InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
APRIL 26 , 2017
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
Tonight and next week, in IntelDigest, we review the economic landscape and map out a thesis for investing in the months ahead. It is necessary to periodically step back and take a look at one’s investment program, to determine if your suppositions about the markets are holding up, to review the performance of the companies in which you have entrusted your funds.
The bulk of these two issues will be devoted to our ideas on the best areas to invest for the remainder of 2017. Before that, we take a broader view of the markets and political events which pull at the markets on a daily basis.
The Trump Agenda
Today was mostly an UP day (until 3:00 p.m.) in the markets because the Trump Administration finally announced its proposals for Tax Reform. What will tomorrow bring?
As you have read in our weekly missives, we believe that Tax Reform is extremely important to the U.S. Economy, and we have bemoaned the Administration’s putting it on the back burner for the First 100 Days in order to address less-important issues.
The reaction of the markets to Donald Trump’s election was a surge upward, on the theory that having a Capitalist in the White House would be Good-for-Business. From November through February, we had the Trump Bull Market.
However, the new Administration has failed to build on that confidence. Uncertainty now permeates the marketplace as the reality of a Trump Presidency has sunk in. Markets have settled into a reactive pattern, ultra-sensitive to the political news out of Washington. Will Congress be able to agree on important legislation? Are the President’s Men up to the task? What has the President tweeted today?
Meanwhile, it is doubtful that meaningful legislation will be enacted before the Fall … legislation which would spur growth in the Economy. So, the upward trajectory of the markets has stalled.
As a result, we believe that many of the stocks in the U.S. markets have hit their top for the year already. We will begin to review positions and set tighter Stop Losses in our portfolios, with the expectation that … absent some consistent progress by the Administration and Congress over the next few months … our buying opportunities are waning.
In the meantime, we have narrowed our focus for investment. We look away from the Dow30 and S&P500, and concentrate on a few market segments, which we set out below. We are trying to take advantage of the last-gasp market surge of the 2009-2017 economic expansion
As we expect 2018-19 to feature both a Credit Default Crisis and a cyclical Recession, we think that these last few months of the expansion bring us the best opportunity for significant investment gains for quite a while.
So, we set out our thesis on each of the sectors where we continue to invest in 2017.
Thesis: Mobile Payments
There are two rapidly-growing trends in the world which are converging and creating a massive opportunity for investors: digital payments and mobile phones.
Governments (including our own) have been encouraging citizens to decrease the use of Cash in the marketplace, and move to digital means for making transactions. Some governments have banned the use of Cash in certain large denominations. The result has been a meteoric rise in Digital Payments.
At the same time, more and more people are becoming accustomed to using their mobile smartphones for more than phone conversations and texting. In just the last two years, paper money has been almost completely replaced by mobile phones in the major cities of China. China has a population of 1.3 billion, and most of them use mobile phones.
You can pay for most anything in China using your smartphone, and the Chinese company which makes it possible could be the largest company in the world in a few years.
The United States has been slower to adopt these habits because we have a better financial infrastructure than most countries. However, the growth of Mobile Payments in the U.S. has been increasing … it is definitely the wave of the future.
Thesis: Machine Learning and Artificial Intelligence
It used to be that computers worked by following rules written by humans. Today, computers are given huge data sets to examine, and use their findings to write their own rules. This is machine learning.
Machine learning is changing the way tech companies develop products and do business, faster than anyone imagined. Stephen Hawking, the legendary theoretical physicist, thinks that this could be the biggest event in the history of civilization.
Jeff Bezos, the founder of Amazon, stated in his recent letter to shareholders, “We’re in the middle of an obvious … big trend … machine learning and artificial intelligence … Machine learning drives our algorithms for demand forecasting, product search ranking, product and deals recommendations, merchandising placements, fraud detection, translations, and much more.”
Using what Bezos calls the company’s “deep learning” computers, he says “customers are already developing powerful systems ranging everywhere from early disease detection to increasing crop yields.”
Amazon is one of the Big Five … also including Apple, Google, Microsoft, and Facebook … which are the biggest tech companies and the five largest stocks in the S&P 500 Index. All have market values in excess of $400 billion.
All use Machine Learning and Artificial Intelligence, although each in its own way. Each company has its own philosophy on how to use technology and change the world. All have become world leaders in processing data and turning data into useful information, because they have created massive databases on user behavior.
They have become some of the biggest companies in America in a very short time. And, there’s no way that a new business can compete with them, because their Machine Learning capabilities allow them to maximize their databases.
Our thesis is: these companies will continue to grow.
Thesis: Investing in China
Chinese stocks have been volatile, and have gone through a few boom-and-bust cycles over the last 20 years. Today, as the country tries to work its way through a difficult transition from a primarily-export economy to a consumer economy, Chinese stocks are in an uptrend … in fact, they are the best-performing stocks in the world in 2017.
This uptrend is likely to accelerate this Summer when the MSCI decides to include Chinese stocks in many of its investment funds, a move which would shift Billions of Dollars into Chinese stocks over the next few years.
MSCI is a leading provider of stock market indexes, exchange traded funds (ETFs), and analytics. In June, the index committee of MSCI will meet to determine when to add Chinese stocks to their indexes.
Despite the fact that China is the second-largest economy in the world, Chinese companies are not yet in MSCI index funds (although Hong Kong-based companies are included).
It is expected that MSCI will announce that Chinese companies will be included, beginning in 2018, and that the weighting of Chinese companies in the funds will increase gradually over several years.
Nonetheless, the announcement would launch a long-term trend of investment in Chinese stocks.
The latter half of this market analysis will appear next week in IntelDigest.