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.
The annual pilgrimage to the MoneyShow San Francisco has been my ritual since graduate school. Experts keep my financial knowledge base refreshed. Times change and shows like this one will eventually be completely virtual. The highlights for 2015 covered the disruption of financial advising and health care. I don't need to repeat the most important talks because those will eventually be webcast. I do need to share my impressions from the MoneyShow.
A former Bear Stearns economist led off by describing our post-monetarist environment. I won't blame an economist for Bear Stearns' collapse. Executives have the right not to listen to their top advisers. I will blame those economists who think zero interest rates and low reserve requirements are a permanent condition. Low commodity prices are already here, so that horse has left the barn. Economists don't get paid to predict something that has already happened. I'm all on board with weaker countries heading for crisis and more negative trends for US corporate earnings.
Venerable tech guru George Gilder peered ahead into life after Google. If wealth is knowledge and growth is learning, then Mr. Gilder should be one of the richest people on the planet. I guess information theory doesn't always equate to investment theory if information ignores capex requirements. Bell's Law of computer classes describes a corollary of Moore's Law. Both are useful to determine the amount of capex to commit to enterprise development. Neither are useful in making personal investment decisions. I am not clear on Mr. Gilder's formulation of "bank assets ex cash" to describe the Fed's daily borrowing. A Web search of that phrase brings up legal discussions about dividing assets in a divorce. Adding the Federal Reserve to this Web search brings up the FRB's H.8 release, so I wonder if Mr. Gilder really meant to describe the assets and liabilities of commercial banks. He may have the big picture mostly correct about cloud layers but I still don't think blockchains will give him a magic currency.
The next panel in George Gilder's Telecosm Forum echoed the kind of stock picks he made 30 years ago when he said something about Intel. Bullish talk about SDN, cloud, and front-haul data processing for apps makes me think that data center REITs will do better than wireless telecom tower REITs if I had to choose between the two. Bring on the fog computing. Tech picks only go so far. Intel took off because it was tied to Microsoft Windows' desktop monopoly. These tech stocks only work as growth stories if they are tied to network effects that impose huge switching costs on millions of retail users.
I have sought a decent predictive model in life sciences for years. The finance community cannot rely upon the same old milestone drivers of stock price movements for drug development companies. I had a gentlemanly confrontation with another investor at the MoneyShow who became frustrated that one participating company did not mention its employee headcount, ticker symbol, annual revenue, target market, or other characteristics. Granted, those are details any analyst should ferret out in due diligence. The one valuable insight I did find was a computational algorithm that enabled better understanding of molecular-level biological processes. That one insight would be worth more to the finance sector than a stack of SEC filings. Financial analysts should read Isaiah Berlin's "The Hedgehog and the Fox" about the difference between divergent, multifaceted thinkers and singular, profound thinkers. Great investors can switch effortlessly between either perspective.
Silicon Valley is taking down Wall Street. New fin-tech concepts start with domain knowledge from human experts, then add machine learning. What if the human experts are flawed? Are they truly the best in their class? True finance experts are rare because their unique brain chemistry enables "six sigma" insights. Warren Buffet, Charles Munger, Burton Malkiel, Carl Icahn, Bill Gross, and John Bogle are true experts not because their methods are peer-reviewed, but because their intellects and temperaments combine for abnormal results. Obviously it is difficult but invaluable to tap them, so lesser experts are poor substitutes. The panel remarked that descriptive analytics give deep insights into a portfolio's geopolitical risks, like the probability of a regime change as a sell trigger. George Gilder just had to mouth off from the crowd during one Q+A. His complaint was that if every investor becomes a passive investor as robo-advisers herd them into low-cost index funds, they really become "parasitic investors" who mimic each other and deprive the market of growth and learning. All I could do is shake my head when I heard him blathering. Come on, George. Does he not understand index investing at all? The growth and learning happens within these stocks as they innovate, become more productive, and increase earnings. Developing new investing theories like modern portfolio theory and arbitrage pricing theory adds learning to a portfolio's efficient frontier. Index investing enables all of that growth and learning by minimizing the costs of wasteful active trading. I do not need Mr. Gilder to tell me how to invest.
Another biotech thesis was a pick and shovel play on specialized real estate for life science research campuses. That idea works as long as it rides the biotech bubble. I did not see any data on this particular idea's performance. Dropping brand names of top pharma companies' revenue is only relevant if they are tenants in such real estate.
I quietly LOL'd at a "tag cloud investing" slide covering cloud, China, wearables, and other trends completely out of context. More computing power, faster data transfer, cheaper data centers, app proliferation, and microbial engineering all have something to do with lifting the fog around innovation and change. Wireless capability has not yet caught up to storage or processing, so maybe there's some untapped opportunity in those wireless tower REITs after all.
Carver Mead invented Moore's Law. He wrapped up the Gilder Telecosm Forum with a peek into the basics of the universe. Quantum systems are so different from anything we understand in our daily reality. They have nothing to do with the thermal system disorder that gives time its one-way direction. I appreciated the reference to sci-fi author Robert Heinlein when he said we should "grok" quantum information exchanges intuitively. He concluded by predicting a revolution in science itself that would resemble technology's revolution. The guy was pure genius. I live for the chance to hear people like him speak in person.
After the telecosm comes the many microcosms of talks on specialized topics. I like business development companies (BDCs) as an idea but their fixed rate loan portfolios make them poor performers during high inflation. I would consider an ETF for BDCs but only in a normal economy with normal rates for growth, inflation, and debt interest. I am very skeptical about companies issuing debt just to pay extraordinary dividends or buy back stock, and some of them may end up in BDCs' portfolios.
I prefer options as hedges or yield enhancements, not as the "strategic" investment some brokerages want to pitch. Too many options specialists favor short term trading. They are gamblers rather than fundamental analysts. "Beta weighting" that ties options to equities sounds like an interesting concept. I will let others tie up the Greek letters they need to explain it.
The long march of ETFs into the fore brings passive investing to cheap robo-adviser platforms. These products have restored asset allocation as the primary driver of portfolio returns. Financial advisory relationships can now be valued in minuscule basis points as venture funding for robo-advisers makes cheap solutions more desirable. Cheap "core" portfolios mean the only "satellites" adding value must be extremely unique. I will remind myself not to trade any ETFs within one hour of the market's open or close, when bid/ask spreads are widest.
I an newly fascinated with farmland REITs. I wonder if the ROI of raw farmland correlates with agribusiness stocks or food commodity prices. Aqua farms and solar farms are boutique touches that may add value to farmland in some areas. Easements for pipelines, highways, and other infrastructure also add value. Farmland exposure is one more type of hard asset hedge. Such a REIT makes farmland liquid, and it retains pricing power during inflation if its owned farmland is leased to tenant farmers under short-term leases. Wow, I may have stumbled on a real game-changer.
One MLP expert said an MLP's distribution sustainability depends on where it operates in the energy chain: upstream, midstream, or downstream. Upstream MLP prices swing with the WTI crude oil price. Midstream MLPs are a larger, diverse sector. Downstream MLP refineries are tied to both crude and fuel prices. The crack spread of a low crude price and high fuel cost equals profitable refineries. Some MLPs issue bonds, so analysts should know how bond yields tie to issuers' credit ratings and distribution history.
Dividend paying companies became investors' little darlings as the Federal Reserve forced everyone to chase yield. I wonder about the typical payout ratio of a sustainable dividend. Are there valid REIT metrics too? How about lease length and type (i.e., triple net versus others), credit rating, and occupancy rates? I'm pretty sure any company whose dividend growth exceeds US GDP growth will outperform the market because it has some durable competitive advantage, unless they're taking on debt just to raise dividends. I would favor REITs with short term leases over long term leases because they have better pricing power during periods of high inflation.
Activist investing works for investors who have lots of money and can add value by directly advising company management over the long term. It's probably not suitable for the retail investor. The SEC's Form 13 series helps us follow the money trail, and I would add that Form 4 filings are also useful. Underperforming companies with clean balance sheets and low insider ownership may not stay so clean for long if they become activist targets, because bad management will lard them up with debt. I stay away from retail investment products that claim to use activist investing because they may not have the managerial acumen to fix what ails an underperforming company.
Marilyn Cohen of Envision Capital Management is always one of my favorite MoneyShow experts. Her approach to bold and brave bond investing acknowledges that many bond issues are rated in the BBB range. I bet calling it a "bold brave bonds" talk was a play on that BBB rating. She thinks investment grade bonds are the most overvalued part of the bond market because institutions have gravitated to them over Treasuries. Any investor can check SIFMA's Investing In Bonds and MSRB's EMMA for bond data but those sites don't give the whole picture for specialized bonds. Investors must track local factors affecting muni water bonds and prison bonds. I agree with Marilyn that the IMF and Federal Reserve obviously collaborate, and that Greece's problems will continue.
I made the mistake of sitting through one panel on a "high growth" subject that was really all about growing something that gets people high. Yes indeed, the hot trend of investing in a certain green plant has hit the retail investing mainstream. I have never used that plant, nor will I ever use it. The product remains illegal to cultivate or sell under current Federal law but that has not stopped states like California from experimenting with decriminalization. The sector's advocates need to stop putting the cart before the horse and outline a path to legalization that is consistent with the rule of law in a constitutional republic. Big Pharma and agribusiness lobbies can be this young sector's allies if they will work with the US Congress on drafting legalization bills. Once the President signs such a bill into law, then Warren Buffett and whoever else can buy all the land they want for cultivation. I wonder what the CFTC will do with futures contracts for this plant after legalization.
Disruptive tech investing now has a unique approach thanks to BDCs. Apparently some BDCs have startup exposure in their loan portfolios. Exit events generate special dividends. The BDC shares experience run-ups prior to a startup's IPO and can then be shorted after the IPO. I think one way to play a BDC in advance of such an IPO is to buy-write the BDC with at-the-money calls and let it be sold away. It could then be a short sell after the shares are called away. I may just try that at some point with my own money, if we ever have a normal stock market again.
I will not embarrass one finance professional who tracks emerging markets. Ignoring international indexes like Transparency for corruption and Heritage for economic governance carries huge risk. Anyone who thinks the Chinese government is the best in the world needs their head examined. That country's rush to urbanization was a huge malinvestment. Their top leaders can't be that bright if they think state intervention in the stock market will stop a selloff. It is delusional to think Chinese companies will add Westerners to their boards for better governance. Boards are always rubber stamps for executives. Westerners typically ignore the Asian "two faced" approach to business with the non-Asian world. The Chinese way of "getting things done" pollutes the environment, steals IP, and overbuilds infrastructure. I will not invest in instruments that follow that approach.
Marilyn Cohen returned for a second talk on nitty-gritty bond investing. I dislike bond ETFs as much as Carl Icahn. Bond ETFs add imperfections that negate the role individual bonds are supposed to play in portfolios. Marilyn thinks institutional selling could trigger a bond market crash, combined with broker/dealers who who are unwilling or unable to commit capital to trades. Detroit's bankruptcy destroyed the myth that governments will raise taxes to pay off general obligation bonds. The new world of muni bonds mean bondholders will get the bad end of any deal in restructuring. She thinks muni bond investors should track facts: balanced budgets, good reserves, accurate spending projections, days of cash on hand, timely financial statement filings, and statement footnotes that reveal promised benefits and unfunded liabilities. The opposite or absence of such factors would indicate poor municipal management, giving reason to avoid such bonds.
Some ideas are too bad to deserve attention. Hard targets for return on capital make sense in a normal environment, but not now. Fully-invested herd followers have no contrarian edge. Separately managed accounts are totally stupid. Index changes remove poorly performing companies for price reasons, not fundamentals, and that is why index arbitrage strategies generate alpha.
Investing for income that anticipates inflation means having something other than plain vanilla bonds. We all have our pick of mortgage REITs, BDCs, convertible debt ETFs, sector ETNs, specialty finance companies, and LNG shipping companies. I love the funny term "offensive assets" because I've never heard a non-defensive strategy with that label. Allow me to vent a frustration here. All of these freaking newsletter publishers love the bubble sectors! Finance, housing, biotech, and health care get plenty of attention. Hardly anyone at the MoneyShow sees stock or bond corrections coming. I had good returns in past years by writing covered calls on high-dividend securities. I just won't risk it while central banks are pumping everything.
Anyone who expected more detail from me should have attended the MoneyShow themselves. I have blogged only a fraction of the things I learned. The remainder is mine to keep until such time as the markets allow me decent entry points. Investment wisdom is only truly actionable when an investor thinks on their own. I invest only for myself, and the MoneyShow always helps make that easier.
I attended Intersolar North America and SEMICON West once again. These shows are shaping up to be my favorite mega conference every year and they delivered the goods in 2015. Other meetings took me away from some of the symposia but I had the main events covered.
The Intersolar Opening Ceremony only had one politician this year. The local politicos couldn't make it so a New York state legislator talked about the Empire State's energy programs. No one can touch California, folks, so I don't know why these other states even try. They may as well just throw in the towel. I was shocked to hear one of the lead presenters state that multi-junction solar cells are now getting 46% conversion rates. That is about three times the long-term historical sunlight conversion rate that PV panels typically yielded for decades. Solar's levelized cost of electricity (LCOE) is also getting more competitive. In case anyone is curious, EIA describes LCOE for 2015 and NREL provides an LCOE calculator.
Tesla Motors' CTO and co-founder tied the Gigafactory's Li-ion battery tech to the pending launch of Tesla Energy. I believe cheap lithium producers will have a major advantage if materials costs truly have the storage sector concerned. Tesla's full rollout targets both home storage for Tesla car owners and microgrid buildouts for demand clusters in emerging markets. One big concern among Opening Ceremony attendees like CALSEIA is the continuance of pro-solar policies like net metering, the federal solar investment tax credit (ITC), and Renewable Portfolio Standards (RPS). Absorbing all that urgency was enough to give me an appetite for the free food at the Opening Ceremony's reception. I always get my fill of grilled turkey and vegetables.
SEMICON West held their opening press conference and analysts like yours truly are sure to be there. I grabbed my coffee and listened to SEMI's market outlook. Gartner and other sector analysts are lowering their revenue forecasts for the semiconductor industry. I noted how a weaker euro and yen are reducing billings reported in US dollars. SEMI is still forecasting decent growth in both material cycles and equipment.
The SEMICON keynote on sub-14nm manufacturing was pretty technical but I tried to follow it for investment insights. Physics allows innovation to march on and fixing bugs always means lots of manual work. I am not clear on the relationship between lower voltage and higher efficiency, especially if huge efficiency improvements are needed to get HPC capabilities into smaller form factors. I am much more clear on the need for databases to communicate in the same language.
The session on EES storage and large-scale grid integration reminded me of something I probably forgot from a previous Intersolar, namely that batteries are less efficient in high-temperature climates. Li-ion batteries have high efficiency and will charge for a large number of cycles, but they also have a higher cost per kWh than other storage technologies. They also have a safety disadvantage of "thermal runaway" if overcharged or crushed. The CAISO duck curve and NREL volatility chart show how storage adds to the capacity of PV systems. Feel free to look those up yourselves, as I suspect their URLs will change.
I went over to SEMICON's Silicon Innovation Forum (SIF) investor panel to learn that the National Science Foundation's (NSF) Industrial Innovation and Partnerships (IIP) office has SBIR funds available for startups. The investors had major takeaways for those of us who track these things. Corporate VCs have discovered they must provide more capital to semicon startups that need cleanroom work or data development. Huge capital requirements for new ventures will eventually deter startups from entering semicon. VCs' recent focus on unicorns further deters interest in startups that can more reliably deliver smaller returns for strategic investors. The corporate VCs would rather hit lots of singles and doubles than invest in one big successful home run.
GTM Research debuted their white paper on solar and the storage market. I like conferences that give me free stuff to read. Less than 0.1% of US solar assets have associated storage capacity, implying there's room for growth. Okay, I've been hearing about storage's huge potential for growth for three years now. It still hasn't grown. I guess Tesla Energy has its work cut out. Good luck selling storage with Tesla cars as a total package given Tesla's tiny share of the auto market. I guess utility incentives will have to drive home storage adoption; EVs can't move the needle until they become much cheaper. Combined savings in commercial costs over a storage product's lifetime are supposed to greatly exceed the initial investment outlay, but I wonder whether that factors in any periodic maintenance cost or insurance cost for the storage unit. One big claim for storage is that it should add a revenue stream to a household by feeding excess energy back to the grid for sale. I will review the sector's numbers to see how that works, and how storage adds value to a solar power purchase agreement (PPA). I also would like to find out whether solar and storage growth curves differ by regions covered by different independent system operators (ISOs).
The US Commercial Service was on hand to talk trade promotion. I have heard them talk before in Silicon Valley so I don't think I need to rehash their many services here. I do expect Congress to eventually reauthorize the Ex-Im Bank, because a big plank of our foreign policy depends on trade finance tied to development in emerging markets. Using "soft power" wisely means keeping US development commitments to Africa that will counter China's influence. The US should probably merge its Trade and Development Agency with its International Trade Administration so businesses have one less block to check when planning foreign trade partnerships. Kudos to the Obama Administration for using StopFakes to support American intellectual property.
One SEMICON keynote from Intel connected IoT to the next 50 years of Moore's Law. You just have to love corporate sponsorship for a keynote. I would do it too if I thought it would make me serious money. Intel is betting that its new module's IoT applications will solve problems in four megatrends: aging populations, carbon footprints in the environment, urbanization booms, and feeding the planet. I would tell any semicon startup to study the standards of the Industrial Internet Consortium and the Open Interconnect Consortium to ensure their IoT solutions are compatible with emerging norms.
I missed the SEMICON "Bulls and Bears" panel due to a schedule conflict, which is unfortunate because other financial firms track the semicon sector more closely than me. I will have to study the sector's capex, inventory, capacity utilization, supply chain, and technical challenges on my own.
The Joint Forces for Solar forum is always the highlight of Intersolar for me. The New York state politician was at it again, making good points about his state's energy market. I like the idea of a state Green Bank, and I wonder whether some of the state's models will work elsewhere. The California PV market review was more relevant to my interests. Rate differentials for high-end and low-end users will get more complex with the addition of a Super User Electricity (SUE) surcharge as a third rate tier. Net metering will be uncapped and unlimited. California's RPS goals don't include rooftop solar, which is just too darn bad. The sector lobby needs to fix that and push for its inclusion.
The final SEMICON SIF keynote was all about transformational innovation and market readiness. I literally did a "whoa" at the academic speaker dude's career history full of hundreds of patents and scientific articles. I take geniuses very seriously. He reminded his audience that there are no shortcuts to building a company and each day brings a "dragon" threat to be slain. I concur with his endorsement of a "sustainable innovation ecosystem" that successfully engage academics in commercializing their university research. Academics deserve better royalties and recognition when they do something entrepreneurial. The decline in US government research spending and the erosion of the US manufacturing base are not coincidences. I agree with our SIF speaker that US industry has a hard time tapping the leadership skills of government and military leaders if the public sector is isolated from industry. Well, duh, really? The finance sector sure kept my military expertise isolated by refusing to hire me and treating me badly. Anyway, our expert said he expects the electronics industry to consolidate as the end of Moore's Law approaches in a decade, but the coming quantum and optics tech will change the sector's economics all over again. He also expects entrepreneurs to lead this newly fragmented next-gen industry, with government and university research playing a critical role. I like that he ended with those optimistic predictions. I also liked the reception afterwards, with plenty of shrimp kabobs and cheeseburger sliders.
Intersolar and SEMICON West always blow my mind. I came away this year with plenty of data sources to use when mentoring startups. I even noted another incubator, the Silicon Catalyst, whose startups will likely need my wisdom. Startup founders who read the Alfidi Capital Blog have a natural advantage when building businesses in solar energy and semiconductors. The genius-level knowledge here literally flies off the page.
I recently received an unsolicited postal mail invitation to attend a free Scott McGillivray real estate seminar in Burlingame. I have no intention of taking Mr. McGillivray up on his offer of free stuff in exchange for an entire morning of my precious time. I've been to enough free real estate seminars (okay, just a couple) to know how they work. I can think of other ways to break into DIY real estate.
If I were serious about fixing and flipping properties, my first stop would be my local big-box home and garden retailer. Those chains have free classes on rehabbing and they can help price out job materials. Your helpful hardware dealers are always there for you because they want repeat business.
My next stop would be my local public library. Have you ever heard of those? They still exist in the digital age and the ones in San Francisco have excellent collections marked "real estate." I would grab the most detailed tomes on home repair and maybe a book on appraising. Speaking of the digital age, Zillow and RealtyTrac have all of the local market info I need to price whatever I want to buy or sell.
Automation has not yet obliterated local bank branches. Every bank has lists of foreclosed properties they want to unload. Loan officers are dying to talk to bank customers who walk in the door ready to take problems off the bank's books. Federal agencies like HUD and the VA still have foreclosures available sometimes for those with the patience to navigate their systems. I love it when a ready-made source for deal flow is near at hand.
Live seminars used to be good for a laugh when I needed free entertainment. I don't need fast-pitch, high-pressure seminars to give me some negligible amount of real estate knowledge. I can learn a lot more on my own.
Prosperity and liberty go together well in cultures that tolerate experimentation and respect for the individual. Writing about investment theories and market action is probably not enough to galvanize support for the enabling culture of economic prosperity. Two writers who may be able to help have recently crossed my radar. Charles Murray, author of By the People, and Larry Gerston, author of Reviving Citizen Engagement, recently spoke at the Commonwealth Club about how to re-energize Americans' concern for public life. I will offer my own thoughts below.
Mr. Murray approaches freedom from the conservative / libertarian right. Curtailing the intrusive power of government regulation would indeed be a boon to the US economy. I suggest he put his ideas to the free market test and crowdfund his proposed legal defense fund. I am generally not fond of those who thumb their noses at the rule of law, but Dr. Martin Luther King elevated it to a moral necessity in the face of unjust laws. Funding his legal defense while he contemplated action in Birmingham's jail would clearly have been a morally correct action. I must also caution those who think human history is an unbroken line of progress to higher states of maturity, freedom, and organization. Things do collapse sometimes despite the best efforts of well-meaning leaders.
Mr. Gerston arrives from the progressive left to critique Americans' disengagement. I agree with him that corporate tax loopholes and the erosion of economic security for workers are bad for prosperity and freedom. I would add that they are just as bad as over-regulation. I am totally on board with his idea for mandatory national service. A couple of years in the US military or a community service program would teach many otherwise entitled Americans that their rights come with civic obligations. Tax reform would work if it dramatically simplified the tax code but I doubt Mr. Gerston's proposed tax increase would pay for the unfunded GAAP liabilities of our entitlement programs. He would benefit from reading David Stockman's critiques of income inequality before he offers solutions emphasizing wealth redistribution.
I recently blogged about what a just society means. Real solutions throughout American history have come from both the right and the left at various times. Diagnosing social problems and working for solutions requires a citizenry engaged in guarding its own liberty. I would very much like to see my fellow citizens assume the task.
I attended a lively philosophical discussion last night at the Commonwealth Club under the auspices of its Socrates Cafe. We discussed what a just society meant, and many highly intelligent people weighed in on fairness, equality, and love. I threw my own thoughts into the mix a few times. I want to note a couple of things here that may benefit others who aren't privy to such discussions.
I believe John Rawls' A Theory Of Justice clarifies how modern societies can be fair to all of their members. His two major principles address political liberties and socioeconomic opportunities separately. The implied task for American citizens is to build a society that maximizes these two principles for as many of our fellow citizens as possible. Building a just society along these lines requires metrics that show us what success will look like. I believe the application of Big Data in a globalized economy can now bring the just society within reach.
My longtime readers know that I use widely regarded development indexes to evaluate country-specific investment risks. The best are Transparency International's Corruption Perceptions Index and the Heritage Foundation's Index of Economic Freedom. I believe Transparency's index corresponds well with Rawls' first principle for political liberties and the Heritage index works for his second principle on economics. In other words, these Big Data repositories enable Americans to benchmark their society's fairness against other countries.
We don't have to stop with two measuring tools. The World Justice Project's Rule of Law Index supports stronger jurisprudence in countries with weak legal traditions. The National Center for Access to Justice publishes a Justice Index for states within the US. Our Constitution promises every state a republican form of government, implying a strong rule of law and a fair legal system. Every American deserves to live in a society that delivers as much justice as is humanly possible. Fixing our systems means first measuring them to see where they need repair.
I spent some very valuable time this month attending the AlwaysOn Silicon Valley Innovation Summit (SVIS) 2015 down at the Computer History Museum. I attended in 2014 for the first time and that's how I got hooked on the AlwaysOn events. Tony Perkins always rallies a start-studded lineup for these confabs. I sat front and center for every session. The stream of consciousness narrative I generate below should capture the event's zeitgeist.
George Gilder displayed his flair for original thinking. I heard him talk at the MoneyShow San Francisco 2014 and he retains his conviction that gold and bitcoin are future stores of value. I disagree with him on the usefulness of Bitcoin. Tech enthusiasts like Gilder love Bitcoin as a currency due to its supposed time-based scarcity. If something must be scarce to be valuable, the ability to fork a digital coin into another variant (Litecoin, Dogecoin) dilutes its value. Real currency is recognized as legal tender; forking introduces confusion as to which coin can be recognized in a transaction. I also don't buy his contention that gold and bitcoin are somehow independent from economic reality. Those things are very much part of the economy as long as jewelry demand drives the gold price and the demand for stronger blockchain ledgers in transactions drives Bitcoin's development.
I have been a big fan of programmatic RTB advertising placement since I first heard of it in 2013. RTB requires massively parallel bids that make ad buys more efficient. The auction method that optimizes a price across several channels can probably apply to other sectors besides online marketing. Calling Wall Street . . . programmatic bids for securities across several exchanges can eliminate the ability of high-frequency traders to front-run other institutional investors.
The debate between advertising tech and marketing tech will never end. IMHO marketing tech offers more opportunity than ad tech as Big Data and AI make automated DRM tools more attractive. Tech advances bring a lower CPC for ad buyers, enabling a wider audience reach and lower CAC. Standardization will happen as ad networks consolidate. Only the biggest players have the market power to demand adherence to standards, as Google achieved with AdSense. The pain point for "fraudulent ad buys" reminds me of payments fraud in finance and it is probably amenable to the same types of fraud detection solutions. There's a pivot opportunity for fin-tech startups there if they understand ad tech.
It's nice to see enterprise software successfully disrupt the HR function. Salesforce and other big players will want to buy that stuff someday. The supply chain is next on the list for innovation. I have nothing against in-memory computing if it can extend the life of Moore's Law. Quantum computing already has that law in its sights, so in-memory players may not have five years to mature and cash out.
Big Data and business intelligence (BI) are supposed to work together. Analysts develop hypotheses from their own experiences, and Big Data is supposed to expand those potential hypotheses beyond analysts' familiar heuristics. Virtualizing BI empowers non-scientists to run analytics. Curious types can read the stuff I've been writing about knowledge management and decision rules for several years.
One of the best quotes I heard at SVIS was that "linear solutions don't solve exponential problems." I'll use that line the next time someone asks me why another European bailout program won't solve Greece's problems. The human brain is wired for comfort and familiarity; it recognizes unsound patterns. Automation and Big Data generate statistically sound patterns that will present robust visualizations.
I liked a couple of cool audio / video tools on display. One automated video editing tool will reduce user friction in content creation. A smart hearing aid had controls on a smartphone and plays music. It reminded me of how Adm. James Stockdale turned off his hearing aid during the televised vice presidential candidate debate in the 1992 elections. The admiral could have saved himself some embarrassment if he had worn this hearing aid.
Lou Kerner mentioned how Roy Amara's Law describes tech investment bubbles. He concluded his talk by arguing that private market valuations are stretched (echoing VCs' public comments since 2014 about bubble conditions) but markets are not close to the dot-com era's levels. He also thinks tech within public markets appears fairly valued, but public markets look overvalued. I disagree with his use of the NASDAQ's five-year CAGR to show we're not in any tech bubble. Five years isn't long enough to reach back to the post-dot-com crash bear market, and it still exceeds the NASDAQ's long term average CAGR. I also think his example of non-VC deal participants ramping dramatically contradicts his data showing VC investing as a percent of GDP not yet reaching 2000's bubble level. I do like his awesome quote, "Beware of confusing donkeys in party hats with unicorns," originally from Bryce Roberts of OATV. Good one there.
I loved it when a former management consultant said "people, process, and tech" with no context. People throw that phrase around a lot in knowledge management with "tools" sometimes replacing "tech." We'll hear it a lot more in on-demand markets as the demand for micro-task fulfillment continues to disintermediate people from the work they perform. Laws and regulations are not catching up to the on-demand labor market that TaskRabbit and others fulfill. Other online markets are making offline experiences in travel, taxis, and real estate more valuable. It won't make participants smarter if they don't understand market basics. Investors making "sight unseen" big purchases like real estate can waste money even faster with tech.
Video service entrepreneurs believe content will prompt transactions. It sounds like a stretch and reminds me of the "push media" fad predating smartphones. Television ads already have professionally produced content and YouTube enables amateurs to make mashups. User-generated content now has more distribution options than ever. I can foresee the existing user-friendly video channels inserting transaction prompts into videos. The implied corporate development goal will be to acquire startups whose algorithms will recognize user actions as purchase triggers.
Let me revisit the blockchain one more time. Open source developers need to think hard about how to make a distributed transaction ledger that no one can falsify. Claims that blockchains are immutable ring hollow. Ask any merchant who has been the victim of a fraudulent Bitcoin transaction. If a blockchain is immutable, it cannot reverse a fraudulent transaction. A falsified blockchain is useless as an auditing record.
I was very impressed with PageCloud's demonstration. The ease of editing a live website will be a boon to small and medium-sized businesses. It looked way easier than the tools I've used with other web hosts. I especially liked how easy it is for a merchant using PageCloud to adjust portal prices. That feature will come in handy during a hyperinflationary period when shops must update their prices daily.
Women have proven they bring advantages to Silicon Valley. Marissa Mayer and Sheryl Sandberg know what they're doing. I would like to believe the conventional wisdom that women project empathy when pitching a believable narrative, but the female supervisors I've had in my career who told me baldfaced lies always left a bad taste in my mouth. One of the SVIS panelists mentioned a McKinsey study on the elements of female leadership. A Web search for that report brought up tons of McKinsey work on the subject. I would like more experts to mention the supplier diversity programs at big companies so that women-owned small businesses are aware of that path to subcontracts. Closing the knowledge gap in SMB contracting will help women.
The VC outlook for the coming year is usually the highlight of these types of conferences for me. I try to think like a VC, partly because I always wanted to know why they wouldn't hire me in the early 2000s when I was looking for work. "Unicorn" is rapidly becoming one of the most overused words in Silicon Valley, just like "disrupt" and "curation." I just LOL at the late-stage non-VC investors chasing unicorns with very unique preference structures. Expect plenty of post-IPO writedowns. I heard one VC endorse wild spending on customer acquisition while cheap capital is widely available. The VCs who acted that way in the dot-com bubble aren't around for the rebound these days. The excuse is that free spending is okay if the LTV/CAC comparison makes sense. My critique of that is a too-generous LTV assumption will tempt inefficient startups to spend like drunken sailors on unattainable metrics. One laugh line quote from a VC is worth repeating: "You can walk down the street, shake a tree, and two angel investors will fall out" because risk capital is so easy to get. I'll try that the next time I'm on Sand Hill Road. Someone else discovered that a group of unicorns is called a "blessing." The blessing of Uber, Lyft, Airbnb, and others will make a handful of founders rich.
AlwaysOn's latest list of hot private companies shows them staying private longer. The late-stage capital injections are a big factor in long incubations. Founders now have every incentive to hold out for larger pre-IPO valuations. This year's big winner was Docker, a sort of "hamburger helper" for app developers that pivoted during its Series A raise. Docker's CEO says we should play the hand we're dealt, and I agree.
Analytics for sales data is mostly "undefended territory" because it doesn't integrate with internal knowledge management systems. No one in Silicon Valley ever discusses KM but I believe that's the ultimate determinant of how analytics delivers value from enterprise systems.
I would like cloud experts to announce which part of their stack is the most expensive to deliver. The up-front cost of any open source solution is lower than a proprietary solution because customers aren't paying a premium to develop a proprietary code base. I initially thought vendor lock-in is more likely in the hardware (IaaS) part of the cloud stack. Now I think SaaS lock-in may be more costly; imagine the difficulty of switching from Oracle to Salesforce. Consider how Amazon Web Services' price cuts and competition from other data centers makes IaaS a commodity, competing only on price.
Knowing your average revenue per user (ARPU) is a start to building credibility in a startup pitch. Losing credibility happens when founders don't describe their target market or team background. They also lose when they assume customers will pay a premium for a commodified service. They gain credibility when they compare their total cost of ownership (TCO) to their competition, describe entry barriers that will protect their market position, understand their sales cycle, and hack their pedigree for endorsements and tech validations.
I have very little insight into the vice economy. The Rosewood Hotel on Sand Hill Road is the local epicenter for VC vices. Knowing that will come in handy at some point. Apps offer instant gratification and gaming is the only vice that can be done 100% online. The eventual legalization of online gambling may displace video gaming. Addictions are more powerful if they generate real financial rewards.
The unicorn roundtable was the single best panel of SVIS. Truly brilliant people were on hand. The rise of secondary market liquidity is changing the exit options available to early investors. I agree with Tony Perkins that companies will find staying private very attractive. One panelist said that a large stock market decline means mutual funds and hedge funds will be forced to meet redemptions, and will no longer have the late-stage capital for startups. Another expert said each megatrend has a value pyramid, and each level of the pyramid from base manufacturing to top content adds value. New tech can invert those pyramids. Startups must anticipate changes when those value-added activities will shift the pyramid in verticals they understand. Folks, this was brilliance I never learned in my MBA program. I attend AlwaysOn events for just this stuff.
Everyone is looking past mobile, just like a previous panel when someone said 5G tech will turn all mobile phone companies into short-sell stocks. I have not heard anyone say "data sector" or "data supply chain" at recent Silicon Valley events. I have blogged about those concepts and that's why I have a data-related speaking engagement coming up in September 2015. It's also why some tech media people have been following my Twitter feed. AlwaysOn might as well follow me too. I learn enough from their events to build my own thought leadership.
I went to a Van Halen concert for the first time in my life last night when they played the Concord Pavilion on their Tokyo Dome Live in Concert 2015 tour. They put on a loud, tight show with plenty of flair from all of the players. I got to relive the 1980s because most of the setlist for this tour was from their earlier albums. Everyone should have careers they enjoy, and if you follow your bliss then financial rewards will follow you. Concert fun and business success often go hand in hand.
Ignore all of the sniping from this 2015 tour's critics. There were no rough lead vocals or pre-recorded backing vocals. Diamond Dave stretched a bit for the high notes he can't reach anymore in his older years but his phrasing and timing were clear enough. Wolf was in front of his mic, singing and playing in time, and he flawlessly led off the famous bass chords from "Runnin' With The Devil." Alex's drum solo sounded like Miami Sound Machine gave him some inspiration. Dave does not have the vocal range of Sammy Hagar or even Gary Cherone, but his stage presence is one of the intangibles that make Van Halen special to fans. Dave twirls a mic stand like nobody's business and his dancing punctuates Eddie's guitar licks. These guys put on a professional show.
Some Diamond Dave quotes were instant classics. Asking the audience "How 'bout that women's soccer team?" was the perfect break during his harmonica intro to "Ice Cream Man." I wouldn't have used a Bill Cosby joke, but I'm not Dave. I don't know what "Fifty shades of Dave" means, or whether there's an America Town in China, or whether his description of a long-ago Mexican girlfriend was accurate. Knowing why would take the fun away. Whatever tension exists between Dave and Eddie was not visible at all on stage. Eddie played along with Dave's verbal gags like a classic straight player to an improvisational comic.
The blurry photo above is the band on stage. Trust me, it's them. If the spirit moves you, well, you move. I was moving along to the beat the whole night, raising my fist with the "hey hey hey" chorus of "Ain't Talkin' 'Bout Love" and everything. Other people could have jumped around the aisle during "Dance The Night Away" but the seats on either side of me were empty. I have high standards, and I'm not jumping around a Van Halen concert even though most of the people in attendance did that at some point in their lives. Oh BTW, I only date drug-free intellectual babes.
The first Van Halen item I ever purchased wasn't even their music. I bought a replica of the poster above during junior high school in 1988 because it just looked so freaking cool. I think the poster was designed for their appearance at the 1983 US Festival. I recall seeing a recording of the US Festival once. One thing from the recording still rings clear as a bell in my memory. The chords that became the riff for "Top of the World" on 1991's For Unlawful Carnal Knowledge were audible during the closing chorus for "Dance the Night Away" in that 1983 show. Eddie played those "Top of the World" riffs during the closing of "Jump" in last night's Concord concert. He obviously loves the way it sounds and I wonder if he regrets not performing any songs from the Sammy era live while touring with Dave. I still have that 1983 poster rolled up in my closet. I feel on top of the world whenever I look at it because it's just so darn patriotic. It is still freaking cool after all these years and I'll hang it up when I'm ready.
Van Halen's body of work remains compelling after four decades because its principal artists are true virtuosos. Wolf is still growing musically but he's coming along fine by all indications. He is making his dad very proud. Dave, Alex, and especially Eddie have always been excellent performers. Some people are just gifted, and wasting natural talent is a crime against nature. Whenever something in business bugs me to the point of exasperation, I think about songs like "Dance the Night Away," "Panama," "Jump," "Dreams," and "Top of the World" to remember that chaos gives birth to a dancing star (paraphrasing Friedrich Nietzsche). I am supposed to be a financial virtuoso. Whatever chaos Dave and Eddie use to create their most memorable songs is something I can tap into myself. It is simply impossible to be sad or angry when you're standing on top of the world, dreaming of jumping all the way to Panama so you can dance the night away. Great music makes you want to do just that every time you hear it.
Van Halen takes forever to put out new music now that their founding members are all age 60 or over. I could not shake the suspicion that this tour for their only live album with Dave could be their swan song. I am very grateful to have seen them just this once if this turns out to be the first and last time I can witness their creative genius in person. The mark of genius is to make a difficult task look easy. Dave and Eddie make rock music look so easy that every amateur in the audience imagined themselves in the music right along with them. The gross revenue from my one concert ticket won't make the band much richer but it should be enough for each Van Halen member to buy a sandwich if they're so inclined. Have lunch on me, guys. You earned it.
I attended a Wonderfest scientific talk last night on "quantum strangeness" in a Tenderloin bar called PianoFight. The combination of tiny performance space, watering hole, and thought leadership nexus on the edge of an ungovernable neighborhood meets my definition of a fun night. Quantum mechanics is a fascinating topic, and I can't do it justice by repeating scientific ideas here. The implications for real-world investing could be tremendous.
Nanotech sometimes exhibits quantum-like expressions, so further research in quantum behavior helps define the practical uses of nanotech. Nanoscale engineering is already attracting investment. Tech at that scale has proven its value in the oil/gas sector and in biotech. SQUID sensors have been around for decades and are gradually finding wider applications.
The NNI website includes links to the federal government's tech transfer initiatives. It would be totally awesome if NNI could leverage the NSF's I-Corps. NSF is certainly tracking NNI. It's great to see my state of California leading the pack of links on NNI's state resources list. We don't call ourselves the Golden State for nothing.
The finance and telecom sectors already use quantum key distribution for data security. Quantum computing is still in development; one guy showed me a prototype of a quantum processor a few years ago and it looked like a broadband modem with no portals. The mature versions of these processors will obliterate Moore's Law in computing. I will be watching the federal government's tech transfer pipelines for quantum tech that deserves commercialization. University research partners here in California that share in the NNI's research budget will also be on my radar.
The big thing driving the news cycle since yesterday is of course Greece's stunning rejection of further European diktats. It just goes to show that you can't get blood from a stone. There may be blood in the streets of Athens if someone doesn't airdrop some cash into the Balkans. Alfidi Capital is here to offer some helpful suggestions for a few sovereign governments.
The EU needs to expel Greece immediately. Broke banks holding unpayable bonds as collateral do not belong in a Continental currency union. France and Germany can't publicly agree on which one should push Greece off the euro cliff. They should both team up and give the little country a good shove. I suspect the splatter at the bottom will resemble tzatziki sauce. Spain and Italy are welcome to cliff-dive of their own volition if they think euro membership is a free ride.
Greece needs to clean up its act. Retiring young and getting a bigger pension is not a recipe for productivity. Gyros are not collateral for loans and an unstable society will not attract tourists. The pensioners desperate for their daily 60 euro withdrawals can find work rounding up all of the illegal African and Middle Eastern refugees in the country.
The US has studiously maintained a safe distance from Greece's mess. Any eleventh hour plan to dollarize the Greek economy or extend the Federal Reserve's swap lines directly to the Bank of Greece needs to be enacted now if such a plan exists. Greece is welcome to apply for statehood in the US if it needs a new club to join. It can sit right next to Puerto Rico in commonwealth status until both governments' unpayable sovereign debts are obliterated.
Global financial markets have yet to take the full measure of this crisis. A few hedge funds are about to get totally clobbered in short order. Quite a few more will bite the dust if Spain and Italy follow Greece's lead. The smart money (including me) got away from most of the developed world's equities and bonds long ago. Everyone else is in for an unpleasant taste of "broke sauce" assuming store shelves remain stocked.
The connection between the two items deserves explanation. Upper-class citizens tend to have above average life experiences. They obtain high-quality social goods like education, jobs, and romantic relationships with greater ease and frequency than lower-class people. These kinds of people comprise the vast majority of the student body at Stanford and other top schools that won't need a tuition waiver. They will not willingly associate with anyone from the free-riding minority who do not inherit robust epigenetic markers.
The children from rich families who have to pay for college usually refuse to socialize with anyone getting a free education. I have experienced this phenomenon personally at both the undergraduate and graduate levels. Economically disadvantaged students cannot fully benefit from a Stanford education if elite students shun them from their networks. Children of rich families at elite schools query each other's backgrounds all the time. They also consider visual markers like brand-name clothing and cars. It is easy for them to pick out the lower-class students and label them as undesirable. Their parents raised them to behave that way to preserve their family's way of life.
Elite families have long obsessed over perpetuating their bloodlines. Science now has proof that humans can self-select for genetic quality. Good epigenetic effects among the elite class will keep them well-suited for handling the stresses of high-powered occupations. Success begets success, and successful people will mate with each other to perpetuate ruling class solidarity. Wealthy people can afford trichostatin A treatments to wipe their mental slates clean and raise the epigenetic responses they will pass to their progeny. The poor may not have such an option; I can see the Affordable Care Act's controls ruling trichostatin A an elective treatment not covered by the generous taxpayer. University tuition waivers for the poor will probably not include hormone treatments to wipe away bad genetics.
Stanford and other schools can afford to throw table scraps to the lower classes while the Federal Reserve inflates asset markets. That luxury will evaporate with the next market crash. University endowment growth after the 2008 financial crisis is entirely a function of central bank monetary stimulus. The American variant of Western civilization will still have the Horatio Alger legend and other such useful myths in its future. It will have less interaction between social classes as the epigenetically fit offspring of elite families avoid their less fit fellow students at top universities.
Competition in the online music sector looks much like the cloud computing sector. A small number of companies with huge audience penetration fight to distribute products whose unit production costs are close to zero. Cloud computing and music are not completely identical; cloud storage space and performance are commodities where music can sometimes command a premium price.
The big channels include Apple Music, Google Play Music, Spotify, and Pandora Media. All except Spotify are part of publicly traded companies. Apple's cash hoard makes it the strongest competitor regardless of the other competitors' market penetration. Apple can win any price war and drive less well-funded companies out, just as it can in cloud computing. Apple Music and iTunes do not cannibalize each other thanks to matching through the iCloud Music Library. Apple Insider describes the library's back-end technical challenges; those problems will lead to user cancellations if Apple doesn't fix them soon.
It is too early to tell whether music will become hostage to the walled garden trend in computing. Your favorite artist may very well end up available only on one streaming platform. Limiting exposure in such a way would be a tragedy for the listening audience. Streaming services pursuing two-tier pricing models will continue to charge premiums for unlimited access and special access to the most popular artists, while enabling advertising sponsorship for free subscribers. Keeping those top artists happy means streaming portals must expand both audience share and the presence of smaller artists on their platforms. The bigger the audience, the bigger the advertising subsidy that makes up for the added costs of hosting popular artists. A vast number of boutique performers on a streaming channel should attract a sufficiently sizable demographic base that makes "freemium" advertising permanently viable.
Full disclosure: No positions in any of the companies named above. The Alfidi Capital website and blogs use Google AdSense code to display advertisements.
Plenty of news items and local events have distracted me from my regular analytical work in recent weeks. I should not allow such things to move me but the black swans flocking out of Greece and other places are a compelling spectacle. Pushing aside the news flotsam leaves deeper currents at work. I need to throw a few thoughts into the pond to see if they float.
Knowledge management practitioners bemoan the lack of metrics in their sector. I have discovered plenty of metrics in human resources and information technology. Those two sectors support the knowledge management capacity of any enterprise. Combing their metrics should reveal some concepts worth formalizing.
Hedge funds that went long on Greek stocks or government bonds are now in regret mode. Betting against them with short positions is not viable so long as the Greek stock market remains closed. The Greek economy's structural problems are unsolvable until a post-euro hyperinflation runs its course. Any Greek-flavored investment strategy is poisonous for years. Bargain purchases of Greek-domiciled shipping stocks may be possible. Those stocks will also be subject to the risk of further crashes in the price of oil and the Baltic Dry Index.
Financialization of everything means pension fund managers and endowment managers have no clue about their real risk exposure. The clever people at major investment banks figured out how to offload their riskiest assets onto the Federal Reserve and the housing GSEs. Repackaging these things for sale means the least clever buyers among institutional investors are stuck with garbage. Money managers sitting on toxic mortgages will have short tenures after the next financial crisis.
My schedule will soon allow for a return to comments on specific companies. The long stretches of haiku in recent weeks were never meant to be the sole content style for Alfidi Capital. Stay tuned to see which retail investors want to badmouth me for criticizing their favorite ideas.