jdmarkman

[jdmarkman]

Apple is all about average selling price

Apple’s newest iPhones are here.  One of them is a real beauty.  And that may be a problem.

Every September, Cupertino rolls out its latest devices.  And every year tech journalists write breathlessly about how this iPhone, the new one, with its innovations and industrial design, really is the future of smartphones.   It isn’t, not normally.

At least, that was until iPhone X.  

image courtesy Getty Images

The new iPhone features a large, almost bezel-free screen, a polished stainless steel frame, a new silky smooth software interface, and innovative facial recognition gear.  It feels like the future. 

By comparison, the other smartphone Apple introduced, iPhone 8, feels very much like the past.  Worse, it is the only new Apple phone most people will get a chance to buy anytime soon.

All of the fancy new hardware for X is being mass produced for the first time.  Since April, rumors persisted Samsung, the maker of X’s beautiful AMOLED screen, was having production yield issues.  

So X is going to be in limited supply.  Even pre-orders have been pushed back to October 27.  Shipping dates will not begin until November 3.  

To be fair, scarcity/exclusivity is a proven marketing strategy.  No company plays this game better than Apple.  This go around, other factors are in play.  In addition to the late shipping date and probably limited supplies, the company will need to convince customers to skip the phone they want and buy another that looks like the one in their pocket.

The risk is they wait, and Apple misses fourth-quarter unit sales targets.  I’m not willing to bet that happens, at least not yet.  

However, competition from Android is ramping up.  Users get an arguably better experience with a high-end Galaxy or Pixel device.  The hardware is better or comparable, and the software is far superior.  Google Maps, Mail, Search, Photos, Assistant, and YouTube are all tightly integrated into the operating system.  Paired with the Google Pixel, it’s a very polished experience.  

To Apple’s credit, it has done a great job crafting outstanding devices and building a very loyal customer base.  Often they will not even consider switching out of the ecosystem.  

Apple does have a plan.  Lost in the euphoria over X, were price hikes for its incremental offerings.  The iPhone 8 and 8 plus now start at $699 and $799 respectively.  That is $50 and $30 higher than the models they replace.  In theory, the company can sell fewer phones and make the same amount of money.

And expect the carriers will offset some of the worries with trade-ins and promotions to move iPhone 8 inventory.  Already, Sprint (S) is offering a $350 trade-in.

Shares have drifted mostly lower since the iPhone X reveal.  There is good support in the $157 area and resistance at the recent high near $164.  As long as the stock remains in that range near term, shareholders should be fine.

Apple made a terrific gadget with iPhone X.  Shareholders need to hope it wasn’t too good.

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[jdmarkman]

Microsoft turns on

Hardware makers bristled when Microsoft (MSFT) introduced its Surface line of computers in 2012. The Redmond software giant seemed to be biting the hand that fed it.

At the Consumer Electronics Show this year, Microsoft’s long-range plan came to light. Lenovo announced a game-changing Surface-like computer with constant connectivity and long battery life.

The future of mobile computing is not smartphones. It is ACPCs – always-connected PCs. And they run Microsoft software.

In 2009, iPhone changed everything. Its touchscreen, ease of use, and constant connectivity were liberating. Almost a decade later, screens are larger and software more intuitive -- but let's be honest, actual computing is still much more comfortable on a desktop or laptop.

chart courtesy StockCharts.com

There is a good reason for that. Microsoft controls the productivity software people want. Office is a robust ecosystem with broad network effects. Good luck exchanging files if you are not running Word or Excel. To make matters worse, Microsoft has been unwilling to duplicate the most compelling features on smartphones.

The Lenovo Miix 360 is a crazy thin and light 2-in-1. The tablet/PC hybrid is ARM-based, promises 20 hours of battery life, and can surf the Internet at speeds greater than most home WiFi connections, thanks to always-on LTE. Better still, it runs the entire Windows software stack, past and present. For most computer users, it is the best of all worlds. 

It eliminates worries about battery life, connectivity, and compatibility. It is not the first time down this road for Microsoft. The original Surface RT, an ARM-based 2-in-1, was a $900 million flop. The machines were underpowered and unloved by developers and hardware partners. This time, Microsoft put in the hard work. The new Windows S software works. And Hewlett Packard (HPQ), Asus and others have announced new machines coming before the end of the year.

Two years ago Apple reimagined the computer with the iPad Pro. The big idea was corporate users would flock to the bigger form factor because they loved their iPhones. Beefed-up second-generation Surface computers were also selling very well. The 2-in-1 format became a legitimate category with widespread demand.

The latest course change at Microsoft leverages Surface’s compatibility strengths, and adds always-on connectivity and better battery life, thanks to ARM-based architecture and mobile system-on-a-chip processors. At 20 hours, ACPC’s will achieve battery life 50% greater than iPad Pros. 

It’s ironic. As Apple is embracing Intel (INTC) and moving away from Qualcomm(QCOM) silicon, Microsoft is going the other way.

That is why ACPC is so important. It could help Microsoft make a surprise takeover of mind share in mobile computing software, with a legitimate competitive advantage.

Microsoft stock has been shooting higher after an important upside breakout at $85. That level is now support. It's a buy for those of you who like large-tech on pullbacks; I'm on the lookout for a spot.

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[jdmarkman]

Get ready for the Spotify IPO

It’s fitting. Spotify wants to shakeup the status quo. The streaming music service is getting ready to issue stock directly to the public

Last week, the Swedish company formally announced a direct listing, coming sometime this spring. This means no fancy investor roadshows. No quiet period. No IPO, even.

It’s going to be an interesting experiment. It could change everything. It wouldn’t be the first time the company broke new ground. In 2008, just a year after the first iPhone, Spotify set conventional wisdom on its ear by offering a huge catalog of music on a subscription basis. 

At the time, even Apple executives thought the idea was crazy. Consumers had only begun to accept paying for music on an al a carte basis. Its service, iTunes, was still under the watchful eye of skeptical music executives.

However, Spotify has flourished. Despite high profile compensation squabbles with artists and producers, the company built a valuable ecosystem of monetized playlists and member curated content. Founders Daniel Ek and Martin Lorentzon were determined to build experiences for every operating system, every smart device.

At last count, membership was 140 million -- including me. According to the company website, paying subscribers number 70 million. Revenue, for fiscal 2015, was $2.18 billion.

Wall Street investment bankers have been chasing Ek for years. The company has brand name acceptance and positive cash flow. In June 2015, venture investors pushed the value of Spotify to $8.5 billion. Landing an IPO would be a lucrative prize. In some cases, the bounty is up to 5%.

In 2014, Alibaba (BABA) raised $21.8 billion in a widely anticipated IPO. Wall Street bankers got $300 million in fees.

By going direct, Spotify will cut out all of the middlemen. Banking and legal fees are saved. The investor roadshow and hassle of pitching directly to institutional shareholders is omitted. And most important, early investors get to forgo the normal lockup period.

If they choose, they’re free to sell on day one as many shares as they desire.

Ironically, Jay Clayton, the SEC chairman, is furiously cutting regulations to encourage more IPOs. It’s part of the broader Trump administration goal to reduce regulations and make it easier to create wealth. However, the increasing might of private equity firms -- and horizontal integration at big technology companies like Alphabet, Amazon.com, Apple, and Disney -- has shrunk the number of viable candidates. If Spotify succeeds in eliminating Wall Street bankers, others are likely to follow.

It is hard to tell where Spotify shares will be priced, but it’s a very attractive prospect.

In a world of ecosystems, there is a vibrant market for agnostic platforms. It is not hard to imagine Spotify doing for music what Roku is doing for streaming. It is also not hard to see its scale making the company a takeover target.

I will definitely keep you posted after it stock launch on whether it's a good value, but I'll tell you right now that I expect to be impressed. It's a great service, an innovator and dominates its niche. Those are three of our key criterion; now we just need to know if the price is too high.

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[jdmarkman]

Notes on my scorecard

-- The second half of the year has begun, but most trends from the first half remain in place. The Nasdaq 100 (QQQ) is still the leading U.S. index, growth (IVW) leads value; and tech (XLK), health care (XLV), materials (XLB) and industrials (XLI) are still the leading sectors.

-- The only major change in the market is energy (XLE), which outpaced every sector except tech in the past week, +2.2%, as crude oil prices rose 5.2%.

-- In global markets, same deal due in large part to the weakening dollar. Picking up the pace overseas this week was Brazil (EWZ), +8.1%; South Korea (EWY), +5.2%; Australia (EWA), +3.7%; India (PIN), +2.8%.

-- Breadth is good among U.S. stocks as the S&P 500 Equal Weight (RSP), S&P 400 Midcap 400 (IJH) and Russell 2000 (IWM) all rose in the past week to record highs.   

-- No big surprises in the second-half leaderboard so far.  Up to the middle of July, starring stocks were also standouts in the first half: NRG Energy (+40% first half; +34% second half); Coherent (64%,  21%); Chemours (72%, 18%); Nvidia (35%, 14%); Square (72%, 13%); Teradyne (18%, 12%).

-- Among the few stocks with negative turnarounds so far in the second half, the most prominent is Tesla (TSLA), which rose 69% from Jan thru June but is down 10% in July. But there's also Juno Therapeutics (58%, -8.5%) and Patterson Cos. (14%, -7.6%).

-- Economic data was weak in the past week, with just six of 18 measures beating expectations, according to a table compiled by Bespoke Investment Group. Big disappointments came from Labor Market Conditions, NFIB Small Business Optimism, JOLTS Job Openings, Initial Claims, Core PPI, Core CPI, Retail Sales and Michigan Confidence.

-- Bespoke points out that the Small Business Optimism Index has lost the momentum following its post-election surge and has fallen well short of reaching highs from the last expansion in 2004.

-- Bespoke also observes that Online Retail has posted gains in a record 24 straight months; the only other retail sales sector with a decent streak is health and personal care at 5 straight months of gains. In the history of the Retail Sales report dating to 1990, the longest prior streak was 13 months for Electronics & Appliances that ended in 2005 with the peak of the housing market. Online Retail now accounts for 10.9% of all sales, double its 2000 level. The General Merchandise sector peaked in 2009 and has seen its share fall by 17% since.

-- One more nugget from Bespoke's retail study: Bars and Restaurants have seen their share of total retail sales rise since 1998 by nearly the same amount that Food and Beverage stores have seen their share decline. A look at the shares of McDonalds (MCD) vs Whole Foods Markets (WMT), above, makes this very plain.

-- Top online retailer Amazon.com (AMZN) last year announced it had done $500 million to $600 million in sales in its second Prime Day sale event. This year it says sales were 60% higher than that, surpassing even sales done around the Christmas holiday on Black Friday and Cyber Monday.

-- Bespoke has created a "Death by Amazon" Index that tracks the performance of companies most affected by the rise of Amazon.com – chains with either a limited online presence or which are dependent on physical retailing locations, and are in the S&P 1500 index. The list includes 60 names such as Bed Bath & Beyond (BBBY), Dicks Sporting Goods (DKS), JC Penney (JCP) and Michaels (MIK). … Since 2012, this group is +16.5%. Over the same stretch, the S&P 1500 is up 86% while Amazon is up 400%. This year alone the Death by Amazon Index is down 10%, losing $70 billion in market value. ... It's a historic wipeout, with no let-up in sight.

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[jdmarkman]

There is a good reason Ford and GM are not as valuable as Tesla

Mark Fields is on his way out as the top man at Ford (F).

Conventional wisdom puts the blame somewhere in the vicinity of Elon Musk, CEO at Tesla (TSLA). Don’t believe it.

The auto business faces a perfect storm of falling prices, rising competition from used vehicles, and a potential avalanche of dodgy loans.

How key stocks react will set up the future for investors. And the direction may surprise you. Let me explain.

U.S. auto companies continue to sell a lot of vehicles. The Automotive News reports that automakers sold 17.5 million vehicles last year, a record. It was the seventh consecutive year of growth.

Unfortunately, dealers must work really hard to move new cars these days. Buyers want incentives. They refuse to pay sticker prices. And dealers can forget about margin-fattening extras like undercoating and prep packages.

As a result, autos sell for less on average and with lower profit margins. That’s doing a number on internal business metrics. It’s reflected in the weakness for Ford and General Motors (GM) shares. Both are down this year. In fact, Ford swerved to near five-year lows.

Meanwhile, used-car prices are plummeting. Part of the problem is past prosperity. After all of those years of sales growth, dealerships are flooded with used cars as owners trade them in or sell them outright. Plus lots of cars and trucks are coming back off lease.

Rental outfits like Hertz (HRZ) are adding to the glut. The company curiously chose to focus on more expensive SUVs while it faced fierce competition from well-financed ride-hailing startups.

Now, it’s selling off fleets in a weak used-car market, putting even more downward pressure on the prices for both used and new cars.

As if all of that was not bad enough, the auto loan market looks a lot like the subprime mortgage market before the financial crisis. In a research report, Larry Jeddeloh, analyst at TIS Group, notes lax underwriting has crept into the market for asset-backed securities.

Stop me if you have heard this before.

Santander Consumer USA, the biggest consumer-loan company in the country, has $15 billion worth of outstanding loans. To sell off its portfolio of asset-backed securities, it has been packaging loans into high risk/high reward pools. The average loan is 16% annually, with a more than 70-month term, loan-to-value ratio of 110%, and borrower FICO score less than 600. Not good.

According to reporting from Bloomberg, Moody’s revealed Santander verified incomes for only 8% of applicants for its high-risk pools.

These asset-backed securities had been rated Aaa as recent as February, and found their way into many conservative portfolios.

This should be the point where investors flee most consumer-credit and auto stocks. You certainly have to feel for ex-Ford CEO Fields. He was in a tough spot. No amount of smooth, happy future Musk talk could have helped.

The outlook is grim. Auto stocks should decline given the fundamental outlook. However, if they stop falling and stabilize, we will know that something important and new is happening. I’m not saying that will happen. But it could. 

Pay attention to the market. Just as stocks should rally on good news, they should remain weak against the backdrop of bad news. When this is no longer true, sellers have been exhausted.

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[jdmarkman]

Crowdsourcing the fight against mosquitos

That smartphone in your pocket could hold the cure for malaria, dengue and the Zika virus, a noted Stanford University scientist says.

Manu Prakash has a history of using oddball materials for medical research. His latest project, Abuzz, uses sound. Specifically, he asks regular citizens to capture and record mosquitoes. There are 30 unique species, and each has a different wingbeat pattern.

The big idea is to use algorithms to match sample recordings with disease-carrying species, and then recommend strategies to control the population.

Weird science, sure, but don't knock it. In this age of massive amounts of compute and abundant sensors, dreamers are doing what should be impossible. They are replicating expensive research tools with inexpensive, makeshift solutions. Solutions that can, in many cases, save lives.

In this case, citizen-scientists capture a mosquito in a plastic bottle, poke a hole in the cap and record the buzzing with their phone. Then they send the digital file off to Prakash and his team.

It’s not the first time the Indian-born professor of bioengineering has made something from almost nothing.

In 2013, he saw a centrifuge being used as a doorstop at a Ugandan clinic. The expensive medical device had been donated by well-meaning researchers. But the village had no electricity.

So, Prakash put on his problem-solving hat. He later developed the Paperfuge.

Inspired by a toy whirligig, the paper-and-string device can separate blood cells from plasma. At a cost of 20 cents, the instrument is perfect for “diagnosis in the field,” Prakash told a TED conference audience.

And that’s just one example of how a little innovation can go a long way, for not a lot of money.

While visiting remote clinics in India and Thailand, he noticed expensive microscopes were collecting dust on shelves. They were too bulky to carry into the field. In 2014, his team showed off Foldscope, an inexpensive, lightweight microscope inspired by origami.

This year, they hope to donate 1 million Foldscope devices. And Wired reports the gizmos have already been used to detect diseased crops, spot fake drugs and diagnose malaria.

The World Health Organization reports 3 billion people are at risk to contract an infectious disease like malaria from mosquitoes. In 2015, 212 million people were diagnosed, with an estimated 429,000 deaths.

For the sake of comparison, 2015 was a record year for worldwide shark attacks, with 98. There were 6 human fatalities.

What Prakash is proposing -- inviting the public to help the fight against mosquito-borne illnesses -- seems preposterous. However, crowdsourcing science and using algorithms to do the modelling is basic procedure in this data-driven age.

Google does it every day with its mobile traffic app, Waze. The stakes are simply higher for Abuzz.

The fact that this is possible is a testament to this era. And it is indicative of the opportunity.

Right now, dreamers like Prakash are out there, building new things and transforming business models. They are going to change what we think is possible. They are also going to build some terrific businesses. Stay tuned.

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[jdmarkman]

Robots are remaking packaged food

Smart robotics. The industry is very capital intensive. As a result, winners are few. Scale is paramount.

John Bean Technologies (JBT) is the dominant robotics player in every facet of the food business. Among other things, its machines package cookies, vacuum-seal meats, can soda, juices and vegetables. When food companies build new factories, they call JBT.

They’re calling. Traditional factories are being retrofitted with smart technologies to improve productivity. The Internet of Things revolution is here. And JBT is ready.

The Internet of Food, if you will, is a big deal. BI Intelligence expects the number of installed Internet of Things devices to swell from 237 million in 2015 to more than 923 million in 2020. By the same year, global manufacturers should spend a staggering $267 billion tracking assets, consolidating their control structures and implementing data analytics to improve predictive maintenance, Business Insider reports.

JBT management saw it all coming years ago.

Working with the likes of Campbell Soup, Coca Cola, Del Monte, Dole Foods, Florida Natural Growers and General Mills, it had the inside track. means “maximizing profits for our customers,” he says.

There is another benefit. The fastest growing region in the world is Asia. China, in particular, is anxious to upgrade its factories with state-of-the-art gear.

In food processing, JBT is the only company with the scale to play there. And it has been bulking up with a new innovation center and a customer outreach program.

The recent thaw in relations between China and the Trump administration will certainly help, too.

JBT shares rose 425% from 2013 through 2016, then tapered off to rise more gently this year, posting a 5.5% gain. The break has given the fundamentals to catch up to the price. The flat spot may last a bit longer. But you could also say the hares are very close to a breakout from their six-month consolidation.

JBT has the scale and expertise to win the Internet of Things revolution in food processing robotics. The shares can be bought into any major broad-market setbacks over the summer.

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[jdmarkman]

Versum Materials is ready for the spotlight

You know I love spin-offs. They get very little coverage by the media or analyst community, but very often turn out to outperform their industry and former parent.

An interesting one on the move now is Versum Materials (VSM), which spun off from Air Products & Chemicals (APD) late last year.  The $3.4 billion company makes the sophisticated equipment and advanced materials powering the next-generation of microprocessors. And demand is brisk. Chips are finding ways into all sorts of innovative gear.

image courtesy Versum Materials

Semiconductor leaders have always sought Versum's chemical compounds, process engineering, and analytical technology when it was part of APD. However, moving the company to the next level as an independent firm has meant getting even closer to customers, strengthening relationships.

In 2016, it moved from the central Pennsylvania to the sun-drenched industrial parks of Tempe, Ariz. The new digs put it a stone’s throw from a major facility of Intel (INTC), a top customer.

Versum is likewise cozying up to customers to form many other longer-term relationships.  It is building manufacturing and technical capabilities in South Korea so it can be close to one of another key customers, Samsung. The Korean giant named Versum its 2016 Best Partner.

That is a distinction Guillermo Novo, Versum’s chief executive, wears with pride, saying: “By creating value for customers, we can then create value for all our stakeholders.”

Companies are working closer than ever with partners as the stakes rise and as semiconductors power industrial robots and connected cars. Versum’s semiconductor equipment and chemistry are considered cutting-edge. New use-cases mean new processes, new materials.

To meet demand, Versum is expanding capacity for 10- and 7-nanometer nodes, following process record wins. And its delivery-service business continues to ramp up supply capabilities and reduce costs, especially in Asia, its biggest market.

All of this adds up to improved profitability and much stronger relationships with big clients, the name of the game in a fast-moving era when success at right supply chains is fundamental.

In its most recent quarter, Versum sales shot ahead 10% to $271 million versus a year ago, led by gains across cloud computing, automotive and industrial integrated-circuits clients. Even PCs, a longtime decliner, seem to be on the mend. Versum expects its sales to PC makers rise in 2017.

That’s in-line with a recent forecast from Gartner. The research firm expects worldwide semiconductor revenues to increase 12.3% in 2017 to $386 billion. Semiconductors are in a super-cycle. 

I think it's valuable to build positions across many facets of the sector ahead of the deluge of Internet-of-Things applications. Versum is interesting because it’s a company in transition. It is shaking off its industrial roots and attaching itself to some of the biggest manufacturers. Plus, it’s still largely undiscovered due to its status as a spin-off.

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[jdmarkman]

Bioterrorism could kill 30 million people

Thirty million people dead in less than a year.  That’s the grisly forecast for a successful bioterrorist attack. And it’s more likely than ever, according to experts.

Bill Gates made his fortune bringing personal computing to the world with Windows software. Lately he’s been consumed with closing the window on the next global epidemic.

image credit: David McNew

Advances in biotechnology mean it is now incredibly easy to re-create  fast-moving, airborne pathogens, like smallpox or the Spanish flu.

Patented in 2014, CRISPR-Cas9, is a gene-editing technique that uses molecular scissors to precisely snip genetic code. It’s a scientific marvel. With it, researchers have modified genes to help blind people see, cure sickle cell disease in some patients and expedite the development of numerous new drug treatments.

They have also been able to create antibiotic-resistant forms of E. coli.

CRISPR-Cas9 is unregulated, inexpensive and somewhat of a cottage industry. In 2016, the Nuffield Council of Bioethics warned that “garage scientists” might unwittingly create a modified organism that could kill millions.

Gates is thinking more strategically. His foundation works in developing nations. He understands the perils of bad actors in unstable environments. He’s worried about biotechnology being weaponized.

A single infected person strategically placed in a busy airport could ultimately kill millions.

“The scariest thing is something like the 1919 [Spanish] flu,” Gates warned at a gathering at the Royal United Services Institute in London. Modern travel coupled with the fact that people have no immunity to that strain would be an unstoppable, deadly combination.

His concern is well founded. In the developed world, we worry about bad actors getting their hands on nuclear materials. Though tragic, a nuclear bomb would not kill 10 million people.

Gates reckons that an infected traveler could be the starting point for a human-to-human respiratory infection. And it would all begin with simple aches and sniffles. The Spanish Flu of 1919 killed 50 million people.

While this is unsettling, we should not count out the good guys. The fact that Gates is involved is a big positive. He understands the scope of the potential problem, and he’s making plans.

We also should not discount the potential for investors. Gene-editing is a legitimate scientific breakthrough. Yet even to the well-informed, it seems like science fiction. For the first time ever, scientists have a very precise tool to reprogram the genetic code of life. The possibilities are endless.

Researchers believe they can eradicate malaria by genetically modifying the mosquitos that carry the parasite. Malaria kills 1,000 children per day, and 200 million people are affected annually.

Others are working with innovative cancer-fighting immunology drugs and new HIV-AIDS treatments.

Drug discovery, treatment and healthcare in general are at an inflection point. CRISPR-Cas9 is set to change everything.

The threat of bioterrorism is real but it’s not the only possible outcome of genetic editing that matters. It’s best for investors to focus on companies creating winners in technology, drugs and the insurance industries.

One large company supplying tools for the effort is Illumina Inc. (ILMN), a $25 billion medical-device supplier in San Diego. It’s been trading sideways for three years — and now, at $180, is about 15% off its peak. Worth a look.

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[jdmarkman]

3D printing will make the future  factory free

Adidas, the giant athletic shoemaker, wants to 3D-print your next pair of sneakers.

The iconic shoe manufacturer wouldn’t be the first to toy with the idea. Rivals have played with the technology, making prototypes or one-off designs for celebrity athletes.

But Adidas is pushing further. It will use industrial 3D printers for mass production. And that’s a very big deal.

image courtesy Adidas

Gerd Manz, Adidas head of technology innovation, told Reuters: “We’ve cracked some of the boundaries.”

3D printing is a cool idea. You spec out details of a product, put its raw materials like plastic and malleable metal into a black box, then push a button to “print” it by layering those materials in accordance with the blueprint. The economics have proved more difficult than the technology.

Yet now almost anything is possible. The exponential progression of information technology is blurring the lines between all sorts of disparate disciplines. If dreamers can imagine a product or service, they can build it.

To make its 3D blueprints a reality, Adidas will work with Carbon, a Silicon Valley company funded by General Electric (GE), Alphabet (GOOGL) and Sequoia Capital.

The big breakthrough came with the use of light, oxygen and a special polymer resin. Carbon calls the process Continuous Liquid Interface Production (CLIP), and it rivals traditional injection-molding at scale.

Plus, CLIP leapfrogs slower 3D printing techniques pioneered by Hewlett Packard (HPE). It also widens the use-cases to electronics, intricate medical devices, industrial components and all sorts of cool stuff in between.

The Milwaukee School of Engineering uses CLIP to build molecular kits for bio scientists tinkering with the building blocks of life. Ford (F) uses it to expand its own materials research for car parts. It’s even being used at Legacy Effects, the Hollywood special effects company behind the futuristic creatures of Avatar, Guardians of the Galaxy 2 and Godzilla.

At Adidas, the near-term goals are more modest

This year, it plans to 3D print about 5,000 pairs of Futurecraft 4D sneakers, shown above. In 2018, it will ramp up production to 100,000 units.

While that is a quantum leap over plans from rivals Under Armour (UA) and Nike (NKE), it’s still a tiny fraction of the shoes the German company will make this year.

As a point of reference, Adidas sold 15 million pairs of its iconic shell-toe Superstars in 2015. In 2016, it made 1 million pairs of sneakers made from recycled ocean plastic.

Futurecraft 4D is a game changer because it changes the manufacturing process. Printing shoes dramatically cuts the time required for models to move from design to store shelves. It makes small batches economical. Ultimately this will drive the made-to-order market of the future.

That is the dream. A future where customers buy branded goods online tailored to their own measurements, download a digital file, then 3D print the product at home or at a nearby storefront location. No factories. No inventory.

While we are not there yet, you can see it off on the horizon. Advances at the intersection of retail and technology are making it possible for dreamers to put the pieces together.

Chemists are fiddling with molecular structures. Programmers are working through modelling and software algorithms. Engineers are building robots.

In the interim, companies are taking the first tentative steps in that journey. Says Manz: “You have to learn to walk before you can run.”

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[jdmarkman]

Why you should question Wall Street research

Bloomberg View columnist Matt Levine always does a great job making sense of the complicated world of investment banking, hedge funds and credit.

Recently, he tackled a February working paper from Nathan Swem of the Federal Reserve — Information: Who Gets There First? — that explores how valuable information is disseminated on Wall Street. The paper argues that analysts help hedge funds market their best ideas to other investors.

image credit: media.tumblr.com

That may appear like a shocking, or at least cynical conclusion. But it’s not going to come as a huge surprise to most experienced investors.  After comparing the “timing of information acquisition,” Swem  concluded that hedge funds get important information first and build positions. As the news seeps out, sell-side analysts at brokerages change their published ratings, at which point hedge funds often reverse trades.

Levine, characteristically, connects more dots:

“The simple model here is: The hedge funds are good at finding undervalued stocks, so they do, and they tell the analysts, and the analysts write up reports, and the stocks go up until they are fairly valued, and the hedge funds sell them and move on to the next trade. It’s an efficient market, but one that relies for its efficiency on hedge funds (who are actually making investment decisions) rather than on research analysts (who aren’t). This is perfectly reasonable!”

Many retail investors are not going to like that conclusion. They may very well be angry. After all, it implies hedge funds have an advantage. That anger is wasted. Trickery by the elite is not an impediment; it spells opportunity.

Almost in unison, Wall Street analysts are now telling investors to pile into cyclical stocks because the Trump economy will bring much faster growth. It’s a compelling argument. Prospects for reduced regulations and lower corporate tax rates have been seen as bullish for earnings growth. And some of the Street’s biggest names, including Apple (AAPL) and railroad CSX Corp (CSX) have soared.

Yet there is a cloud on the horizon: Hedge funds, as a group, are selling. A recent report from Credit Suisse Group AG, based on its prime brokerage accounts, reveals hedge funds have been selling banks and materials stocks like copper.

It might be simple profit taking. After all, those sectors have had their best run since 2013. But it’s likely something bigger. Bloomberg reports hedge funds are worried about the pace of economic improvement. Benjamin Dunn, president of Alpha Theory, advises funds with $6 billion in assets. He sees a lot of skittishness because the hard-economic data is lagging despite the ramp-up in consumer sentiment. The turmoil in the White House over Russian ties, and the Federal Reserve’s determination to hike short-term interest rates in the face of rising inflation metrics, will not help.

If this seems confusing, just remember the conclusion of the Federal Reserve paper: The smart money gets the best information, and acts early to sell its inventory to retail investors before the truth is widely dispersed. This leads to one clear conclusion:   Turn brokerage recommendations upside down before use.

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[jdmarkman]

Video games become more dangerous

I love my digital stuff. My iPad Pro, Dell laptop and Nexus smartphone make me way more productive, and I can trade, email, read and catch up on ballgames from anywhere.

Sadly, there is a darker side to the digital age. Personal electronics can be clinically addictive. People are dropping out, losing themselves outside the physical world. This is not just a mom complaining about her kids. This is a real, medical-level problem. More young, unemployed people are spending a larger portion of their day playing or watching others play video games. And it’s starting to fray the social fabric.

credit: Steven Andrew, flickr, Creative Commons Attribution-NonCommercial 2.0

It’s weird because this era holds unprecedented opportunity. We have access to virtually unlimited compute power and knowledge. It should free us, not enslave us. Yet a recent Economist article argues that the alternative reality of role-playing games is sucking in disillusioned young people in America at a dizzying rate.

For example, between 2000 and 2015, the rate of employment for young men in their 20s dropped from 82% to 72%. Fully 22% of the 2015 jobless cohorts acknowledged not working at all during the year. Furthermore, they are not marrying, nor are they leaving their parents’ home.

Young adults are delaying employment to play video games.

Given the decline in work hours is offset 1-for-1 with a rise in hours spent gaming, Erik Hurst, an economist at the University of Chicago, concludes a significant portion of young adults are “delaying or cutting back employment to play video games.”

It’s something the gaming industry has known for a while. In 2014, Wall Street analysts were shocked when a bidding war broke out for Twitch, a fledging online network where gamers went to watch others play video games. The bidders were Amazon (AMZN) and Alphabet (GOOGL). The winning bid was $970 million.

Since then, Alphabet has scrambled to beef up YouTube Gaming and Microsoft (MSFT) countered with Beam. Last week, Facebook (FB) announced it was bringing its vast social network to desktop gamers. And Nvidia (NVDA), a company that dominates high-end gamer graphics cards, is stepping into the fray, too.

Consulting firm PricewaterhouseCoopers predicts U.S. gaming sales will reach $19.6 billion by 2019. That is a compound annual rate of 30% from 2015. It augers well for leaders like Activision Blizzard (ATVI) with its diverse portfolio and strong franchises like Call of Duty, Overwatch and Candy Crush.

Unfortunately, commerce does not strengthen the social fabric.  Policymakers are being forced to rethink safety nets. The consequences are expensive and long-lasting.

In 2010, a cornerstone of the Affordable Care Act was a provision allowing young people to remain on their parents’ health insurance policies until age 26. In fact, the provision was so popular it was included in the recent repeal and replace effort. This is a symptom, not a solution.

Some warn things will only get worse as robots, both mechanical and software, replace large swathes of workers, before new industries develop. Artificially intelligent software can already write code, they warn. If young people are disillusioned now by grim employment prospects, just wait.

I’m more optimistic. The promise of our age is invention. Digitization changed the way we consume media and the way we connect with each other. It made new business models possible. In the past, technology has always created new opportunities for investors and society at large. And it will be that way again now. In the meantime, ATVI and NVDIA remain my favorite ways to play the trend.

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[jdmarkman]

The message of small cap stock performance

Small-cap stocks took off like rockets immediately after election day, soaring to a peak of +18% in mid-December. Over the ensuing three months, however, the small-cap benchmark Russell 2000 has gone to ground, while at the same time the big-cap benchmark S&P 500 has shot up 6%.

The market is always talking to us in some form or another, and it's our job to shake our biases and hear the message. So what is the message?

The always astute analysts at boutique research firm TIS Group in Minneapolis argue that the market is telling us that the White House tax reform package will be delayed by as much as a year.

Here's why: The Trump deregulation and tax reform plan should be more beneficial to smaller companies than to larger companies because larger companies have a million ways to avoid taxes and skirt regulations. Smaller firms don't have the same resources. So the price action in U.S. stocks suggests is that corporate tax reform, which would benefit small caps most, is not imminent.

The analysts note that there is a school of thought in Washington that that tax cuts for companies may not be all that important anyway. Large companies, especially multinationals, pay relatively low tax rates anyway.

The analysts go on to posit that it's possible that large-cap stocks are rising disproportionately because they are anticipating synchronize, global growth instead. This is not a consensus view, so it bears attention.

This actually makes sense because the tax reform package may not pass Congress until the first quarter of 2018. So investors can't be pricing in higher earnings for the third or fourth quarter of this year.

The TIS analysts conclude by observing that dragging out the timeline may not be bearish for equities. They note that a study of the S&P 500 since 1950 shows that when the first 50 days of trading exceed a 55 gain, then 95% of the time stocks continued to rise by an average of 12% the rest of the year. And they note that gains continued in every year when the market started with a 5% gain, except for, gulp, 1987. And even in that year, which suffered a crash in October, stocks continued to run into late August.

The nuanced message of the market then could well be to stay in at least through the end of August, with a style tilt toward large caps.

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[jdmarkman]

Nvidia pushes computing to the edge

The future of computing is on the edge. Powerful, self-contained devices at the periphery of networks will make cloud computing obsolete, say venture capitalists.

Nvidia Corp. (NVDA) is not waiting around to see how it all plays out. Last week it announced a partnership with Bosch, the German automotive-parts behemoth. The two will build energy-sipping, next- generation supercomputers for the self-driving cars of the future.

It’s a market Nvidia knows well. Chief Executive Jen-Hsun Huang invested billions to develop deep-learning algorithms and sophisticated silicon before it was commercially viable. That vision was vindicated in Drive PX and a seat aboard every new Tesla (TSLA).

The Bosch deal ups the ante. It pushes Nvidia technology beyond upscale electric cars, into the mainstream. Bosch is expected to use Nvidia AI technology in the mass production of autonomous cars.

This pushes the envelope. The new supercomputers will feature Nvidia’s Xavier AI-on-a-chip architecture. The company claims it’s capable of 20 trillion operations per second. That kind of oomph on board negates the need to beam most of the complex computation for self-driving to the cloud.

Venture capitalists are taking note. Peter Levine, general partner at Andreessen Horowitz, makes the case that self-driving cars need to become “data centers on wheels”. They are screaming for computing power on the edge of the network because latency is a safety issue.

It makes sense. Being dependent on a network connection for navigation while hurtling down the road in 2 tons of glass and steel is not a comforting thought.

Levine argues that cloud computing is essentially the mainframe on steroids. What it makes up in power, it surrenders in flexibility. The normal ebb and flow is to bring compute closer to the client.

This is something Nvidia has obviously given some thought. Current Drive PX supercomputers are as powerful as 150 MacBook Pros. Their ability to render 3D maps is cutting-edge. Still, they are part of a system that relies heavily on server-side Drive PX components to make everything click with precision. In the always connected Tesla, this works.

While the Nvidia and Bosch partnership is based on Drive PX technology, the secret sauce is Xavier. By bringing the AI onboard, the most important bits of self-driving are self-contained, inside the vehicle and on the edge of the network.

Intel (INTC) made news last week with the acquisition of our old favorite, Mobileye (MBLY), an Israeli maker of assisted-driving cameras. Intel sees synergy between future self-driving cars and its vast data center microprocessor business. For the record, that is not the edge.

Nvidia has been a terrific stock because management recognized future trends early. That has not changed. I like management. I like the technology. Shares are still a buy on dips.

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[jdmarkman]

Retail’s secret weapon

As retail goes digital, first mover Amazon.com is crushing the competition. It’s time for traditional brick and mortar stores to get back in the game before it's too late.

Their new secret weapon: Impinj (PI), a small, nimble maker of ultrahigh frequency radio solutions that helps retailers track every item in their supply chain in real time with tags, readers, gateways and enterprise management software. It’s the sort of impressive software slingshot that traditional stores need.

RFID systems have been the next big thing for ages. Impinj has been doing most of the heavy lifting gathering patents and building alliances for the better part of its 17-year existence.

The chips until recently were always too costly, or offered too few benefits over the barcode system the industry reluctantly adopted. Digital is the game-changer. To compete with Amazon, companies need inventory intelligence and customer analytics. And they need it now.

Because products get a unique RFID code, Impinj software tracks billions of products throughout the supply chain. Stores can reduce inventory while increasing availability, slow shoplifting, implement next generation features like smart fitting rooms and automated points of sale. All of this comes with the added omnichannel flexibility of coordinating on and offline sales.

Retailers are taking note. In 2016 State of Adoption Among US Apparel Retailers, researchers Bill Hardgrave and Justin Patton at the Auburn University RFID Lab note new implementations rose 32%. The authors conclude:

“The accelerating rate of adoption continues to be driven, in our opinion, by the requirements of being an omnichannel retailer. Specifically, inventory accuracy is a requirement for omnichannel and retailers simply cannot efficiently achieve a high level of inventory accuracy without RFID.”

Last month Amazon showed-off a concept “Go” store. Much of the media buzz came from the cashier-free checkouts. The omnichannel potential is more significant. Amazon is closing the loop. Buy a product in any channel, pick it up or have it delivered. Never stand in line again.

Traditional retailers have the potential to do this even better with RFID. If they can get tags and software to do the checkout, they can devote all of their human capital to service. And customers who come to stores tend to price compare less and spend more due to impulse and experiential purchases.

Impinj enjoyed revenue growth of 50% to $31 million in the most recent quarter. Chief executive and co-founder Chris Diorio wrote to shareholders that he is “excited about broad-based demand.” And the company is working on RFID solutions for the healthcare, supply chain logistics and food and beverage sectors. The future is bright. The potential is huge.

The shares have performed well, too. Since the IPO at $14 last July, the stock has doubled. And after a $12 slide to start the year, it is on the move again. It popped as some speculated Impinj might be the technical partner for Amazon Go stores.

I'm expecting a broad market pullback over the next few months. If PI gets back to its November-December levels in that event, around $24, it would probably be a long-term winner.

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[jdmarkman]

Amazon ready to shake up shipping

It’s classic Amazon. Build an internal business to service the massive online store. Give it dominant scale. Sell the excess supply as a stand-alone enterprise.

The Wall Street Journal reported Amazon (AMZN) may be developing an application to independently schedule and track shipments online. That should sound vaguely familiar. It’s the exact service provided by United Parcel Service (UPS), FedEx (FDX), DHL Group and others. Amazon wants to build a new entrant with the global scale. That’s going to materially change the $150 billion global freight industry.

Cathy Roberson, founder of Logistics Trends & Insights LLC told the WSJ: “This is the next piece in the jigsaw puzzle. It’s all falling into place for Amazon as a logistics provider.”

For global freight’s big three, the implications are clear. Soon they will be competing head-to-head with one of their best customers.

When Amazon began building a network of massive warehouses almost two decades ago, many in the retail industry scoffed. It seemed like overkill for a tiny Seattle company selling books online. Those warehouses were later automated with innovative robots. They were connected to global data centers providing instant access to storage and to compute at unprecedented scale.

The data centers became Amazon Web Services. Years later, its excess supply became the information technology infrastructure for many of Silicon Valley’s hottest startups. Recently that migration has extended to the Fortune 500 and is growing rapidly. Wired reported AWS grew 49% in 2014 to $4.6 billion in sales. Last quarter, the internal unit had sales of $3.2 billion, a 54% surge year-over-year.

Legacy technology companies have been left in the wake. Hewlett Packard, Dell, EMC and Cisco have struggled to retain clients. After all, why should those customers build out and maintain their own data centers when they can simply rent state-of-the-art gear and software analytics from AWS for a fraction of the cost?

Amazon could do the same with logistics infrastructure. In 2015, it announced it would brand thousands of the trucks that shuttle packages between its distribution centers. Last year, it leased 40 cargo jets and registered a shipping company in China. Massive spending projects to provide last mile services in the UK and India are ongoing. It’s a trend.

It is what Amazon does. Massive warehouses outfitted with productivity-enhancing robots reduced the cost structure for the online store. AWS had the same effect. Building out an Amazon-branded global logistics business will put pressure on the rest of the industry to reduce fees. That’s a win for Amazon.

It’s a loss for UPS, FedEx and DHL. Worse, history suggests Amazon is likely to extend its AWS business model to logistics. That means it will eventually offer excess capacity as a stand-alone business. That would mean even lower prices.

Amazon is a dominant business with the type of scale few can match. That is a huge advantage. The shares remain a long term buy into pullbacks.

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[jdmarkman]

Post-election sentiment suggests plenty of dry powder

Stocks have rallied mightily since Election Day in November, but the ranks of the advance has been narrowing by the day. Unless you're heavily in financials, energy, some cyclicals and techs, the positive vibes of the past two months may have passed you by.

This narrow advance, which has been broadcast widely in the media as significant due to its assault on the 20,000 level of the Dow Jones Industrials Average, has penetrated the consciousness of the public more than any random stretch of the market's activity. But I was wondering whether people have actually started to take action to invest at all if they were on the sidelines, or invest more if they were already in stocks but had cash sitting around waiting for an opportunity.

Turns out that, according to Bespoke Investment Group data, people are interested but not doing much. Which is what I suspected.

Late last week, Bespoke released its comprehensive monthly Consumer Pulse survey of consumer sentiment towards all different aspects of the economy. The first chart below shows the monthly results to the question, “Do you follow the stock market on a regular basis?” In this month’s survey, the percentage who responded ‘yes’ surged to 52.3% from 46.7% in November. As shown, this is the highest monthly reading to this question since Bespoke first started the survey in the summer 2014, the analysts said.

charts courtesy Bespoke Investment Group 

Along with being more aware of the stock market, U.S. consumers also have increasingly positive views towards the stock market. In a tracker of sentiment, Bespoke asked consumers what their current view of the stock market is on a scale of 1 to 5 with 1 being very negative and 5 being very positive. In this month’s survey, shown in the second chart, the tracker ticked up to 3.53, which is also the highest level in the history of the survey. That said, at a level of 3.53%, the tracker is skewed positive but still hardly at levels that would be indicative of investors being all in .

The final chart reinforces this point. Despite the fact that more people are following the market on a regular basis and sentiment is higher than it has been at any point since mid-2014, the percentage of consumers who responded that their household was invested in “stocks, bonds, commodities, real estate, or other financial products” is still at the low end of its historical range (41.5%), the Bespoke analysts report.

Bottom line: Investors may be getting more positive, but they aren’t necessarily acting on it. That gives the potential for further upside more credibility, as rising prices will ultimately drag in a lot more money.

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