The official "blog of bonanza" for Alfidi Capital. The CEO, Anthony J. Alfidi, publishes periodic commentary on anything and everything related to finance. This blog does NOT give personal financial advice or offer any capital market services. This blog DOES tell the truth about business.
Eno's "Getting to the Route of It" report devotes nine of its 89 pages to the Bay Area's transit governance. The Bay Area system succeeds in spite of itself. SF Muni does much of the heavy lifting by regulating multiple modes within its jurisdiction. SPUR's "Seamless Transit" report notes that riders encounter cost penalties in transferring from one local system to another. A single fare for a multi-leg trip would reduce rider friction, as would a unified route map. Read the reports yourselves for the details.
The policy analysts joined the panel of local transit big-shots to entertain plans for fixing the mess. I was impressed that the top honchos of the major regional transit providers came for this seminar. I was even more impressed that the often whiny Commonwealth Club members submitted questions that avoided grandstanding on pet projects. Way to go, San Francisco. The City is demonstrating adult responsibility. I like to think that the radiance of my genius in the room has something to do with this maturation.
The panelists noted a few common themes that are very germane to the financial subjects found here on the Alfidi Capital Blog. Someone claimed that BART fares respond to the Consumer Price Index (CPI) minus 0.5%. State and federal transit subsidies allow BART the luxury of such a simplistic pricing scheme. True fares cannot be that simple because they must somehow account for operating costs. Spikes in electricity demand drive prices up during the day, particularly summer. BART's financials may shed some light on their costs.
Transit officials know that subsidies from revenue sources other than fares maintain their systems. In a perfect world, the annual farebox recovery ratio for municipal transit providers would be very close to 100%. American taxpayers should insist that their transit agencies aim to be as financially efficient as the ones exceeding 100% in Asian metropolises. The Federal Transit Administration's National Transit Database collates operating costs and farebox recoveries from transit agencies across this great land of ours. APTA cited that database's 2010 report to show that US rail systems have farebox recovery ratios of 20-40% and operating costs of $200-350/hour. Slide 21 of that summary shows BART and Muni with costs pretty close together, but BART's farebox recovery ratio is much higher (over 70%) than Muni (over 20%). Muni has some explaining to do if they haven't improved that ratio since 2010.
It's obvious that technical solutions like the Bay Area's Clipper Card are easier for policymakers to push than political solutions. The State of California's Strategic Growth Council is supposed to provide guidance for local development that supports statewide infrastructure spending. Plan Bay Area is this region's answer to the state's sustainability challenge. The value of these state and local efforts is their preference for development that maximizes mass transit use. The clear implication for investors is that property values will be permanently higher for high-density development around multimodal transportation nodes. Property appraisal, municipal bond valuation, and investment decisions will all revolve around this integrated land-use focus for generations. That's the bottom line for Alfidi Capital.
Here's my own contribution to smart planning. Bay Area transit systems can't get their farebox recoveries to Asian levels because too many people in this region are still moving around by automobile. Making passenger care use prohibitively expensive will get more cars off the road. I say San Francisco should require all passenger car owners to register their cars and pay an annual fee to operate them. Start it small, say $100 per car, and then raise it every year until the poor and lower middle classes are weaned from car ownership. People on limited incomes will quickly get rid of their cars and switch to mass transit. Owning a car is not a human right. Urban space is at a premium and using it for private transit should carry a premium price. You have to love these Alfidi Capital solutions.
I cannot solve all of our transit agencies' financial problems with such an elegant move. The panelists noted that housing development property taxes paid to the state under Prop 13 offer less financial benefit to local transit agencies than commercial developments that pay local sales taxes. Waving the magic wand over development should tell planning commissions to combine mixed-use development near transit nodes with higher gasoline taxes and parking fees that will be useful subsidies for transit agencies. I totally grok the panel's point that countercyclical funding sources will stabilize revenue sources vulnerable to recessions, when sales taxes and fares from ridership both drop.
I would very much like to solve the agencies' labor cost problems by decertifying their unions and drastically curtailing expensive work rules. Alas, labor problems turn bipartisan support for transit programs into partisan food fights over pension benefits and votes. It was good to hear the panelists express support for private transit options like Google buses. I doubt those are run by union thugs.
Smart people want local transit to run better. Transit boards have the technical skill to work around hard political problems. The politicians supporting them will listen to polls over research data, but they will also listen to financial elites before anyone else. Finance will lead the way to more valuable land use when investments around transit infrastructure are at stake. Elites can count on Alfidi Capital to fill in the analytical holes in the road.
Full disclosure: I take SF Muni to events at the Commonwealth Club.
Startup and Tech Mixer did it again in March 2015. They pulled off an edgy conference last week with an immersion lounge, double-powered cold coffee, and a silver statue of a gorgeous woman. I like coming to STMixer in San Francisco because it's a thought-provoking break form the normal tech conference circuit. Here comes my reaction to the spectacle.
I had a few minutes to wander the exhibit floors before the lectures started. The billed "6D immersive experience" looked too decadent for my tastes, and it wasn't something I could capture on camera anyway due to its mature theme and dark enclosure. The actors involved were allowed to interact with participants in ways that required both discretion and consent. If I wanted that kind of experience I would have gone to one of the gentleman's venues on Broadway instead of a tech conference. Oh BTW, I have attended such classy places in the past for exactly the right reasons, and I always got my money's worth.
The exhibit floor featured some really powerful cold brewed coffee. The brewers said they focus on office deliveries but I would buy their stuff if they distributed through Trader Joe's. Another vendor had some iPad case that doubled as a keyboard, but I've seen keyboard apps on the iPad that don't require the purchase of a specialized case. The babes running all of the booths were certainly attractive enough for my tastes.
I headed back to the conference room with my fill of power coffee and healthy snack bars. The MC said success often takes thirteen failures to get something right. I am still short of that number so more failures are always in store. He also said unwavering commitment matters. You betcha, dude. Plenty of people tried to talk me into abandoning Alfidi Capital for entry level jobs in unskilled labor. I told them all to take a hike.
The first cluster of speakers knew something about marketing revolutions. Their cited stats showed that entrepreneurship is an aspiration for only a minority of people. Everyone else on the planet would rather hand control of their fate to someone else. The marketing technology landscape is very crowded due to low entry barriers. The "question mark" box of the BCG growth-share matrix for companies like Hootsuite and Marketo will eventually narrow down once they buy smaller rivals. The most compelling marketing innovations reduce customer acquisition cost (CAC). The panel's comments on difficulties in branding convinced me there's a disruptive opportunity for creating metrics that assess brand image and awareness. Expect to see those metrics on a social media dashboard at some point. The moderator described "analytical overoptimization" as an unneeded narrowing of the marketing funnel that doesn't identify new customers. I would have called it the "paralysis of analysis." I would also refer marketers to Google's suite of list marketing tools that recapture parts of a digital marketing funnel. Whatever marketing tools we end up using must drive improvement in a product's growth-share matrix position. The marketing tools that break out of "question mark" status themselves deserve acquirers' attention.
Marco Cochrane and Julia Whitelaw shared the stage to talk about art and society. The silver-colored sculpture above is called "R-Evolution," the third and final piece in the Bliss Project featured at Burning Man. The model who posed for all three pieces is Jamie Deja Solis, one awesome-looking babe who has no objection to showing the world her natural form. The sculpture had many of the people here transfixed while it was on display. The beauty of the female form has an incredible power. Marco's work emphasizes the humanity of female figures and Burning Man's pervasive exhibitions make for a suitable showcase. I used to have a naively innocent view of Burning Man as a laid-back, temporary art colony. Lately I have heard so much about the event's massive mind-altering substance use that I'm glad I've never attended. Marco and Julia noted that assault has also been a serious problem at Burning Man. I am not optimistic that conditions will ever improve. Anyone fascinated by anarchy should examine what really happens when a community with no formal governance or norms tries to suppress dangerous behavior. I hope Marco and Julia keep making great art, because I really like to look at attractive women. I also hope that any women attending Burning Man to admire art do everything possible to protect themselves from drug-addled predators.
The third panel taught us how to channel the failure, anger and shame that are common in tech entrepreneurship. This subject is right up my alley and I've got all the answers. I fail when corrupt people steal my work; I no longer work with corrupt people. I get angry when I think of all the stupid people I've met who succeed despite their incompetence; I channel this anger into my blog articles. I have been shamed by spoiled trust fund babies who demanded that I depart social events in San Francisco; I now get invited to so many events that I don't have to worry about the small-minded people who don't want me around. The panelists don't need therapists; they need to get hard core about sticking it to stupid losers. That's the Anthony Alfidi solution to nonsense in the human race. I also suggest that any attractive woman who feels shame should take after Deja Solis' example and pose showing it all for artists. That gal has every reason to be proud of her toned, athletic body. Pride comes from satisfaction with the self, once discomfort and shame are expelled.
I have to object to some of the coping tactics the failure panelists advocated at STMixer. I'll mention the "fake it until you make it" attitude that so many entrepreneurs feel they must project. I think it's a mental trap that will eventually lead to lots of anger and shame. I am unable to fake anything, especially a false image of success. Admitting the lack of progress I have sometimes experienced in life invites insults from successful people. I would rather take the insults than live with the cognitive dissonance of a success picture out of whack with reality. I also do not agree with the panelist who said that admitting vulnerability builds trust. A whole bunch of people stopped trusting me at times when I admitted I was having career problems. Furthermore, I do not agree with the panelist who said we should find experienced greybeard advisors. Folks, greybeards are a dime a dozen and most aren't even worth that one dime. The greybeards I've sought in San Francisco have either given me fraudulent advice or told me not to have a career. That is why I no longer need or tolerate mentoring. I'll close by saying that the "quantified self" movement in modern health care should also apply to mental health. I'll bet wearables can make a huge impact developing biofeedback methods that improve mental well-being. The Google Glass modality would be perfect if it included sensors that monitored the wearer's mental state. Speaking of health care, that's the perfect segue into the next panel.
The final panel covered medical technology and health care innovation. My friend Robin Farmanfarmaian did an awesome job discussing some of the advances we can expect. She's the gorgeous blonde woman in the photo above. Her own experiences with inefficiencies in health care give her enormous credibility. I can't wait to see the m-health revolution come to the smartphone, because it would give me an excuse to actually buy a smartphone for the first time.
Patient empowerment is the name of the game. Merging Big Data from the health care system with patient data from mobile devices means changing some privacy protocols, but I think most consumers will accept privacy tradeoffs if it means optimized patient self-management. Our society will eventually reach a decision point where the benefits of sharing patient data will obviously outweigh privacy concerns. The irony is that patients will not be the ones making that decision. I am certain that federal government officials in DHS administering the Affordable Care Act exchange will make that decision on their own with no Congressional oversight.
Truly personalized medicine awaits more tech advances in mildly intrusive delivery modalities. Robin mentioned a few applications in tissue engineering that won't be in the realm of science fiction for much longer. Growing replacement organs from your own stem cells eliminates the rejection problems of transplanted organs. It also allows growing test cells for customized drugs designed exclusively for one patient's unique biochemical pattern. Artificial intelligence (AI) will probably be a necessity in patient management if the projected physician shortage in America's future becomes reality. AIs can diagnose people remotely and keep routine cases out of expensive emergency rooms. The panel could have spent more time discussing mental health but I'm sure an entire conference could cover that subject and still not be exhaustive. Insurance coverage for non-traditional treatments is coming once ACA auditors have enough data on the costs it will save.
The STMixer people put on a great show. I am always entertained when I come. Every tech conference needs more women to attend. Maybe a female-themed STMixer would attract them. They may be turned off by statues of completely bare women at a conference, but the babes at Burning Man are highly tech-savvy and they don't mind getting natural at all.
I have been on the Bay Area Wealth Builders (BAWB) email list for years. I have never visited one of their events until this month. I had to go check them out because real estate writer John T. Reed was their headlined guest speaker at the March 2015 monthly networking meeting. The photo below has my reflection in the window to prove I was there, way up north in Corte Madera.
Property owners had time to pitch their investments. I noted that most of the properties seemed to be outside California. I don't get the appeal of out-of-state properties for most real estate investors. I respect sophisticated investors who can afford to research and visit distant locales but most beginners will find it easier to perform due diligence closer to home. I won't even think about buying real estate outside the nine county Bay Area because I'm not willing to travel any farther than I can drive in a couple of hours.
The most unique financing method BAWB discussed involved using an IRA as a source of funds. I would not use my own IRA to advance a loan to a third party investor. There are other ways to capture the value of a mortgage note within a tax-advantaged retirement account, such as by simply buying shares in a securitized mortgage loan product. There are even ETFs tracking mortgage-backed securities. Owning liquid, registered, exchange-traded securities eliminates all of the headaches real estate investors face from IRA-funded renovations that add Unrelated Business Income Tax (UBIT) liability. Owning publicly traded mortgage securities in an IRA also avoids scrutiny of mortgage originators under Dodd-Frank and the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act. Playing around with loans in IRAs is not the game for me. My IRA is not a bank and I am not inclined to impair its value with some third party's credit history. I am also not inclined to fiddle around with wrap-around mortgages; thanks but no thanks. I guess some real estate investors prefer to tempt fate and play with fire just for the thrill of ownership.
John T. Reed spoke at length about the most common mistakes real estate investors make, with the main ones listed on his website. I learn something new every time I hear this guy talk. Real estate investors can read John's free articles so I don't have to recap his main points here. I am sufficiently impressed with the voluminous legal requirements for landlords that I am deterred from ever investing in physical domiciles for live tenants. Humans are an inconvenience and most amateur landlords must be masochists if they underestimate the risks John identifies. I will never ignore PITI components and how they impact ROI. I always have an exit plan; that's why I would rather own a REIT or ETF than a physical building. If poor cost accounting fails to identify poorly performing projects, then the multiple derelict buildings and empty lots I see around San Francisco must reflect a whole bunch of landlords who flunked managerial accounting. John closed out with a recap of his approach to liquid hard assets and other parts of his hyperinflation hedging strategy.
The BAWB session was a success for me because I came away more intelligent about real estate. I don't envision any physical property ownership in my future but the animal spirits moving real estate investors are compelling. I would return if BAWB wants me as a guest speaker. I am certain I could speak at length about REITs and related securities that don't require retail landlording. I could also talk the audience's ears off about economic statistics that drive markets and investor behavior. Real estate investors will then bask in the glow of the glory that is Alfidi Capital.
Full disclosure: I paid $20 to attend this BAWB event. I usually attend business events for free but I relaxed my cheapskate rule just this once. It was the correct decision because I got my money's worth in wisdom. No one paid me to make this disclosure.
Study after study bemoans Americans' disinterest in saving money for their future lives. Behavioral finance academics are looking for an explanation. I've already found an explanation consistent with our evolutionary biology. People don't save because the future is an abstract concept.
Consider how poor people open bank accounts and forget they have money deposited there. They also think money isn't real unless it sits in their pockets as cash. The digits in their accounts are an abstraction. If something physical isn't readily available, it may as well not even exist for most people. The vast population of stupid Joe Sixpack Americans remains poor because their monkey brains cannot process abstractions.
Americans who do prepare adequately for their futures are small in number. The smallest number are autodidacts like me. We can literally see the future because our brains process information much more rapidly and in larger quantities than most humans. Desire for knowledge feeds this process, so one could say that strength of character is a factor in successful financial preparation. Another portion of well-prepared Americans may not be so smart or driven. These people succeed because someone in their bloodline who once possessed those characteristics set them up with inheritances and trust funds. A well-oiled deus ex machina does the hard work of investing for these idiots.
Digital versions of the deus ex machina are now rapidly proliferating. Robo-advisors are coming. Charles Schwab's automated portfolio rebalancing system debuted this month. The robo-trader is a decent solution for the bulk of Americans who are too dimwitted and unmotivated to grok the importance of financial preparation. Government mandates to enroll every working proletarian in a robo-balancing 401(k) are probably in our future. They may have to wait until after a hyperinflationary explosion sweeps away the detritus of the last three decades' malinvestment.
Human beings are largely incapable of imagining their future selves. The masses of humans wandering about this planet's surface are in dire need of preprogrammed solutions that will lift the heavy burden of abstract thinking from their lumpen shoulders. Robots are arriving to do physical human labor. Robo-traders can take care of financial work for people who cannot believe in the future.
One of the company's drugs is GR-MD-02, a treatment for nonalcoholic steatohepatitis (NASH) with advanced fibrosis. The possible reversibility of fibrosis tempts drug makers to develop treatments. Alcoholics everywhere will rejoice when their liver problems are solved. Non-alcoholics will be even happier with a solution for fatty buildups that inflame livers. Chronic kidney disease (CKD) and end-stage renal disease (ESRD) are related ailments. The size of the market for fibrosis treatment can be approximated from CDC data on CKD and ESRD, and Medicare pays for a decent slice of the ESRD treatment market. In other words, a fibrosis treatment would reap financial rewards.
Here's a run-down of Galectin's select metrics from Reuters. The company's ROA, ROI, and ROE are all disastrous over both the short term and long term. Galectin's destruction of investor capital is evident in over three years of progressively negative retained earnings. The GR-MD-02 drug has been under development at least since 2009, according to research papers Galectin cites on its website. More than half a decade is sufficient to show satisfactory Phase 2 trial results, and yet Galectin is just now beginning Phase 2 for GR-MD-02. Efficiency is not this company's strong suit.
There is no turnaround in sight. Galectin will spend more years burning cash until it gets test results, if ever. I cannot be certain whether its drug pipeline will ever reach an addressable market for liver disease patients comparable to the CKD or ESRD markets.
Full disclosure: No position in GALT at this time.
Carbon dioxide emissions occur in the natural environment. Environmental scientists exploring the relationship between human-generated CO2 emissions and climate change advocate pricing these emissions. Economists now seek ways to endogenize the value of carbon emissions within financial models. Carbon pricing is a relevant topic for financial analysts if their models accurately encompass reality.
The Ceres Carbon Asset Risk Initiative looks sane at first glance. It does not write off all hydrocarbon reserves as stranded assets and allows room for energy companies to use their carbon reserves productively. The Global Investor Coalition on Climate Change gives the Ceres initiative credibility, although the language I read in some of the coalition's public materials takes a harsher tone than Ceres. Carbon Tracker Initiative takes the hardest line on stranded assets and I am not convinced their analysis will withstand long-term improvements in energy technology. More efficient internal combustion engines are one way to curtail emissions.
One widely known approach to estimating carbon costs is the social cost of carbon SCC. The flaw in using a comprehensive approach like SCC is its inability to account for whatever the IPCC's climate models cannot estimate. Approaching a financial estimate this way invites political meddling and artificial adjustments. Regulators need to set the bar somewhere, but allowing for too many variables sets the bar too high. An artificially high SCC risks exposure to Black Swan shocks from technology advances that will render it harmful to energy producers. Lawrence Berkeley Lab's early work on insurance risks from climate change is so intertwined with IPCC model assumptions that it shares the same drawbacks as SCC.
The financial sector should take the same approach to pricing carbon as it does to pricing oil. Investment banks track a global cost production curve for oil and gas fields. Tracking a cost production curve for major carbon emitting energy companies and nations is a logical next step. The IEA statistics on CO2 emissions are the first input for country-level analysis. Energy producing companies' annual financial statements contain annual production statistics. These are the starting points for a fuller understanding of the carbon cost curve. Simplifying the SCC and running it through a Monte Carlo simulation will give the carbon cost curve an elegance divorced from political agendas.
The Carbon Tracker Initiative's Carbon Bubble report is one renowned reference for the pro-bubble case. Here's the theory in a nutshell. The argument contends that burning hydrocarbons raises the earth's carbon budget beyond a threshold that human civilization can tolerate. Avoiding this threshold and the climate catastrophe it will cause requires sequestering discovered hydrocarbon energy reserves in the ground forever. These reserves thus become stranded assets that cannot contribute economic value to an energy company's balance sheet. The financial markets' expectation that these unavailable assets will still become available implies that energy companies' stocks trade at an unsustainable "carbon bubble" valuation.
A contrary analysis in the Wall Street Journal from January 2015 argues that the world economy will still need significant hydrocarbon energy for the foreseeable future. I have enough financial expertise to see wisdom in realistically calculating economically recoverable energy reserves. Energy and mining companies are always engaged in a complex pursuit of exploration, discovery, and write-down of reserves that has more to do with local geography and logistics than with global carbon regulation. Carbon bubble proponents should remember that when they estimate large amounts of uneconomical reserves. They should also remember than even the IPCC caveats its climate warnings with probabilities, not certainties.
Some of the carbon bubble logic falls apart in the face of project economics. If energy company executives are truly incentivized to replace depleted reserves as the driver of share price, and if difficult projects are indeed only profitable at higher energy prices, then it follows that stringent carbon controls that drive up oil prices will revive those abandoned projects that have unfavorable break-even points.
Carbon bubble proponents and critics need to revisit the US DOE EIA's Annual Energy Outlook. Consider that population growth, energy use per capita, and energy use per dollar of GDP are all very relevant in forecasting the amount of reserves the energy sector must discover and develop. Tighter carbon rules will make less energy available in the short term before any dramatic supply increase from renewables comes on line to save us.
The financial sector has begun pricing securities that make lower contributions to the world's carbon budget. Fossil Free Indexes has made a stab at finding benchmarks for portfolio managers. Clean Energy Victory Bonds are a proposed category of US Treasury Bonds that individual investors could buy. The victory bonds' emphasis on funding widely available technology distinguishes them from the Clean Renewable Energy Bonds (CREBs) that public utilities have issued to develop specific commercial-scale projects.
The movement encouraging divestiture from energy companies should not concern long-term value investors. It is music to the ears of bargain hunters who seek undervalued securities with reduced demand. Thank institutional investors for making energy stocks cheaper. We can also thank the water-energy-food security nexus for making those three inputs more expensive, and thus more profitable for natural resource companies developing new projects.
The World Bank's World Development Report (WDR) from 2010 is a good reference for analysts pursuing insights into how the energy sector will change, with or without carbon bubbles. Analysts must also compare the competing market valuations of the sectors for oil/gas, coal, nuclear, and renewables both inside and outside the US. The ongoing WDR series reveals opportunities for direct investment and portfolio rebalancing. The energy sector's component valuations will reveal opportunities for arbitrage. Count on Alfidi Capital for continuing insights into companies that deliver ROI, with or without carbon limitations.
The RAND Corporation's CEO spoke at the Commonwealth Club last night and I scored a front row seat. It helps that the Club's own CEO was once a RAND analyst. Almost all of RAND's research focuses on cost-benefit planning tools that public policy makers can use. I noticed that they have published some research on behavioral finance, economics, and energy. Wall Street can use that stuff free of charge. Alfidi Capital's never-ending search for financial insights means there is gold to be mined in RAND's methods.
RAND's CEO mentioned the corporation's early work in dynamic programming, linear programming, and game theory. Analysts in many sectors still use those methods today. Finance types would have used variations of the Solver program for decades to automate their optimization searches in those methods. I'm increasingly certain they use Python programs today. Moving objects around saves time over running long scripting routines. The operations research that RAND and other government analysts perfected after WWII is now heavily used in Python applications. Python even handles cost-benefit analysis, RAND's bread and butter.
I was intrigued to hear RAND's optimism over data visualization tools. Python can do that too, so making data comprehensible to semi-literate policymakers is within every competent analyst's reach. Technocrats who design our society's future policies now have compelling visual sales tools as the rest of society reverts to pre-literacy levels of comprehension. I bet RAND also uses the scenario planning method that Royal Dutch Shell and Global Business Network have used for decades. My web search for jobs involving scenario planning shows a few listings that require proficiency with - you guessed it - the Python language. There's no escaping coding as literacy these days. I also noticed a few references to manipulating data stored in Hadoop architectures during scenario analysis. It's all about Hadoop and Python for finance types who dream of the C-suite for the next decade.
RAND's concerns over threats to the future of objective research are solvable. Their CEO's main concerns were the short attention spans for digesting longer research products and the political polarization in Washington that discourages objective policy solutions. First, consider that Arthur McCollum's Eight Action Memo of 1940 summarized US strategic aims in the Pacific with just six pages of text. Any RAND report with a one-page executive summary is digestible by policy makers who don't code and won't read in depth. Second, solving the polarization gridlock means presenting research conclusions that are summarized in ways that both liberals and conservatives can understand. This may require drafting two separate executive summaries for a research product - one written with liberal language, one written with a conservative language - and circulating them separately on Capitol Hill. Each political audience can then perceive the project summary in language it understands. Either political interpretation is valid so long as they both point to the same RAND policy recommendations.
I should have applied for the RAND Arroyo Center Army Fellows Program while I was on active duty but it's probably too late in my career to get a slot. I took a lot of analytical coursework through Army distance learning and my MBA program, and I can still break out my old notes on PERT/CPM and minimax problems if needed. The stuff comes in handy. If RAND needs my help, they know where to reach me. I'm available and affordable.
Annual health tech fests like the JPMorgan Health Care Conference, Biotech Showcase, and One Med Forum came and went this year in San Francisco. The star performers in this sector no doubt have a lot to brag about. They will also have a lot of explaining to do when the biotech and health care sectors eventually crash.
The NASDAQ Biotechnology Index (NBI) has only been around since November 1993. It does not have as much history with the United States business cycle as the S&P 500. Retail investors did not need to pick stocks in this sector to compensate for whatever they lost in the 1990s dot-com crash. The iShares Nasdaq Biotechnology ETF (ticker IBB) was priced at $95.32 at inception on Feb. 12, 2001. It now stands at $341.43, a healthy gain for anyone who held it through the financial crisis and didn't get spooked when it dropped into the high 50s in March 2009.
Continued ACA subsidies, like all other federal discretionary spending, depend very much on the US government's ability to borrow at low interest rates indefinitely. That is unsustainable. Any upward movement in interest rates would explode the federal government's interest costs on sovereign debt and immediately crowd out discretionary programs. The likely effects on politically popular entitlements like ACA handouts would include inflation indexing. Uncle Sam is an expert practitioner at artificially understating inflation to save on CPI-based entitlement costs. The end of endless cheap borrowing will bring the end of meaningful ACA subsidies and Medicare reimbursements. The health care and biotech sectors will not escape that banquet of consequences.
Full disclosure: No position in IBB at this time. No position in other health care or biotech stocks at this time. One small private equity position in one medical device startup.
I paid attention at tonight's Commonwealth Club talk on "open source housing." The concept needs more definition but the movement's drivers are on the right track. The current state of open source housing is a collection of websites offering simple, low-cost designs for stand-alone single family homes. Those plans are great for rural areas or exurban infill that can be rebuilt into a denser community. An urban core like San Francisco needs a different open source template.
Capturing a social capital spirit is great for open source plans that support non-profit organizations. The limitation on this movement is that non-profits do not drive America's GDP. Urban housing solutions need a capitalist impulse. Non-profits are welcome to experiment with starting their own credit unions, sequestering parts of their endowment into residential housing units, or issuing bonds to buy buildings. Our Commonwealth Club speakers mentioned all three tonight and I noticed that all three are limited by most non-profits' lack of a capital base. Universities have successfully launched campus-owned residential housing initiatives because they have sufficient financial strength to underwrite large acquisition and construction projects. Your typical San Francisco neighborhood charity cannot match the strength of our local universities.
The fourth pillar of tonight's talk is some kind of open source creative commons license for local housing solutions as co-working spaces. This concept has legs if it finds an ecosystem that can make it profitable for large numbers of market participants who are not limited by geography. Open source systems like Linux and Arduino work because they enable the construction of products that many people will purchase in a free market. Adapting an open source model from IP to physical residences means creating a legal and financial template that people will find profitable.
Here is the Alfidi Capital contribution to open source housing. The private sector already has a concept that allows employees to convert their labor into equity; it's called the employee stock ownership plan (ESOP). Adapting this for a non-profit enables non-profit workers to make tax-free contributions to an equity pool that the organization can use to buy multi-unit residential buildings. Making this scalable means multiple non-profits can pool their ESOP housing funds into a professionally managed private REIT. Consolidating the purchased buildings into a private REIT fund gives each employee shares they can exchange for an available residence, similar to a condominium's homeowner association. The advantage of a REIT structure is that shares may be sold privately between non-profit organizations' employees. Perhaps they could be tradeable on portals like SecondMarket. The REIT's liquidity allows flexibility for non-profit workers who may not wish to spend their entire lives committed to one housing arrangement if they decide to move on with their careers.
I look forward to seeing what SOCAP people will do with open source housing. FINRA notes that private REITs come with many caveats. Physical designs for housing are less important than an economic framework that is scalable to address a large number of mostly urban non-profits that are too small to move the residential market on their own. Employers and investors know that ESOPs and REITs already work as capital pools. The non-profit sector can use them to buy affordable housing.
The finance sector is always ready to entertain some new theory. The latest is thematic investing, which can mean just about anything. A handful of asset managers and consultancies have think pieces telling institutional clients how to make this work. Do a Web search to read them yourselves. I poked around a number of reputable sources tracking thematic investing to see what's missing from the discussion.
Academic validation is the main missing link. The academic research on focus investing validates a very selective approach to investing in a small portfolio of actively selected stocks, provided those stocks have strong fundamentals and are held for the long term. Books covering Warren Buffett's methodology support this conclusion but it's worth mentioning that Buffett himself is genetically unique. No other human investor or human-created selection screen has been able to duplicate his performance. Ten years is the minimum for a long-term holding but active investors pursuing thematic investing usually don't have that kind of patience.
Whether an average investor can outperform a broad market simply by starting with a pure macro idea is questionable. Investors awaiting hard evidence need only look at the poor track records of most hedge funds and sector-specific mutual funds to see the problems facing theme investing. The longer think pieces I've read on thematic investing emphasize wishy-washy concepts like hunches, feelings, and inclinations. Those are poor reasons to pick stocks. Thematic investing appeals to some of the lamest institutional investors, specifically sovereign wealth funds and pension plans, who fell for the Swensen-Yale investing model when it was hot.
Plenty of macro ideas are just plain bad. "Globalization" is a very broad theme implying multinational corporations are best suited to handle it. The trouble is that multinationals are often tied to the regulatory environment of their home countries. Here's one I won't try: the "food-water-energy security nexus." It matters to geopolitical strategists who try to predict conflict flashpoints. It matters less to corporations that play it primarily by mitigating its risk.
Thematic investing is not for everyone. Investors are welcome to pick their favorite sectors provided they know a sector inside and out. Sector market leaders have pricing power and the sectors themselves have barriers to entry (like switching costs) that deter competitors. Those are components of a Buffet-style durable competitive advantage. The dearth of competent investment managers means the mediocre majority will fall back on weak top-down selection strategies. Thematic investing is gaining speed with people who don't know where they're going.
I attended SMX West 2015 this week, aka Search Marketing Expo. I got a free Expo Plus pass, which means I got to attend all of the major sponsored talks and score free snacks throughout the day. I am all over free deals, folks. My original genius is in bold text because that is how I add value after these conferences.
Yahoo's Ad Lab kept me occupied on the first morning. The Yahoo presenters and staffers all wore some purple clothing item and the free pens they handed out had purple ink. Yahoo is all about purple. I use Yahoo Finance a lot and their top menu bar is purple. Maybe these people wear purple underwear too. Yahoo no longer has a personals section but I used it briefly in 2004, and I don't recall seeing any purple people there. Anyway, the common theme among the Yahoo presentations was the importance of storytelling in advertising. The channels in online marketing are obvious; everyone differentiates between native and search.
Yahoo's research revealed some curious things. Using trademark designations for a brand enhances an ad's click-through rate (CTR). Some people must like the simplest possible stimuli. Constructing a "power of three" language rhythm means telling a story of how "this, this, and then THIS" describes a brand. I saw that rhythm when I worked at UBS a decade ago, when their internal communications people put out some really confusing nonsense about the corporate logo. The people at UBS were stupid in 2005-06.
People remember ads that connect emotionally. Yahoo advocates connecting in three realms: consumer, product, and copy. Connecting with the consumer means placing the brand logo in the upper right corner of an online ad's image. There's more to it than that, but that was a big take-away. Using less than 20% text overlay in an image is how the ad copy connects without distracting from the image.
I have never worked in marketing so I will oversimplify the obvious winning formula for an effective ad campaign. The marketing pros first need to tie CTR to conversion rates to see whether their ads are driving behavior. The ad campaign's spend divided by the number of unique conversions is the customer acquisition cost (CAC). Comparing the CAC to the net income generated from the observed conversions reveals whether the campaign was worthwhile. See folks, this marketing stuff is really simple.
I caught a couple of expo theater talks before the afternoon's headliners. Disguised pitches are sometimes a chore but usually fun. Presenters don't always grok that their talk should be mostly actionable practices and only just enough brand mention to establish a value proposition. The few tips I picked up on the first day are coming at you right now. Google's advanced search can reveal reading comprehension levels, and one presenter claimed the insurance industry is required to write documents with reading levels no higher than 10th grade. I have not found confirmation of that anywhere, so naturally I am skeptical. Online ads are mainly images and short text phrases, so writing something for the Gunning fog index or Flesch-Kincaid test would just be a waste of time.
Another theater talk mentioned the "digital marketing funnel" concept. Link building is a marketing tactic now in decline but one presenter mentioned it as a brand awareness tactic at the top of the funnel. Content generation, tactics, formats, channels, and metrics are different for each level of the funnel. You can satisfy all of your funnel urges with the Content Marketing Institute's articles.
Google's constant algorithm changes have not deterred dedicated link builders from pitching their services. I don't think it's dawned on many link builders that they can use Help A Reporter Out (HARO) to pitch journalists. Doing media outreach the old-fashioned way takes a lot more time and gets more rejections than a response to a HARO query. I asked these link builders afterwards about the effectiveness of link building by making comments on blogs and forums. The lead dude said moderators have gotten a lot savvier in the last three years about deleting blatant link promoters and enabling a no-follow for web domain links. He said it still works if the comment and link posted are relevant to the blog or forum. I'm pretty sure link building as a third-party marketing service has almost reached the end of its useful life in the digital economy.
Another presenter had tips about building content that would resonate with search results. There's an audience out there for everything and keywords show us want they want. Experts in every vertical watch content their peers distribute. Think through high-traffic keywords that work well as anchor text so potential back-linkers will like it. Any amount of ad spend will drive some traffic but only quality content will make people stick around. I am not a fan of any paid social media presence because it has the potential for abuse if marketers pay for artificial likes and follows. The major social media channels now encourage marketers to think hard about spending on pay par click (PPC) campaigns after listening to complaints about its shortcomings.
The first day's cocktail reception is one of those conference traditions that has survived into the digital age. The cocktail with soda, Hennessy cognac, and Grand Marnier cognac liqueur fueled my survey of the hot babes wandering around the expo floor. Some of these gals had amazing hips, thighs, and calves, so they must get lots of exercise taking the stairs wherever they work. The #WeaselPecker photo meme was also working its way around the expo floor but I did not let it distract me from my search for hot babes. The concentration of woman in digital media seems to be higher than in other tech fields. We need stats to confirm this phenomenon.
I attended all of Google's sponsored talks the next day. Their big glass enclosure had all kinds of free candy and notepads. I swear I should have started my career with tech startups in Silicon Valley. The tech culture does free stuff right. The Google people showed us how return on ad spend (ROAS) measures "lift." Pure content people like bloggers may be able to ignore ROAS in favor of eCPC if their business model does not rely upon conversions, unless of course they have proof that ad spending to publicize a blog will drive their own ad revenue. I practice what I just preached by not spending a penny on ads. Google had plenty of cool things to say that I don't need to repeat because Google Best Practices has it all. They even figured out multiscreen optimization. Once you Learn With Google, you are welcome to Think With Google. I would rather eat and drink with Google, which is precisely what I did at the reception they hosted for those of us who attended their talks. All of the Google team leads who presented looked like they're in their late 20s or early 30s. It's no company for older people.
I had little time for the second day's theater talks. One of them really turned me off by playing very loud introductory music and disregarding the published topic. Dude, if you're going to pull a half-dozen stunts in twenty minutes while dressed in a running outfit, please go find another job. I couldn't find the dude on the expo floor to complain even after he said he would be in his booth. Good riddance.
The disparities between the search engines sponsoring most of these talks are growing. I think Yahoo and Bing will have trouble creating analytics suites to match Google no matter how good they make their algos. Google simply has way more data to aggregate because it dominate search. Mobile is turning into the same story. App aggregation captures more traffic than search on mobile. The dominant app stores will have the data for analytics. Apple and Google lead the app store presence. They will own the in-app advertising channels forever. The network effects are simply too large to overcome.
Bill Tancer gave the keynote talk recapping his research from several books on consumer behavior. I like the guy's "1/9/90 rule," where 1% of an online population generates content, another 9% interact with it, and the final 90% passively consume it. Like everything else in human history, a tiny fraction of a population drives civilization forward and everyone else is just along for the ride. I am going to try out the "People Hate Us On Yelp" meme and use negativity to drive more Web traffic to Alfidi Capital. Bill predicts a disruptive entrepreneurial opportunity in searches for "perspective" on consumer review sites because different age groups and demographics will perceive the same service quality differently. IMHO solving this opportunity simply means review sites can sort review listings by preferences for speed, cost, and quality. The DevOps people at the biggest sites can solve it within a few weeks.
I have never purchased advertising so I can't use some of material at this conference. Google Analytics and other services increasingly cater to ad agencies and other large media buyers who can generate multiple sales packages. SMX was still worth my time for the many free tips I got on SEO sources.
Over-indebted American Baby Boomers have raised their Millennial children in their own image. They have passed on their proclivity for living beyond one's means to a new generation. Gen-Y continues to take on new debt in the form of unpayable student loans.
The Project on Student Debt noted last November that average college debt for the class of 2013 was two percent higher per graduate than the prior year. Debt.org notes that total US student debt still tops $1T. Carrying so much debt would not be so bad in a normal economic expansion. The problem today is that personal income growth has slowed to a trickle. Median incomes for most middle class demographics, however you slice them, have not increased since the early 1970s after adjusting for inflation.
Baby Boomers have an average net worth of maybe a buck fifty because hardly any of them saved anything for retirement. They all counted on Social Security, which is in financial peril according to the Bowles-Simpson commission as long as its recipients aren't means-tested. Millennials have done their parents' generation one better. They are going for negative net worth rather than merely going for broke.
I attended this year's DeveloperWeek in San Francisco. The brand new Pier 27 terminal made for excellent views. The most recent America's Cup made use of some temporary buildings here and it's nice to see The City repurpose the lot into something useful.
The conference started off in a disorganized manner. The initial Main Stage talk got relocated to Stage 2, or so I was told. The other stages weren't open on time in the morning. The opening talk I attended started 20 minutes late. Sheesh. I did not have time to stay all day so I had to make the most of the morning. I guess the trend in tech enterprises towards minimizing meetings means some presenters aren't accustomed to showing up on time in person.
The morning talk on GitHub pull requests convinced me that engineers are susceptible to simple ego strokes like fancy job titles. Designating someone as "Senior Associate Engineer" makes them feel superior to a mere "Associate Engineer." I saw this same head game when I worked at an asset management firm whose initials were the same as Baloney Goofball Imbeciles. The "Senior Associates" at my former employer worked for the same entry-level wage as the new hires even if they had years of experience. Giving someone a longer title is much cheaper than giving them a raise.
The gist of GitHub is that its suite offers advantages over wikis as a documentation method for engineering processes. Updating a wiki takes constant curation effort. I once inherited a US Army unit's wiki that did a poor job of documenting the unit's knowledge management architecture. I ended up shutting it down and migrating users to a more hierarchical archiving system. The US Army's new taxonomy for updating its doctrinal publications is actually a very useful governance technique for engineering handbooks. Base document changes should be much less frequent than minor document changes. Splitting out the documents into a base series providing broad guidance makes sense if they are not updated as frequently as product-specific technical guides.
I like that GitHub's online process changes contribute to a meeting-averse culture, a good evolution in engineer-based enterprises that value productivity. Knowledge management systems in larger enterprises should use automated workflows. Non-engineers seem to have trouble grasping workflows' utility. GitHub pull requests apparently create an audit trail of changes documenting a process during updates, especially the "why" of an author's update. That's analogous to clarifying a commander's intent in a military mission planning process. I need to examine GitHub myself to find more analogies.
The Main Stage talks eventually began where they belonged. The bottom line in several talks is that many verticals are upgrading their tech stacks and this drives demand for developers in the labor market. I did not mind the thinly disguised pitches for services like HackerRank because they provide a disruptive benefit to productive enterprises. I have noticed other such disruptive talent matching services migrate to the finance sector. Whale Path does for finance professionals what HackerRank does for developers, elevating skill demonstration over a stale resume and obsolete academic credentials. You're only as good as your last performance. Having a verifiable track record of accomplishment on HackerRank or Whale Path means job performance has a market value.
Some other talks covered deep learning, a new approach to machine learning. We're all going to hear more about it as VC money starts pouring into IoT devices that need to operate autonomously. It was fun to see someone walk through the ease of manipulating images displayed on a Lightbox-enabled website. No coding knowledge is needed to alter Lightbox parameters. The clear lesson for non-techies is that object manipulation is an easily mastered skill. Coding as basic literacy still makes sense but not everyone who touches tech will need to code.
I didn't win any raffles or door prizes at DeveloperWeek, nor did I score dates with the hot tech babes who flirted with me. I still came away with the perspective I needed on how enterprise tech is changing. DeveloperWeek matters to people driving tech's migration into ease of use modes that business domain experts can interpret. Anyone in business who is at least minimally tech literate will be economically viable for years to come.
Google's Zero Moment of Truth (ZMOT) concept drives home the importance of a ubiquitous presence for business brands. The ZMOT is a compressed decision time frame between a stimulus and a purchase decision. Consumers who switch between several computing platforms during the day, say from personal smartphone to business desktop to personal laptop, engage in "sequential screening." Marketers now face a challenge of keeping up a brand's presence all day long through inbound marketing. Business listing sites have figured out Google.
Marketing used to spread brand identities across several media in the age before the Internet. People read newspapers in the morning, kept their radios on in the car or in the office, and watched TV at night. Ad spending became more difficult to target as people became more mobile. The explosion of smartphones into several different sizes and operating systems initially compounded the targeting problem. The curse of Big Data for marketers is also a blessing, as those same mobile devices generate a stream of updates about a consumer's daily minutiae.
Enter the magic of Google's search algorithm and page ranking system. Google has figured out that some business listing services are simply more reliable in delivering high-quality solutions to consumer Web searches. The best business listings maintain a brand's ubiquitous presence in front of a target demographic, across multiple platforms. Brand ubiquity increases the chance that a consumer will select a well-positioned brand once they reach their ZMOT and make a purchase. It is no accident that the most successful business listing sites configure brands in rich snippet formats that resemble Google Places listings.
Small and medium-sized businesses (SMBs) cannot rule out business listings in their branding strategy. Google is powerful enough to reward advertisers who select favored keywords in ad spending and punish business listings that do not deliver attractive search results. Many skills in SEO and content marketing are interchangeable enough that SMBs can learn the basics. I do not believe the financial cost of an outsourced SEO effort is all that high, but the time needed to devote to the SEO learning curve may be a sufficient pain point for business listing services to solve. Business listing services may fill a gap for SMBs lacking the time or budget to optimize for mobile. Some of them may cost nothing at all.
I looked through my pile of notes from recent events and dug out my notes from attending the BIG Talk Summit in Silicon Valley this past January. It was okay for a one-day conference and a few of the speakers had provocative things to say. I am not clear about what Baidu is trying to accomplish by hosting such BIG events. It may be someone's BIG chance to pick the brain of American thought leaders and piggyback their ideas all the way to the backdoor of a Chinese tech lab. You won't see my name badge in the photo I took below because it wasn't worth capturing.
One Baidu guy and an MIT guy had stuff to say about deep learning. I would like the next big leap in mobile UI to be a direct digital thought interface rather than a speech interface (listen up, Siri and Droid developers). Thought transfer UIs would be perfect for wearables as remote control devices once the IoT launches itself into our wired home appliances, personal robots, and private drones. Baidu's preference for high-performance computing (HPC) in AI over cloud computing is anecdotal. I need to see independent confirmation of HPC's supposed superiority.
One of the Web's favorite MOOCs got up and talked about disrupting education. I did that once in a Notre Dame undergraduate philosophy course by insulting several of my stupid classmates. Content-based models like MOOCs will eventually have problems expanding into markets of authoritarian regimes (China, Iran, etc.) that control mass media, Internet access, and human thought. Non-ideological course offerings may be universally allowed but menu offerings of the humanities will face political limits in conservative societies.
There's a local "singular" executive education system that charges a lot of money to talk to VIPs appearing on rolling flatscreens. These people advocate innovative medicine because the cost per genome performance curve now beats Moore's Law in computing. If you can handle bioprospecting, biosecurity, bioweather, biohacking, mHealth, eFormulations, and other such buzzwords then you have a future in health care. It also means you'll be overqualified to run the ACA health insurance exchanges. I could probably sell these people some solutions for biobonanza once I figure out how to grow cell cultures on a dollar bill. Can biology be securitized? Maybe genes can be sold like music royalties or IP portfolios. You heard it here first at Alfidi Capital.
Speaking of finance, another MIT genius wants to disrupt it with Big Data. Count me in, I'm all over it. MIT's Media Lab is pushing the needle on social physics. They should not mistake correlation for causation. Idea diversity and social tie engagement density emerge in MIT's research as healthy indicators. In other words, it's easy to achieve high GDP per square kilometer in Silicon Valley. They also measure the effects of Pigouvian taxes and subsidies on the relationship between idea flow and ROI. There's a ton of innovation waiting to spring out of all that research.
RAEL Berkeley can't plan smart communities all by themselves. It takes ECPA and Cool California to move the sustainability bandwagon down the road to riches. I expect that magical vehicle to get up to full speed once Apple and Google come out with their competing models of automated cars. Watch one zoom through your ZCTA at highway cruising speed and try to guess which USDOT automation level it uses to avoid hitting your car. Seriously, I'm being obscure because the obviously proprietary work of the automakers and their Silicon Valley partners is just as obscure.
The combo of robotics and machine learning was the topic that set some of the gurus on fire at this conference. The breakthrough in neural nets that can execute pattern recognition 30 levels deep due to increases in computing power is begging for commercialization. We really need to hardwire Asimov's Laws of Robotics into these things before we design them to breed and teach them to adapt to their environments. Future generations will thank us for not giving them a real-life Terminator nightmare.
Steve Wozniak, aka the Woz, was last marquee guest at the BIG Talk. He noted that hardware startups grew so well in Silicon Valley specifically because of its ecosystem, while software startups can grow anywhere due to the proliferation of IT. His observation about software poses a minor challenge to MIT's social physics discoveries about social density and idea diversity being strongly geolocated. I may have heard him say elsewhere that finding flaws and gaps in dominant tech systems opens paths to entrepreneurial disruption, but repetition is good when the Woz does it. The dude has an enormous ability to synthesize diverse intellectual concepts. He should volunteer his thought process to whomever is mapping pattern recognition 30 levels deep.
What's Woz's impression of Silicon Valley? It is a frenetic work pace and massive environmental stimulation bringing fast progress, bringing a human price of up/down, happy/sad cycles. Woz's mind must be a model for how rapid testing and experimentation with multiple technical iterations leads to innovative product functions. His description of Fusion IO's disk drive development condensed a huge sequence of related analytical problems into something simply amazing. Such creativity! People asked him about corporate creativity. IMHO the most creative companies give employees the most diverse stimuli and the most chances to randomly interact. Look at the communal bulletin boards at the headquarters of Facebook and Google, where people post classes, clubs, movie nights on "campus," and other things that appeal to perpetual students.
I counted the number of times someone said "game changer" at this conference - exactly twice, and Woz was one of them. Way to go, Woz. One of Silicon Valley's living icons is sharing buzzwords. I missed whatever chance I had to tell him so when we left the parking lot of the Computer History Museum at the same time. I'm sure he'll have another chance to benefit from my wisdom. The attractive women at this conference definitely benefited from my genius, especially the two who just had to pose with me at the end of the day. Keep it coming ladies. I'm getting big exposure at events like the BIG Talk.