Curated Insights 2017.10.01

Alibaba takes control of delivery business at center of U.S. probe

China’s largest web marketplace agreed to increase its stake in Cainiao Smart Logistics Network Ltd. to 51 percent. Under the deal, Alibaba plans to consolidate Cainiao’s financials into its own books, eroding Alibaba’s bottom line, and will get an additional seat on Cainiao’s board, taking its representation to four out of seven seats.

It oversees a coterie of more than a dozen shipping partners, orchestrating deliveries carried out by about 2 million people across more than 600 cities. Cainiao’s operation had enabled Alibaba to maintain what it called an asset-light model that eschewed expensive warehouse construction.

“They’re realizing that it’s much more capital-intensive than they expected to build this out. Right now they are essentially obligating themselves to report profit and loss on the income statement every quarter, which they probably should have been doing.”


A small-screen iPod, an Internet Communicator and a Phone

This comparison is apt: the Watch is effectively stealing usage from the iPhone. At first it took alerts, timekeeping, and basic messaging away. Now it’s taking basic phone calls and music and maybe maps.

It’s fitting therefore to remember how the iPhone was launched; as a tentpole troika: A wide-screen iPod, an Internet Communicator and a Phone. Today the new Watch is a small-screen iPod, an Internet Communicator and a Phone.

So not only is the Series 3 Watch more powerful than the original iPhone but it is also poetically capable of the same tentpole jobs. But it’s not just a miniature iPhone. It has a new, completely orthogonal attack on non-consumption and market creation: fitness and health. This is a key point. The iPhone was born a phone but grew up to be something completely unprecedented, unforeseen by its creators and, frankly, undescribable in the language of 2007.


Forget the Swiss, it’s Fossil that Apple is threatening

In the watch world, the Fossil Group is a giant. It has 17 brands: six of its own (Fossil, Skagen, etc.) and 11 licensed brands (Michael Kors, Emporio Armani, Tory Burch, etc.) In 2014, it was on a roll, achieving a fifth consecutive year of record revenues, at $3.51 billion. Watches accounted for 78% of that.

Then along came Apple. Suddenly, Fossil was competing with a monster 67 times bigger than it was (measured by revenues). “Prior to that, we were clearly positioned as the competitively advantaged leader in a growing category,” Fossil CEO Kosta Kartsotis told financial analysts in February. “However, with the introduction of technology into wrist devices, traditional watches came under pressure and we were disadvantaged. We didn’t have the technology capabilities to compete with smartwatches, leading to a decline in our market.”

“I haven’t met with anybody [in Switzerland] yet who sees this [downturn] as anything other than a slump,” he told me in March. “They don’t see the threat from the smartwatch.” Apple will continue to perfect the smartwatch, he says. “By version 3 or 4, everyone will be thinking this is a good thing to have. Forty to 80 million people will want this.”


Siemens to merge rail operations with French rival Alstom

Siemens will transfer its business making train and transit cars and signaling equipment to Alstom in exchange for a 50 percent stake in the enlarged company.

The combination will give the German company control of an icon of French industry that developed the high-speed TGV trains that zip across the countryside at upwards of 300 kilometers an hour (186 miles per hour)…Capping years of speculation in the industry about the need for consolidation, the tie up could mirror the emergence of European planemaker Airbus in the 1970s that went on to become the biggest competitor to Boeing Co.

Now, the companies’ tie up comes after Chinese dominance of the train market has solidified. CRRC controls about half of the rail car and locomotive market, while Siemens and Bombardier each have about 12 percent and Alstom around 11 percent, according to Desjardins Capital Markets. The Chinese company was formed in 2015 in a merger of the country’s two main regional train manufacturers and it has won rail orders in U.S. cities such as Boston, Philadelphia and Los Angeles.

China gives automakers more time in world’s biggest EV plan

Under the so-called cap-and-trade policy, automakers must obtain a new-energy vehicle score — which is linked to the production of various types of zero- and low-emission vehicles — of at least 10 percent starting in 2019, rising to 12 percent in 2020, the Ministry of Industry and Information Technology said on its website. The rule applies to carmakers that manufacture or import more than 30,000 traditional vehicles annually, and those who fail to comply must buy credits or face fines.

The targets look achievable for the industry as a whole, McKerracher said. Considering the credit structure, 12 percent in 2020 would translate to about 4 percent to 5 percent of actual vehicle sales.


Why India will tell us when self-driving cars will hit the US

When will self-driving cars arrive? Depends on who you ask. The VCs believe what they’re told by their portfolio companies. Automakers will say anything to inflate their stock price relative to Tesla. Self-driving evangelists and “keynote speakers” on LinkedIn? Broken clocks not yet right even once. The media? There are still less than ten people writing intelligently on a market expected to hit $7 trillion.

Population density is so high that no current Automatic Emergency Braking system could possibly work in traffic, because no car equipped with it would ever move. What about Blind Spot Monitoring systems? They’d be lighting up and chiming so much, you’d have to disable them.

That Indian roads are more dangerous than America’s is obvious, and beside the point. No government ever eases traffic safety laws. Indian traffic fatalities in 2013 approached 240,000, in a country of 1.3 billion. That’s 16.6 deaths per 100,000 inhabitants per year. For those numbers to go down, people have to have choices that lead to them to safety. In a country where the majority have never owned a car, where two wheelers dominate and road conditions are terrible, getting people into any car will improve overall safety.


Learning effects, network effects, and runaway leaders

Learning effects have the potential to generate enormous economic value, as network effects do, if companies are able to close this loop and make it self-reinforcing: that is, if their products learn more because they have become more valuable.

In order for learning effects to produce runaway leaders, a company must secure a definitive advantage over its competitors in one of the component areas of learning effects – data, intelligence, product innovation or user/customer growth – and leverage this into advantages in the others, such that the company can acquire data, learn, innovate and grow not only more rapidly than its competitors do, but more rapidly than they can.

Certain products – particularly those built on highly dynamic datasets – may have perpetual learning curves such that in a rapidly changing world, they can always be meaningfully improved. It’s around these kinds of products that the most valuable runaway leaders will likely develop. Potential examples include search, semantic engines, adaptive autonomous systems and applications requiring a comprehensive real-time understanding of the world.

How Europe’s changes to copyright law will affect America

The goal of these copyright changes is to adopt new protections for publishers and artists. But if they are put in place, the burdens they would place on internet platforms would curtail the kind of quick uploading, sharing, commenting and responding that makes the Web so useful. Additionally, we have no reason to believe that these new plans would actually benefit the journalists and artists in whose name the measures are being proposed.

Yet a lot more is at stake than the fate of Google or Facebook. Those companies at least can afford the cost of complying with (or avoiding) Europe’s copyright proposals. Smaller businesses can’t. For example, medium-sized internet platforms pay between $10,000 and $25,000 a month in licensing fees for a common tool that conducts a copyright scan of uploaded audio files, an impost that could wipe out a new startup.


India: A $6T GDP By 2027?

The government and the Central Bank are on a mission to rapidly formalize and financialize the Indian economy. India has introduced a universal biometric identification system (Aadhaar), initiated measures to boost financial inclusion, moved to a new fully online value-added goods and services tax system and implemented real-time payment systems. Coupled with rising smartphone penetration, likely doubling from 300 million to nearly 700 million by 2020, these changes are driving India’s digitization. We expect a step change in India’s per capita income, banking system and stock market performance over the coming years. The channels of change include more financial penetration, greater tax compliance and increased credit to micro enterprises and consumers.

The result could be a multi-trillion dollar investment opportunity. Aside from the near-term teething issues involved in execution of such big changes and other cyclical problems faced by the economy, there is scope for visible shifts in economic activity starting in 2018.


We’re going to need more lithium

By 2030, Tianqi Lithium, SQM, Albemarle, and FMC, the companies that dominate the business, will have to supply enough lithium to feed the equivalent of 35 plants the size of the Tesla Gigafactory now being built in Nevada, according to BNEF. The total investment in new mines, including some for other elements used in lithium ion batteries, will likely range from $350 billion to $750 billion, according to analysts at researcher Sanford C. Bernstein & Co.


 

Our hankering for meat is a boon for global antibiotic producers

Food animals will consume 200,235 tons of antimicrobial medicines by 2030, 53 percent more than they were getting in 2013, according to a study published Thursday in the journal Science. China, already the world’s largest consumer of veterinary antimicrobials, is forecast to lead the charge, with a 59 percent jump.

Limiting daily meat intake worldwide to the equivalent of one standard fast-food burger per person could reduce global consumption of antimicrobials in food animals by 66 percent, the researchers said.

37 quotes from big corporate execs who laughed off disruption when it hit

“Amazon.com is a very interesting retail concept, but wait till you see what Wal-Mart is gearing up to do,” he said [IBM Chairman, Louis V. Gerstner Jr.]. Mr. Gerstner noted that last year IBM’s Internet sales were five times greater than Amazon’s. Mr. Gerstner boasted that IBM “is already generating more revenue, and certainly more profit, than all of the top Internet companies combined.”

The Apple watch is an interesting toy, but not a revolution,” said Swatch executive Nick Hayek Jr., speaking to a Swiss newspaper. “I personally don’t want my blood pressure and blood sugar values stored in the cloud, or on servers in Silicon Valley … I cannot accept the responsibility of whether my device warns a customer in time before a heart attack.”

“Apple is like a mutant virus, escaping from the traditional structure of the PC industry, but the industry will still eventually build up immunity, thus further blocking this trend, and we believe the size of the non-Apple camp will exceed Apple’s, because this is how the industry normally evolves.”

“Television won’t be able to hold onto any market it captures after the first six months. People will soon get tired of staring at a plywood box every night.”


So few market winners, so much dead weight

Only 4 percent of all publicly traded stocks account for all of the net wealth earned by investors in the stock market since 1926, he has found. A mere 30 stocks account for 30 percent of the net wealth generated by stocks in that long period, and 50 stocks account for 40 percent of the net wealth.

Once you actually find these rare companies, you have to hold on to them. This too is much more challenging than most realize. The stellar stocks tend to have regular, gut-wrenching price slumps; the big winners above have all suffered retreats of 50, 60 even 90 percent on the way to becoming the biggest winners. Most investors lack the fortitude and discipline to manage the pain of these severe price fluctuations.

Once you get through those two challenges, you have to decide when to jettison these winners since nothing continues forever. As Sommer points out, General Motors Co. was a star from 1926 on — that is, until it went bankrupt in June 2009 and basically wiped out equity investors. AT&T Inc., meanwhile, was broken into many smaller parts, some of which have done very well (Verizon Communications Inc.), while others not so much (Lucent).

As we have observed repeatedly, finding the very best companies to own is very difficult to do.


Some market myths hurt investors

Margin debt at all-time highs mean euphoria in the markets. Margin debt reflects the amount of borrowed money used to purchase securities in the markets. It sounds scary when people point to margin debt at an all-time high because that means investors are borrowing more money than ever to buy stocks. But this indicator doesn’t really tell us anything. As markets rise, margin debt will rise. As markets fall, margin debt will fall. All historical margin debt peaks tell you is that margin debt fell when stocks fell. The following chart is more useful, as it shows margin debt as a percentage of the overall market cap of the stock market. Margin debt is a backward-looking indicator that tells you nothing else beyond how the stock market has performed in the past.

Something’s gotta give between stocks and bonds. Investors often assume stocks or bonds are telling them something. So when both rise at the same time, the assumption is that either the equity or fixed-income market must be wrong. The problem with this line of thinking is that stocks and bonds both go up over time, and most of the time they go up at the same time.

Bonds always lose money when interest rates rise. Out of those 36 rising rate years, 27 had positive returns on five-year Treasuries. So three-quarters of the time when rates rose on a calendar-year basis, bonds still earned positive returns. Rising rates will lead to lower bond prices, but you have to think in terms of total returns to understand the relationship between bond performance and interest rates.

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