Category Archives: Asset Classes

A Disturbance In The Force

Overnight the news came out that Apple had cut its parts orders for the iPhone 8 by 50%. While it has been obvious for a while that this iteration of the iPhone was being greeted with a yawn, I think nobody realized that it was a disaster in the making. So now the Apple boosters are saying that the iPhone X, rumored to be priced at $1,000 or more, will bring redemption. Really.

Anyway, we finally see a little selling as one of the major generals of this market has been wounded.

No Comment Needed

Self-Driving Cars

Probably the most dramatic innovation in transportation since 1885 (the first car, Daimler-Benz Patent Motor Car, Model 1) is the self-driving car.

But what does self-driving really mean? These are the SAE levels:

Level 0: Automated system issues warnings but has no vehicle control.

Level 1 (”hands on”): Driver and automated system shares control over the vehicle. An example would be Adaptive Cruise Control (ACC) where the driver controls steering and the automated system controls speed. Using Parking Assistance, steering is automated while speed is manual. The driver must be ready to retake full control at any time. Lane Keeping Assistance (LKA) Type II is a further example of level 1 self driving.

Level 2 (”hands off”): The automated system takes full control of the vehicle (accelerating, braking, and steering). The driver must monitor the driving and be prepared to immediately intervene at any time if the automated system fails to respond properly. The shorthand ”hands off” is not meant to be taken literally. In fact, contact between hand and wheel is often mandatory during SAE 2 driving, to confirm that the driver is ready to intervene.

Level 3 (”eyes off”): The driver can safely turn their attention away from the driving tasks, e.g. the driver can text or watch a movie. The vehicle will handle situations that call for an immediate response, like emergency braking. The driver must still be prepared to intervene within some limited time, specified by the manufacturer, when called upon by the vehicle to do so.

Level 4 (”mind off”): As level 3, but no driver attention is ever required for safety, i.e. the driver may safely go to sleep or leave the driver’s seat. Self driving is supported only in limited areas (geofenced) or under special circumstances, like traffic jams. Outside of these areas or circumstances, the vehicle must be able to safely abort the trip, i.e. park the car, if the driver does not retake control.

Level 5 (”wheel optional”): No human intervention is required. An example would be a robot taxi

Levels 0 and 1 are widely available today. Tesla is at level 2. The new Audi A8 is available with level 3 (up to 37 mph.). It appears that level 3 will be widely available in 2018-2019 when level 4 will be on a few models. By 2020, level 5 will be available.

Here is the 2017 CES presentation from Toyota that covers this issue. Their concept is 9 minutes in, discussion of safety and levels 19 minutes or so. It even explains why the Audi is limited to 37 mph.

This is a revolution, folks, that will change all our lives. Pay attention.

Steppin’ On The VIX

I’ve been trying to come up with new lyrics for “Puttin’ on the Ritz,” starting with a new chorus – “Steppin’ on the VIX.” So far, abject fail. I guess I’m not a poet or songwriter.

But this market is all about selling volatility. The trade has worked well for a long time. But it has built up a huge short position, figures in excess of $40 billion are being bandied about. I hear that this is mostly retail interest at this point. The pros are well aware that there are two sides to every trade, and somebody is on the long side, big time. Don’t forget the crazy fat kid.

Internet Advertising

I’m seeing an increasing number of companies (e.g. Proctor and Gamble, Restoration Hardware, Uber… ) complaining publicly that they are receiving little or no value for their internet advertising spending. It is trite to say that half of every advertising dollar is wasted, you just don’t know which half. But in these cases, companies claim to be reducing their internet ad spending without significant negative impacts. Reasons given include poor placement and fraud, although these seem very hard to quantify.

Given that a big chunk of the market cap out there comes from highly valued internet advertising companies (Google, Facebook, etc.) I think one should “watch this space.” Closely. Very closely.

Nothing Unusual Here

Zero hedge of course. Just for the record.

DACA

The Trump administration announced the end of the DACA program, that allows undocumented immigrants who arrived as children to obtain work permits.

The administration’s point is that the program, established by the Obama administration, was a direct violation of black-letter law and exceeded the President’s authority. Like many other immigrant-friendly policies, of course. True enough, but one can reasonably hope that Congress will act to change the law and the administration has provided time to allow that to happen, if it will.

The good reason for acting is that these people are the innocent victims of their parents’ bad acts and should not be penalized for them. Many have little or no connection with their country of birth and may not even speak the language. The bad reason for acting that is being bandied about is the resultant shortage of workers for low-wage jobs. The shortage has nothing to do with immigration and everything to do with the “welfare trap,” which makes it foolish for many Americans to seek employment because the withdrawal of benefits will more than offset any wage income they might receive.

To fix the shortage, the government needs to remove the trap.

That Which Is Not Seen

Alhambra Partners

After tax, corporate profits are still slightly less in Q2 2017 than in Q4 2014, and barely more (+3.4%) than in Q1 2012 five years ago.

SocGen’s Albert Edwards:

Our Ice Age thesis has always called for US and European 10 year bond yields to converge with Japan. We still expect that to happen, with the downward crash in US yields likely to be particularly shocking. There is mounting evidence that underlying US CPI inflation has already slid into outright deflation in exactly the same way that Japan did seven years after its credit bubble burst. Hence we repeat our call for US 10y bond yields to ultimately converge with Japan and Germany at around minus 1%.

In short, stocks are grossly overvalued and Treasury bonds are similarly undervalued. Not news, of course, just some confirmation bias.

Sticker Shock

A buying panic in the biotechs today as the FDA approved a radical new therapy for certain blood cancers.

This therapy, developed by Novartis, costs a cool $475,000 for a course of treatment.

Nothing To See Here

The dip-buyers and volatility-sellers are quickly reversing the overnight selloff, due to the Korean missile crisis.

These strategies work until they don’t. The absolute lack of fear is totally consistent with market tops.

The good news is that Treasuries are holding on to most of their overnight gains. When the bond and stock markets disagree, the bond market is usually right.