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Getting Back To Basics.

It’s interesting – a single word was predominantly responsible for billions of dollars moving worldwide within a matter of seconds as Janet Yellen delivered the Fed statement in Washington on Wednesday. Shakespeare would have been proud; valuation professors in MBA schools may want to consider adding ‘English’ to the curriculum along with DCF, comparables, etc. on how to value stocks, considering the way the markets have reacted to official statements these days.

Anyway, enough fun on the subject – the path is clear to start focusing on economics and company fundamentals again, given an accommodative Fed policy for the next few months. We recommend caution and a long term approach due to three major observations: monetary policy divergence worldwide is causing unsettling capital flows, extremely volatile oil prices are providing no real clarity on direction, and we’re in a delicate situation where markets are fairly valued and the same trades are now being discussed by everyone (long dollar, long Europe, long Apple, etc.). It’s a good time to take a step back and think; possibly take some chips off the table if you’re thinking short term gains, but definitely stay invested for the long term due to fundamental economic strength. Here are two subjects we’re looking into the details for this week:

– Commercial lending: The 2008 crisis completely changed the horizon for high risk lending by banks. Given the new Dodd-Frank regulations and balance sheet reduction requirements, obtaining loans has become noticeably more intense for small companies looking to get off the ground. However, there’s an interesting situation forming to deal with this. Highlighted by the WSJ this week, Goldman Sachs, Credit Suisse, and other banks are now forming specialty lenders known as ‘business development corporations’ – through which they can now lend in a more efficient way to small companies with no credit ratings – ‘one of the fastest growing segments of the US market’, according to the paper. Does this method have the potential for bubble creation, similar to the 2000s, where poorly-vetted sub-prime mortgages laid the foundations for disaster? Sure. But remember – small businesses (with less than 500 workers) employ close to 90% of the US labor force, according to the Small Business & Entrepreneurship Council. Keeping this sector moving is pretty critical for the US – and with obtaining loans as difficult as is, we’ll take whatever we can get. Meanwhile, according to JP Morgan’s ‘Eye on the Market’ report, commercial bank loan growth is also accelerating – at nearly 8% YoY in 2015, rising steadily since the depths of -10% in 2010. The bottom-line: Small businesses can succeed if they get capital – and it’s looking like they slowly are. Our favorite proxy for domestic small cap growth is the Russell 2000 index – we reiterate our recommendation from earlier this year that the IWM ETF remains a good place to be, given domestic economic strength, increasing capital access for small businesses, and shelter from volatile currency movements.

– Biotechnology: Since we recommended this field earlier this year, the sector (represented by the IBB ETF) is up over 15% – in less than 3 months. Our opinion is that this is not a bubble; the field is literally one of the only ones showing solid growth potential – and that’s why the market has been clamoring to get into it. Take the example of last week’s Alzheimer’s breakthrough by Biogen – it’s pretty fascinating to know that such breakthroughs could completely alter lives. Ask yourself the question – if you have millions of dollars, what else would you want (for yourself)? We’re betting living longer is a thought that has entered several peoples’ minds. It certainly has for noted venture capitalists like Peter Theil, who’s aiming for 120 years, according to Bloomberg. The biotech sector is red hot for capital, and while such short term parabolic returns may signal potential correction, you know the quest for longer life expectancy and better health is not going anywhere. Stay invested for the long term – we have solid expectations that it’ll pay off.

What it means for you: As the Fed meeting dust clears, stocks have some room to run with the accommodative monetary policy, but stay prepared for significant volatility given potential interest rate hikes later in the year. Frankly, with the immense impact of such meetings on valuations, predicting short term returns is nearly meaningless, in our opinion. We reiterate watching and investing in structural trends such as the ones mentioned above and in our columns below by looking at least 2-3 years out, while investing the bulk of your money in passive ETFs such as SPY and VXUS. Keep looking into the details while thinking big picture, and be part of the smart money by winning in the long term on Wall Street.

Neel Kulkarni March 22, 2015 Stock Insights Read more >

Caution: Turbulence Ahead.

Let’s cut to the chase: The Fed is totally in charge of the market’s moves in the next few weeks.

Interest rate hike conversations are basically dominating every news article on the capital markets. While everyone knows it’s difficult to predict market returns, we can say with certainty that ‘patient’ will be the most discussed word during Wall Street happy hours on Wednesday evening, depending on whether Janet Yellen utters it in her press conference earlier in the day.

The payoff is simple. If she doesn’t say the word, an interest rate hike is coming soon. If she does, global markets will probably celebrate with some wild, spring-break style partying as the inevitable rate increase gets delayed. And, with central banks worldwide bracing themselves through all possible measures, although well-intentioned, we find ourselves for the next few weeks – more than ever – in a situation where monetary policies are driving stock prices, impacting currency valuations, displacing imports and exports, and making tourists change their plans.

The good old state where economic strength and company fundamentals drive stock prices will come soon, hopefully. In the meantime, making short term moves by trying to predict the Fed’s policy is akin to gambling, and we don’t think it’s worth the risk. So, continue to think long term, and detach from the daily news noise. In light of the projected turbulence up ahead, here are a few investment ideas worth looking into:

– Small Caps: Companies described by the Russell 2000 derive over 80% of their revenues domestically, according to the Bank of America – so, they’re way less affected by international currency trends, including the (increasingly) strong dollar. Per data from Perritt Capital, ‘during periods of dollar increases of 15% or more, small-caps have achieved an annual total return of 13.6% vs 10.7% for the S&P 500’, going back to 1970. Meanwhile, the Russell 2000 has averaged returns of 2.5% 3 months after a fed funds rate increase, 12.6% 6 months after, and nearly 16% a year later, based on Perritt’s data between 1980 to 2005. This sector isn’t cheap from a P/E standpoint by any means, but it’s worth considering an ETF like IWM for a bit of shelter when we look at the dollar’s strength, impending rate increase, and domestic US economic improvement.

– Infrastructure Growth: This is a long term play. According to PwC’s Capital Project and Infrastructure Spending Outlook, ‘Worldwide, infrastructure spending will grow from $4 trillion per year in 2012 to more than $9 trillion per year by 2025’. Meanwhile, according to the World Bank, ‘a 10 percent increase in infrastructure investment contributes to a 1 percent growth in GDP’, and the ‘number of people living in cities [worldwide] is expected to double by 2030’. Infrastructure needs are a no-brainer for the world in the long term – ETFs such as GII and IGF can provide good exposure to this sector in your portfolio.

– Financials and Emerging Markets: Interest rate hikes will bring stocks down – but structurally, the US is rapidly improving. The financial sector hasn’t taken off yet, and we emphasize an investment here for reasons noted in our February 8^th column. Meanwhile, remember that active fund managers aren’t paid by their clients to hold cash. As international markets diverge in the coming weeks, they’re going to reallocate their capital somewhere, and you want to be exposed to the countries that will gain from inflows aided by internal structural reform. Per our column on the 26th, India, Mexico, South Korea, the Philippines, and Indonesia top our list. Consider buying and holding ETFs that correspond to these markets, and keep your seat belts on. The ride will be tough as the year goes by, but even if they fall, in the long term you’ll do fine.

What it means for you: Barron’s recently highlighted that ‘the pace of redemptions from hedge funds slowed in January ($8.9 billion) from December($28.1 billion)’. In the ongoing 6-year old bull market, hedge funds have significantly underperformed the S&P 500 – not thoroughly unexpected, as their intention is usually to deliver absolute returns while protecting from downside, as the word ‘hedge’ suggests. The smart money investing in such funds may be suggesting that with redemptions slowing, the markets are primed for a pullback.

Individual investors are notorious for buying high and selling low – meaning panicking when stocks fall. At a time when market turmoil is imminent, a diversified stock portfolio along with a chilled out attitude is the way to go. Sit back, stay invested, take a long term approach, and avoid getting trampled by the bulls, bears, and little guys duking it out on Wall Street in the coming weeks.

Neel Kulkarni March 15, 2015 Stock Insights Read more >

Noting The Lights On Wall Street.

The past 7 days’ financial news was enough to keep market connoisseurs continuously occupied, and pretty happy. Among emerging markets, India’s budget release showed a balanced approach to deficit reduction and spending, and China lowered its interest rates to join the rest of the international central bank herd. Meanwhile towards the west, Warren Buffett’s annual letter got dissected, European data showed positive signs, the Dow announced it was adding Apple to the menu, and the US jobs report blew through expectations. Alongside, NASDAQ’s conquering of the tech-bubble mark on Monday was fun to note, but pretty insignificant – considering adjusted for inflation, it’s still nearly 40% off the 2000 peak. All in all, we’re pretty content with where the global economy stands from a long term perspective, but note some temporary caution required. Here are 4 subjects on Wall Street to keep an eye on:

– The onset of rising interest rates: Since 2008, investors have fled to stocks for yield. Friday’s jobs report continues to show stellar growth in employment. We do recognize that wages didn’t grow significantly – but we believe that it’s only a matter of time – and among several data points, BMO Private Bank’s Jack Ablin summarized a key observation very well: ‘strikes at oil refineries, west coast ports, and pay increases at Walmart and TJX are showing that bargaining rights for workers are increasing’. The labor market is tightening, and the Fed’s aims are well on track to being met, in our opinion. All these factors point to a rate hike sooner than later – likely in the summer. As the required return on assets will increase when this happens, future cash flows from companies (used to determine stock prices) will get discounted more, and stocks should, theoretically, come down. A healthy pullback is much needed, and we think the time has come to lower expectations from the S&P 500 for some weeks.

– Private valuations: The frothiness in the private sector continues to worry us. Company valuations, along with young, fast money and real estate price growth in the Bay area, as well as the cyclical nature of the technology industry is leading us to believe that any minor company busts will lead to VCs tightening their belts, and also catalyze consequent pullbacks in the biotech and tech sector. Consider that IBB, the iShares Nasdaq Biotech ETF, is up 12% YTD and has a P/E of 33 (according to iShares). That’s pretty unsustainable, in our opinion, in the short term. While not a major risk, we think this subject is worth keeping an eye on (even more than oil volatility – a subject that keeps dominating headlines).

– Apple’s impact: This magical, life-changing company has enough cash on its balance sheet to make a material reduction in Greece’s debt. As if we don’t love the company enough, how epic would it be for Tim Cook to swoop in and literally save the Eurozone? Anyway, back to the point. With its inclusion in the Dow index starting March 18^th, Apple will represent approximately 4% of the Dow and S&P 500 index, and nearly 10% of NASDAQ’s market weight. There’s no hiding from this giant anymore. Historically, the stock hasn’t done much (in the few weeks) after big product launches, and with the iWatch event this week, a pullback for the stock (due to any product disappointment or simply as a breather from its colossal run-up in the past 3 months) could lead the markets down too.

– The Eurozone ahead: We reiterate buying (currency hedged) European stock ETFs; even with the run up this year, the region remains undervalued. The MSCI Europe Index shows a forward P/E of 15.9, compared to 16.8 for the MSCI World Index and 17.6 for the MSCI USA Index. Eastern European PMI data and German manufacturing is showing significant improvement, and inflation expectations are increasing for later this year – countering the threat of deflation. Meanwhile, rising corporate profits from the weak euro and low oil prices should help multinationals in the coming quarters. Bank of America’s Capital Markets Outlook last week noted that ‘the austerity that held back global growth after 2010 is slowly fading, especially in Europe’. Importantly, we note that quantitative easing begins there this week. Bespoke Investment Group had an interesting observation that we can extrapolate to the region: During the multiple initiatives in the US in recent years, the S&P 500 rallied 36.4% during the 1st round of quantitative easing, 24.1% after the announcement of the 2nd round of easing until the end, and during the 3rd round, according to the WSJ, over 25%. Whether QE is good for growth remains a polarizing question among economists, but it has certainly shown to be good for stocks – and we can expect something similar from Europe ahead.

What it means for you: The yellow traffic light is a confusing one – neither red or green; in different countries it either means slow down, or get set to go. But one thing’s for sure – we can think of it as depicting temporary caution – and that’s what we’re taking away right now from the data. In the short term, we see a breather in the S&P 500 – mainly due to the 1^st point above. But structurally, the US economy is showing solid strength, making a case for buying on the dips if you want to capitalize on the rebounds. Other than the passive ETFs (such as SPY and VXUS) that we recommend for the long term with the bulk of your assets, we reiterate investing in the consumer discretionary sector, the transportation sector, and Europe for possible outperformance over the market in the coming year. In the meantime, stay invested and in sync with the details on Wall Street.

Neel Kulkarni March 8, 2015 Macroeconomic Insights, Stock Insights Read more >

Moving With The Emerging Markets.

Deciding where to invest abroad can be as confusing as figuring out the color of the dress (‘that almost broke the internet’ – USA Today) this week. If everyone thought the same way, there’d be no debate, no marketplace, and no room for improvement. However, for the dress, there was a science behind the reasoning – while for understanding the financial markets, we look at economics – a social science, in which other than just supply and demand, the interaction of humans in society is what drives the result. That same concept provides an interesting question – are we able to note what international regions are making the right decisions for the future – before other investors? We’re projecting some outperformance from a set of emerging markets in the coming years. Stay with us:

The 2000s was a decade undoubtedly ruled by the BRICS (Brazil, Russia, India, China and South Africa) – a group of countries filled with untapped resources, aspirational workforces, and insufficient capital and infrastructure at the start – meaning there was significant room for investment. Goldman Sachs’ Jim O’Neill coined the term ‘BRICS’ in a landmark paper promoting them in 2001 – and consequently delivered one of the best projections in Wall Street history. This set of countries led the world’s growth, and gave a cumulative stock market return of over 420% from 2001 to 2010, compared to a 44% gain for the MSCI All-World Index and approximately 15% for the S&P 500.

So, does the credit all go to the fiscal and monetary heroes of these nations, that took the baton and ran with it for 10 years? Definitely, much of the progress came from the policies they implemented. But we believe there’s one factor that doesn’t get enough credit – a factor which the BRICS themselves didn’t have much of an influence on. And that’s the US interest rates.

Step back into 2001. The US was gathering the pieces from the technology bubble bust – and to help, the Fed stepped in and reduced interest rates from around 6% to below 2% – rates not seen since the 1950s – to get the economy back on track. Consequently, capital fled the US in search for yield, and with the BRICs positioned perfectly to greet it with the situation described above, came the outperformance. As the US’s consequent economic boom via consumption fueled Chinese manufacturing, Indian outsourcing and commodity consumption from Brazil and Russia, the BRICS were able to withstand the Fed’s rate increases from 2005 towards 2007. Consequently, the 2008 recession occurred, and we’re now somewhat back to square one, with even lower rates than 2002 and a much weaker global state than in 2006.

So, the real question is – which emerging countries – BRICS and beyond – took advantage of the capital rushing to their borders in the 2000s, and invested it wisely for the long term? Which countries shored up their infrastructure, delivered structural reforms, invested in education, privatization, and transparency to ensure that when the rates did go up, they’d be in good shape? We worry that Brazil and Russia did not take advantage of the cheap capital inflows to implement significant structural reforms, and China’s growth will continue to slow unless it starts focusing more on domestic consumption and promoting free markets. As they do, of course, we’ll revisit them. But in the meantime, in our opinion, the BRICS as a package deal is over – and the importance of the EEM index as a whole is diminishing. If we want exposure to the developing world, it’s time to be a bit selective.

So, we decided to screen the following factors to determine the next set of countries to outperform the world: demographics, primary contributors to GDP, global competitiveness, the orientation towards free markets, and leadership objectives involving private investment, foreign capital incentives, and smart government spending. We find Indonesia, the Philippines, Malaysia, India, and South Korea to fit the criteria for investment along with Mexico and Nigeria, and believe these are the countries to watch for the next decade. Indonesia has rapidly risen to 38^th from 50^th in the Global Competitiveness Report by the WEF in just 2 years. A young population with a highly educated workforce, driven by technology, favors the Philippines and India, along with infrastructure-driven governmental spending and foreign reserves. Mexico has rapidly reformed its manufacturing sector to take advantage of international consumer discretionary spending, and South Korea remains coupled with (solid) US growth due to its export-driven economy. Nigeria, despite regional instability, has the fastest growing large African economy and population – we find this to be a very attractive entry location for the likely emergence of the continent in the coming years. Meanwhile, note that Wall Street’s joining the party – with MINT, TIMPS, and other acronyms slowly making their way into research reports, and replacing BRICS as the next set of world outperformers. We believe there’s plenty of room for everyone on this ride; it’s worth allocating a bit of your money to ETFs that provide exposure to these countries for a 5 year horizon.We’ll be speaking more on this subject in the coming weeks.

What it means for you: Given the impending US interest rate increase, we felt it was worth reflecting on the case study of the BRICS – and the highlighting the importance of understanding the drivers of any investment’s performance, rather than the performance itself. Today’s globally connected economy brings influences outside individual nations’ controls – and the ones that take advantage of them with a long term, visionary approach, are the ones you want to invest in for the coming years. Similar principles are applicable to single stocks as well. Refer to our column on ‘Keeping It Real While Investing’ for our thoughts on blending passive and active investment distribution, and think about allocating a bit of capital to the countries mentioned above in the coming weeks to benefit from the structural progress of the emerging markets.

Neel Kulkarni March 1, 2015 Macroeconomic Insights Read more >

Staying Ahead Of The Street.

You’re probably exhausted of hearing the words ‘interest rate hikes’, ‘Greece’, and ‘crude oil prices’ over the past few months. Fear not, we’re all pretty much in the same boat. Unfortunately, with all 3 subjects in the hands of policymakers, the outcomes can be influenced only to an extent by free markets (sure, oil prices remain low due to the excess of supply over demand, but it’s something Saudi Arabia could influence very quickly if it decided to deviate from the waiting game with US shale players). So, let’s look into some less-covered financial facts that are worth another glance, and at the end, discuss what they mean for you as we enter February’s last trading week:

1. Fundstrat’s Thomas Lee recently pointed out that the percentage of US accumulated depreciation to gross plant assets is now over 50% in the S&P 500, for the first time in history.

Whether capital expenditure will increase this year is one of the two compelling questions we’re watching for in 2015. Such statistics further our belief that it’ll happen sooner than later – companies can’t just keep depreciating their assets forever. So it’s a question of ‘when’, rather than ‘if’, they’ll start spending. And ‘when’, in our opinion, is contingent on whether a potential global economic slowdown later this year deters US corporations from spending their cash. We remain optimistic that they will.

2. With January’s employment report, the US is now down to a 5.7% unemployment rate – ‘among the lowest in the club of [rich] OECD nations’, as stated by The Economist. In fact, the publication goes on to state ‘at last, a proper recovery’ for the United States, where ‘all sorts of Americans are feeling more prosperous’.

The last sentence above is key, with the average weekly earnings in January showing the biggest increase since mid-2011. More people are finding employment, and therefore, can spend more, along with increasing wages. Also, remember that they’ve got approximately $750 more in savings for 2015 due to lower gas prices, per the US Energy Department. We’re pretty happy with the US economy’s progress and growing discretionary spending potential, especially considering the bleak international outlook. It remains a safe, competitive, and growing economy where we believe the investment reward is well worth the risk in the long term.

3. The number of private equity funds is at an all time high, according to Palico, an online private equity marketplace (highlighted by CNBC). And according to the WSJ, there are now at least 73 private tech companies valued at more than $1 billion, compared to 41 a year ago. It also highlights that 2014 was the most lucrative year for venture capital since 2000.

Our belief of it being a yield-parched world is further solidified by these three facts above. Keep in mind that markets are trading at moderately expensive levels, a Greek exit (we agree, it’s more fun to call it Grexit) remains a risk to unraveling the Eurozone, and global bond yields are at ridiculously low levels. Meanwhile, a possible capital flight later this year due to US rate increases is not really enticing investors to rush into emerging markets (for example, the EEM tracker has underperformed the S&P 500 by over 10% in the past year). Therefore, to earn some return, investors are scouring all sorts of alternative routes to put their cash to work. This includes private equity, venture capital, shareholder activism, and other uncommon methods that most retail investors can’t access easily. So, be careful with making risky single stock trades – the smart money may be hinting that there’s no value left there, and therefore has moved on to other alternatives as shown by the 3 points above.

4. US corporate bond sales hit an all time high in 2014, at more than $1.5 trillion, according to FactSet. Meanwhile, this January, Apple conducted a $6.5 billion bond sale to lock in low interest rates. And, we highlight that the utilities sector is the worst performer in the S&P 500 so far this year.

The utilities sector is commonly used as a proxy for bonds due to the stable dividends and company risk profiles. The 3 points above show that companies and investors are preparing for a US interest rate hike later this year. We’ll be watching the Fed’s meeting minutes next week for hints on whether this happens. Inflation is not yet at the Fed’s target levels, and with a chaotic global geopolitical scene, it may just hold back. But at the moment, the markets – and we – are factoring in a rate increase in our decisions.

What it means for you: Per our previous article, if you can’t influence a policy maker, all you can do is adapt. Invest most of your hard earned money passively with ETFs such as SPY and VXUS and ignore the daily news noise – you’ll be fine in the long term. Still, it’s important to know what can impact your money. In the meantime, if you want to invest actively, note that 43% of active large-cap fund managers outperformed the Russell 1000 index in January per CNBC – way higher than the meager 20-odd% in all of 2014. So, take solace in knowing that the volatile markets so far – and likely ahead in 2015 – may be providing more short-term opportunities for smart investors to capitalize on. Companies benefiting from capital expenditure, consumer discretionary spending, and the US market as a whole should provide decent, stable returns in the next 2-3 years. Meanwhile, in the short term, choose single stocks extremely carefully, base your decisions on their products, management team and vision, and remember that high-dividend stocks might suffer significantly when interest rates do go up. For more ideas, check out our columns below, and keep an eye on the risks as you move ahead with the markets.

Neel Kulkarni February 22, 2015 Macroeconomic Insights, Stock Insights Read more >

Keeping It Real While Investing.

When we mix a delicious Greek gyro with an excellent German lager, we get an average combination that doesn’t do justice to the epic individual components. In any case, we survive, with a moderately satisfying meal. Greece’s PM, Alexis Tspiras – voted in recently by his country with a mandate of removing austerity – has been making some headway with his European counterparts in renegotiating the country’s debt details. We project a compromised deal will be reached between the parties involved in the coming weeks, leading to short term stability and a continued bullish European market sentiment. But even if it doesn’t, we need to be prepared – and in the meantime, will projected US interest rate hikes, global currency wars and geopolitical issues all calm down and lead to glorious results that make life simple? It’s unlikely. The world’s complexity and intertwined nature needs to be factored in to your investment decisions. We, or likely you, don’t have the ability to alter Tspiras’s and Angela Merkel’s mindsets – unless you’re on their board of advisers, or hanging out with them on the weekends. So, all we can do is adapt to the hand we’re dealt – and take a strategic approach.

According to John Bogle, the indexing pioneer and founder of Vanguard, asset allocation (meaning, dividing your investment between equities, bonds, real estate, commodities, etc) is the primary driver for over 94% of your investment return variation. Security selection and market timing comprise the other 6% in terms of return contribution. So essentially, regarding stocks, Bogle’s point is to stay invested in the broad market rather than risk choosing and losing. And while we keep seeing the stars of the latter two methods in the media, remember – they’re only a few percent of the population. And, within this few percent, they may be activists – handling big funds that influence management teams and actually alter future cash flows, rather than just project the same flows the market is factoring in (leading to today’s stock price). It’s unlikely that you have the horsepower to do this type of stuff (can you picture yourself picking up the phone and calling Google’s CFO, asking for a dividend?). So, with this background, here’s an approach to consider for your investments.

– Think about investing your hard earned cash through a combination of passive ETFs (such as a combination of SPY and VXUS) for the long term, and disengage yourself from single stock risk, short term volatility or downturns. Over the past 80 years, stocks have doubled your money every 10 years, approximately. Why miss out on future gains, assuming the world continues to progress? It’s a great place to store your money and relax with a long term horizon.

– After this, if you have some free time and want to play around with the remaining few percent, look into certain sector and region ETFs if you think you’re seeing something the market isn’t – or believe the world will move in a certain direction with time (remember – this is a slight deviation from Bogle’s methodology – but we think it’s worth it to an extent). We recommend the technology field, biotechnology, financials and global infrastructure, among others, for 2-3 year time horizons/tactical plays. Also look at countries and regions to invest in – check out our Trends for 2015, Germany, and India columns below for ideas. Funds remove single stock risk, so if you think you are onto something macro-driven, we recommend going with the broad ETFs.

– Play around with single companies only if you have the time to research, and think you see something in the future that the market is ignoring – or believe that human sentiment plays a role in mispricing stocks. Sometimes, we agree that markets overreact. Remember JP Morgan falling over 24% in the month the news of the London desk trade-gone-bad flashed on CNBC? We don’t think that drop was warranted given the company’s performance otherwise. High frequency trading, meanwhile, is responsible for nearly half of the US equity volumes these days, and short term news or unvetted reports can cause electronic trading to go haywire, again, leading to overreactions and opportunities. However, we wouldn’t count on this strategy as a sustainable one. If you want to look into single companies, we advocate doing serious research in terms of their products, management team and financial statements before going for it. We sincerely appreciated Tim Cook’s comment at the Goldman Sachs Technology Conference last week, where he said Apple doesn’t focus on the ‘numbers’, but rather, on what ‘creates the numbers’. Such are the firms we like to invest in – the ones that lead the drive for innovation in achieving a smarter, better world through their vision and products. Check out our Performance and Outlook page for some ideas, and meanwhile, stay invested with the financial markets and in sync with the details.

Neel Kulkarni February 16, 2015 Stock Insights Read more >

Systematically Investing In Financials.

When you compare the developed world to developing regions, what criteria would you usually compare? Infant mortality, GDP growth, literacy levels, poverty, etc. probably top the list. The strength of the capital markets, however, is often overlooked by many people – and that’s something worth looking into the details, according to us.

In the developed world, strong equity and debt markets allow entrepreneurs to reach potential investors and seek funding with far greater ease, facilitating the pursuit of progress. Strong markets bring the transparent, liquid movement of money, provide regulations protecting buyers and sellers, and have governance that encourages innovation and intellectual property. They let companies focus on what they do best – providing products and services that the world is looking for – and provide fair, efficiently priced values so investors can make informed decisions. What’s the benefit of having world-changing ideas if you can’t pursue them due to a lack of funding? Encouraging investment and facilitating robust, transparent capital markets is a critical objective for the developing and frontier markets to progress, in our opinion.

On that note, let’s look into the details of the US financial sector – the backbone of the world’s strongest economy. As a tactical play, the S&P 500 financial sector (XLF) is a pretty tempting buy right now. Here are three reasons why we think so:

– A strengthening economy: The US job market is showing significant, sustained growth, and finally, wages are also showing signs of increasing – as we think will inflation, and therefore, the interest rates in the 2^nd half of 2015. According to the Financial Times, Apple’s corporate bond sale earlier this month signals companies are racing to lock in low rates, projecting a rise sooner than later. The financial sector will be one of the beneficiaries of the interest rate rise as they earn more on their deposits (through steepening yield curves/differences between short and long term rates), lend more with a strengthening economy, and see investor confidence with time. In January, the sector had the 2^nd largest monthly (positive) change in jobs, according to WSJ data – sandwiched between construction and restaurants/bars. Think about it. Those two categories hire more hourly employees and are susceptible to weekly layoffs; financial companies would hire longer term. This projects management confidence, and investors should take note.

– The recent performance: Last year, the financial sector underperformed the S&P 500 by nearly 4%, and this year has started pretty rough, with XLF down a massive 7% compared with a flat broader market. JP Morgan, Citigroup, and other major banks trade at forward P/Es between 10-13, far below the S&P 500’s and their own recent averages, according to Yahoo Finance data. The banks have shaped up with stronger balance sheets through deleveraging (per McKinsey, the financial sector debt has fallen by 24 percentage points of GDP) and capital-bolstering due to regulatory requirements, but investors haven’t rewarded them…yet. We don’t believe such a discount is warranted, and it’s worth moving in at these levels.

– The components: Berkshire Hathaway is the biggest holding in XLF. Its stock hasn’t really blown away the S&P 500 since the recession, and CEO Warren Buffett will possibly name a successor this year. That may provide a change in strategy, and a possible kick starter to the stock. Meanwhile, JP Morgan, Citi and other banking behemoths remain under regulatory-hangover, ‘systematically-important’ tags and too-big-to-fail worries. We think the litigation issues have passed, but the stocks don’t reflect that. Earlier this year, Goldman Sachs called for the breakup of JP Morgan due to recent capital requirements, stating it could be worth as much as 25% more if broken up. If it occurs, this could start a trend, and undoubtedly benefit shareholders. Meanwhile another set of the financial sector, regional banks, will benefit from the strong dollar and strengthening economy due to being domestically focused and not facing global currency headwinds. Real estate investment trusts, meanwhile, were among the best sub-sector performers last year – and S&P is going to give this field its own designation as an 11^th sector in the index in a couple of years. This projects an increasing importance, and we suggest allotting some money now.

What it means for you: Think of adding a bit of XLF to your portfolio. The WSJ highlighted a fascinating insight in late 2014 from a research paper from NYU’s Edward Wolff – ‘for the wealthiest 1% of Americans, only about 9% of their total net worth is tied up in their home. That’s compared to 63% for the broad middle class’. The rich invest, with a significantly higher percentage of their assets tied to stocks, compared to the less rich. Consider the capital markets as a smart way of storing some of your cash in the long term, and know that by doing so, you’ve probably directly or indirectly benefited smart ideas – such as the next Facebook or Apple – that need capital to change the world.

Neel Kulkarni February 8, 2015 Stock Insights Read more >

Looking Into The Trends For 2015.

Some months ago, humankind rejoiced when the FAA started allowing travelers to keep phones on in-flight. While most of us were busy thumbing through our Facebook newsfeeds while the attendants nagged us to turn them to airplane mode, some logical investors were looking at the debt outstanding and private equity options for a little known company called Xhibit, betting it would collapse.

Looking into the details, we see that Xhibit is the owner of Skymall – the ubiquitous magazine that we all used to glance through in-flight because there was nothing else to do in that Jurassic (pre-airplane-mode) era.

Last week, the company declared bankruptcy – the phones being kept on wiped out their magazine’s customer base and corresponding revenue. A pretty nice reward for those logical people; it’s amazing how some simple observations could provide smart trade ideas. Quoting Sherlock Holmes, ask yourself this – you see, but do you observe? Facebook, Chipotle, Apple and Amazon, among others, have the most loyal customers, according to a late 2014 survey by Brandkeys. Check out these companies’ profiles. If we had invested in Nike or Microsoft in the 1980s (say, since the Oct’ 87 crash) after seeing similar trends then, you’d be up over 1000% in your investments. Do the ones above resemble them? I suggest allocating a bit of money to such stocks and chilling out for the long term, Interstellar-style. We’ll revisit the subject below with Shake Shack. With the majority of your money, of course, invest passively (for example, with the SPY and VXUS ETFs) and benefit with the markets in the long term. Meanwhile, for some fun, here are a few tactical plays for 2015:

1 – Tech and Biotech: We suggest an allocation to both – they aren’t as affected by interest rate hikes, and several stock picks lead the way in consumer trends, such as the ones above and Google. A McKinsey Global Institute paper from January focuses on productivity to save the day in a worldwide slowing growth environment. That’s technology’s next step. And an interesting quote from a Forbes article some months ago – ‘of all the deals with an initial financing between 2000-2010 that have [been] exited, roughly 8% of life science deals vs 4% of tech deals delivered above 5x realized returns’. Venture capital will continue to feed the booming biotech industry, and fuel the next steps in curing conditions, diseases and delivering higher life expectancy – which is slowly going upwards worldwide.

2 – Oil has bottomed out: We feel that the low 40s for WTI was basically it for oil – it isn’t sustainable. Companies are falling head over heels to cut their capex forecasts, including Conoco Phillips and Continental. Supply will reduce in some months. Wait for another week or two for the earnings season to taper off, and start buying XLE slowly.

3 – The bullish dollar trend: This has some more ways to go this year, with international regions fueling currency wars (Singapore joined the herd last week). It’ll hurt US exports, but that only forms 14% of GDP, according to Quandl. Smaller companies that derive revenues domestically may benefit more, and are worth looking into.

4 – Spending (wage growth and consumer discretionary stocks): Will it increase in the US? That’s a compelling question for 2015, along with capex spending. An interesting statistic from a Washington University research paper highlighted by the WSJ: ‘In 2012, 30% of consumer spending came from the wealthiest 5% of US households, compared to 23% 20 years ago’. Meanwhile, studies show wealth has gotten even further concentrated since the recession for the top 1%. As a result, we see the high-end retailers such as Nordstrom and Tiffany’s outperforming JC Penney, Sears, Target, etc over the recent 5 years. If we see wages growing, the middle class will benefit, and so will the retailers they go to.

5 – Macro trends: Our wild, surprise projection since the beginning of January is the European Stoxx 600 could outperform the US S&P 500, due to quantitative easing, and simply being oversold (last week, the WSJ noted that European stocks are at a 40% discount to US stocks, compared to 10% historically). Make sure to bet, though, via a currency-hedged ETF, such as HEDJ. Our projecting in mid-January that Germany is a smart investment has paid off well so far. But we’re in it for some more months. For other international picks, check our Outlook for 2015 post.

6 – Cybersecurity: Stocks in this subsector are richly valued, so while we don’t recommend buying in wholesale right now, it’s worth looking into. With hackers dominating headlines and business news networks turning into TMZ-equivalents far more often than in the past (Sony’s executive email leaks, for example), companies will spend on this to save on the embarrassment.

These are some trends to keep an eye on – we’ll keep adding as the year goes on.

To end on an appetizing note, let’s look into the details at Shake Shack. The Flatiron/Madison Square Park area in NYC is among the most frequented tourist destinations in the city. It’s also Shake Shack’s primary location, and significant consumer research (meaning, standing in line) reveals a great blend of tourists and locals. Now remember – high-browed New Yorkers traditionally frown upon chains. However, Shake Shack already has over 20 thriving locations all over the place. This burger must have made the cut for them. Meanwhile, it’s strategically positioned in JFK’s Terminal 4 at B23 and B37; at least half of the international travelers there have to walk past them to get to their gates to board for every corner of the planet, every day. What better way to say goodbye to a most-likely memorable New York, USA visit than with an American staple burger from Shake Shack? Imagine how happy they’ll be when the taste reaches their hometown. It’s not nearly there yet. The stock just IPO’d last week, and has extremely high expectations. Still, seeing – and observing – the consumer loyalty and growth trend may provide yet another delicious return by investing in this company for the long term.

Neel Kulkarni February 1, 2015 Macroeconomic Insights, Stock Insights Read more >

The Outlook For 2015

11 days ago, the Swiss National Bank suddenly announced it was removing the cap of the Swiss Franc against the Euro, causing the Franc to soar over 30% and the Swiss market to fall over 8% in a matter of hours. Nodding off yet? Stifle that yawn for a second and check this out – that single policy decision caused multiple hedge funds to implode, estimates for companies such as Nestle and Roche to be cut by nearly 15%, and banks including Citi, Deutche Bank and Barclays to collectively lose over $300 million, according to Bloomberg. Your 401k and stock positions were most likely directly impacted. So, it matters. Now, before you close your positions and run off to seek penance in the Himalayas, relax. Stay invested and benefit with the markets in the long term. The story was just an example to highlight the fascinating way in which decisions made in global financial markets across the planet directly impact you. It’s important to know the risks that lie out there so you can plan for your liquidity needs accordingly – and be financially aware of what your money is doing. On that note, let’s prepare for the year ahead.

2014 ended with a pretty solid market performance, with the S&P 500 up over 13%. Here’s a sampling from what the Street’s finest are expecting in 2015:

– Goldman Sachs’ David Kostin predicts a total return of 5% for US stocks, based on elevated corporate profit margins, with buybacks and dividends leading the way in paying back investors.

– Morgan Stanley’s Adam Parker is looking for above 10% from the S&P 500 – stating ‘the core of our thesis is that we are in the middle of a long US expansion, one that may last until 2020’.

– FundStrat’s Thomas Lee is projecting over 15% in returns, saying ‘capital stock is again showing signs of pent-up demand, and as a consequence, companies and households will have to invest [in capex]’.

– Deutche Bank notes ‘the US upswing is self-supporting’. They’re looking for a 5% return from US stocks, and advise opportunistic investors to focus on IT companies, pharmaceuticals, and financial stocks (I assume this is based on a strong dollar, consumption growth and interest rate increases).

– Oppenheimer’s CIO states ‘valuations reflect sustained growth, healthy corporate balance sheets, and less uncertainty about fiscal and monetary policy’.

– PIMCO’s outlook is interestingly underweight US equities, and overweight Europe and Japan. Their reasoning – ‘EM Asia equities offer attractive valuations and may benefit from strong U.S. growth; European financials may benefit from ECB accommodation; we selectively participate in merger arbitrage and other event-driven marketneutral pairings’.

In general, the consensus is in the mid-to-high single digit returns for the S&P 500, with
projected interest rate increases in the 2^nd half of the year, and oil prices to be back above $70/barrel. That, by itself, implies a 30% upside in oil – and although the strategists are treating this as pretty obvious, I’m definitely not seeing any barrels being rolled up 6^th Avenue by eager investors making room in their garage; oil prices remain in the 40s despite investors saying this for a few weeks now. It’s a nice example of the risks involved in projecting for 2015.

What it means for you: You could, of course, take a passive approach by investing at monthly intervals in the global market, sitting back with a martini and watching reruns of The Big Bang Theory. This could be through a combination of the SPY and VXUS ETFs, or just the VT ETF. Definitely do that with some of your assets. For the remainder, to add some spice to your investment life, here are some themes to watch for and trade on:

– Corporate activism: With investors parched for yield in the bond markets, global markets pretty fairly valued and geopolitical risks fueling uncertainty, expect shareholder activism to continue to target the big behemoths that are slow to grow and adjust to market needs and regulations. Kellogg, Campbell’s, Dupont, IBM, and banks, among others, remain targets. Meanwhile, the average tech company age to IPO at the moment is 11 years, compared to 5 years in the dot com bubble, and there are 48 private companies valued over $1 billion as of December, according to DJ Ventures. See IPOs and M&A activity continuing forward with last year’s trends as we see acquisition trumping organics to fuel growth, and VCs cashing out with the market at serious highs.

– Volatility and stock picking: Stock swings will be pretty frequent in an environment of projected interest rate increases, so wear your seat belts. According to Barron’s, during the 1962-81 span, in which 10-year Treasury yields tripled, large capital (actively managed) mutual funds outperformed the S&P 500 by 3% every year, on average. This year might be similar for stock picking. It also comes on the backdrop of last year, where 80% of large cap funds underperformed the S&P 500, according to CNBC.

– Corporate social responsibility: This theme will overpower profits, with the educated workforce showing an inclination for companies that emphasize this. Google, Facebook, etc remain high on the most-sought-after list, according to LinkedIn. Expect companies emphasizing actual products and their impact on people in conference calls to outperform companies that focus on lukewarm statements such as ‘increasing shareholder value’.

Watch for capital expenditure: Will it increase? This remains possibly the most compelling 2015 question. US profits remain at record highs, balance sheets have tons of cash, and the question is whether executives have the confidence to invest or not. This is a wait-and-must-watch. US wage growth remains another barometer – it has barely moved since 2008, but if inflation picks up and this increases (at the moment, WSJ Economist polls project it to), it bodes well for the US. Meanwhile, the bullish dollar trend should continue in the face of quantitative easing in international markets.

Macro trends: Countries such as Mexico, Indonesia, the Philippines, India and South Korea will outperform international peers. Common trends? Most are net oil importers, have an educated workforce, are reform-oriented, and have self-sustaining economies driven by consumption (in South Korea’s case, exports tied to the US). Meanwhile, be careful with countries such as South Africa, Russia, China and Brazil. Interest rate increases may promote greater capital flights from these countries, and commodity-driven growth may be slow with the bullish dollar holding down prices. Also, if you need any water cooler talk inspiration, there is a slight chance the EU may unravel, based on Greek election results. More to come on that in the coming weeks.

On a parting note, it’s worth remembering that this is the year before the US presidential elections. According to Forbes’ Ken Fisher, the 3^rd year of presidential terms hasn’t been negative since 1939, with an average return of 18.5%. That’s a pretty epic statistic. So be prepared. Through this week, we’ll update the Performance & Outlook page with stocks and ETFs to look into for 2015. Meanwhile, start preparing the dips for the Superbowl – and lets hope that the New England Patriots’ inflated expectations are realistic.

Neel Kulkarni January 25, 2015 Stock Insights Read more >

Taking Stock Of The German Market.

There’s a ton of stuff to love about Germany; beer, cars, football, and some seriously smooth public transportation are just the beginning of the list. The stock market, however, isn’t on too many investors’ Top-10-Things-I-Love-About-Germany files at the moment. The MSCI Germany index had a return of -10% last year, while the S&P 500 delivered over 13.7%; over a longer span of 5 years, Germany has returned 6.5% annually compared to the 15.5% return for the US MSCI index. With this significant underperformance, in my opinion, it may be time to place some money to work here, given the following reasons:

– Currency Depreciation: The Euro is projected to continue downward with quantitative easing, and Wall Street’s bullish dollar-projecting camp is growing by the day. Goldman Sachs even predicts a 1:1 Euro-Dollar parity by 2017. Companies focusing on exports benefit when the local currency depreciates, as the same goods sold internationally provide more local accounting revenues. Over half of Germany’s GDP is from exports, and while imports become more expensive, I believe the continued depreciation will bode well for Germany’s largest companies (Bayer, Allianz, Siemens, etc – all of whom have massive international revenue streams).

– US Capital Expenditure: In JP Morgan Private Bank’s 2015 Outlook, Michael Cembalest outlines a very telling graph – where the US durable goods and fixed investment as % of GDP is well below the 28% peak (last seen in 2007), suggesting the economy is far from saturated investment levels and only mid-way through the expansion phase. The US stock market has been heavily propped up by financial engineering via dividends and buybacks over the past two years, and capital expenditure remains the next stepping stone for the reviving economy (when this occurs, of course, is up for discussion – but with wages not budging, low inflation, and cheap debt available, companies have a lot of cash on hand to deploy into capital investment – so it’ll happen – stay patient). The US is the 2^nd largest export market (by country) for Germany, and considering the leadership role the US economy plays worldwide, a continued expansion will help international markets heal, along with propping German industrial exports.

– An Already-Battered Market: With European stocks getting hammered over the recent past, several hidden multinational gems within Germany have been dragged down with the herd and are trading at bargain prices compared to their peers. The benchmark MSCI Germany index itself is at a discount, trading at 12.7x forward P/E compared to the MSCI Europe index’s 13.9x forward P/E (as of Dec 31^st).

– Germany’s Engineering Prowess: There’s a reason why a country with only 80 million people has not had to deal with the outsourcing of engineering to countries such as India and China, where the technical expertise arguably exists, along with far cheaper labor. The differentiation factor for Germany is quality – something that cannot be easily outsourced and will remain a major strength, according to local sources and industry sentiment.

– East Germany’s Integration: In 2012, Morgan Stanley’s Ruchir Sharma had laid out an extremely positive scenario for eastern European growth – and in my opinion, eastern Germany should be placed in the same bracket. Note this – per CNBC, the GDP per capita in the East – even today – remains only two-thirds of the West after 25 years since the Berlin Wall fell, and unemployment is over 10% compared to the West’s 6% rate. At the same time, this is massive improvement from the past, and with population integration and government-aided investment occurring, the trend will continue, helped by proximity with the surrounding eastern countries that themselves are continuing their immersion into democratic, market-driven domestic growth engines.

– Negative Government Real Bond Yields – Germans are literally paying banks to hold their money. Sooner or later, the local population (traditionally known to be weary of stocks) will move towards the stock market in search of actual yield, benefiting the investors already there.

What it means for you: A smart way to invest and monitor is through HEWG – a currency-hedged Germany ETF that allows you to benefit from Germany’s growth while not worrying about the currency depreciation. Allocating some money to international markets is a smart approach at a time when everyone is talking about investing in the US because it’s the only developed economy showing resilience. And yes, oil-based capital expenditure cuts, a possible Eurozone-recession and deflation is looming; with the ECB set to make some unprecedented policy decisions on buying bonds in a few days, we’re looking at some pretty unchartered territory in European financial markets. However, a small investment here looks enticingly positioned compared to the risk, as Germany provides an interestingly unique diversification benefit compared to its developed Eurozone peers for the reasons above, as long as you keep an eye on the trade.

Neel Kulkarni January 14, 2015 Macroeconomic Insights, Stock Insights Read more >

Why Investing In India Makes Sense.

Whether bulls can swim or not is a confusing question (try googling it). However, one thing’s for sure – they definitely crossed some serious ocean miles last year to help the Indian BSE Sensex go up nearly 35% – and plenty are along the way right now too. The Indian stock market story remains one of serious structural, fiscal, and monetary reform anticipation, with the country well placed to perform in the coming years. A Wall Street favorite for investing in 2015, it is a consensus trade (and therefore a bit dangerous, since when everyone loves something, you want to be careful), but current foreign stock investment in India continue to be tiny compared to global counterparts – meaning, in my opinion, there’s room for everyone to have slice of the growth story in the long term. Consider this – today, the top 4 ETFs focused on India together have less than $10 billion dollars under management, compared to over $180 billion in the top S&P 500 ETF alone. Here’s why allocating some of your money into Indian ETFs makes sense:

1. The country has a ton of room to grow:

– Today, half of India’s population is under 25, and by 2020, the average age will be 29 – among the youngest in the world for a G20 economy. Young people spend, and this group is pretty seriously aspirational. By 2025, the middle and upper class will grow to over 55% and spend 3x compared to today, according to the Boston Consulting Group. Therefore, its domestic consumption growth will, within itself, provide a pretty sustainable self-reliant economy.

– Currently, the GDP per capita stands around $4,000, far lower than the world average of over $10,000 and even its peer emerging markets. Its number, in fact, is low enough to be compared to the frontier markets, such as Africa and South-east Asian nations. So, we’re starting on a very low point.

– It’s ranked 142nd out of 191 countries by the World Bank for doing business, and 54th in the global Logistical Performance Index. There’s a ton of room to improve, and fiscal agendas show the awareness of this.

– India accounts for only 7% of MSCI emerging markets index (Example tracker – EEM). While India accounts for around 5% of the world’s total market capitalization, it has a share of the world’s population of around 15%, making an interesting argument for sustained inflows in the years to come as India’s markets become more liquid.

– India’s services sector contributes over 50% of its GDP. The government’s ‘Make In India’ campaign is focusing on it becoming a manufacturing hub – a sector that has underperformed significantly, contributing to about 15% of GDP and 12% of employment, compared to over 25% in emerging market peers. Barron’s data recently stated that India’s carbon emissions per capita are around 1.9 tons per year, compared with China’s 7.2 tons and the world average of 5 tons – combining this with the inevitable needs for a transition into an industrialized nation, democratic nature, and solid relationships with developed countries, including the US, Israel and Japan, it has enough bargaining chips to not ruffle too many feathers on the climate change front.

2. It’s got the leadership to implement the changes:

– PM Narendra Modi and RBI Governor Raghuram Rajan have solid credentials. Modi’s focus on manufacturing, proven track record of implement policies successfully in his home state, and a reform-driven agenda is showing promise that the government is focused on the right issues, according to analysts. In a recent note, Morgan Stanley stated that ‘the pace of reforms is accelerating’, moving forward on land acquisition rules, labor flexibility, and a national taxation system – all previously identified as key foundations for solving the issues noted above.

– Meanwhile, Governor Rajan has delivered on his commitment to tackle inflation (down from over 9% to about 5% during his tenure) and protecting the rupee value in the face of currency wars in international regions. He has also got some fortunate backing with oil prices plummeting by nearly 50% over the past year. The country accounts for less than 1% of the world’s oil reserves but over 4% of consumption – further helping keeping inflation in check. India’s current account deficit has improved to only 2% of GDP – and as a result, put simply, ‘is less dependent on foreign capital’, according to Thornburg’s Lewis Kaufman, interviewed by Barron’s this week. While US interest rates are projected to go up this year, the country is slated to suffer much less from a capital flight than its emerging market peers such as South Africa and Turkey. On the other hand, it also provides a hedge in case the US Fed ends up, in fact, delaying the rate increase. An established Dalal Street advisor told me earlier this year that that his firm expects an 18% annual return over the long term from the Indian markets; so does Morgan Stanley and other institutional smart money.

What this means for you: With the Indian growth story looking pretty real, it’s worth joining the bullish herd on this one because, frankly, it’s still small right now. Plan to park some of your money into funds such as EPI, INDY, or INDA for a long term time horizon and gain from the international exposure and growth story of the world’s largest democracy.

Neel Kulkarni January 11, 2015 Macroeconomic Insights Read more >

Transporting The Future.

The 85^th anniversary issue of Bloomberg Businessweek in December featured 85 disruptive ideas that changed history – it had a pretty gripping countdown, with the #1 spot taken by a solid owner – the Jet Engine. In my opinion, it is definitely a smart winner – since its invention over 60 years ago, the world has truly changed in terms of global access, business, and international integration. However, its worth asking, has much changed within air travel since then? Marginally, sure, with greater cost-saving on fuel, airline alliances leading to increased connectivity, passenger comfort (maybe not even that!), and more industry competition. However, its not as if the time between New York and Mumbai has reduced from 16 hours by more than some minutes over the decades – the Concorde came close to the next major step ahead but sadly didn’t last. Now, check out SpaceX, Virgin Galactica, and other private space travel companies’ visions. In the times of Elon Musk, Mark Zuckerberg, Richard Branson, Google, and yourself, seeing the progress of technology over the past 10 years, isn’t it worth betting that the next 10 years will produce this major breakthrough? Possible vertical take off/landing locations inside cities, easier access to space leading to faster speeds between destinations on earth, maybe fully renewable fuel-usage leading to lighter planes and quicker flights, and increased private sector competition producing innovation could redefine the travel scene.

So, looking ahead with a 10 year time horizon, assuming the next breakthroughs occur in our generation, here’s what might look different:

Immigration patterns – ease of access to different countries and shorter flying times would lead to more immigration, greater culture-meshing, and physical movement of people (currently, international migrants remain steady at 3% of the world’s population).

Consumption – consequently, the access to luxury brands, foreign goods, and the ability to convert ‘wants’ into ‘needs’ would increase (McKinsey states annual consumption will go from $12 trillion to $30 trillion by 2025).

Competitive advantages – countries would have a greater ability to utilize their competitive advantages through increasing international trade agreements (we don’t expect the world to go backward, after all)– with population growth in (current) frontier markets and emerging markets far exceeding the developed world.

Education – through technology, more people would have access to education (over 5 billion online in 5+ years compared to 2.5 billion today, according to Entrepreneur), and consequently, eyes into the global world – and therefore travel and work where their personal skill sets are rewarded the best.

Healthcare – biotechnology, medical research and transportation’s progress would be able to move vaccines, medication, research and doctors across the world quicker and more effectively, consequently increasing life expectancy – projected to increase to 73 years by 2025 compared to 65 years in 1995, according to WHO. This, in turn, circles back to each other point above.

What it means for you: So, consumer discretionary funds, transportation, biotechnology, infrastructure, technology, among others, would provide nice returns if you want to park some money for several years and not look at it. Or, you could take the easy way and just buy a global equity fund like VHGEX, ACWI, or VT. In the long term, being exposed to the world is a nice idea.

Neel Kulkarni January 4, 2015 Macroeconomic Insights, Stock Insights Read more >

Drive The Street.

Today, global household wealth, as noted by October’s Global Wealth Report from Credit Suisse, stands at $263 trillion. Capital markets form a major source of growth in this wealth, with over $50 trillion dollars invested in global stock markets. Earlier this year, a McKinsey Global Insights report stated that the global goods, finance and service flows reached $26 trillion in 2012 – 50% more than in 1990. It’s obvious, both by the numbers and our everyday experiences, that the world is becoming more connected through greater data accessibility, freer capital markets, and increasing trade.

The benefits have been seen by the markets – JP Morgan’s data shows the S&P 500 index has returned over 8% annually over the past 20 years. However, the risks continue to exist. In fact, diversification is yielding lesser benefits, considering correlations between world markets – emerging regions and Europe, Africa and the Far East with the S&P 500 index – have increased from approximately .5 to .7 or more in the same span, meaning markets behave more in sync with each other compared to before.

Meanwhile, while the S&P 500 returned over 8% annually, the individual investor only made 3.5% in the same span, according data from QAIB. Why the underperformance? We believe it could be due to human biases arising from selection, impatience, simply the lack of information about the ease, accessibility, or value of investing – or perhaps not knowing where to invest. Staying informed, therefore, is critical to making the right investment decisions. EconomicStreets aims to bring information, facts and opinions that could use a second glance as we go about our lives, by tying together macroeconomics, finance, and investment research to allow investors to make informed decisions, benefit with the market, or simply better understand the role these subjects play in our daily lives. Stay with us for insights, updates and information here at EconomicStreets.com.

Neel Kulkarni December 21, 2014 Stock Insights Read more >