon's Jeff Bezos is about to be massively distracted by divorce (and who gets the shares…), Tesla is admitting it doesn't have the capacity to build cheap cars, its autonomous driving system is dodgy and it's being sued for fire deaths.

But, the real threat is the competitive evolution of companies, markets and consumer demand. Netflix is on my what on earth list – spending too much money buying customers at a time when competition is rising. Disney is not a supplier of Netflix content – it intends to be a dominant competitor in the streaming market! Again, consider who you could buy your music streaming service from?

Spend five minutes perusing this infographic from Visual Capitalist – The 20 Internet Giants The Rule the Web:  https://www.visualcapitalist.com/20-internet-giants-rule-web/.

I leave you to draw your own conclusions about competition in the Tech jungle...

Meanwhile, my second issue is the interest rate and tax structure of markets. For the last ten years we've seen distorted interest rates, enabling companies to borrow at zero cost, making the rich richer and maintaining competitive advantage without necessarily doing anything better. Trump's tax cuts simply extended the false financial reality. Now, as the Fed minutes show, we're back into a normal financial market.

While the Fed might not hike this year, normalization is coming.. and that will have profound implications for many stocks addicted to cheap money – if I had time, I'd probably launch into WeWork and Softbank at this point – but I'm sure you get the drift. 

Out of time! Back to the day job!

Bill Blain

Strategist

Shard Capital



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