Of Unicorns and Bubbles

In addition to profiling the story of the Oculus acquisition by Facebook, Vanity Fair recently featured articles about Unicorns (billion-dollar valuation start-ups), and the technology bubble. Current valuations are (again!) brought about by 7 years of easy money, where you have too much money chasing after assets. This can be good and bad: the abundance of capital has encouraged more people to come out to build companies; however, those that truly add value to our economy, or are profitable, are few and far between.

For an idea of how bubbly the sector is, take Jet.com. The brash four month old e-commerce startup out to take on Amazon.com raised $225m at a $600m valuation, and is going for another round at a $3b valuation! (See WSJ article)

If this is not a bubble, what is? The names are not without reason: Unicorns are mythical and bubbles have to pop sometime. What investors could do would be to understand the companies' business models and financials, if they are truly sustainable and defensible. Are the companies going after something faddish, that can be done without, or something essential, a technology that has the potential to change the world? The man on the street should also ensure that his income is not fully dependent on errand running start-ups, taxi disrupters, or freelance internet work. 

Around half of dot-com era companies such as Amazon and ebay survived the last crash to emerge as the tech behemoths they are today. Perhaps the best test for the companies would be the bursting of this bubble with more rounds of financing, as it would purge the wannabes or "unicorpses", and leave the strongest standing. Another way would be for them to be to go to market, where they will have to reveal their performance numbers and investors can then ascribe a true value to them. The rest of us will just have to be wary as we watch this bubble grow. 

In search of real growth - Part 2

Here are the next 5 sectors with the potential to propel the American/Global economy into the next decade...

6. Virtual reality (VR)

After the very high profile acquisition of VR headset maker Oculus for $2b by Facebook, Oculus has since launched a mobile VR device with Samsung. Almost at the same time of the acquisition, Sony announced a VR device for its PS4 gaming console, named Project Morpheus. Google is also dabbling with VR by coming up with a low-cost, self assembled headset, Google Cardboard, as well as teaming up with GoPro to create Jump, a 'spherical-video' camera. Nokia came up with a virtual reality camera for making immersive films, TV and games, while VR start-up Jaunt received $65m from investors, including Walt Disney. Apart from entertainment purposes, VR has numerous possibilities for uses in aerospace, education, manufacturing, and industries.

Facebook acquired VR headset maker, Oculus for $2b in March 2014

7. 3D printing

3D printing, aka additive manufacturing, is the next revolution in manufacturing; it will enable the personalized manufacturing of items from jewelry, aircraft parts, precision engineering, architecture, and medical devices at no minimum quantity. The production of prototypes can be done in a matter of days, reducing costs, increasing productivity, and opening opportunities for smaller companies.

Traditional supply chains will also be disrupted via virtual warehousing, which means parts are digitally stored and manufactured only on demand, replacing the current approach of storing thousands of physical parts in warehouses. Witness the shift to the Long Tail, or from mass production to made-on-demand customization. However, the technology has yet to achieve high speeds and quality, which could explain its slow rate of mainstream adoption.

Recently, listed 3D printers such as Stratasys and 3D systems have gone into a slump. This is possibly due to the weight of expectations pressuring the companies into spending more, leading to a contraction in their margins. Likely a long term investment opportunity if 3D printing achieves mainstream acceptance as it has been touted to. HP Inc, the hardware segment of HP, is also making its foray into the industry via their Multi Jet Fusion machines by end 2016.

3D printing: print yourself...or anything!

8. Robotics

Robotics include drones, automation, and Artificial Intelligence (AI). There is reason to be concerned: an Oxford study predicted that 47% of all employment in the US is likely to be automated by 2030; Scientists, researchers, and academics, including Elon Musk and Stephen Hawking, have warned that your Hollywood movie of an AI arms race might come true if autonomous weapons are developed. For less innocuous uses, count on the usual suspects like Apple, Google, Amazon, Microsoft and Facebook to develop machines that chat with you, or drones to deliver your parcel. Google in 2014 paid more than $500m to acquire AI startup DeepMind in the UK. The latest is that Apple bought 2 AI companies in 4 days, snapping up Perceptio, an image recognition technology for smartphones, and VocalIQ, a UK based startup with technology to help computers understand human speech.

The Amazon drone delivering your parcel 

9. Fintech

Financial technology, or Fintech, is making the Banks sweat. Ranging from peer-to-peer foreign exchange/lending/funding, to online payments, to the Bitcoin/Blockchain, fintech startups are picking off the most lucrative parts of the banks' relationships with customers, leaving them as just dumb providers of capital. Apart from the listed Paypal, here is a list of fintech startups to watch. In this list, Square is due to IPO by the end 2015.

And of course, the Bitcoin, or its underlying Blockchain technology (distributed record of any bitcoin transaction ever traded), cannot be ignored after it was announced that 22 major banks have invested in New York fintech firm R3 to create a framework for Blockchain technology in markets; and that Blythe Masters, former head of commodities at JP Morgan, joined Digital Asset Holdings to design software that can make financial transactions more efficient with blockchain technology. More on Bitcoin/Blockchain in another post.

10. Quantum computing

Quantum computing overcomes the limitations of today's computers by applying quantum mechanics to increase computing capacity significantly. Rather than the usual 1 and 0 bits, the qubits in a quantum computer can be in both states at the same time, massively increasing the number of possibilities that can be analysed simultaneously. This means optimising large volumes of data, making advances in AI, where computers can be taught to solve problems and understand language, pattern recognition, and financial analysis. Along with NASA, Google has been testing a system made by Canadian company, D-wave Systems, which claims to have built the first working quantum computer.

The D-Wave quantum computer 

The usual suspects, Social Media, E-commerce, and the Apple/Android application ecosystem have already upended the traditional industries (mainstream media, retail) and will continue to grow and create jobs/value. Notably, Google is involved in 8 out of 10 of the above mentioned sectors!

No matter the state of the economy, we can be comforted that humans have always been able to progress through reinvention, innovation, and adaptability. Would appreciate hearing your thoughts, or if you could help add on to anything I might have missed!

In search of real growth - Part 1

As highlighted in my previous post, QE, or printing money, cannot be a source of real or long-term growth. Instead of depending on injected steroids, the economy will have to depend on some real muscle to achieve sustainable growth.

These sectors and their related companies seem to be the diamonds amongst the rubble (or bubbles), and are the rising stars; they are likely to be the sectors with the greatest job creation, as well as the catalysts of growth for the American/global economy for the next decade...

1. Big data/Internet of things

On the premise that there is value in data; data can be mined to understand relationships, predict trends, and save costs. Think Palantir and Cloudera who receive million dollar contracts from governments/corporations to study and store data. For the Internet of things, which relies on Big Data, Nest, which was acquired for $3.2b by Google in the beginning of 2014, will revolutionize the ways things work at home.

2. TV

We are witnessing the demise of cable. Instead, count on the internet to serve up your favorite shows to your TV. This will mean higher subscription revenues for the likes of Apple, Netflix, and Amazon. Netflix and Amazon have also started producing their own (award-wining) content to wean off media companies such as 21st Century Fox and Time Warner Inc, while also increasing their scale of distribution and margins. Attractively priced devices such as Apple TV, Google's Chromecast, and Amazon Fire stick will also increase the adoption for these internet TV services.

House of cards*, just one of the award winning series by Netflix.

*House of cards was not made by Netflix, but owned and produced by film and TV studio Media Rights Capital. The first season was then sold to Comcast Corp for on-demand rights. Still, it was a milestone in Netflix's successful foray into making and owning original content. 

3. Sharing economy 

The sharing economy not only redefined employment, it has also unlocked asset value by providing asset owners with additional sources of income. We wait with baited breath as Uber and AirBnB inch closer towards their mega-listings. The ultimate combination: Google invested $258m in Uber...imagine them ruling the roads with driverless cabs!

Possibilities from the Sharing Economy

4. Electric cars

Pump prices may be low, but that is not stopping the adoption of electric cars as supporting infrastructure (i.e. charging stations) is being rolled out. Even at an exorbitant price tag, there is still a waiting list for the the latest Tesla X model. Not to be left behind, BMW, and General Motors are racing to develop their own models. Warren Buffet invested in BYD, while Chinese billionaire Lu Guanqiu revived Fisker Automotive (Tesla's nemesis) as Karma Automotive with a $139m injection. Now, Apple wants to get into the game too. It is also a matter of time before the chasm is crossed and there is widespread adoption.

The Tesla model X with its X-wing doors presented by its visionary founder, Elon Musk

5. Life Sciences

Imagine being able to know where your health is headed, detect disease early, and understanding your DNA for ancestry or hereditary diseases. Theranos, 23andme are among the companies making it happen. Google, under its umbrella structure, Alphabet, has a Life Sciences division investing in various projects and has also invested in 23andme and biotechnology venture, Calico. According to Angelina Jolie, who underwent preventive double mastectomy after tests revealed she was at high risk of ovarian/breast cancer, " knowledge is power".

These are the first 5 sectors, I will continue with another 5 sectors in my next post...

The ills of easy money

The US and Europe have been trying to revive their economies through Quantitative Easing(QE) policies. However, we are now witnessing the repercussions of their actions. See interview with billionaire activist Carl Icahn.

In the past 7 years, the money created has flooded financial markets in the guise of higher stock prices, but have hardly permeated the real economy, or got to the Man on the Street. Property and stocks have been inflated by excess money chasing after limited assets, and borrowing against inflated assets will only make this bubble even bigger.

Note that the job of the Fed is to manage inflation, but not assets. However, this misguided effort has led mainly to the inflation of assets, but not demand or prices. John Burbank of Passport Capital hit the nail on the head with this remark:

"QE had caused a misallocation of capital across the world, while the end of QE last year triggered a dollar rally with consequences that were only now beginning to be realised. The wrong people got the capital — emerging markets countries and corporates and a lot of cyclical companies like mining and energy, particularly shale companies — and this is now a major problem for the credit markets,” he said.

QE has in fact, gone against its purpose, leading to declining prices from an imbalance between an excess of supply from Asia and a drop in demand from the West - Overleveraging has led to overcapacity that is driving down prices (read: China).

So, where will real growth come from? And what can we put our bets on? I will highlight some of these promising sectors in my next post...

When the rates goes up...

It is only a matter of time before the US Federal Reserve hikes rates. Everyone is watching Janet Yellen like a hawk (although she has yet to become one) because the impacts of the move distills down to everyone of us. In order not to tip the scales, the rate rise is likely to be gradual. However, here are some of the more pertinent implications for us to be prepared for:

Rise in borrowing costs (mortgage, car loans, credit cards) & savings rates - 

Savers can start smiling again as deposit rates will finally go up. However, the higher cost of funds will have to be compensated by higher borrowing rates for mortgages, car loans, and credit cards.

In Singapore, we have already seen that happening with the 3 month *SOR and SIBOR climbing to 1.405% and 1.075% respectively in August, the most since end 2008.

In light of the rising SOR, banks are already dangling offers to refinance home loans:

Rise in USD + fall in Emerging market currencies and EUR:

This presents a good window to accumulate the USD, which is set to appreciate as rates increase; and sell Emerging market currencies (e.g IDR, THB, MYR, VND), before they drop further when the Fed starts the ball rolling.

The Singapore dollar is already set for its biggest annual loss since 1997, hitting 1.42 to the USD just before the Fed decision. Declining currencies also implies lower asset values for foreign investors, but an opportunity to accumulate assets in emerging markets.

Companies at risk:

Interest payments for low grade debt could rise more quickly. This would increase the burden on ASEAN companies, which have already seen their currencies depreciate, and face higher USD repayments. The extended period (7 years!) of low interest rates have also sustained zombie companies, which might be unable to survive a rate hike. Look out before investing in these companies at risk.

*The Swap offer rate (SOR) is typically used to price corporate loans. A softer Singapore dollar can put upward pressure on local interest rates such as SOR, as investors seek higher yields as compensation for holding the weakening currency; the Singapore Interbank Offer Rate (SIBOR) is the rate at which banks lend to each other, and is used to price mortgages. It usually follows the SOR with a lag.

Something we don't know - Post Fed reaction

Oddly, the markets did not respond well to the Fed decision to hold rates at zero on Friday. The Dow was down almost 300 points at one point (1.74%), while the S&P 500 was down 32 points (1.62%). Convention would dictate that the markets rally if the Fed kept rates low, which translates into lower financing costs for the economy. Here are some reasons I can think of for this anomaly:

The Fed knows something we don't:

The US economy might not be on the recovery we all think it is. Inflation at 0.4% was far away from the target of 2%; the only number on track was unemployment dropping to 5.1% ... but could it be because people gave up looking for jobs altogether? More people not looking for jobs would also exclude them from the workforce, thereby leading to a lower unemployment rate... there is more to the numbers than meets the eye.

OR

There are external risks (i.e China, Emerging markets,Commodities or ??? ) too great to ignore that it had to be taken into account. See previous post.

OR both.

Does she know something we don't?

Either way, investors are selling off because of the lack of clarity and certainty. They have interpreted the decision that the table of wise men do not think well of the economy. What happened on Friday should be a knee jerk reaction, unless things get worse. Till then, as Chuck Prince remarked infamously before the crisis," As long as the music is playing, you've got to get up to dance".

This time is different?

Bloomberg came up with a very relevant article on why where we stand is different from the Asian Financial Crisis of 1997.

In a nutshell, here is the gist of it:

What is happening?

The recent devaluation of the RMB and a strengthening USD, in anticipation of a rate hike (that didn't happen) has resulted in SE Asian currencies such as the Indonesia rupiah, Malaysia Ringgit, and Vietnamese Dong tumbling to levels seen during the 1997 Asian Financial Crisis.

How is this time different?

• These countries have lower external debt burdens.
• Exchange rates are now flexible; they were fixed and indefensible in 1997.
• They have more dry powder this time - higher foreign currency reserves - to shore up their currencies if required. In Indonesia and Thailand, for instance, there is room for further rate cuts, while Jakarta and Bangkok have announced higher domestic spending to boost their economies. Meanwhile, Kuala Lumpur has also announced a higher spending plan.
• Current account surpluses for these countries - exports are greater than imports.
• Asian banks are stronger - higher quality loan portfolios and regulations

In light of the above factors, analysts say that the drop in currencies is actually a healthy realignment that would help boost exports amidst a commodity slump. However, I'd like to add that there are now new factors in the equation:

What's new this time?

• It is a matter of time before the US starts raising rates, thereby exacerbating the outflows from emerging markets in search of safer havens and higher returns. 
• The slump in commodity prices have added on to the woes of Indonesia (coal) and Malaysia (oil).
• Loss of confidence in the Indonesian and Malaysian governments could lead to further political turmoil.
• China's slowdown, exporting deflation with it. 

All this volatility in the markets is not helping confidence, which is a prerequisite to boosting much needed investment and consumption. Surprisingly, 7 years from the crisis, we are still hearing about massive job cuts (read Deutsche, HP, Standard Chartered) with the only bright spot coming from Silicon Valley, widely touted to be approaching bubble territory. 

All eyes will be on the US and Chinese governments if they can bring their economies out of the deep end. It would also be crucial these new factors do not throw their economies out of balance; because this time it may be different ... a different crisis. 

If not now, when?

Not now! Market watchers, including myself, will be dissecting Yellen's statements word for word after the Fed made the decision not to hike rates. Here are some excerpts and my interpretation of them:

The Fed could still hike rates next month in its October meeting. The decision to hike will not hinge on any data release, but a broad range of economic and financial indicators. Her main concerns were inflation running under 2%, a depressed housing market (all time low 30 year mortgage rates and slowing housing starts), as well as volatile markets caused by China and commodity prices. The Fed has discarded negative interest rates as a possibility, adding that its goal is to put people back into jobs, not increase income inequality.

At least this gives us a clearer picture of the Fed's considerations. So...if not now, when?

US Fed - To raise or not to raise?

Come September 18, the most hotly debated decision will be known: whether the US Fed will raise its interest rates. Here is my cow sense on what will happen and why:

The Fed is likely to raise rates, if not this time, at least by 2016. Rates have been held close to zero since December 2008. Amidst a lamentable recovery, the Fed's dual mandate of employment and price stability have been about met: Unemployment has halved to 5.1% since its peak in 2009, and inflation, at 0.2% (for the last 12 months till Aug 2015) is slowly approaching its target of 2% (Inflation for a large part of 2014 was nearer 2%).

In addition, assets are reaching "bubble" territory. In her July 15 semi-annual testimony to the Senate Committee, Janet Yellen has alluded to this herself by warning that she sees signs of asset price bubbles forming in some markets such as those for leverage loans and lower rated corporate debt, while indicating that stocks aren't overvalued. Car sales are rising at the quickest pace in a decade (also fueled by low pump prices), while commercial real estate prices are going through the roof.

Detractors (i.e. the World Bank, Lawrence Summers, Lloyd Blankfein) claim that raising rates would hurt a fragile recovery and impact emerging markets; the higher interest rates would cause outflows from emerging markets into the US. However, as pervasive as the impact of this decision may be, the US has to tend to its own backyard in order not to sow the seeds for runaway inflation and asset bubbles, as during the Greenspan era.

Whatever the case, it is most certain that a rate raise will happen; if not in September, at least within 6 months. Should it happen on September 18, it will be largely priced in as the Fed has done a good job of preparing the markets for it. If it doesn't, the markets will likely continue with its upward trajectory.

2015 SG elections - takeaways for the incoming government

In Singapore, we are heading into the elections held every 4 years. This time, the elections were held much earlier than the legislated date of January 2017, presumably on the back of raging patriotism stemming from the country's 50th anniversary festivities, and death of Lee Kuan Yew, widely recognized as the nation's founding father.

Singapore has the shortest election campaign of 9 days, including a day for "cooling off", compared with around 40 days for the UK, 180 days for the Philippines, and more than a year for the US (http://www.bloomberg.com/news/articles/2015-09-08/quirks-of-singapore-s-elections). No, I don't think this is proportional to the size of the country,but the strength of the opposition. 8 days were more than enough for the various parties to harp over the same issues (mismanagement of constituency funds, CPF, election protocols) and towards the end, launch into unfounded personal attacks.  In Singapore, there is yet an opposition party which can match the incumbent Peoples' Action Party (PAP) in size, strength, and resources...but we are getting there.

From the various campaigns and my observations of what has happened, the following are my takeaways for the incoming government:

1) Be forward looking - 

Do not plan without ensuring that there is support to put the plans in place. Do not tell your people you will squeeze 6.9m of them into the country without ensuring there is adequate infrastructure (especially transport and healthcare) to support their needs. This will only lead to widespread discontentment and resentment, especially in the age of Social Media where every incident spreads like wildfire. Do not forge ahead only to walk into a sinkhole. 

Succession planning is critical too. Let us know who is taking us forward and why. Hopefully, someone with a different surname. 

2) Ask for consensus -

Let your people know you value their opinions, that you are not this iron-fisted autocrat; because times have changed: a highly educated populace will not put up with this. 

3) Transparency - 

The controversy surrounding the 2 state funds, GIC and Temasek arose because people didn't know what was happening with them. Where the money went, where it came from, and how much is made or lost. We get vague and inconsistent results such as 10 year, 20 year returns or whichever paints a better picture. Give us an annual breakdown of fund inflows, outflows and performance, in good times AND bad.  

This is my cow sense on what I hope the incoming government can take note of. A penny for your thoughts?