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Thanks to a subscriber for Howard Marks’ latest memo for Oaktree which may be of interest. Here is a section:
Imaginary Taxes Can Have Real Consequences
This article by Matt Levine at Bloomberg does a good job of explaining the different impact on various companies of the tax changes. Here is a section:
Deemed repatriation is significantly less fictional than remeasurement of deferred tax assets. Under the old tax system, U.S. companies were taxed on all of the income they earned everywhere, but only when they brought it back to the U.S.; they could defer taxes on foreign income by keeping it offshore. The new tax system is mostly territorial -- U.S. companies pay U.S. taxes on U.S. income and foreign taxes on foreign income -- but there is a one-time "toll tax" on foreign income previously earned abroad. That tax is at a much lower rate than the old (or new) corporate tax rate -- 8 or 15.5 percent instead of 35 (or 21) percent -- but it has to be paid over the next eight years, whether or not the money is actually brought back onshore. So, for companies that were planning to keep their foreign profits offshore forever, this is an actual new cost. (For companies like Apple Inc. that had already accounted for the cost of bringing the money back at 35 percent, though, it creates an accounting profit.) American Express really will have to pay that $2 billion of taxes over the next eight years. Perhaps it would have ended up paying more than that anyway under the old regime, if it had brought the money back, but it will definitely pay that much under the new regime. So, it needs to find $2 billion, and that is money that it cannot pay out to shareholders.
Stocks Jump to Records, Bonds Fall on Tax Benefits
This article by Kailey Leinz and Sarah Ponczek for Bloomberg may be of interest to subscribers. Here is a section:
Taxes drove much of the gains. Financials were strong after Bank of America Corp. beat estimates and indicated that it could benefit from the U.S. tax overhaul by reducing pressure to cut future costs. And Apple Inc. climbed after saying it will bring hundreds of billions of dollars back to the U.S. from overseas to invest in jobs and facilities.
“We’re all really trying to figure out the real impact off tax reform on some of the major sectors,” said Jamie Cox, a managing partner for Harris Financial Group in Richmond, Virginia. “Financials in particular have been in the news because you’ve seen some weird things with some of their deferred tax assets being reported in earnings. I think a lot of people misunderstood and don’t understand how the deferred tax assets work, and so they’re seeing these massive charges that the banks are taking as a result of tax reform and they can’t see too clearly into the future about how much the impact on tax reform is going to have on their bottom line three quarters from now.”
And“A lot of the move that we’ve been seeing has been just the beginning,” said John Stoltzfus, chief market strategist at Oppenheimer & Co. “It’s hard to quantify, but we see some evidence of bull market bears as well as skeptics of this bull market finally beginning to capitulate. And when that capitulation starts, it’s a process.”
BofA Warns Bull Market Capitulation Has Begun as Bears Surrender
This article by Blaise Robinson for Bloomberg may be of interest to subscribers. Here it is in full:
Here comes another sign that the few remaining bears are finally giving up.
Investment flows going into stock funds worldwide jumped to $24 billion in the week to Jan. 10 - the sixth largest weekly inflows ever - while $13 billion went into corporate and emerging markets bonds, according to strategists at Bank of America Merrill Lynch, who said the data show the market is reaching “maximum bullish” levels.
“Peak positioning on its way, but we expect asset prices to overshoot first,” the strategists led by Michael Hartnett wrote in a note, saying that to get a proper “sell signal,” they still need to see fund managers’ cash levels falling below 4.3 percent in their next monthly survey, as well as further inflows into high-yield bonds, emerging market equities and emerging market debt in the coming weeks.
Among recent signals that stocks are overheating: the proportion of bullish participants in the American Association of Individual Investors hit a seven-year high earlier this month, most major equity benchmarks around the world trade at overbought levels, and the S&P 500 has reached its most expensive level since 2002.
Intel Unveils 'Breakthrough' Quantum Computer
This article by Joel Hruska for Extreme Tech may be of interest to subscribers. Here is a section:
The new system is codenamed Tangle Lake, a reference to an Alaskan lake chain and the tangled state of the electrons themselves. Quantum computers are extremely different from standard (classical) computers, and can tackle problems modern classical machines can’t handle. The reason increasing the number of qubits in the system is important is because it also allows for a significant amount of additional work to be done and for more complex problems to be considered. And according to Intel, the gap between where we are today and where the company thinks we need to be for commercialization of quantum computing is enormous.
“In the quest to deliver a commercially viable quantum computing system, it’s anyone’s game,” said Mike Mayberry, corporate vice president and managing director of Intel Labs. “We expect it will be five to seven years before the industry gets to tackling engineering-scale problems, and it will likely require 1 million or more qubits to achieve commercial relevance.”
Intel is also investigating another type of qubit, spin qubits, to see if they can be implemented in silicon. Spin qubits are much smaller and can potentially be implemented in CMOS and Intel has invented a spin qubit fabrication flow on “300mm process technology.” This is oddly phrased, but seems to indicate Intel is building these chips on its 300mm wafers as opposed to some new process node.
Tech Rally Goes Global, Powering Major Stock Indexes to Fresh Records
This article by Riva Gold for FoxBusiness is an example of common theme in the media to highlight tech’s outperformance. Here is a section:
Just eight companies -- Facebook Inc., Apple, Amazon.com Inc., Netflix Inc., Alphabet Inc., Baidu Inc., Alibaba Group Holding and Tencent -- have increased by $1.4 trillion in market cap in 2017, a sum roughly equivalent to the combined annual GDP of Spain and Portugal.
Tech giants' powerful user networks, large cash piles and access to consumer data have led many investors to expect the big will only get bigger.
"You need critical mass to support continuing innovation," said Christopher Dyer, director of global equity at Eaton Vance. While there are exceptions, "China and the U.S. would be natural destinations for incremental dollar investment within tech," he said.
The Chart Seminar
Ubisoft's Microtransaction Revenue Just Beat Digital Sales for the First Time
This article from Extreme Tech may be of interest to subscribers. Here is a section:
Microtransactions have been hotly debated since they began debuting in mobile games almost ten years ago. While they’d been used sporadically in various games for years, the rise of mobile games and their extremely low-to-free pricing made them a functional necessity for developers working in Android or iOS. The AAA PC gaming industry quickly took notice of this, and began offering games with microtransaction options. There’s been a great deal of pushback from the community at various points (Dead Space 3 got hosed for it, as did Bethesda and its horse armor), but microtransactions are clearly here to say. Ubisoft just reported that it took in more money in microtransaction sales than it did in game sales for the first time ever.
Over the past few years, Ubisoft has seen a notable shift in its earnings for various titles, SeekingAlpha reports. Game sales were buoyed this year by South Park: The Fractured But Whole and Assassin’s Creed: Origins, but microtransactions shot up even further, growing 1.83x in 12 months compared to 1.57x for game sales. Ubisoft also got a boost from the Switch, but even with Nintendo’s new platform, microtransactions brought home the bacon.
How To Diversify Your Portfolio and Transfer Wealth Across Generations Without Financial Advisory
Thanks to Bernard Tan for this note which offers an interesting perspective on why truly global companies, that dominate their respective niches, with long track records, tend to outperform over time. Here is a section:
I’m going to use 3M to illustrate the following points.
1. Equities as an asset class is often perceived as riskier than others but there is one sector within equities that I will argue is safer than everything else including fixed income and real estate.
2. If you invest in a world class, global scale company that is from this sector, you are already fully diversified, hedged and all the macro economic issues and challenges taken care of.
3. This sector is resilient in the face of even a global financial crisis because frequently, these companies do not have high financial leverage. (Caveat: In recent years, it has become less true in the US and Europe)
What is 3M really? It is a deep physics, chemistry and material science company. Everything they do is about manipulating the atoms and molecules of nature to create functional materials that we can use in our daily lives.
With each passing year, 3M piles on more patents, a bigger library of chemicals and processes, more knowhow. All this knowledge is cumulative. The company is now 115 years old. All that accumulated intellectual property is practically unassailable. There will never be another company like 3M anywhere else in the world. Certain segments of their business can be separately attacked but there will never be another company that can challenge 3M on most fronts simultaneously.
This is the nature of science and intellectual property. The strength is cumulative over time. In contrast, for real estate companies and banks, big or small has no bearing on vulnerability to debt crisis storms, as we all learnt in 2008. The underlying strength is not cumulative over time, not the way it is for a science and intellectual property company.