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FitBit competition, AES dividend and macro -3

09:27 13-Oct-17


Samsung's Gear Sport smart-watch just became available for preorder today, and it will be in stores on October 27th.  Both the watch and the wireless earbuds mimic Fitbit's latest products, but the earbuds have their own memory and thus can play music standalone.  The main differences with the watch are that it can respond to messages and has voice commands.  It also has a round AMOLED screen versus the Ionic's square LCD.  I've gotten positive feedback so far from the hands-on reviewer, but it's still coming in.  On the other hand the software development for Ionic looks like its not yet ready for prime-time, and the interactive messaging features that were present in the Pebble are likely to be quite a way off.  That's very troubling, given Samsung's same price point, development environment and broader interconnectivity push, which includes watch connectivity for iOS and Android phones.  Samsung does have its own problems, but this looks like competition that could limit Fitbit to its core user base.  I hope to have a fuller Ionic review out by the end of the weekend.

Moving on, AES Corp has announced its latest 12 cent dividend for shareholders who own the stock as of the close on October 30th.  We'll have to wait rather longer to assess the scope of the opportunity here.  Theoretically, the DoE should be producing some definitive (though potentially misguided) policy by December, based on its rule-making notice, and then of course, there's tax reform, which hasn't added any clarity yet.  I'm not prepared to count on a schedule for either.  However, I think AES has flexibility to cope with changes in both arenas.  Even with slight gains since I added it to the pick list, the yield is still nearly 4.3%, which is why I'm happy to take a wait-and-see approach.

I think many companies are taking that same approach, before they make moves in the U.S. market.   ABB certainly seems to be acting faster abroad, with investments in Germany and England.  The company continues to move its products ahead on both the business and consumer sides, and I continue to wait for a better entry point on ABB, and some clarity in the U.S.

To add further macro color, I'll share a recent conversation with a subscriber, who wrote:

As you may recall from past comments I read The Economist.  Their most recent edition includes an editorial on the “The bull market in everything.”  They claim that all assets are expensive and go into some detail about why they think that is so – mostly because of continued low interest rates.  They observe that investors are paying a lot for even very risky yields; 

“Consider, for instance, investors’ recent willingness to buy Eurobonds issued by Iraq, Ukraine and Egypt at yields of around 7%.”

There isn’t much in the article that is actionable – at least nothing that I can act on.  They do call for “gradualism” in the reversal of quantitative easing and endorse continued raising of capital requirements for banks combined with strenuous stress tests so there is a margin of safety.  Your latest macro comments go into more depth than they do. 

For my portfolio I am mostly looking for growth.  I appreciate your insight on higher yielding stocks and I have benefitted from much of it.  But today I am about 2/3 invested in growth stocks some of which are GRoDT.  Some that you cover, some that you don’t.

This leads me to my questions for today.  Can you see anything that would drive an already fully priced market even higher?  The only thing I can see on the horizon is american tax reform.  If that is true and if tax reform is likely then can we all plan for a Trump tax bump? Following that we should all get the heck out of the market until after the next correction – or make a more determined switch from growth to sustainable yield.

My response:

Thanks for an excellent question.  I read the article you mention, though I was not impressed by it.  I'll try to focus more on your questions, and less on discussion of the overall macro situation, but they are intertwined, in my eyes.

American tax reform could help drive the market higher, but it's unclear how much of that is already priced in.  Markets seem to have come around to my idea that something will get done, but I don't see that the chances have improved since I brought it up, and the details could wind up being disappointing.  So there could be a bump, but I'm not counting on it.

The more important point here is that the market doesn't really need anything other than a continuation of the status quo to drive it higher.  What you're seeing is inflation flowing into only one side of the divergence of the real economy from the bank-driven statistical one that I've criticized The Economist for focusing on. 

The open question is whether or not the FOMC's balance sheet reduction, which is just starting to ramp up, is enough to meaningfully disrupt that status quo.  The market is assuming that the answer to that is NO! and Kaplan's statements support that viewpoint.  To summarize, low long-term rates are "ominous" therefore we should be careful about raising short-term rates and helping the working class?  I have no polite words for how awful this bad theater is, and just about no hope that there will be a more realistic picture presented.  Either the powers that be will err (again), or it will be something else that upsets the Apple cart.  The market will call it a black swan, but it's really more like an earthquake that you already knew had to come sooner or later, though maybe much later.

So no, even though I've seen former Fed officials peg a correction at 40-70% stock market decline, I don't necessarily think we should all get out of the market right after tax reform, if it comes.  That's because real inflation is such a huge and consistent, though hidden risk, especially when you consider that the situation has its origins in 1971, and has been playing out ever since.  Thus, for long investors, the yield strategy that I've espoused.  I think there is still a place for growth in disruptive stocks like RESN and ERII (to cite opposite ends of the risk spectrum), though, and I'm glad that it seems that you're at least aware of the dangerous environment.

I don't know that I've given you anything very actionable, here.  That comes in the updates from the service, where I've tried to consistently emphasize yield for safety.  I still hope this is a good answer to the excellent questions you've asked, though.