$goog

5 Reasons Why the Nasdaq is Different 15 Years After the Bubble

“The markets are the same now as they were five to ten years ago because they keep changing, just like they did then” Ed Seykota

As the Nasdaq Composite looks to make new all-time highs, some market participants just aren’t having it, throwing around the old “I guess this time it’s different.” Now given the fact that the index experienced a nearly eighty percent crash the last time we were at these levels, it’s understandable why some people are so anchored to those previous highs. But the truth of the matter is things are different this time, as they are every time. Let’s examine…

The Economic Landscape

In March 2000, the 10-year treasury was yielding 6.2%, inflation was running at 3.8% and the unemployment rate was at the lowest level in thirty years. Today, the 10-year yields around 2%, inflation is virtually nonexistent at 0.6% and the unemployment rate still has not fully recovered from pre-recession levels.

Performance leading up to the peak

In the seven years from 1991 through 1997, the index appreciated by nearly four hundred percent. And after that spectacular seven year run, it doubled in 1998. And then it doubled again in 1999. 

During the dot-com bubble, the Nasdaq 100 went from 1,100 to 4,400 in just nineteen months. This time around it took seventy-two months. 

Size and valuation

At its peak the Nasdaq Composite was trading at 500x earnings versus 31x today.

Shifting gears to the Nasdaq 100, which has more than $50 billion in ETFs tracking it, we see the index is now much more tilted to large cap stocks. The total market cap of the Nasdaq 100 (in billions) was $2,218 in 2000 and $4,822 as of December 2014. Furthermore, the smallest company in the index today has a market cap of $7 billion and the average market cap is $48 billion. For comparison, the average size of an S&P 500 company is $38 billion.

The actual construction of the index

At its peak, technology stocks represented 70% of the index, today they are 55%. Healthcare now makes up 15% of the index, up from just 5% in 2000. Today the dividend yield on the index is 1.1% which is one thousand percent higher than it was just a decade ago.

The individual components of the index

Kraft, Staples, American Airlines, Bed Bath and Beyond, Whole Foods and Tractor Supply, to name a few. These are not very reminiscent of the revenue-less high fliers from the dot com days.  

So…

If you’re trying to scare people, the parallels are striking. If you’re objective, well, they’re not. When Sir John Templeton said the four most expensive words he was referring to fear and greed and the constant nature in which investors behave. If he were alive today, what he would most certainly not have done is throw up a fifty year arithmetic chart, draw a line and scoff “I guess this time it’s different." 

I’m sure the naysayers were saying the same things back in 1954 when stocks finally made new highs after twenty five years of zero returns. Spoiler, it was different that time and stocks never looked back.

Further reading: The Nasdaq-100 Turns 30

GOOG entries

According to the weekly, this stock has yet to confirm a breakout. Given the gap up and underperformance relative to the SPY, buying after a break of the $550 range seems to be a safer bet than jumping in beneath resistance.

The daily chart suggests that a retest of $520 marks solid support, and also confirms the resistance at $550. A break of $550 would be even stronger if accompanied by an expansion in volume and relative strength compared to the SPY.

The 60 min chart also confirms support at $520, but given the strength of this market, $GOOG may not fall that far before climbing higher.

Watch on jamesaltucher.tumblr.com

My Interview with Mark Cuban: What I Learned

I interviewed Mark Cuban for my podcast (found on itunes or stitcher) but I’m embedding it here in this post. 

Mark was very interesting, not only because he described things I never heard his say before before about his sale to Yahoo, what he was doing the second he made his first billion, how he values the Dallas Mavericks, but also his thoughts on how we should reduce our Digital Footprints and what he’s doing about it. 

I first encountered Mark 17 years ago, before the Broadcast IPO, when we were working together on the first live streaming of a TV show: the People’s Court with Judge Ed Koch. Since then we’ve kept in touch through the years. I like to think I paid a small part in him making his first billion but I’m basically just kidding around when I say that. 

I’m always amazed at the “outrage porn” he tends to get from every corner and we discuss that a bit. 

If he had not sold Broadcast.com I always wonder if it would’ve gotten bigger than Google’s YouTube. 

Also, for more fun facts on Cuban: Ten Lessons I Learned from Shark Tank

Google: next step distributing its mega free cash flow?

I admit my initial casual reading of the Google numbers after the close Thursday had me worried.  If you regard the combination of paid clicks minus cost-per-click as some kind of indicator to the company’s inherent growth rate than Q1′s level of a net +6% (13% paid clicks growth minus cost-per-click deflation of 7%) contrasted spectacularly poorly with the previous three quarterly metrics of +19% (Q2 14), +15% (Q3 14) and +11% (Q4 14).  

Easy to conclude Google is inherently slowing then?

Step forward the power of the conference call.  In my view by far and away the most insightful comment from yesterday’s utterances by Google management representatives was this observation:

‘So many commentators are incorrectly assuming that the growth trends in our sites, clicks, and CPCs (cost-per-click) are primarily due to difficulties monetizing search on Mobile, but that’s in fact not the case…Excluding the impact of YouTube TrueView ads, growth in site clicks would be lower, but still positive, and our CPCs would be healthy and growing year-over-year’.

So it is all the fault of those ‘click to skip’ YouTube ads then?

The simple answer is ‘yes’…but it is a high quality problem to have.  As the world gets more mobile and more visual YouTube becomes more central to our lives. Earlier this week it celebrated its tenth birthday.  How much more do you think the world’s citizens will be using YouTube in another decade’s time?

The metrics announced yesterday agree as Google also noted that: 

‘More and more, brands are seeing the value reaching audiences on YouTube, with the number of TrueView advertisers growing by 45% in 2014′.

That is a very decent rate of growth.  

Now if Google was getting crushed on its margins then its non-GAAP operating income would not have risen by 14% over the last year and - even more importantly - it would not have unveiled another record free cash flow generation level.  If the ultimate requirement of a company is to generate free cash then Google is killing it at the moment - even whilst keeping capex up near record levels:

If the role of a company is to generate free cash flow then Google is happily running at a 4.5% free cash flow yield at the moment.  The fabled land of a 5% free cash flow yield kicks in at around $500/share but frankly in my view it is going to take some generalised market weakness to get the shares back there now.  

No, Google has a high quality problem: its bundle of net cash is growing and the introduction of a new CFO in a month’s time provides the opportunity for some new thinking. 

In a year’s time Google is going to either be paying a dividend or buying back stock - or maybe both.  And this is going to attract a whole new set of investors.  It certainly has not been an evolution that has held back Apple’s stock over the last few quarters…

Google: omnipresent in most of our lives.  Soon it may be joining the income generating world too.  I remain a strong holder in anticipation of a share price in the deep $600s.  

(all images via the Google corporate site and company presentation document)

Google Blows Past Analysts' Expectations, Revenue Is Up 33%

Google reported just shy of $10 billion in revenue accrued last quarter, blowing past analysts’ expectations. The 13 year old company’s revenue is up 33 percent year-over-year.

Larry Page has brought a newfound focus to Google. In the last quarter alone, Google deadpooled over 20 products. This allowed Google to focus more heavily on its long-term strategy – to build a relationship with its users.

Google+ is part of Google’s long-term strategy. The business is still new, but it is growing very quickly. About 40 million users have signed up for an account, and the service has only been out of beta for a week. Another statistic, over 3.4 billion photos have been shared on Google+. So far, the service has shown exceptional growth. Google expects that this growth will carry into Q4 2011.

On the other hand, Google says they want to perfect Google Offers before they do a fullscale roll out. The service is offered in just 11 markets, which is much less than Groupon and Living Social. But Google likes the position they are in. Groupon has not been doing too well. In fact, Groupon’s current valuation is far less than what Google estimated when they were going to acquire Groupon last year. On the off chance that Groupon does implode, expect Google to pounce on the daily deals business.

Google ($GOOG) ended the trading day up 6.9 percent to close at $558.9. The stock carried that momentum into after-hours. At the time of this post, Google was up another 5 percent in after-hours trading.

For more information, be sure to check out Google’s official press release.

youtube

Google Loon: The Most Underrated Project In The World

Google is building something remarkable. It’s called Google Loon and quite frankly not enough people are talking about it. Especially in the investment community.

Imagine hundreds, if not thousands, of giant balloons floating in the stratosphere above us transmitting WiFi to the entire world.  That’s what Google Loon is.

The video above is a must-watch and it dives deep into the Google Loon project. You’ll quickly realize that if this is executed on, it will probably wreak havoc on Internet service providers everywhere. From Verizon to Orange to China Mobile. How will they defend themselves against balloons 65,000 feet above ground?

Five Stocks the Billionaires are Buying


It’s that time again. The Direxion iBillionaire Index ETF (IBLN), which follows the trading moves of billionaire investors, is doing its quarterly rebalancing. Eleven of the ETF’s 30 stock positions are getting the boot.

What’s in? Consumer discretionaries and tech, each of which will now make up 30% of IBLN’s portfolio. 

Getting kicked to the curb are energy and financial stocks. After the rebalancing, energy will make up just 7% of the portfolio, and financials will not be represented at all. 

While I would never recommend blindly following the moves of other investors, I’m a big fan of guru-following strategies and consider them a great starting point for further research. The brains at iBillionaire have their own unique take on guru following. They start with narrowing their pool of gurus to the 10 billionaire investors whose public, S&P 500-listed stock positions have generated the highest returns over the past three years. They then build a portfolio of the 30 “highest conviction” S&P 500 stocks owned by these 10 billionaires and rebalance quarterly. 

This makes IBLN a high-quality subset of the S&P 500. And, unlike most guru ETFs, which are often invested in small and mid-cap stocks, the S&P 500 is actually the appropriate benchmark. Year-to-date, IBLN is up about 2.7%, keeping pace with the S&P 500. 

With no further ado, let’s take a look at five hot stocks the masters of the universe are buying.

Google

Apple Inc (AAPL) has been an IBLN holding for a long time, due in no small part to Carl Icahn’s massive, high-conviction investment in the company. But now archrival Google Inc (GOOGL) joins the portfolio too, due mostly to a high-conviction buy by David Tepper. 

Tepper runs a concentrated portfolio of 28 stocks at Appaloosa Management, of which Google is one of the largest. Tepper owns both the A shares (GOOGL), which have voting rights, and the C shares (GOOG), which do not. Between the two share classes, Google is Tepper’s second-largest holding. Only General Motors (GM) — which is also an IBLN holding — has a larger allocation. 

I’ve never been the biggest fan of Google, as the company is notorious for burning shareholder money on quixotic projects that rarely pan out. I prefer Apple and Microsoft (MSFT), both of which have evolved into disciplined, shareholder-friendly companies over the past decade. But given his conviction, Mr. Tepper clearly sees value here.

Yahoo! Inc

Also joining the portfolio is Yahoo! Inc (YHOO), a company that has really struggled to compete in recent years with search rival Google. Value investors have long been attracted to Yahoo’s large cash position and its stake in Alibaba Group Holding Ltd (BABA). Yet the question remains open as to what Yahoo intends to do with its Alibaba windfall. 

Yahoo makes the cut due to high-conviction buying by David Einhorn of Greenlight Capital. Einhorn made a major new purchase of Yahoo last quarter, and Yahoo now makes up about 1.4% of his portfolio. 

Einhorn has 42 publicly-traded hot stocks in his portfolio, 56% of which is in the tech sector. Like Icahn, Einhorn also owns a lot of Apple, which makes up about 13% of his portfolio.

Time Warner Inc

Another recent Einhorn pick is Time Warner Inc (TWX). This pick surprises me, as I see paid TV as a sector ripe for upheaval. I expect Dish Network’s (DISH) introduction of Sling TV, an internet-based “Netflix-like” cable service, to be a major disruptor in the coming years, encouraging cord cutting and pushing down the prices paid to all content providers. Yet Einhorn clearly sees value here, as Time Warner has quickly become his sixth-largest portfolio holding. 

And he’s not alone. Leon Cooperman and Steve Cohen were also busily buying shares last quarter. I should point out that Time Warner Inc. is a media company, not a cable company — the cable company is Time Warner Cable (TWC). TWX owns, among other properties, HBO, Cinemax, CNN, TBS and TNT. And the successful introduction of HBO GO as a standalone paid service could very well be the catalyst that sends this stock higher. (Interestingly, TNT, TBS and CNN are all included in Dish’s basic Sling TV package.) 

Whether all of this compensates for the slow decline in cable news and marginal, non-premium cable channels remains to be seen.

Mohawk Industries, Inc

Americans will put some of the money they’re saving on gas into improving their homes. At least that seems to be the rationale for flooring manufacturer Mohawk Industries’ (MHK) addition to the IBLN portfolio. Brazilian billionaire Jorge Lemann has been a high-conviction buyer of Mohawk. 

You might not be familiar with Lemann, but you should be. He’s the wealthiest man in Brazil and is ranked by Forbes as the 34th richest person on the planet. Bloomberg also called him “the World’s Most Interesting Billionaire,” in a tongue-in-cheek comparison to the “Most Interest Man in World” of Dos Equis beer commercial fame. 

The title is deserved on two counts. Not only is Lemann a fascinating man of the world — a five-time national tennis champion who splits his time between Brazil and Switzerland — he’s also in the beer business. Lemann and his partners at 3G Capital dominate Anheuser-Busch Inbev SA’s (BUD) Board of Directors. 

Ironically, Dos Equis is not a BUD product; it is owned by rival Heineken (HEINY)

Goodyear Tire & Rubber Co

And finally, we have one last consumer discretionary pick from David Tepper, Goodyear Tire & Rubber Co (GT). Goodyear joins General Motors as a play on falling gasoline prices leading to more spending and more driving by American consumers. 

We’ll see if the American consumer comes through; I’m personally a little skeptical on that front. Still, Goodyear trades at a very reasonable 13.5 times earnings and 0.4 times sales. 

Goodyear has seen better days; its per share revenues have been declining for years, even while its debt burden has continued to grow. Still, Tepper seems to see something in the company he likes. Tepper owns a 3.7% stake in the company that accounts for fully 7.2% of his assets under management.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Photo credit: Thomas Galvez

Why I don't like the $17,000 Apple Watch

Most new technology devices have expiration dates. Buy a laptop today and see it functions properly at the turn of decade. People upgrade their smartphones every two years for a reason. Whether it’s the graphics, speed, need of additional memory, ports etc. the rate of change is as fast as ever.

Apple ($AAPL) has actually taken advantage of this phenomenon in a major way. Unlike Google’s ($GOOGL) Android, where phone users are on so many different versions of the platform, when Apple upgrades its operating system, it’s only a short time before almost all of their users upgrade to the latest version.

Newer software and applications are the primary causes of hardware depreciation. If I had the same software and applications, I would be still be able to use the hardware casing my windows 3.1 PC. When an iPhone 4 tries running the latest version of iOS, with all its new features and processing needs, it’s no wonder the phone runs slower and needs to be recharged more often.

Enter the Apple Watch. I can see many people buying the Apple Watch Sport or the Apple Watch whose starting prices are $349 and $549 respectively. What I don’t get however, is why Apple thinks anybody would buy the Apple Watch Edition with a starting price of $10,000 (customizable up to $17,000). Most people that buy watches for that type of money expect the watch to maintain its value and in many cases increase as time goes by. 

I don’t know how much Gold is inside Apple’s watch, or what its sapphire crystal can sell for, but there’s no doubt in my mind, that unless Apple is willing to offer free exchanges or somehow swap out and upgrade the hardware when the next version comes out, these watches will become unusable.

Think about the watch bull case - my friend @conorsen wrote this great piece last week -  you’re talking about the watch becoming your keys, running your home applications, tracking your location, much more complex fitness applications etc. There is no way the current watch’s hardware will be able to run the apps and software of future versions. People are complaining about 18 hour battery life now, imagine trying to run apps and software that is.

I assume Apple knows this, and I’m pretty sure they are looking at the Watch Edition more as a novelty luxury item, but I think it’s a risky move. The upside is that they may create so few of them, that they’ll be worth tons of money like the vintage Apple 1 that sold for $905,000 last year. The risk however is that they’ll become virtually worthless.

People trust Apple’s brand - probably more than any brand in the world right now - the last thing they need is their best customers plunking down $10,000 dollars on an item which they’ll need to scrap for its gold in a few years.

- Aron

Twitter: @MicroFundy

Related:
Apple Watch: The Device to Manage Your Sensor-Based Life

h/t to the Barron’s for inspiring this post with this weekend’s article - “Swiss, It’s Not: Apple’s $17K Watch Is No Collector’s Item

photo credit: Apple

Main Street Gets Involved in Startup Bubble


The good news is that Main Street has now gained a toehold in the new national pastime, throwing money at software programmers as they seek to disrupt every industry under the sun and roll out essential new services we can’t imagine living without (It’s like Uber, but for twisting the cap back on your Poland Spring bottle for you). Retail investors can thank the mutual funds who have become the new financiers of Silicon Valley early- and late-stage funding rounds. The democratization of insane wealth creation has finally come to your IRA.

The even better news is that Fidelity, T. Rowe Price et al are getting mom and pop into these deals right at the ground floor – before they become the Facebooks and the Instagrams of tomorrow. And there are probably another twenty or thirty Facebooks just waiting in the wings for a little bit of walking-around capital.

Some pull quotes from a mind-blowing Bloomberg article that’s so chock-full of nuggets that it could pretty much serve as a digital time capsule for the current moment:

Hedge funds and mutual funds that once shunned venture-style deals are flocking to the market’s hottest corner, paying 15 to 18 times projected sales for the year ahead in recent private-funding rounds, according to three people with knowledge of the matter. That compares with 10 to 12 times five years ago for the priciest companies, one said.

and…

Companies now valued at 16 times future revenue could easily lose a third of their value in a market pullback that Weber and others say may occur in the next three years. The other people asked not to be named because they didn’t want to be seen criticizing competitors’ deals.

LOL, throwing shade anonymously – sounds like someone got left out of the last jackpot deal! What else?

Mutual funds and hedge funds have elbowed into late rounds, both to boost returns and to ensure they can buy blocks of shares in IPOs as competition for tech offerings intensifies. Mutual-fund giants Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management Co….took part in at least 37 pre-IPO funding rounds totaling $5.55 billion from 2012 to 2014

Is that a lot of money?

“Mutual- and hedge-fund dollars coming is one of the main things driving these higher valuations and larger deal sizes…You didn’t used to see that before. The trend is accelerating.”

Oh, okay…

Investors of all stripes poured $59 billion into U.S. startups last year…Late-stage companies received two-thirds of it, with a record 62 firms raising money at valuations of $1 billion or more, almost three times as many as in 2013. About half the investors weren’t venture-capital firms.

Oh. Oh wow. Half of the investors in startups are amateur startup investors. Well, they’re not virgins anymore.

I have to admit, I’m a bit torn here. Part of me knows how this is going to end. The other part of me says: Well, it’s not the growth mutual funds’ faults that startups are going public much later. In another era, these would have been public market investments in early stage growth companies and their inclusions into these funds would have been perfectly normal.

And by the way, who could blame a company like Fidelity, which the article says led a financing round for Uber at a $17 billion valuation (yes, they led it). If a fund makes money from something like this, it counts as 100%, pure, unadulterated alpha! The Uber IPO, like the Alibaba IPO before it, won’t appear in any indexes. Pure alpha has become nearly impossible to come by in this day and age. Less than 15% of domestic stock funds managed to keep up with, let alone beat, their respective benchmarks last year – alpha like this is a glass of water in the desert.

So I get it, and I’m not hating. Opportunity is knocking and people with capital and ambition are answering the call. The mutual funds are simply joining in on a huge parade of folks headed West – this morning we found out that Morgan Stanley’s CFO is leaving to join Google. The news item was echoed widely among the growing cacophony of former business journalists who have become tech reporters out in the Valley in recent months.

This is quite a moment we’re having. It seems like a lot of fun, I hope it lasts forever.

Image by Kim Owens

Traditional TV Is So Screwed, Maybe…

So YouTube stars are taking over and we are now approaching the phase where the establishment comes in, begins buying up assets and ultimately takes credit for the trend.

In this regard, credit due to Disney which came in and bought Maker Studios for half a billion donuts.

In effect, Disney now owns PewDiePie, featured in this WSJ video.

At worst, Disney’s purchase is a solid hedge and, at best, its a home run. Our only quibble might be buying a business built on the platform owned by The Google.

Check out the full WSJ produced YouTube star profile featured on the Yahoo Finance.

OMG! Google Rigs Its Search Results…Cue The Feigned Shock and Disgust

Those who are familiar with Google’s history know that their self-proclaimed prime directive is, “Don’t be Evil.”  But in the best Clintonian tradition, it turns out that their definition of “evil” is open to interpretation.

According to a newly discovered 160-page report, authored by the Federal Trade Commission in 2012, Google has been systematically gaming it’s search results to—now hold on to your hats—refer consumers to their own services to the detriment of their competitors.

Here’s the Wall Street Journal:

In a lengthy investigation, staffers in the FTC’s bureau of competition found evidence that Google boosted its own services for shopping, travel and local businesses by altering its ranking criteria and “scraping” content from other sites. It also deliberately demoted rivals.

The reaction among the public was swift.  “I’m totally blown away by this type of deceit coming from Google,” said a blind man without a cane, currently living under a rock in a cave.

But to be fair, opinions were mixed, and some brave individuals dared to challenge the government’s claims, including Kent Walker, Google’s General Counsel, who said Thursday afternoon, probably in high-pitched, whiny voice;

“After an exhaustive 19-month review, covering nine million pages of documents and many hours of testimony, the FTC staff and all five FTC Commissioners agreed that there was no need to take action on how we rank and display search results.  We regularly change our search algorithms and make over 500 changes a year to help our users get the information they want,” We created search for users, not websites—and that focus has driven our improvements over the last decade.”

God bless the lawyers!

Those of us who write for a living know that Google is particularly sensitive to the use of copied content, going so far as to penalize sites that plagiarize others and even warning bloggers—with an implied threat of adverse search rankings–against using too much quoted material.  But apparently those rules don’t apply the ‘Big G” itself.

Again from the Journal:

To bolster its own listings, Google sometimes copied, or “scraped,” information from rival sites. According to the FTC report, Google copied Amazon’s rankings of how well products were selling, then used that information to rank its results for product searches. Amazon declined to comment.

The report also contained a staff recommendation that the FTC bring suit against Google for numerous anti-trust issues, potentially creating one of their highest profile cases since suing Microsoft in the 90’s.

Ultimately though, the FTC’s commissioners took the highly unusual action of contradicting their own staff’s recommendation and voted unanimously in 2013 to end the investigation against Google after the company agreed to voluntarily change some of its practices.

Experts say, the fact that Google was the second largest donor to President Obama’s re-election campaign and that its top executives are regular visitors to the White House, had no bearing on the FTC’s decision, though none of them could say it with a straight face.

I, for one, have always assumed that Google, despite its desire to convince us of its deep-seated corporate altruism, knowingly skews search results to their benefit.  I just figured it was the price of admission.

The revelations in this report, which was only released in error due to a Freedom of Information Act request, will hopefully put to rest the naïve view that corporate policies fall on either side of the political landscape or public interest.  As I have always said, corporations are neither good or bad, nor red or blue.  The only color that matters to them is green.

Like what you read?  Want more?  Then sign up for my free, once weekly newsletter The Lund Loop to get exclusive insights into what I am writing, reading, and hearing about the stock market.  Click here to sign up.

Source:

How Google Skewed Search Results (WSJ)

Inside the U.S. Antitrust Probe of Google (WSJ)

The Google Cloud Platform, now synonymous with Google Compute Engine, is the biggest deal in IT since Amazon launched EC2 and will completely alter the cloud market in at least two fundamental ways:

• We now have a utility market
• We now have true competition

The first will cause an explosion in adoption, especially by enterprise customers. You want to build a 99.99%+ availability system on top of something that has 99.9% availability? Well, you better have more than one, and now you do. Here comes the hockey stick!

—  Benjamin Black (@b6n), July 2012
Why The Economy is Completely Screwed. Which is Why You Need These Stocks.

(a tale of two economies)

I’m scared. Imagine you’re the passenger and a coke-addict speed addict drunk is driving the car and it’s on one of those James Bond cliffs where one wrong move and everybody dies in a firebomb.

That’s where the economy is. I’m not a doom and gloom guy. I’m an optimist. But…

If you’re lucky they can take a skin graft from your leg and turn it into a nose. They can fix up your eyes. But nothing can replace a smile except skin from another face.

But don’t worry. I think there’s a way to avoid it. I’m an optimist because although the “economy” is screwed up, innovation is here to stay.

I put economy in quotes because there’s no such thing. The word itself is in doubt. “Economy” means a way of being prudent, of having less leg room, of being forced to check your bags all the way through. We’re an economy class world being ruled by first class plutocrats.

Again, I don’t mean to be paranoid so I won’t be. Let’s focus on the optimism.

But first, let’s not forget whose fault this is:

Women.

I don’t mean this in a bad way. The real fault is that all the 18 year old little boys in the US were sent off to shoot people in WW II.

Note this is not an anti-war post. History is written by the winners. You and I are winners.

So women took their jobs. And when the men came back the women, quite correctly, didn’t want to give those jobs back. Why should they?

Double income homes. Double income garages and white picket fences and grass and schools and big roads and mass transit into the city they left behind.

But then they needed more. Dopamine is triggered when you get your new rewards. Dopamine makes you happy. But “new” is the key word here and not “reward”. So we needed more “new” to trigger more “dopamine”.

Johnson had his Great Society, which put money into the economy. Then we had to pay for another war, another group of 18 year old coming back depressed and dead. And we needed more.

So Nixon took us off the gold standard. Suddenly we were shooting inflation into our veins. The great thing about inflation is that first you feel flush and it’s only later you feel down.

Which led us to the 1980 stock market boom, then junk market boom, until people went to jail and got cancer.

When we needed a fix again we had the peace dividend, then the need for speed got us the Internet boom (and thank God Clinton said “no sales tax” on Internet sales) and then finally a man who understood the dark side of history used Y2K as an excuse to flood the economy with money (more and more leg room in our economy class).

This created a housing boom and credit cards that were like instant mortgages on our houses. And then banks that collateralized all the loans and hedge funds that collateralized the collateral and sold them in pawn shops.

And….it was over. That was it. 

The only thing left. The Federal Reserve for the first time ever actually gives interest payments (0.25%) to banks that don’t lend out money while the Fed still buys stocks.

Which leads me to….the average person is screwed. There’s nothing left to help us. That’s all you need to know about the economy.

I’m on the board of a billion revenues temp agency. I can tell you, it’s not pleasant what is happening. Don’t believe the employment numbers. Look at the part-time numbers. Look at underemployment. Look at people leaving the “numbers” behind.

Which is the good news.

Because there is a separate economy. A real economy. An economy where people are driving cars with no drivers. Where robots perform surgery. Where drones kill people from thousands of miles away. Where fracking goes horizontaly into your rivers to turn the US into a new Saudi Arabia.

In other words, the innovation economy.

So if you want to avoid riding over the cliff in economy #1, you must go into economy #2. Be the lady and the tiger.

Here are the trends coming in the next ten years and the stocks to keep an eye on. Some old, some new. I will write more about these in follow-up articles. 

A) Lithium shortage.

Every car needs batteries. A car is just a computer with a car app on it now. And computers need better batteries. All the lithium is in..guess where…China and a tiny unheard-of country called Afghanistan. Why do you think we’re still there?

ENS, Enersys, is the Lithium play. ENS makes the batteries and trades for 12 times forward earnings although my guess is they will continue to surprise. More on this stock and all stocks I mention here in a future article.

B) Old people.

Every ten years the average age of death is rising by 2.2 years. You know what happens to old people? The three top causes of death: cancer, heart disease, and Alzheimer’s.

I am a big fan of diagnostics.

I own TROV (Trovagene) . Here’s the key, what if Steve Jobs peed in a cup every week to keep updates on his pancreatic cancer instead of get invasive biopsies. That’s the difference between TROV and what hospitals do now.

The market for this is basically every person above the age of 40. Meanwhile TROV is doing deals with every medical facility out there to test the test. I own it and I’m not selling until $70.

C) The OFFENSE industry.

Too many people mistakenly call this the defense industry. What exactly is America defending against. We have military in 74 countries. We’re in ten different wars in the past few years.

And the government doesn’t hire tiny companies to offend for us. They hire big companies that then hire the tiny companies.

Lockheed Martin (LMT) is my choice. When we need more drones some general calls LMT who then makes the call. They trade for 13x forward earnings, 3.2% dividend yield and they’ve raised their dividend for 10 years in a row. BAM!

If you really like drones (and I do. I’m still waiting for Amazon to start delivering me pizzas with drones) then keep an eye on AMBA (Ambarella) but right now I’d wait for a pullback or just build a small position.

They make the camera chips inside the drones. In the land of the blind, drones are king.

D) Clean energy.

And by clean energy I mean coal. You ever see those vast tracts of land with those ugly wind farms that don’t work? Land that could’ve been used for food?

You get coal by mining straight down, and still fuels half the country with electricity.

ALRP trades for 6x earnings, has raised their dividend for 10 years in a row. 5% dividend. 40% year over year earnings growth.

E) The leaders.

We can argue all day long about what companies will be here in 20 years.

But there are three clear leaders that are not going anywhere and keep out-innovating each other: AAPL (the iphone6 is baked into the price but not the ipad mini air), AMZN (all bookstores are dead), and GOOG (the above-mentioned driverless cars are only the starting engine).

I will follow up more on each category in future articles. This is my starting point.

I’m very scared. If we trust that the world will fix itself, we are putting our trust in the wrong place. It never has and never will. The world will be fixed by the next generation of the economy.

And nobody can predict the future.

But I look for what demographic trends are starting to ripple with excitement today. What trends seem unstoppable by the direction the car is going.

In 2005 I wrote a book, “Trade Like Warren Buffett”. In the book I show how Buffett’s first criteria is not value but demographics and trends. This is the way to build for the future.

I’m scared but I have hope for the future because of the innovation that I am seeing every day. Don’t believe anyone who focuses on doom and gloom or timing shorts or hate for the news or hate for the people who think they control the economy. These people will lose money.

Focus on what works today. Because the best indicator of a successful tomorrow is a successful today.

And before I forget. My latest book, The Power of No, has been discounted 80% by it’s publisher just this week on Amazon.  

And also, you can follow my life story and ups and downs at jamesaltucher.com 

Is Google the next "Apple at $400"?

As a fundamental investor, I believe asset prices fluctuate based primarily on two factors. The fundamentals - revenues, earnings, cash flows etc. and the multiple investors are wiling to pay for those fundamentals.

In 2013, the operating earnings of the S&P 500 rose by 10.8%, easily explaining part of the S&P’s strong year. The actual index rose 29.6% however, which can only be explained by “multiple expansion” - where on December 31st of 2013 investors were willing to pay 2.5 turns more per dollar of earnings than at the start of the year.

Understanding these two drivers of asset prices is critical to every investment. Fundamentals are typically more steady, stable, and easier to model. Unfortunately, shorter term swings have much more to do with sentiment and are way harder to predict. 

Ideally, stocks should be purchased and sold when both the fundamentals and market sentiment are at a turning point.  Not only will the investor benefit (if going long) from growth in revenues and earnings, but also by the amount other investors are willing to pay for those set of fundamentals. Vice versa if going short or selling.

Apple Inc. ($AAPL) at $400 (or in the high $50’s post split) last year was a perfect example. As you can see from the following chart, Apple’s TTM (trailing twelve months) earnings started drifting lower in January of 2013 and bottomed a little after the stock hit its lows in the 3rd quarter of the year.

While Apple’s earnings did bounce around 14% since the lows on a TTM basis, on its own that does not justify a double in its stock price (or a little less than a double after its recent pullback). Most of Apple’s gains must be attributed to the willingness of investors to pay more for the given level of earnings. This is perfectly depicted by this next chart.

As you can see, since the beginning of 2012 there has been almost a perfect correlation of Apple’s stock price and its P/E ratio. At the 2013 lows, investors were only willing to pay around 9.5 times for each dollar of Apple’s earnings (less than 7 times if you exclude their cash). Fast forward to a few weeks ago, the same market place was clearing a price which equated to more than 18 times for the same company’s earnings.

This brings me to Google Inc. ($GOOGL $GOOG).  I don’t know if we are at - or even close - to a turning point like Apple was, but it’s definitely getting interesting. 

As the third heaviest weight in the PowerShares QQQ index ($QQQ), Google is the only one of the top six companies in the index that is negative so far this year. The other five companies - Apple, Microsoft Corp ($MSFT), Intel Corp ($INTC), Facebook Inc ($FB), and Gilead Sciences Inc ($GILD) -  are up an average of 37% so far year-to-date. Thirty seven percent! Google on the other hand is down 8%.

As my friend Conor Sen tweeted yesterday, in Google’s 10 year history it has made only fifteen 52-week lows. Thirteen of them were in 2008, the other two were Monday and Tuesday this week. I think it’s safe to say that sentiment has rarely been so negative.

Fundamentally, while earnings expectations have been coming down, Google is still expected to grow over 18% this year followed by 17% in 2015. Their forward P/E ratio is a tad over 16 and that’s excluding the $60 billion of cash they have on their balance sheet.

I have yet to do much work on Google, and from what I’ve read, even after lots of work, there’s much about them that isn’t disclosed therefore making it hard to fully comprehend.

Having said that, the fundamentals seem to be there, their business model and moat that they have built is to die for, if sentiment were to turn, we might very well have another “Apple at $400” on our hands.  

- Aron

Twitter: @MicroFundy

Photo credit: mengfeish