Walt Disney Makes Two Big Additions to Its Board

Media company Walt Disney on Thursday named Oracle’s chief executive, Safra Catz, and her counterpart at Illumina, Francis A. deSouza, to its board.

Disney said their election would be effective Feb. 1 but it was yet to decide on which committees they would serve on.

The company currently has 12 members on its board, including Facebook’s Sheryl Sandberg and Twitter’s Jack Dorsey.

The election of the two new members comes at a time when Disney is said to be in the lead to acquire much of Twenty-First Century Fox’s media empire.

Disney CEO and chairman Bob Iger contemplates on extending his tenure past 2019 to facilitate the integration of Fox’s assets if a deal is completed, the Wall Street Journal reported on Wednesday.

3 Business Ideas to Consider for Future Growth

Every small business starts with the labor of individual people, but as a business grows it becomes too much for the founders and more labor is needed. This is the classic scenario for hiring more workers, but that’s not the only way a business can be made more efficient. Let’s examine a few other labor multipliers that could be the key to help you reach the next level.

1. Time Management Software.

These days it’s hard to do business without the use of a computer. Programs like Microsoft Office or another office suite are essential for tracking spending and sending documents to clients. But adding in some time management software to the mix just might be the thing to discover where all the hours in the day go.

This can be a simple as learning how to leverage a business calendar in your email client to dedicated time tracking software. Just because you’re not punching a clock anymore as an employee doesn’t mean you can’t learn a thing or two about your work habits by tracking your time.

Proper time tracking often provides powerful knock-off benefits. The obvious benefit I experienced in my own business was that I could tell where I was wasting time, but I could also tell which clients were taking a disproportionate amount of my time. It helped me make educated decisions about which clients to nurture and which ones to fire. Done correctly, this increased my profitability by 45 percent and made the workday more enjoyable; and profitable.

2. Vehicles

The company car may sound like just a perk for executives, but using vehicles for business goes well beyond that. From making deliveries, traveling to meet clients, and even purchasing utility vehicles, some small businesses might need to make the decision to purchase or lease a vehicle.

Many people use their own vehicles to start, as thousands of ride-share workers have done. But the extra wear-and-tear on a personal vehicle might not justify the costs. Tax deductions for using personal vehicles for business use don’t kick in unless you can prove that you use your vehicle for business over 50 percent of the time.

That said, having a vehicle on hand for certain occasions can impress customers. A car accident lawyer keeps a wrecker as part of their vehicle fleet because he found that his clients love that extra touch of not having to worry about a tow. A wedding planner might invest in a limousine and offer chauffeur services to newlyweds to the venue.

I personally lease two different vehicles, for the tax write-off, but also to impress potential clients. I have tested out whether arriving at a meeting in a BMW versus a Toyota helps me win deals. It works more often than not. Possibly because it helps me be more confident, but also possibly because the appearance of success gives potential clients that same feeling.

With careful planning, you might be able to turn a vehicle investment into a positive revenue generator for your company, whether through tax deductions and saving cash on your personal vehicle or from using a vehicle to create a new service for your business.

3. Outsourced Employees

Many small business owners are moving away from employees and looking for freelancers to fill in labor gaps. A small business might not have the capital to hire a full-time or part-time employee along with all the overhead costs of having one. Hiring freelance contractors temporarily might be the necessary ingredient to push revenue up to the level needed to justify a full employee.

Freelancers are usually hired per-project or for a certain number of hours a week to fulfill a particular task. Business owners must be conversant in contracts and the differences between employees and freelancers to gain the most benefit from them and to keep away from legal trouble. The safest way for a small business to hire a freelancer is to go through job boards like UpWork and Freelancer, which have contracts, time tracking, and arbitration systems built in that can protect you from many problems.

One important note before hiring a freelancer is that they have much more flexibility than an employee. Freelancers can work for multiple clients and operate on their own schedules. Professional freelancers will let you know how long a project is estimated to take up front, but it’s a lot like hiring your mechanic. Don’t expect that they will be at your beck and call like an employee. In fact, treating them that way could land you a lot of trouble with the IRS.

When the job starts getting to be too much for one person and it’s time to remove inefficiencies and expand, these three tips just might be the thing you need to move to the next level. Try them out over the next year and by this time again you just might love where your business is.

American Airlines Just Decided To Offer Something on its International Flights That Might Upset You

Absurdly Driven looks at the world of business with a skeptical eye and a firmly rooted tongue in cheek.

Here’s the trend.

As U.S. airlines attempt to lessen their offerings to domestic passengers, they have an eye on the world.

Why, United Airlines just decided to use its more cramped Boeing 777-200 planes on some international flights.

Now along comes American Airlines. 

It’s expanding its Basic Economy offering — the one that’s supposedly cheaper, but doesn’t let you bring a full-size carry-on, book a seat in advance, change the flight or go to the restroom (that last one is a joke, so far) — to international flights.

As the Dallas Morning News reports, American is beginning to offer what I prefer to call its Sub-Cattle Class to destinations in Mexico and the Caribbean.

Just in time for the holidays.

Yes, you too can spend an hour at the airport wondering which middle seat will be yours. 

You can also hope that your carry-on won’t offend a gate agent who’s having a bad day and incur a $50 charge for being a few millimeters too large.

The deeper truth, sadly, is that Sub-Cattle Class is a mere pricing ruse.

Airlines want you to feel so bad about the mere idea of tolerating it that you’re prepared to spend more to avoid it.

United Airlines’ CFO Andrew Levy recently admitted this was the case.

This strategy appears to be also working for American in the U.S. So why not expand it across the world?

If you can get passengers used to it on the shorter international flights, you can start to slip it onto the longer ones too. 

It used to be that there was a limit that passengers would bear. 

If a flight is over a certain length, surely airlines must offer a little more space, food and entertainment in order to stop those passengers from going doolally.

Now, however, airlines have realized that they can take away things that passengers used to think were basic and charge them more for those very things. 

Inventive, it isn’t. Hard-hearted, it most certainly is. 

The lack of meaningful competition — more than 80 percent of U.S. airplane seats are in the hands of four airline groups — means airlines are in a strong position to dictate. 

I cannot confirm that bench seating is their next big idea.

Maduro's cryptocurrency to fare no better than Venezuela itself: analysts

CARACAS (Reuters) – Venezuela’s plan to create an oil-backed cryptocurrency faces the same credibility problems that dog the ruling Socialist Party in financial markets and is unlikely to fare any better than the struggling OPEC member itself, investors and technical experts say.

Venezuela’s President Nicolas Maduro speaks during an event with supporters in Caracas, Venezuela December 1, 2017. Miraflores Palace/Handout via REUTERS

President Nicolas Maduro on Sunday floated a plan to create the “petro” that would be backed by the world’s largest crude reserves, amid a crippling economic crisis worsened by U.S. sanctions that limit Venezuela’s capacity to borrow money.

Cryptocurrencies rely on confidence in clear rules and equal treatment of all involved, three experts said, adding that Venezuela was widely seen as flouting basic property rights and mismanaging its existing bolivar currency.

Without such confidence, the “petro” would neither help Venezuela raise funds nor help it avoid sanctions levied by U.S. President Donald Trump’s administration.

“If any government is willing to set up a fair set of rules for a cryptocurrency, it would be a great thing,” said Sean Walsh of Redwood City Ventures, a bitcoin and blockchain-focused investment firm.

“But if an administration has a history of unfair treatment of the population, then tacking on a buzzword like ‘cryptocurrency’ isn’t going to change that behavior.”

The Information Ministry did not respond to requests for comment. In further comments on Tuesday, Maduro said Venezuela’s new virtual currency would be backed by oil from the heavy-crude Orinoco Belt, plus gold and diamonds.

Bitcoin, the world’s most popular cryptocurrency, has soared in recent weeks to nearly $12,000 BTC=BTSP in what detractors call evidence of a bubble but supporters insist is the start of a new monetary system not dependent on central banks.

Venezuela’s inflation is expected to top 1,000 percent this year, driven by unchecked expansion of the money supply and a currency control system that critics say provides favorable treatment to well-connected officials and business people at the expense of everyday citizens.

‘DO WE TRUST VENEZUELA?’

Under the 15-year-old foreign exchange regime, state agencies receive dollars to import food and medicine at a rate of 10 bolivars, while private citizens now pay more than 108,000 per greenback on the black market. The black market rate has depreciated more than 99 percent under Maduro.

Basic food and medical items are increasingly out of reach for most citizens, fueling malnutrition and preventable diseases. Maduro says the country is the victim of an “economic war” led by political adversaries with the support of Washington.

Maduro has not outlined the rules that would govern the proposed currency, including what rights its holders would have over Venezuela’s oil reserves.

“The fact that the bolivar’s value has plummeted shows that people have very little faith in Venezuela,” said Yazan Barghuthi of Jibrel Network, a blockchain development firm.

“A tokenized asset will still have the same problem: Do we trust the institution that is backing this to fulfill the promises that this token represents?”

U.S. sanctions, in response to accusations of human rights violations and the undermining of democracy, have effectively blocked the country from issuing new debt and have made global banks increasingly wary of working with Venezuela.

But Venezuela is unlikely to find foreign companies willing to accept payment for food or medicine in newly minted petros and has little chance of convincing creditors to accept them in lieu of dollars when making payments on its distressed bonds, the experts said.

“Given that there is no stable judicial system in Venezuela, no one will trust anything that the government claims is backed by assets of any kind,” wrote Marshall Swatt, founder of bitcoin exchange Coinsetter, in an email.

“Even if the technology were proper and prevented government meddling (impossible to imagine), it is dead on arrival.”

Reporting by Brian Ellsworth; Additional reporting by Deisy Buitrago; Editing by Lisa Shumaker and Peter Cooney

Our Standards:The Thomson Reuters Trust Principles.

Google pulls YouTube from Amazon devices, escalating spat

(Reuters) – A rare public spat in the technology industry escalated on Tuesday when Google said it would block its video streaming application YouTube from two Amazon.com Inc devices and criticized the online retailer for not selling Google hardware.

FILE PHOTO: The new Amazon Fire TV is displayed during a media event introducing new Amazon products in San Francisco, California, U.S. on September 16, 2015. REUTERS/Beck Diefenbach/File Photo

The feud is the latest in Silicon Valley to put customers in the crossfire of major competitors. Amazon and Google, which is owned by Alphabet Inc, square off in many areas, from cloud computing and online search, to selling voice-controlled gadgets like the Google Home and Amazon Echo Show.

The stakes are high: many in the technology industry expect that interacting with computers by voice will become widespread, and it is unclear if Amazon, Google or another company will dominate the space. Amazon’s suite of voice-controlled devices has outsold Google’s so far, according to a study by research firm eMarketer from earlier this year.

In a statement, Google said, ”Amazon doesn’t carry Google products like Chromecast and Google Home, doesn’t make (its) Prime Video available for Google Cast users, and last month stopped selling some of (our sister company) Nest’s latest products.

“Given this lack of reciprocity, we are no longer supporting YouTube on Echo Show and Fire TV,” Google said. “We hope we can reach an agreement to resolve these issues soon.”

FILE PHOTO: The new Amazon Fire HD 10 tablet and keyboard is displayed during a media event introducing new Amazon products in San Francisco, California, U.S. on September 16, 2015. REUTERS/Beck Diefenbach/File Photo

Amazon said in a statement, “Google is setting a disappointing precedent by selectively blocking customer access to an open website.”

It said it hoped to resolve the issue with Google as soon as possible but customers could access YouTube through the internet – not an app – on the devices in the meantime.

Slideshow (2 Images)

The break has been a long time coming. Amazon kicked the Chromecast, Google’s television player, off its retail website in 2015, along with Apple Inc’s TV player. Amazon had explained the move by saying it wanted to avoid confusing customers who might expect its Prime Video service to be available on devices sold by Amazon.

Amazon and Apple mended ties earlier this year when it was announced Prime Video would come to Apple TV. Not so with Google.

In September, Google cut off YouTube from the Amazon Echo Show, which had displayed videos on its touchscreen without video recommendations, channel subscriptions and other features. Amazon later reintroduced YouTube to the device, but the voice commands it added violated the use terms and on Tuesday Google again removed the service.

The Fire TV loses access to its YouTube app on Jan. 1, Google said. Amazon has sold that device for longer than the Echo Show, meaning more customers may now be affected.

Reporting By Jeffrey Dastin in San Francisco; Editing by Andrew Hay

Our Standards:The Thomson Reuters Trust Principles.

Even Robots Are Joining the Bitcoin Craze

Quant blended with cryptocurrency sounds like a cocktail poured in hell. But behind closed doors, a few intrepid souls in the investing world are starting to drink it.

Part academic exercise, part arranged marriage of Wall Street fads, a handful of theorists and traders are looking at what investment factors like momentum and value can tell you about — yep — the price of bitcoin. Factors, the wiring behind smart beta exchange-traded funds, already revolutionized equities, proving that groups of stocks with traits like cheapness and low volatility return more than the market as a whole.

That discovery was a gold mine, launching $700 billion in smart beta ETFs, so it’s no surprise people want to turn it loose elsewhere. A more abstract motive hearkens to the foundation of quantitative investing. It’s the idea that no matter where you look — stocks, bonds, ICO tokens — mental mistakes by investors cause the same trading opportunities to arise in every market.

In the theory camp is Stefan Hubrich, the director of asset allocation research at T. Rowe Price Group Inc., who set out to publish the first academic paper linking factor anomalies to blockchain assets. After building models and analyzing data, Hubrich says he can show that factor investing beats a simple buy-and-hold strategy in digital tokens.

“Our results should not be taken as an endorsement of cryptocurrencies as an asset class,” Hubrich wrote in his Oct. 28 research. “Instead, we view our findings as an intriguing confirmation of the efficacy of the underlying factors themselves.”

Too little bitcoin data

One reason bitcoin and its peers are a tempting laboratory for academic quants is how different they are from traditional assets. Stocks may bounce around, but they’ve got nothing on cryptocurrencies, where jarring price swings, flash crashes and cataclysmic exchange malfunctions happen regularly. If concepts like value and momentum stand in that jungle, researchers reasoned, it would help confirm that behavioral biases operate everywhere.

It’s been something of a cause for Cliff Asness, the founder of AQR Capital Management, to prove that factors aren’t just for the stock market. In 2013, long before the bitcoin craze, he published a paper that found tilts like value, momentum and carry work across asset classes, geographies and time periods. Asness said in November that while still early, it’s not unreasonable to apply the same logic to cryptocurrencies.

While it may not be unreasonable, at present too little data exists to prove tradable risk factors exist in bitcoin, says Campbell Harvey, an adviser at Research Affiliates and Man Group and professor at Duke University. It’s a little too convenient, Harvey says, to declare the momentum factor may be at work in bitcoin, something everyone knows has done nothing but rise in 2017.

‘Operational hurdles’ in predicting bitcoin

“I would not really call any of the factors applied to cryptos, factors,” Harvey said. “That said, given these are relatively young markets, it makes sense that there could be some inefficiency in the pricing.”

Doug Greenig has more concrete goals. The University of California-educated math doctorate and former chief risk officer at Man AHL, started his London-based CTA, a type of quantitative fund that bets on price patterns, called Florin Court Capital in January 2015. Then, in April, he converted his $522 million firm solely to exotic assets on April 17.

Why? Because unlike trendless, crowded and calm developed markets, Greenig saw value in chasing assets like European electricity and, yes, bitcoin.

“It just makes sense to be involved even though the operational hurdles for an institutional-grade fund are considerable,” Greenig said. “My perspective, in short, is that cryptocurrencies are an interesting asset class, with low correlations to the traditional asset classes and strong historical trending behavior.”

Bitcoin momentum strategy

The change seems to be working. From April through the end of October, Florin Court has returned 15.5 percent, compared with 0.2 percent for the Societe Generale AG CTA index.

Greenig says he’s one of the first CTAs to incorporate bitcoin. The strategy is momentum, adding bullish bets as the cryptocurrency picks up steam. His preferred method of obtaining exposure is Bitcoin Investment Trust, which trades over-the-counter.

Hurdles for investing in cryptocurrencies are like those in the other weird things Greenig trades, like finding counterparties, minimizing operational risk and keeping up fiduciary responsibility. But the beauty of bitcoin, he said, is that it’s so sentiment driven: Interest begets interest, making momentum a powerful strategy.

“The trending behavior of bitcoin has been strong in the past, and CTA momentum models seem to work as expected,” Greenig said. “The maturity of the market has grown, and we expect eventually to see more participation by systematic players.”

Three factors in predicting digital currency value

According to Hubrich, three factors work in the major digital currencies: value, carry and momentum. The philosophical challenge is finding a way to replicate those traits. They’re reasonably straightforward in stocks, say, measuring value through a company’s price-earnings ratio.

To find a crypto corollary, Hubrich gets creative. He translates value to mean the token’s market value versus the dollar volume of blockchain transactions. For momentum, Hubrich uses a four-week horizon because of limited historical data, rather than the 12 months typically used for equities.

“This is a very volatile and young asset class, and we’re bound to learn much more over time,” Hubrich said. “Momentum is more than 100 years old, but it’s very early days for cryptocurrencies.”

Though Hubrich’s study was an academic exercise, Michael Paritee of Serrada Capital uses a similar value ratio to invest in cryptocurrencies. Paritee founded Serrada in 2006, and launched the Digital Asset fund in September, which blends discretionary and systematic strategies to invest in cryptocurrencies. That includes evaluating a token’s market cap to transaction volume ratio, he said.

“We saw a lot of opportunity to trade something we love doing — volatility, because that’s how we like to make money and traditional markets have gotten harder and harder in the last couple years,” Paritee said. “There’s technical reasons to be involved in crypto, there’s idealogical reasons to be involved in crypto, but we see a real business opportunity for hedge funds and asset managers in this space.”

Breakthrough Innovations Often Come From The Most Unlikely Places

In Simon Sinek’s popular TED Talk, which remains one of the most viewed ever, he explains how great leaders, like Steve Jobs, the Wright Brothers and Martin Luther King Jr. succeed where many others failed because they put purpose first. “Start with why,” he says and then move on to the “what” and the “how.”

That’s generally good advice. The best way to build a great organization is to start with a clear mission rather than a plan or a product. Still, it overlooks another very important truth. Success eventually breeds failure and, when that happens, you must venture into the unknown where your purpose becomes unclear.

That’s a very different type of problem and we need to approach it differently. We have to explore, probe new spaces and make new connections. That’s the only way you will come across the unexpected, random pieces of insight that can take you in a new direction. Starting with the “why” is one path to success, but sometimes it’s better to start with the “why not?”

A Personal Journey

In 1997, when I was still in my twenties, I took a job in Warsaw, Poland. I found soon after my arrival that I was poorly prepared. Working for a large corporation in the US, I had been trained to work within a system, to play a specific part in a greater whole. When a problem came up that was outside my purview, I went to someone down the hall who played another part. Yet in post-Communist Poland, there was no system and no one down the hall.

So I had to learn a new outlook and a new set of skills. Now when a problem came up, I had to figure it out myself. That meant stretching myself and going to places — both geographically and cognitively — that I’d never imagined going. Although I had planned on a 6-month stint, I ended up spending fifteen years in Eastern Europe, including Poland, Russia, Ukraine and Turkey.

I consider myself lucky to have had that experience. When you explore the unknown, you end up finding valuable things that you didn’t even know to look for. Howard Schultz’s travel in Italy gave him the idea that made Starbucks a global juggernaut. Clarence Birdseye’s explorations with the Inuit gave him the idea of selling frozen food.

As Abraham Flexner explained in his famous essay, The Usefulness of Useless Things, the greatest human achievements often don’t begin with a purpose, but as a quest for understanding.

Exploring “Room At The Bottom”

When Richard Feynman stepped up to the podium to address the American Physical Society in 1959, he had already gained a reputation as both an accomplished scientist and an iconoclast. He would win the Nobel Prize just six years later, in 1965, and was almost as famous for his inveterate pranks and his heavy Brooklyn accent as he was for his brilliance.

His talk, modestly titled There’s Plenty of Room At The Bottom, began with a seemingly innocent question: How could you shrink the entire 24 volumes of the Encyclopaedia Brittanica to fit on the head of a pin? It seemed like a joke — and with Feynman you could never be sure — but he went on with a straight face.

Over the next hour, he continued to explore the idea, explaining how, by reversing the lens of an electron microscope, you could shrink something down that much. He then went on wonder if you could shrink an encyclopedia, why not machines or surgical robots or anything else? Yes, there would be some problems, but he outlined how those could be worked around.

At the end of his talk, he presented two challenges — to shrink a book page and a motor down to microscopic size– and offered a prize of $1000 for each one. The first challenge was achieved in less than a year and the second in 1985. With his playful little talk, Feynman had managed to invent the field of nanotechnology.

Darwin’s Other Exploration

One of the most famous explorations in the history of discovery is Charles Darwin’s voyage on the HMS Beagle, which sailed in 1831 when he was just 22 years old. Its journey lasted for five years, during which Darwin sent back numerous dispatches about the amazing diversity of life he found in far flung places such as Africa, South America, Australia and, most notably, the Galapagos Islands.

Evolution was something Darwin had been thinking about for a while and he had been heavily influenced by Charles Lyell’s theory of geological uniformitarianism, which argues that the world had not been made all at once, but was constantly changing shape. What he saw on the voyage reinforced those beliefs, but he had no working theory to explain them.

That all changed in 1838, three years after he had returned to England, when he happened by chance to read an economics essay by Thomas Malthus on population growth. It was about as far away from Darwin’s usual interests as you can imagine, but nevertheless turned out to be the final piece of the puzzle. As he would later write:

In October 1838, that is, fifteen months after I had begun my systematic enquiry, I happened to read for amusement Malthus on Population, and being well prepared to appreciate the struggle for existence which everywhere goes on from long and continued observation of animals and plants, it at once struck me that under these circumstances favorable variations would tend to be preserved and unfavorable ones to be destroyed.  The result of this would be the formation of a new species. Here, then I had at last got a theory from which to work.

If you think about it, the connection is quite remarkable. After years of working on the problem of evolution, the final insight came from an essay in an unrelated field that was written 40 years earlier, in 1998, and the result was one of the most important scientific theories in history.

Anatomy Of A Breakthrough

There is a fundamental difference between innovation and operations. Starting with the “why” will give you a purpose and help you achieve it, but asking “why not?” will take you to places you never imagined going and that is where the really exciting stuff happens. It is often those seemingly random wanderings that shed new light on our everyday work.

In the research that led to my book Mapping Innovation, I consistently noticed the same pattern. Smart, hardworking people who had significant expertise in their field were all of a sudden taken in a new direction that led to a breakthrough. In many cases, this was the product of an exploration that didn’t seem to have any immediate relevance to the problem at hand.

Darwin never dreamed that Malthus’s essay would help him crack the evolution puzzle. If he had, it wouldn’t have taken him 40 years to get around to reading it. Feynman was a habitual explorer. Besides physics and nanotechnology, he was a pioneer in quantum and parallel computing, did serious work in virology and was an enthusiastic painter and bongo player.

It would seem silly to ask why they did these things. There really isn’t any tangible reason to shrink an encyclopedia or to read things with little tangible professional relevance. Yet it is through traveling down unlikely paths that we end up in unexpected places. That’s how we have fun, which can lead to passion and, eventually a new “why.”

President Trump's Retweets Top This Week's Internet News Roundup

First off, let’s start with a simple message that is particularly meaningful this week. And really, all weeks. Click here, then come right back. Now please take a moment to consider that Jimmy Kimmel is in a Twitter war with Alabama senate candidate Roy Moore, because that’s something that happens in the real world now. Happy holidays, everyone! Oh, and maybe you want to see what’s happening online, for some reason. That’s below. We promise there’s a relatively happy ending this time around.

Twitter Governance, Part 1

What Happened: Forget fiddling while Rome burns, it might be time to update the saying to “tweeting while America heads towards a federal shutdown because of a lack of funds.”

What Really Happened: At the start of the week, political voyeurs in Washington were already thinking about the possibility of a government shutdown, but were heartened by the fact that a deal to avert such a thing was already in the works, with President Trump set to sit down with the Republican and Democratic leaders of the House and Senate to hash out the details. Previously, it seemed to work out, but this time? Not so much. And it’s all because of Twitter.

In response to Trump’s pre-emptive strike, House minority leader Nancy Pelosi issued a few tweets of her own.

And, just like that, the meeting was off. That wasn’t exactly what Trump had hoped for, which led to some speedy spin from the White House.

Meanwhile, some were already suggesting that Trump essentially removing himself from events was the best thing that could have happened for the government as a whole.

As the media tried to work out what in the world was happening, Trump did what he does best: tried to take back control of the narrative.

While many saw this as the spin on high school politics that it was, the ploy certainly appealed to the people it was targeted at: the president’s base.

But after all this, surely the shutdown was avoided and nobody wants it to happen, right? Right?

Oh, good.

The Takeaway: Then again, maybe the president is working on a level no one has considered.

Twitter Governance, Part 2

What Happened: Do you remember “Retweets do not equal endorsements”? It might be time for President Trump to look into that. Or at least choose his retweets a little more carefully.

What Really Happened: Pelosi and Senate minority leader Chuck Schumer weren’t the only people the president alienated via Twitter last week. He also shocked quite a few people when he retweeted three tweets from far-right group Britain First. (Tweets linked above instead of embedded, in case they upset readers.)

(That’s the husband of the murdered British MP whose killer yelled “Britain First” before killing her, in case you’re wondering why the name sounded so familiar.)

Condemnation came from all quarters, it seemed. It was such a breach of both protocol and common sense that British Prime Minister Theresa May responded in an official statement, condemning what the president had done:

Surely in the face of such a serious reaction, Trump would back down and apologize, right?

The response to Trump’s follow-up was swift.

Turns out, lots of people were thinking about that prospective state visit…

So, upsetting the country that has traditionally been one of the strongest allies of the US and tacitly endorsing an organization that shares anti-Muslim content? That didn’t go over well. But at least that was the extent of it, right? Oh, wait: there were also reports that Britain First’s membership was growing as a result of Trump’s patronage. So there’s that.

The Takeaway: For further evidence of how this was received, here’s a reminder that even Piers Morgan turned against Trump on this one.

Meanwhile in the Mueller Investigation…

What Happened: Christmas came early for everyone watching the Russia investigation, as Michael Flynn pled guilty to lying to the FBI.

What Really Happened: How best to mark the start of the holiday month? Special Counsel Robert Mueller opened it with a gift for those following his investigation into the Trump campaign’s possible contacts with Russia.

Oh, but it turns out it wasn’t just a charge.

Let’s put this in some perspective.

To those thinking that this is a big deal… Well, it really is. (Just look at all the media coverage it’s getting, after all!) But what if it’s even bigger than it looks at first glance?

But whatever could that be? Some have a suggestion:

At the time of this writing, this is all still unfolding, so don’t be surprised if this shows up again in next week’s column.

The Takeaway: Oh, the irony of history.

A Royal Engagement

What Happened: Who doesn’t love a good wedding? Especially when it’s a modern day fairy tale come true, complete with an actual prince.

What Really Happened: But enough about politics! Maybe there are better things happening somewhere else in the world. Does anyone have any suggestions?

That’ll do. It turns out, people were very happy about this news, whether they were leading countries…

…or just pretending to be related to one of the betrothed on television:

(That’s Patrick Adams, who plays Meghan Markle’s husband on the USA Network show Suits, for those who don’t follow such things.)

Turns out, Markle’s real relatives were on board as well, luckily:

But what about the rest of the world?

Oh, you mean this interview?

Yes, it seems that people liked that one.

Of course, this is one of those stories that the media loves, but there’s one story in particular to bear in mind: someone asked Prince Harry how it felt to be marrying Markle “being a ginger”. (“Unbelievable,” was his reply.)

The Takeaway: We shouldn’t forget that this happy occasion wasn’t happy for everyone.

Did You Hear the One About the Cat and the Library?

What Happened: Just let the damn cat into the library, everyone.

What Really Happened: Sometimes it doesn’t take much to see that the problems of little people don’t amount to a hill of beans in this crazy world. Especially when there’s a cat who wants to get into the library and isn’t allowed.

And for those looking for a little more backstory…

It turns out, the person responsible for the sign was happy about the attention it got:

But none of this answers the important question at the heart of these things: How does Max feel about his new-found fame?!?

The Takeaway: If Max’s story does somehow turn into a kids’ book, where will this new trend end? Hopefully before this happens:

Evaluating Goldman's 'Pain Is Coming' Thesis

Introduction – The old familiar valuation concerns reach the upper echelon

When an idea that makes sense gets ignored for years, then bubbles up to the Bloomberg News and Goldman Sachs (GS) level, it’s worth paying attention to, because the concept may finally be ripe. The immediate issue is one of great importance to all investors, even ones with a 10-year horizon. It was covered by Bloomberg Wednesday in Goldman Warns Highest Valuations Since 1900 Mean Pain Is Coming. I’ve been talking for years about this phenomenon, which is likely due to QE more than anything, and now that these heavy hitters are focusing on it, it may finally be time.

Here’s a brief summary of the article, which itself is brief.

High stock and bond valuations: implications according to Goldman

Here are the two sub-headers from the article that make the main points:

  • Returns likely to be lower across all assets in medium term

  • Risk scenario sees inflation jump that ushers “fast pain”

To flesh it out a bit, here are the opening two paragraphs:

A prolonged bull market across stocks, bonds and credit has left a measure of average valuation at the highest since 1900, a condition that at some point is going to translate into pain for investors, according to Goldman Sachs Group Inc.

“It has seldom been the case that equities, bonds and credit have been similarly expensive at the same time, only in the Roaring ’20s and the Golden ’50s,” Goldman Sachs International strategists including Christian Mueller-Glissman wrote in a note this week. “All good things must come to an end” and “there will be a bear market, eventually” they said.

There is more in the article, including a graphic that carries a lot of information. Goldman strategizes overweighting stocks and underweighting long-term bonds.

The article repeats other relevant points that the Goldman research note makes, but the ones I would like to focus on come from the bullet points in the Bloomberg article. Namely, are returns really “likely to be lower” across “all assets” in the “medium term” (defined as what)?

To do that, the variable that Goldman points to as most operative is the one many of us have pointed to for years, namely QE and reversal of QE (also called quantitative tightening).

Do we really have any idea what any or “all” assets are going to do in any time frame?

This is a strong statement. There are too many influences on asset prices to make this sort of prediction. Note that I am responding to the Bloomberg article, and do not have access to the Goldman piece in its entirety.

Given the latest weekly Fed balance sheet data, it is possible that the Fed has indeed begun its reverse QE program, as it says it has. I think this is a headwind to general asset valuations, but headwinds are only one influence. So I’d be careful about getting grandiose about what any one “known known” will lead to.

But Goldman and Bloomberg do have a point:

Reverse QE is an anti-liquidity action. So were, in a different sense, the three times that QE 1, 2 and 3 ended. Each of those episodes were followed by bear moves in fixed income (rising rates) reversing. QE 1 and QE 2 were followed by weakness in gold (GLD) and silver (SLV). The onset of QE 3 saw the inflation-linked metals and oil briefly soar, then plunge; and they have never really recovered.

All this makes sense in thinking about the current liquidity reduction program of reverse QE, which is scheduled to be doubled in amount in January-March and then ramped higher from there if the economy cooperates.

Think of the prior crisis management of late 2008 through the Taper of QE 3 in 2014. Then, the more aggressive, crisis-driven policy was QE (liquidity injections aka “money printing”), and the status quo, more optimistic policy was to keep the money supply stable. In those more optimistic periods, interest rates declined; they rose during QE when it was “risk on” in the markets.

Now, the Fed is confident that the crisis is over, so the optimistic view of the economy is to reverse QE and return toward normalcy. A bearish view of the economy, and possible simply a downshift toward low inflation, would be reflected in not ramping reverse QE, suspending it, and/or dropping the short-term interest rate. However, absent major crisis, renewed QE is now off the table.

This scenario could actually produce good, even double-digit, annual returns for many stocks and reasonable results for bonds, because it could lead to declining inflation, stable long-term rates, and stable to rising P/Es if equity earnings yields get compared directly to yields on corporate debt, a comparison I have been making lately on Seeking Alpha.

Reverse QE is disinflationary

By now shrinking the base money supply, the Fed is essentially giving up on its fight to increase inflation. Fewer dollars in bank and money market deposits chasing an increased supply of goods and services (the economy is growing at about a 2.5-3% rate right now) tends to be disinflationary or deflationary. It is in this context that I interpret the move in SLV as reflecting this three-year stagnation in the money supply (from end of QE 3 in 2014 until October) and now the slight decline:

Chart

SLV data by YCharts

That was a three-year chart. On a five-year chart, we see the gold mining stocks (GDX), which tend to lead GLD (which is acting a little better than SLV), weak as well:

Chart

GDX data by YCharts

Crude oil is uptrending. However, the out years show much lower expected prices than the front months. Backwardation is a warning about current cycle strength and longer-term price weakness.

All this is in the setting in which the Fed’s favorite inflation measure, PCE, is only up about 1.5% yoy. This comparison could easily drop as the base money supply shrinks on schedule. The amount of base money shrinkage is large, even for the US economy; it is set to shrink by $420 B in 2018 and $600 B in 2019.

However, since the shrinkage is in excess bank reserves, which are not needed for the real economy, the flow of goods and services can continue unhindered as the Fed reverses QE.

How reverse QE can help strong stocks and cash-like instruments

I do think that inflation hedges and weaker companies, such as those with leverage and without strong business models, can be classic victims of the change in Fed policy. However, focusing on stronger companies – and the US public markets have many – produces different potential outcomes from a reversion toward monetary normalcy. First, we need to think of the earnings yield paradigm in which stocks, especially stocks with high conversion rate of earnings to free cash flow, compete with bonds. This is different from the old paradigm that perma-bears such as John Hussman go by, in which depressions with deflation were associated with depressed stock valuations and low interest rates.

Now we have seen governments and their central banks create vast amounts of new money “out of thin air,” driving short-term interest rates to near or even below zero, and either directly or indirectly pulling long-term rates down. This was accomplished with no significant amount of deflation even in Japan or the EU, and with no deflation in the US at all using the core PCE measurement even for the Great Recession period. So the idea that bonds are safer than stocks, thus there should be an “equity risk premium” in which, all else equal, bonds should be preferred to equities, makes little sense – if any. Rather, all that matters is total return in this view.

At the same time, the free market is now valuing long-term bonds fairly freely, now that the UK has stopped QE long ago, the US is already reversing it, and the EU is planning to taper or stop it next year. And what do we have? The UK issues a 30-year bond, and the yield is a tiny 1.83%. Australia, which never did QE, apparently has no Federal government bond longer than 15 years, and the yield is 2.80%. Australia used to be a high interest rate country, but the free market has put yields very low as well, just slightly above US Treasury rates. Canada, with no QE, enjoys a 10-year government borrowing rate of only 1.84%.

So while stocks should not be discounted any longer with an equity risk premium (i.e., be valued lower than bonds just because they are stocks), bonds may have a case. This can be especially so because current inflation rates in the US reflect the approximately $2 T of base money that the Fed wants to withdraw from bank and money market accounts. Absent the pressure of all that money, inflationary pressures may well decline.

Let me sum up in a little detail.

Conclusion: dealing with high valuations as QE goes into reverse, part 1: bonds

Goldman works off of a key point. The Bloomberg article says that:

As central banks cut back their quantitative easing, pushing up the premiums investors demand to hold longer-dated bonds, returns are “likely to be lower across assets” over the medium term, the analysts said.

There is clearly some logic here; I have been pointing this out in various ways for quite some time. But we can look around and see a rationale for optimism as investors.

When the mythical Mr. Market was really worried about long-term inflation in 2010-11, “he” pushed the spread between short term, T-bill rates and the 30-year T-bond rates to nearly 4%; the 2-30 spread was nearly that high. Now, the spread between 1-30 spread is only about 1.3% (130 basis points), and the 10-30 spread has dropped from about 100 basis points in H2 2013 to 40-45 basis points. Investors are looking at lots of supply of high-quality, long-term bonds, both Treasuries, corporate and municipal, and are looking at QE going away, and they are judging that the future will have low inflation. Why should inflation be low going forward? Perhaps these reasons: demographics, productivity gains and the fact that the Fed has thrown trillions of new dollars at the system, and we still do not even have 2% PCE inflation. Markets may also be pondering the deconstruction of some of the administrative state in the US, which could be disinflationary or deflationary.

In summary, I would first agree with Goldman that reverse QE is a highly consequential process, and that removing perhaps $2 T of base money that the Fed created for a reason cannot in and of itself push asset valuations higher, nor can it provide additional economic stimulation. So I would be cautious about speculating in weaker stories now than in, say, 2014, when QE 3 was going on.

But then I would take a different emphasis than Goldman. Reverse QE is in my analysis both friendly and unfriendly to long-term bonds. It appears friendly for the disinflationary reasons mentioned above and unfriendly because the article is correct that the bond complex, across all durations, will be seeing fewer dollars available to compete for a similar supply of debt. Less demand means, all else equal, lower prices, which in bond-land means higher interest rates. I happen to think that this effect will be concentrated at the short-to-intermediate term part of the bond complex, where rates are clearly unattractive and where most of the issuance occurs. So, I remain sanguine about very high-quality, long-term bonds such as Treasuries, AAA-rated corporates, etc.

Conclusions, part 2: stocks

I partly agree with Goldman that stocks may be more attractive than bonds, but only high-quality stocks with normal valuations and high enough quality that we can forecast their earnings yields (reciprocal of the P/E expressed as an interest rate) several years hence. These stocks would range from the well-known blue chips to stronger smaller stocks that have never received the valuation step-up they might. In thinking of Goldman’s thesis of low forward returns, I’m not that impressed for these many stocks. That’s because on an earnings yield basis, many high-quality stocks with secular growth characteristics are cheap to their own bonds and can see P/Es rise, not necessarily fall. Consider a long-term Apple (NASDAQ:AAPL) bond maturing in 2045 with a yield to maturity of only about 3.7%. Well, AAPL has a forward earnings yield near 7% right now based on prospective calendar year 2018 earnings, and usually all of AAPL’s earnings are equivalent to its free cash flow. AAPL is my #1 stock, as it has been much of the time since I first bought it in January 2010 upon its announcement of the iPad at a split-adjusted $28-29 price. Within tech, a lower forward earnings yield than AAPL’s but still an attractive one is found in Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Using about a $42 EPS for 2018 and a stock price for the class A shares of $1,033, the forward P/E is 24.6X and the earnings yield is 4.1%. If GOOGL had much long-term debt, I would expect it to carry a yield equal to or lower than that of AAPL. Even if its Other Bets do not pay off well, GOOGL is expected to have substantial growth from its core businesses, thus a forward earnings yield of 4.1% is expected to step up rapidly.

Information technology remains a secular growth area that I believe can easily trade at much higher relative valuations to the debt securities that companies in the sector issue.

Another secular growth area that is cheaper than Internet stocks is biotech. Many biotechs trade with trailing P/Es in the teens, and most other large names are below 25X. Even with near-term challenges, they are attractive longer term in my view. In a period of diminishing liquidity as reverse QE moves along, I favor the operationally and financially strong biotechs (NASDAQ:IBB) over the little guys (NYSEARCA:XBI).

Given the prospects for positive economic growth, many cyclical stocks are attractive when not worrying about equity risk premia and simply focusing on actual returns. One of the interesting changes in cyclicals is that many now perform little capital spending and have become strong free cash flow generators. So, take Deere (DE), which is partly a technology-driven company now. Consensus EPS for CY 2018 may soon be around $8.50. At its current price around $149, that gives an earnings yield around 5.7%. This is far above the yield on DE bonds. And DE is still not even back to mid-cycle on US/Canadian tractor sales. So, while DE does not have the stellar prospective returns it had a year ago, I own the stock, not its bonds. And so on. Plus, DE may benefit from a corporate tax cut.

One more sector is worth mentioning, namely restaurants, which have been out of favor for some time, except for McDonald’s (MCD). If the consumer economy carries on, these sorts of stocks may begin to outperform the cyclicals, which may lose attractiveness as the Fed pushes short-term rates higher (finally!) and the industrial cycle matures. Domestic restaurant chains pay high tax rates and thus can be big beneficiaries of a tax cut. I remain long a good deal of Darden (DRI), which controls Olive Garden and several other concepts. The stock is around $85 and the current yield is 3.0%.

For strong stocks, such as those listed above, and given positive real growth and 1-2% inflation, we can think about P/Es holding steady or even rising in my lower-for-longer interest rate scenario on the long end. In that case, the owner of the business – i.e. the shareholder – owns the free cash flows, receiving some as dividends and indirectly owning the rest, presumably to receive these earnings later. Thus Goldman/Bloomberg may be a bit too negative on forward returns from many equities even as the Fed normalizes policy.

Summary and final thoughts

1. When Goldman Sachs and Bloomberg News begin to demonstrate graphically just how extreme combined stock-bond valuations are, then this metric may finally matter. This warning in conjunction with reverse QE from the Fed and its related ongoing interest rate-raising program.

My interpretation is that the first securities to be affected by these points will be more marginal, weaker ones.

2. Rising short-term and intermediate-term interest rates are again being associated with relatively stable rates above 20 years maturity. Since 1981, this curve flattening or inversion process has signaled continued disinflationary pressures. Thus, long-term bonds may provide modest positive returns after inflation and may hold their trading price, i.e. yields may stay range-bound, with both upside and downside possibilities to be considered. Goldman focuses on the rising inflation, rising rate possibility, but the action in GLD, GDX and SLV, as well in Treasuries (TLT) makes me give at least equal weight to the opposite scenario as the Fed shrinks the base money supply at an accelerating rate.

3. In the modern era, with widespread monetary manipulations by central banks now the New Normal, and with support of stock prices (SPY) semi-official policy, there is good reason to view equities of dominant, strongly FCF-positive companies as inherently as attractive as bonds, or more attractive. If and when inflation comes roaring back, only equities give inflation protection; in the other direction, the old-fashioned risk of serious price deflation is simply off the table for the indefinite future.

Thus I agree with Goldman that certain stocks are more attractive than bonds, but I would take a more optimistic tone about equities. Rather, I look at many equities as providing what, in context of competing assets, are attractive earnings/FCF yields right now, with the prospect of long-term growth of those cash flows. Total returns from many stocks may turn out very well on all foreseeable time frames from this perspective even as the Fed goes through what may be a prolonged tightening cycle. Of course, ups and downs cannot be predicted, but in 1995-2000, there was no QE and stocks got a little crazy on the high side in their valuation. If that happens again, then I would sound the alarm about equities. But not now.

Thanks for reading and sharing any comments you wish to contribute.

Disclosure: I am/we are long SPY, AAPL, GOOGL, DE, DRI, TLT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. I am not an investment adviser.

Elon Musk Just Delivered On a Bold Bet By Powering Up the World's Largest Battery

Seems like mega-entrepreneur Elon Musk is everywhere these days. I keep waiting to see him on Dancing With the Stars or show up in a role on Game of Thrones

Here’s the latest. The New York Times reported that the State of South Australia announced Friday that it had powered up the world’s biggest battery–the size of an American football field–ahead of an already ludicrously fast 100-day schedule. This timing is notable because the head of Tesla (an organization recently announced as an Inc. finalist for Company of the Year) usually doesn’t hit deadlines–even if he always seems to deliver in the end. 

The battery will store enough energy from nearby wind and solar power turbines to power 30,000 homes.

This matters because Australia has long been facing an energy crisis, with supply falling far short of demand and blackouts all too common. As a result, the cost of electricity has been spiraling out of control. South Australia has the highest energy prices in the world, producing jaw-dropping electric bills for the state’s 1.7 million residents. For perspective, Australians pay 50 to 100 percent more for power than Americans.

The ginormous battery (being hailed by some as “one of this century’s first great engineering marvels”) will provide a reserve of energy to help manage the surge demand times and create an overall more efficient power grid.

While debate rages between proponents of fossil fuels and renewable energy (the former cite the mega-battery as a publicity stunt, the latter as “the future”), one thing can’t be denied. Mr. Musk delivered on one big, hairy, audacious goal. A goal (and a bet) he made in a two-sentence tweet in March, 2017. 

Turns out Musk was chirping that he could and would build a battery that would solve South Australia’s energy problems. Fellow billionaire and Australian Mike Cannon-Brookes called him out, tweeting, “how serious are you” and stating he could deliver the money and politics end of the equation if Musk could do his part. Musk responded with the tweet below:

And in two sentences, Elon Musk had set another audacious goal for the world to see.

When I learned of this, it got me thinking about the power of setting seriously stretch goals. Neuroscience has long touted that the human brain is most creative, receptive and effective when it’s given near impossible goals and forced to innovate to achieve it. 

While Musk’s tweet was a huge PR play, it also illustrates the importance of not just dreaming big dreams, but putting specific goals behind those dreams. Musk is a master at this, but he’s not alone.

In 1974, the founder of Subway restaurants, Fred DeLuca, set an impossibly bold goal for the world (and his employees) to see. At a time before mass franchising was everywhere, with only 200 stores in tow, DeLuca set a goal of getting to 5,000, then 10,000 stores–something his employees couldn’t fathom (this proclamation was covered in an Inc. story in 1994). 

He didn’t have Twitter to proclaim his goal. So he turned to what he had to cement his commitment–the restaurant napkins, upon which he emblazoned the brash goal. 

DeLuca set this goal to stimulate creativity among his employees, creativity that would never have been kicked into gear without the goal itself.

No doubt when Musk committed via Twitter to his goal, employees were forced to up their game too.

So whether it’s big batteries or lots of five dollar foot longs, it doesn’t matter. Set a big goal and you’ll power up and energize more than just a battery–you’ll stimulate serious creativity and innovation. 

Pundits of moonshot goals would say, however, beware the crash of not actually hitting the goals or the risk of not getting employees behind them. There are several ways you can ensure employees are on board with big goals. Most importantly, ensure the employees have had an opportunity to weigh in on the creation of the goals and that the stretch goals are consistent with the purpose and mission of the company and its employees. That way, even if the goals seem nearly impossible, they are at least in line with what employees are used to (and hopefully motivated by).

While this article has offered a peek into the future, let’s end it with a glimpse at the past–a quote from Michelangelo: “The greatest danger for most of us is not that we high too high and miss it, but that we aim too low and reach it.”