David Fuller and Eoin Treacy's Comment of the Day
Category - Technology

    China to use cornerstones to help Alibaba, Xiaomi list in mainland: sources

    This article by Julie Zhu and Shu Zhang for Reuters may be of interest to subscribers. Here is a section:

    Beijing could also rip up its unwritten rules on pricing caps to make way for these blockbuster deals, said the sources who have direct knowledge of the matter, adding that Alibaba and Xiaomi were furthest along the CDR planning path.

    Selling CDRs equivalent to say about 1 percent of Alibaba’s market capitalization would mean raising $5 billion in Shanghai or Shenzhen, marking what would be China’s largest share sale on the open market since 2009, according to Thomson Reuters data.

    While such deals would allow mainland investors to benefit from any further share price rally, the securities regulator is worried they “will take up too much liquidity in the secondary market, which may lead to a drop in the main indices”, one of the sources told Reuters.

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    In India, Facebook's WhatsApp Plays Central Role in Elections

    This article by Vindu Goel for the New York Times may be of interest to subscribers. Here is a section:

    WhatsApp has largely escaped that notice because it is used more heavily outside the United States, with people in countries like India, Brazil and Indonesia sending a total of 60 billion messages a day. And unlike Facebook and Instagram, where much of the activity is publicly visible online, WhatsApp’s messages are generally hidden because it began as a person-to-person communication tool.

    Yet WhatsApp has several features that make it a potential tinderbox for misinformation and misuse. Users can remain anonymous, identified only by a phone number. Groups, which are capped at 256 members, are easy to set up by adding the phone numbers of contacts. People tend to belong to multiple groups, so they often get exposed to the same messages repeatedly. When messages are forwarded, there is no hint of where they originated. And everything is encrypted, making it impossible for law enforcement officials or even WhatsApp to view what’s being said without looking at the phone’s screen.

    Govindraj Ethiraj, the founder of Boom and IndiaSpend, two sites that fact-check Indian political and governmental claims, called WhatsApp “insidious” for its role in spreading false information.

    “You’re dealing with ghosts,” he said. Boom worked with Facebook during the Karnataka elections to flag fake news appearing on the social network.

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    Email of the day on valuations, Dow/Gold and anti-trust:

    Thanks for your comments which are very interesting, especially your focus on technology and its potential to alter radically the investment landscape.

    I have 2 points of my own to make. Using gold as the standard of value for stocks is interesting but I would think valuation metrics are more useful. As you know the Shiller PE, derived by comparing the S&P to the 10-year moving average of real corporate earnings- GAAP (not adjusted)- is at the highest level since the TMT bubble popped in 2000. The ratio of market value (the Wilshire 5000+) to GDP was at all-time highs in January. We have lived through a decade of extraordinary monetary policy (almost zero interest rates and QE), which is now being reversed. I think S&P market value to S&P sales may also be at all-time highs, but I may be wrong about that.

    So the starting point is pretty rich. The PE is at 25 times 4 quarter GAAP earnings, implying a 4% earnings yield. The Moody's Baa 20-year bond yield is around 4.6% so the equity premium has been negative the last 5-6 years for the first time since 1961 when the Bloomberg series started. On average equity holders over this period have earned a premium of 1.62% to reward them for investing in the riskier part of the capital structure, but now they must pay for the privilege.

    However, this does not address your major point about the enormous earning potential of companies involved in future technology. Now a standard criticism of your point is that competition between businesses will reduce the excess profits to "normal profits". What economists call "consumer surplus" consists of the extra value that is transferred from businesses to consumers for free due to the operation of the competitive market which eliminates excess profits.

    This flows from the ideal world of independent competitive enterprises. Anti-trust laws in the USA have been around since 1890 (Sherman Anti-Trust Act) and were designed to cause real world behaviour to better approximate the theoretical. 

    What I have found interesting is that Anti-Trust is no longer as big a deal as it was when I was a student. In fact, when Mark Zuckerberg testified he named 5 or 6 tech companies that are competitors of Facebook's. In this list he mentioned WhatsApp and another company (Telegram?) that he has already bought and perhaps one or two others. He also mentioned Skype, which Microsoft has bought. The big tech companies have the where with all to buy smaller rapidly growing companies and maintain tight oligopolies and thus earn outsize profits. I doubt whether many of these purchases would have passed muster from the Department of Justice's Anti-Trust division one or two generations ago.

    So the key may be to watch politics and see whether the populists at some point turn their attention to Anti-Trust.

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    Amgen's Just-Approved Migraine Drug Will Cost $6,900 a Year

    This article by Rebecca Spalding for Bloomberg may be of interest to subscribers. Here is a section:

    “The payers recognize that there is a clear and longstanding unmet need in migraine,” said Tony Hooper, executive vice president of global commercial operations at Amgen, on a call with analysts Friday. Hooper said the company is in talks with pharmacy-benefit managers and insurers and “by and large, they are supportive of our price.”

    Amgen and partner Novartis AG said that they will launch the drug within one week in the U.S. Hooper said that the company expects patients will take the drug if they have tried and failed on other migraine treatments.

    The drug’s lower-than-expected price was met positively by analysts who said they expect it will win broad reimbursement from insurers.

    “Overall, we think their pricing strategy fits well into the current reimbursement environment,” said Michael Yee, an analyst with Jefferies wrote in a note. Yee, who has a “buy”

    rating on Amgen shares, said the lower price “sends a good message.”

    But Baird analyst Brian Skorney said once rival treatments come to market, insurers and drug middlemen may pit drugs against each other to get the lowest possible price.

    “If anything it just makes the eventual lowest net price that much lower once there are several on the market,” wrote Skorney, who rates Amgen shares “neutral.”

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    Email of the day on the high cost of electric vehicle subsidies

    I just returned from a very eye-opening trip to Arizona, visiting Scottsdale (in the Sonoran desert) and the mountains of Northwestern Arizona. We flew into Phoenix and drove a lot. We saw zero Teslas. I'm told there are a few around Phoenix. But with the poor performance of electric vehicles in both cold and hot environments, it probably should not be shocking.

    Going to Arizona from California is like going from lala land, where the majority of people are drinking weird kool-aid, to the real world, where people work for a living, dislike taxes, and are really concerned about the massive influx of Californians who are oddly leaving their dream state.

    Electric car enthusiasts here in CA get the pleasure of paying $0.38/kwh for their electricity, FAR above the advertised $0.12/kwh, thanks to tiered billing and some of the highest real electric rates in the nation. When an electric car is parked in every driveway, neighborhood power distribution systems will be grossly overloaded (recharging typically starts after 6pm and finishes before 8am, compressing the "average" load on power networks). So, these systems will have to be replaced at taxpayer or ratepayer expense, with lower income people getting no benefits but definitely sharing substantially in the costs.

    All this means that one of the highest tax states in the Union will become far higher taxed, both in direct taxes and indirect taxes like state mandated burdens on electricity ratepayers. Meanwhile gas taxes remain some of the highest in the nation, and will only go higher, putting yet more burden on the lower income folks. 

    Meanwhile, the exodus of retirees naturally accelerates.

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    Tencent Gains $18 Billion as Record Profit Eases Margin Fear

    This article by Lulu Yilun Chen for Bloomberg may be of interest to subscribers. Here is a section:

    Revenue from Value Added Services, which includes online games and messaging, rose 34 percent to 46.9 billion yuan. The company has however been leery of barraging its users with ads - on Wednesday, it declared it had raised the maximum number of ads that customers see on WeChat Moments, a function similar to Facebook’s newsfeed, to just two a day from one previously.

    “The results were good even without the one-time gains, but the gains made it even better,” said Bhavtosh Vajpayee, a Hong Kong-based research analyst at Bernstein.

    But overall costs surged 51 percent. Tencent executives have signaled a willingness to sacrifice margins in favor of longer term growth in new businesses, though that would depend on growing and engaging a massive user base now primarily confined to China.

    Profit was also helped by one-time gains of almost 7.6 billion yuan from its investments in arenas like video and news.

    “The reason why analysts had been modeling down was because they did mention about subsidies on payments and also continued investments in content costs,” Citigroup Global Markets’s Head of Pan-Asia Internet Research Alicia Yap told Bloomberg Television. “All these years of investments in digital content, for example music and video, actually started to show some leverage” this quarter.

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    "Random Gleanings on a Trip to Traverse City"

    Thanks to a subscriber for this note from Jeffrey Saut at Raymond James. Here is a section:

    The rude crude rally has not gone unnoticed by the gasoline market where there is the potential for gasoline prices to spike this summer with prices at a four-year high amid record demand (prices).  So far such price increases have not bled into the inflation figures, but the truckers are seeing the pinch.  To wit (as reprised by David Lutz): Trucking companies increased leverage is applying added pressure to cargo costs as accelerating economic growth bolsters transportation demand and exacerbates driver scarcity.  With first-quarter trucking spot rates up 27 percent from a year earlier, according to Bloomberg Intelligence, freight expenses are crimping profits at companies.

    To us, the creeping inflation, and marginally higher interest rates, suggests the economy is going to strengthen in the back half of 2018.  Certainly that is what the stock market is telegraphing as earnings continue to ramp-up.  As we write, the D-J Industrial Average has made it eight consecutive winning sessions, leaving the equity market very overbought in the short term.  Also worth consideration is that the Industrials rarely make it more than nine straight sessions in any one direction.  Consequently, there could be a pause in the upward onslaught or even an attempt to pull stocks back.  However, we think the S&P 500 (SPX/2730.13) should be well supported at the 2670-2685 level and that should contain any decline barring unexpected news.  Also waxing bullishly is the TD Ameritrade Investors Movement Index, which is back down to its 2015-2016 levels.  That means investors are not very optimistic currently and, therefore, not buying stocks.  Further, there was over $8 billion of money flows into prime money market funds last week.  These are not the kind of metrics one sees at stock market tops.  However, it’s May option expiration week, which has been bearish for the last nine years, and with stocks stretched for the aforementioned reason, look for some kind of pause/pullback that does not get very far.

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    RBC Electric Vehicle Forecast Through 2050 & Primer

    Thanks to a subscriber for this report from RBC which may be of interest. Here is a section:

    How the World's Biggest Companies Are Fine-Tuning the Robot Revolution

    This article William Wilkes for the Wall Street Journal may be of interest to subscribers. Here is a section:

    The big question surrounding automation has long been whether robots would compete with workers or help them. Initially, workers feared robots would destroy jobs across the economy. Scholarly research and real-life experience has eased that concern, although some types of workers and industries are ending up on the losing side.

    Today, the question is more precise: In which industries does automation help both employer and employee?

    The companies that may have cracked the code are those that can assign repetitive, precise tasks to robots, freeing human workers to undertake creative, problem-solving duties that machines aren’t very good at. That’s particularly relevant for manufacturing, the food sector and service sectors such as billing, where timetable spreadsheets can be automated, freeing up workers to do higher-value tasks.

    With demand for Bosch-built steering controls high, the company has used automation to increase its output, leading it to hire more people to perform the type of checks Mr. Rösch conducts.

    “We looked for 20,000 new hires last year,” a mix of new positions and replacement staff, said Stefan Assmann, one of the company’s chief engineers, to join Bosch’s total 400,000 employees. Bosch factories world-wide now make use of 140 robotic arms, up from zero in 2011. “We can’t see robots having a negative impact on our workforce,” Mr. Assmann said.

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