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The Fastest Growing Brands Of 2017

In a modern business era of near-constant disruption, which brands are winning the hearts of consumers the fastest?

Today’s charts look at the brands that are trending upwards. See below for the brands that have gained the most in brand value since last year, as assessed by BrandZ in their report on the world’s 100 most valuable brands.

Onwards and Upwards for Tech

As many big name brands try to find their footing in today’s fast-paced consumer environment, it’s not surprising to see up-and-coming tech brands skyrocketing in value.

Biggest Movers in Tech

In line with growing revenues, tech brands like Amazon, Facebook, and Netflix are also flying high with their brands. Amazon, for example, had its brand value soar 41% since last year to make it the fourth most valuable brand in the world at $139 billion. Chinese tech companies are gaining traction in the eyes of consumers as well, with Tencent and Alibaba both growing their brand values at clips of 20% or higher.

Note: the measure of “brand value”, not to be confused with company valuation metrics like market cap, is a way of quantifying the dollar value that a particular brand’s image is contributing to the overall value of a corporation.

Other Big Movers

Although tech brands seem to be moving up the list in unison, it’s also worth examining the brands in other sectors that have seen their brand values rapidly increase.

Biggest Movers in Tech

The brands seen here have some interesting commonalities and points worth noting.

Firstly, despite not being a tech brand, Adidas was actually the fastest-growing brand in the whole report with a 58% increase in brand value from 2016 to 2017. According to the analysis, the apparel brand saw its retro sneakers “connect perfectly” with the fashion moment.

Next, alcohol brands also generally performed admirably. Three of the brands that had double-digit growth were owned by the world’s largest beer company, AB InBev – and two of those brands (Skol and Brahma) are Brazilian. Further, Kweichow Moutai, a Chinese liquor maker that surpassed Diageo earlier this year in market capitalization, is also rising fast.

Also of interest is that two 3G Capital restaurant brands, Burger King and Tim Horton’s, happened to increase substantially in brand value. Of course, 3G Capital owns a stake in the aforementioned AB InBev as well.

New Entrants

The following brands are the newest entrants on the 2017 edition of the top 100 list:

Biggest Movers in Tech

However, as we transition into 2018, these new entrants may have very different fortunes ahead of them.

On one hand, Salesforce has been outlining when it’ll hit $20 billion in sales, and Netflix is still crushing expectations for subscription growth.

On the opposite side of the spectrum, Snap Inc. recently reported slow user growth, which made shares tumble 18% in value. The company’s platform, Snapchat, is locked in a battle with Instagram for users, and it remains to be seen how this will affect both company and brand values down the road.

Courtesy of VisualCapitalist

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Will Credit Cause A Slowdown

Saxo Bank thinks a slowdown in credit growth is bad news

IF THERE is a consensus at the moment, it is that the global economy is finally managing a synchronised recovery. The purchasing managers' index for global manufacturing is at its highest level for six years; copper, the metal often seen as the most sensitive to global conditions, is up by a quarter since May

But Steen Jakobsen of Saxo Bank thinks this strength will not last. His leading indicator is a measure of the change in private sector credit growth. This peaked at the turn of the year and is now heading down sharply. Indeed the change in trend is the most negative since the financial crisis (see chart). Since this indicator leads the economy by 9-12 months, that suggests a significant economic slowdown either late this year or early  in 2018. He says that

This call for a significant slowdown coincides with several facts: the ECB’s QE programme will conclude by end-2017 and will at best be scaled down by €10 billion per ECB meeting in 2018.  The Fed, for its part, will engage in quantitative tightening with its announced balance sheet runoff. All in all, the market already predicts significant tightening by mid-2018.

Given the role played by central banks in propping up the economy and markets since 2009, it is certainly plausible that their role will be vital in ending the recovery.  And while copper is a good leading indicator, so is the bond market. At the turn of the year, most people thought the ten-year government bond yield would rise as a Trump stimulus fulled the global recovery; the yield is now 2.06%, down from 2.44%.

Courtesy of TheEconomist

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A Timeline Of Future Technology

A Timeline of Future Technology

Making predictions about future technology is both fun and notoriously difficult.

However, such predictions also serve a very practical purpose for investors and business leaders, since failing to adapt to changing industry paradigms can completely decimate a business venture, turning it into the next Blockbuster, Kodak, or Sears.

Today’s infographic from Futurism rounds up some of the most interesting predictions about the future, from trusted sources such as Scientific American and The National Academy of Sciences.

Machines,Big and Small

The confluence of robotics, artificial intelligence, and increasing levels of automation is a prevailing trend throughout the projected timeline of future technology.

In less than 10 years, we will be able to control machines based on eye movements, while ingesting nano-sized robots to repair injuries from within our bodies. Later on, it’s also expected that the next wave of AI will be a reality: by 2036, predictive AI will be able to predict the near-future with impressive precision. Elections, weather, geopolitical events, and other dynamic systems will be analyzed in real-time using thousands or millions of data streams.

Even further down the line, human brains and machines will be continue to become closer to interfacing directly, creating all kinds of possibilities.

The Energy Revolution Continues

If you think the current progress in clean energy is exciting – wait until you see the technologies in the queue. The future of battery technology will include carbon-breathing batteries that turn CO2 into generate electricity, as well as diamond-based “nuclear batteries” that run off of nuclear waste. Meanwhile, solar power will be even cheaper as cells operate at near 100% efficiency, and commercial fusion power will be available by 2044. Climate change will also be tackled by interesting techniques, such as geoengineering with calcite aerosols, and carbon sequestration.

Timeline of Future Technology

More on Future Technology

Want to see more bold predictions about the future of technology?

Check out the future of alternative energy, the military, or the futuristic tech that could be inside your home.

Lastly, check out some very speculative predictions about what the world could look like, 100 years from now.

Courtesy of VisualCapitalist

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Growth in the global electric-vehicle market

With the recent announcement from Volvo that all vehicles will have electric engines in 2019 and phase out combustion engines, it becomes shockingly clear that electric is growing.................and faster than we have previously believed. Clearly Tesla (TSLA) has more competition than ever before so I bring you this piece from McKinsey to give you the breakdown. By the way, what does this mean for crude oil?  Just tossng it out there.

New research on electric mobility reveals Chinese OEMs produced 43 percent of EVs worldwide in 2016 and highlights other trends in supply and demand.

China has increased its lead in electric-vehicle (EV) production, according to new McKinsey research (Exhibit 1). Chinese OEMs produced 43 percent of the 873,000 EVs built worldwide in 2016. And the country now has the largest fleet of EVs on the road, overtaking the US market for the first time (see sidebar, “Our methodology”).

Exhibit 1
Electric Vehicle Index, ranking 10 countries based on market and industry performance

China extends EV industry leadership

China extended its industry leadership by making gains across all dimensions of the supply side of EVs, including current and projected production of EVs and their components, such as lithium-ion battery cells and electric motors. One important factor is that the Chinese government provides subsidies to the sector in an effort to reduce fuel imports, improve air quality, and foster local champions. Whereas Chinese OEMs accounted for 40 percent of EV production in 2015, this increased to 43 percent in 2016. Leading Chinese EV manufacturers all ranked among the top ten global EV producers in 2016. Given the rapid increase in production capacity by domestic suppliers, China’s lithium-ion battery-cell players increased their global supply share, reaching about 25 percent in 2016. This is mainly at the expense of Japanese companies, which lost significant market share year on year—though they still accounted for the greatest share in 2016, with around 48 percent. South Korean suppliers expanded their position and now hold 27 percent of the light-vehicle battery-cell market.

Overall, Germany and the United States also perform well in the industry, with no major changes in EV production share (23 percent and 17 percent, respectively). However, these countries saw slight losses with respect to electric-motor production due to China’s expansion.

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China’s domestic EV demand grows, while Europe stagnates

In addition to its leading role in EV supply, the market for EVs in China held steady in 2016. For the first time, China has overtaken the US market in the total number of EVs on the road. Cumulative EV sales reached 650,000 units in 2016, and the country increased new registrations for EVs by 70 percent year on year, to around 350,000 units (Exhibit 2). In comparison, Europe saw a sales increase of only 7 percent during the same period, after doubling them the prior year. The stagnation of the European market largely stems from a big drop in new registrations in the Netherlands, attributable to changes in the incentive scheme for plug-in hybrid vehicles. In the United States, EV sales were at 160,000 in 2016, a 37 percent increase.

Exhibit 2
growth in electric vehicles in China, Europe, and United States for 2014-16

The sales dynamic in China has been supported by a launch of many new EV models. Roughly 25 new EV models were introduced to the market in 2016. Overall, Chinese customers can now choose from around 75 EV models—the most of any market.

While China outperforms in absolute terms, the country does less well if considered in relative terms: in 2016, EV penetration in the overall light-vehicle market was only 1.4 percent. Norway outperforms here; about one in four cars sold in the country in 2016 was electric. Generous incentives are provided to EV customers in Norway, making EVs more affordable than cars with internal combustion engines. The Netherlands also has relatively high penetration, with an EV share of 5 percent, though sales decreased in 2016 (falling by 48 percent year on year). Sales dropped in 2016 after the country announced it would increase the company car tax for plug-in hybrids. Most other markets still do not exceed the 2 percent threshold. Japan was also affected by very low sales in the second half of 2016. These examples show that e-mobility development varies significantly by country.

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Y Combinator, one of best-known Silicon Valley accelerators, has an impressive track record of success. With well-timed investments in Dropbox, Stripe, and Airbnb, the startups in the company’s portfolio are now worth an aggregate of $600 billion in market capitalization.

While Y Combinator has made a clear impact on the tech sector, the company also launched an internal side project in 2007 that would end up becoming highly influential in a different and surprising way.

Its user-powered news aggregator called Hacker News, which is now visited by 20 million people per month, has become a mainstay for entrepreneurs, tech professionals, and venture capitalists around the world. Using a Reddit-like interface, users can upvote and downvote articles that they think have the most relevance to trends and issues affecting the tech sector.

Data Mining For Trends

Today’s charts come to us from Variance Explained, and they help to paint a picture of what topics have been trending on Hacker News over the last 3.5 years.

Using data from over 1 million subject lines, we can see which topics are being mentioned with increasing frequency by the site’s community of technology influencers.


As you can see, words like “AI”, “artificial”, “bot”, “deep”, “neural”, and “learning” are key terms that have growing interest within the community. It shows that the buzz around AI and deep learning is widespread and happening on multiple fronts.

Donald Trump was also a hot topic of debate in Hacker News, as evidenced by the increase in mentions.

Cooling Off

Here are some of the words in the community used with decreasing frequency over the same 3.5 year timeframe:

The fastest-declining words in Hacker News titles

Over time, as the rubber hits the road, we get to see which ideas have staying power.

Google Glass, as cool as it was, ended up not directly revolutionizing how we use augmented reality. Likewise, Edward Snowden’s revelations about the NSA and surveillance seemed to have also dropped out of discussion.

On the flipside, some of these concepts also seem to have transitioned to the mainstream. Bitcoin and other altcoins, for example, are now more popular than ever before with a market capitalization of over $100 billion. Likewise, iPads, Gmail, and Kickstarter are pretty ubiquitous, but it could be argued that discussion on these topics is now pretty staid for the idea-hungry folks that frequent Hacker News.

Blockchain vs. Bitcoin

It’s also interesting to see the contrasting popularity of two related terms among Hacker News participants.

Bitcoin-related talk, at least on Hacker News, was hot in late-2013 after the price skyrocketed for the first time. The blockchain, on the other hand, took some time to pick up steam among influencers.

The popularity of Blockchain vs. Bitcoin on Hacker News

Fast-forward to today, and the concept of the blockchain is much more fleshed out.

It took time, but the blockchain is now considered to be a foundational technology that is affecting everything from how how stock markets work, to the proof of ownership for digital assets.

Courtesy of VisualCapitalist

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Earnings Growth Likely Peaked In Q1

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actuals and estimates for the current and following periods, please click here>>>

Here are the key points:

•    The Q1 earnings is effectively over now, with results from 492 S&P 500 members already out. Total earnings for these companies are up +13.5% from the same period last year on +7.2% higher revenues, with 72.6% beating EPS estimates and 65.2% beating revenue estimates.

•    These results represent a notable improvement over what we have been seeing from the same group of companies in other recent periods. While growth reached the highest level in more than 5 years, a bigger proportion of companies have been able to beat estimates, particularly revenue estimates.

•    For the Retail sector, total Q1 earnings are up +1.7% from the same period last year on +3.1% higher revenues, with 60% beating EPS estimates and 50% beating revenue estimates. The sector’s Q1 results have been below other recent periods and are also among the weakest of all sectors this reporting cycle.

•    For Q2, total earnings for the S&P 500 index are expected to be up +5.8% on +4.8% higher revenues. The Energy, Finance, Technology, Construction and Industrial Products are expected to be big growth drivers in Q2, with the quarterly earnings growth pace dropping to +3.1% on an ex-Energy basis.  

•    Estimates for Q2 came down since the quarter got underway, but the magnitude of negative revisions nevertheless compares favorably to other recent periods.

The chart below shows how estimates for Q2 have evolved since the start of the period.

This trend of negative revisions ahead of the start of each reporting cycles is not new; we have been seeing this play out quarter after quarter for more than 3 years. The revisions trend has been moving in a favorable direction over the last two quarters and that same trend is even more at play in Q2 estimates. What this means is that while estimates for Q2 have come down, they haven’t come down as much as would typically be the case by this time in other recent periods.

Estimates for 12 of the 16 Zacks sectors have come down since the start of Q2, with Consumer Discretionary and Utilities suffering the largest declines in revisions. Estimates for the Tech sector remain effectively unchanged, while estimates for Transportation, Construction and Industrial Products sectors have gone up. The positive revisions to Deere & Company (DE) and Caterpillar (CAT) are a big reason for the Industrial Product sector’s improved earnings picture.

The actual Q1 earnings growth (+13.2%) turned out to be double the growth pace that was expected at the start of the reporting cycle (+6.6%). This magnitude of outperformance was unusual and above the recent quarterly trend. We know that actual Q2 growth will be higher relative to what is currently expected. But even if actual Q2 earnings growth turns out to be as high as was expected at the start of the quarter (+7.9%), it will still be below what was achieved in Q1.

In fact, we can project with a reasonable level of confidence that the Q1 earnings growth pace will be the highest for the next few quarters. Earnings growth has undoubtedly turned positive now, but the quarterly growth pace in the coming quarters will likely stay below what we experienced in Q1.  

The chart below shows quarterly earnings growth expectations beyond Q2.

Unlike the year-over-year growth pace, the dollar amount of total earnings are expected to be in record territory in the coming quarters, particularly in the second half of the year, as the chart below shows.

Q1 Earnings Season Scorecard

Total Q1 earnings for the 492 index members that have reported results are up +13.5% from the same period last year on +7.2% higher revenues, with 72.6% beating EPS estimates and 65.2% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is currently 51.8%.

The side-by-side charts below compare the growth rates and beat ratios for the 492 index members with what we saw from the same companies in other recent periods.

The comparison charts above show that growth as well as positive beats are tracking above historical periods. The proportion of companies beating revenue estimates is particularly notable, as is the revenue growth pace.

Please note that the positive Q1 results are broad-based and not narrowly concentrated. Sectors that beat revenue estimates at a proportion higher than the average for the S&P 500 index, which itself tracked above historical periods, included Autos (90% beat revenue estimates), Conglomerates (83.3%), Industrial Products (81.8% beating revenue estimates), Technology (78.3%), Basic Materials (75%), Transportation (73.3%), Construction (69.2%), Utilities (69%), Medical (67.9%), and Finance (68.1%). The Consumer Staples operators appeared to struggle, with the proportion of Consumer Staples companies beating revenue estimates the lowest of all 16 Zacks sectors.

Courtesy of MrTopStep

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The Big Picture

First and foremost let me point out that Ray Dalio, founder of investment firm Bridgewater Associates, has joined Twitter so I encourage you to follow him here.  Secondly I suggest you grab a cup of coffee or maybe the entire pot as he gradually lays out what he sees ahead for the market.  Enjoy!

Big picture, the near term looks good and the longer term looks scary. That is because:

  1. The economy is now at or near its best, and we see no major economic risks on the horizon for the next year or two,
  2. There are significant long-term problems (e.g., high debt and non-debt obligations, limited abilities by central banks to stimulate, etc.) that are likely to create a squeeze,
  3. Social and political conflicts are near their worst for the last number of decades, and
  4. Conflicts get worse when economies worsen.

So while we have no near-term economic worries for the economy as a whole, we worry about what these conflicts will become like when the economy has its next downturn.

The next few pages go through our picture of the world as a whole, followed by a look at each of the major economies. We recommend that you read the first part on the world picture and look at the others on individual countries if you’re so inclined.

Where We Are Within Our Template

To help clarify, we will repeat our template (see www.economicprinciples.org) and put where we are within that context.

There are three big forces that drive economies: there’s the normal business/short-term debt cycle that typically takes 5 to 10 years, there’s the long-term debt cycle, and there’s productivity. There are two levers to control them: monetary policy and fiscal policy. And there are the risk premiums of assets that vary as a function of changes in monetary and fiscal policies to drive the wealth effect.

The major economies right now are in the middle of their short-term debt cycles, and growth rates are about average. In other words, the world economy is in the Goldilocks part of the cycle (i.e., neither too hot nor too cold). As a result, volatility is low now, as it typically is during such times. Regarding this cycle, we don’t see any classic storm clouds on the horizon. Unlike in 2007/08, we don’t now see big unsustainable debt flows or a lot of debts maturing that can’t be serviced, and we don’t see monetary policy as a threat. At most, there will be a little touching the brakes by the Fed to slow moderate growth a smidgen. So all looks good for the next year or two, barring some geopolitical shock.

At the same time, the longer-term picture is concerning because we have a lot of debt and a lot of non-debt obligations (pensions, healthcare entitlements, social security, etc.) coming due, which will increasingly create a “squeeze”; this squeeze will come gradually, not as a shock, and will hurt those who are now most in distress the hardest.

Central banks’ powers to rectify these problems are more limited than normal, which adds to the downside risks. Central banks’ powers to ease are less than normal because they have limited abilities to lower interest rates from where they are and because increased QE would be less effective than normal with risk premiums where they are. Similarly, effective fiscal policy help is more elusive because of political fragmentation.

So we fear that whatever the magnitude of the downturn that eventually comes, whenever it eventually comes, it will likely produce much greater social and political conflict than currently exists.

The “World” Picture in Charts

The following section fleshes out what was previously said by showing where the “world economy” is as a whole. It is followed by a section that shows the same charts for each of the major economies. These charts go back to both 1970 and 1920 in order to provide you with ample perspective.

1) Short-Term Debt/Economic Conditions Are Good

As shown below, both the amount of slack in the world economy and the rate of growth in the world economy are as close as they get to normal levels. In other words, overall, the global economy is at equilibrium.

2) Assets Are Pricing In About Average Risk Premiums (Returns Above Cash), Though They Will Provide Low Total Returns

Liquidity is abundant. Real and nominal interest rates are low—as they should be given where we are in the longterm debt cycle. At the same time, risk premiums of assets (i.e., their expected returns above cash) are normal, and there are no debt crises on the horizon.

Since all investments compete with each other, all investment assets’ projected real and nominal returns are low, though not unusually low in relation to cash rates. The charts below show our expectations for asset returns (of a global 50/50 stock/bond portfolio). While those returns are low, they’re not low relative to cash rates.

Relative to cash, the ‘risk premiums’ of assets are about normal compared to the long-term average. So, both the short-term/business cycle and the pricing of assets look about right to us.

3) The Longer Term Debt Cycle Is a Negative

Debt and non-debt obligations (e.g., for pensions, healthcare entitlements, social security, etc.) are high.

4) Productivity Growth Is Low

Over the long term, what raises living standards is productivity—the amount that is produced per person—which increases from coming up with new ideas and implementing ways of producing efficiently. Productivity evolves slowly, so it doesn’t drive big economic and market moves, though it adds up to what matters most over the long run. Here are charts of productivity as measured by real GDP per capita.

5) Economic, Political, and Social Fragmentation Is Bad and Worsening

There are big differences in wealth and opportunity that have led to social and political tensions that are significantly greater than normal, and are increasing. Since such tensions are normally correlated with overall economic conditions, it is unusual for social and political tensions to be so bad when overall economic and market conditions are so good. So we can’t help but worry what the social and political fragmentation will be like in the next downturn, which, by the way, we see no reason to happen over the next year or two.

Below we show a gauge maintained by the Federal Reserve Bank of Philadelphia that attempts to measure political conflict in the US by looking at the share of newspaper articles that cover political conflict from a few continuously running newspapers (NYT, WSJ, etc.). By this measure, conflict is now at highs and rising. The idea of conflicts getting even worse in a downturn is scary.

Downturns always come. When the next downturn comes, it’s probably going to be bad.

Below, we go through different countries/regions, one by one.

Looking at the Individual Economic Blocs

United States

As shown below, the US is around equilibrium in the mid-to-late stages of the short-term debt cycle (i.e., the “in between” years), and growth remains moderately strong. Secularly, the US is at the end of the long-term debt cycle. Debt levels are high and have leveled off after a period of deleveraging. The Fed has started to tighten gradually, but interest rates remain low, so the Fed has limited room to ease in the event of a downturn. And as we’ve covered in prior Observations (so won’t go into here), the US is in a period of exceptional politicaluncertainty as the new administration’s policies continue to take shape.


While there are two Europes within Europe, we will talk about the Eurozone as a whole (as we have covered the different parts in other Observations). The region is around cyclical equilibrium, but this masks significant divergences between depressed periphery countries and Germany, where the economy is running hot. In response to ECB stimulation, growth has picked up a bit, but inflation is still very weak and below the ECB target. Secularly, Europe is also at the end of the long-term debt cycle. Debt levels are high and haven’t fallen much. Nominal interest rates on both the short and the long end are around zero and are priced to stay low for years. We won’t go into detail here, but Europe also faces one of the most challenging political backdrops due to the growing support for populism.


In Japan, policy makers are trying to reverse decades of ugly deflationary deleveraging and shift to a beautiful deleveraging. As shown below, over the last several years, the BoJ’s policies have produced a cyclical upswing and eased deflation. Japan is now around its cyclical equilibrium, growth rates have picked up a bit, and inflation is still very low but the economy is no longer in deflation. Secularly, Japan is at the end of the long-term debt cycle, with the highest debt levels in the developed world (which the BoJ is monetizing at the fastest rate). Debt is still rising, driven by government borrowing. Interest rates have been around zero for two decades and are priced to stay there.


We’ve previously described that China faces four big economic challenges (debt restructuring; economic restructuring; capital markets restructuring; and the balance of payments/currency issue) that are being well managed. We won’t go into these challenges here other than to emphasize that they are an important backdrop for the perspective shown below. Cyclically, overall levels of activity in China are neither too high nor too low; growth has accelerated and is now strong; and while inflation has picked up some, it remains modest. Debt levels are high and growing rapidly. Interest rates remain relatively low, though these have risen some recently. Under the hood, these aggregate conditions are the net of “two economies” that look very different: a slowing, heavily indebted “old economy” with pockets of excess capacity, and a steadily expanding “new economy” driven by higher-end industries and household consumption.

Emerging Markets ex-China

Obviously, this category aggregates many countries with many different sets of circumstances, which we won’t get into here. Overall, cyclical conditions in EM ex-China are a bit weaker than in the developed world, reflecting, that several of the largest countries (e.g., Brazil, Russia) are now recovering from balance of payments adjustments. But the longer-term picture is comparatively stronger. These EM countries haven’t yet seen much of a productivity slowdown akin to what the developed world has seen, and debt burdens remain low.

Courtesy of Ray Dalio @ LinkedIn

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S&P500 Earnings With Trump Over The Shoulder

Before I present the insight on expected earnings ahead, there is one point I wish to make; that being Trump.  If you're not following our President elect on Twitter, you should get with it now.  Some may say it's not "Presidential" to be on TWTR but our commander and chief does what he wishes, and he wishes to scare whomever he can.  At the very least, throw him up as a column on TweetDeck and watch the charts fly when he mentions a name. 

Now while AMZN and GM were formerly expecting good growth in 2017, you will notice that both are now on Trumps radar for taxation and import/export fees which explains their recent trading action.  There seems to be no love lost between AMZN owner Jeff Bezos.  Even Trumps comments on taxation such as “If @amazon ever had to pay fair taxes, its stock would crash and it would crumble like a paper bag." should leave investors more than a tad concerned.  At this point, I feel we'll see quite a bit of this concern over China/Mexico/taxation/tariffs in the next few months but in the meantime, there's always the Trump trades to rely on.  Read on:

At the start of 2016, analysts were projecting earnings growth of 5.3% and revenue growth of 4.4% for the year. For the first half of 2016, the index reported declines in earnings and revenues. For the second half of 2016, the index is expected to report growth in earnings and revenues. Overall for the entire year, analysts believe the index will report slight growth in both earnings and revenues.

Here, we look at the expected earnings and revenue growth rate for the S&P 500 for 2016, with a focus on the top and bottom performing sectors, industries and companies for the year. SP500 Annual Earnings Growth cy11-16.png

Slight Earnings Growth of 0.1% Expected for 2016

The estimated earnings growth rate for CY 2016 is 0.1%. Seven sectors are projected to report year-over-year growth in earnings, led by the Real Estate, Consumer Discretionary, and Utilities sectors. Four sectors are projected to report a year-over-year decline in earnings, led by the Energy sector.

sp500 sector earnings growth cy16.png

Real Estate: Equity Residential and HCP Lead Growth

The Real Estate sector is expected to report the highest earnings growth rate of all eleven sectors at 17.9%. At the sub-industry level, five of the eight sub-industries in this sector are projected to report earnings growth for the year, led by the Health Care REITs (223%) and Residential REITs (111%) sub-industries. At the company level, Equity Residential and HCP are the largest contributors to earnings growth for this sector. The EPS growth for Equity Residential is benefitting from an unusually high EPS estimate for CY 2016, while the EPS growth for HCP is benefitting from a comparison to an unusually low EPS actual for CY 2015. The mean EPS estimate for CY 2016 for Equity Residential is $10.87, compared to year-ago EPS of $2.36. The mean EPS estimate for HCP for CY 2016 is $1.30, compared to year-ago EPS of -$1.21. If these two companies are excluded, the estimated earnings growth rate for the Real Estate sector would fall to -8.6% from 17.9%.

Consumer Discretionary: Internet & Direct Marketing Retail Leads Growth

The Consumer Discretionary sector is projected to report the second highest earnings growth rate of all eleven sectors at 9.1%. At the industry level, eleven of the twelve industries in this sector are predicted to report earnings growth for the year. Of these eleven industries, four are projected to report earnings growth of more than 10%, led by the Internet & Direct Marketing Retail (49%) and Household Durables (27%) industries. At the company level, Amazon.com, General Motors, and Charter Communications are the largest contributors to earnings growth for the sector. The mean EPS estimate for CY 2016 for Amazon.com is $4.84, compared to year-ago EPS of $1.25. The mean EPS estimate for General Motors for CY 2016 is $6.02, compared to year-ago EPS of $5.02. The mean EPS estimate for Charter Communications for CY 2016 is $3.68, compared to year-ago EPS of -$2.69. If these three companies are excluded, the estimated earnings growth rate for the Consumer Discretionary sector would fall to 5.6% from 9.1%.

Utilities Sector: NRG Energy Leads Growth

The Utilities sector is predicted to report the third highest earnings growth rate of all eleven sectors at 7.9%. At the industry level, all four industries in this sector are expected to report earnings growth for the year, led by the Independent Power & Renewable Electricity Producers (101%) industry. At the company level, 22 of the 28 companies in the sector (79%) are expected to report EPS growth for CY 2016. NRG Energy is the largest contributor to earnings growth in the sector. The mean EPS estimate for NRG Energy is for CY 2016 is $1.05, compared to year-ago EPS of -$0.48. If NRG Energy is excluded, the estimated earnings growth rate for the Utilities sector would fall to 5.8% from 7.9%. 

Energy: Broad-Based Weakness

The Energy sector is predicted to report the largest year-over-year decline in earnings of all eleven sectors at -75.7%. Five of the six sub-industries in this sector are expected to report a year-over-year drop in earnings: Oil & Gas Exploration & Production (N/A), Oil & Gas Equipment & Services (-92%), Oil & Gas Drilling (-82%), Oil & Gas Refining & Marketing (-61%), Integrated Oil & Gas (-49%). The only sub-industry expected to report growth in earnings for CY 2016 is the Oil & Gas Storage & Transportation (2%).

Telecom Services: Level 3 Communications Leads Decline

The Telecom Services sector is expected to report the second largest (year-over-year) earnings decline of all eleven sectors at -7.5%. Overall, four of the five companies in the sector (80%) are projected to report a decrease in EPS for the year. The one company that is driving the earnings decline for this sector is Level 3 Communications. However, the EPS decrease for this company is exacerbated by a comparison to unusually high earnings in CY 2015, due to unusually high EPS reported in Q4 2015. In the company’s earnings release from Q4 2015, Level 3 Communications stated (regarding EPS for the quarter), “This includes a non-cash benefit to the fourth quarter Income Tax Expense of approximately $3.3 billion related to the release of the company’s valuation allowance against U.S. federal and state deferred tax assets…” The mean EPS estimate for Level 3 Communications for CY 2016 is $1.59, compared to year-ago EPS of $9.58. If this company is excluded, the estimated earnings decline for the Telecom Services sector would drop to -0.1% from -7.5%.

Revenue Growth of 2.2% Expected for 2016

sp500 annual revenue growth cy11-16.png

The estimated revenue growth rate for CY 2016 is 2.2%. Nine sectors are expected to report year-over-year growth in revenues, led by the Health Care, Consumer Discretionary, and Real Estate sectors. Two sectors are expected to report a year-over-year decline in revenues, led by the Energy sector.

sp500 sector revenue growth cy16.png

Health Care: Broad-Based Growth

The Health Care sector is projected to report the highest revenue growth of all eleven sectors for CY 2016 at 8.1%. All six industries in this sector are expected to report sales growth for the year: Health Care Providers & Services (9%), Health Care Technology (9%), Life Sciences Tools & Services (6%), Biotechnology (6%), Pharmaceuticals (5%), and Health Care Equipment & Supplies (5%).

Consumer Discretionary: Internet & Direct Marketing Retail Leads Growth

The Consumer Discretionary sector is projected to report the second highest revenue growth rate of all eleven sectors for CY 2016 at 7.7%. At the industry level, ten of the twelve industries in this sector are predicted to report sales growth for the year. Of these ten industries, three are projected to report revenue growth of more than 10%: Internet & Direct Marketing Retail (27%), Household Durables (17%), and Media (13%).

Real Estate: Equity Residential and HCP Lead Growth

The Real Estate sector is expected to report the third highest revenue growth rate of all eleven sectors at 7.3%. At the sub-industry level, seven of the eight sub-industries in this sector are projected to report sales growth for the year, led by the Real Estate Services (21%), Industrial REITs (13%) and Specialized REITs (11%) sub-industries.

Energy: Broad-Based Decline

On the other hand, the Energy sector is expected to report the largest year-over-year decrease in sales of all eleven sectors for CY 2016 at -17.7%. All six sub-industries in the sector are predicted to report a decrease in revenues: Oil & Gas Drilling (-43%), Oil & Gas Equipment & Services (-31%), Oil & Gas Exploration & Production (-21%), Integrated Oil & Gas (-16%), Oil & Gas Refining & Marketing (-15%), and Oil & Gas Storage & Transportation (-2%).

Energy Sector Largest Drag on Growth in 2016

Not only is the Energy sector expected to report the largest year-over-year declines in earnings and revenues for 2016, it also is the largest detractor to the estimated earnings and revenue growth rates for the S& P 500 for 2016. If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 would jump to 3.4% from 0.1%, and the estimated revenue growth rate for the S&P 500 would jump to 4.2% from 2.2%.

S&P500 2016 Earnings and Revenue Growth Ex-Energy.png

Courtesy of FactSet

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The Death Of Tradtional Retail vs The Size Of Amazon

The Extraordinary Size of Amazon in One Chart

The Extraordinary Size of Amazon in One Chart

It’s bigger than most brick and mortar retailers together

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

What has more value: all major publicly traded department stores in the United States, or Amazon?

Amazon takes the cake, and its no contest.

Add together the market caps of Walmart, Target, Best Buy, Nordstrom, Kohl’s, JCPenney, Sears, and Macy’s, it amounts to a significant $297.8 billion:

Brick & Mortar Store 2016 Value ($B)
Total $297.8
Sears $1.1
JCPenney $2.6
Nordstrom $8.3
Kohl's $8.8
Macy's $11.0
Best Buy $13.2
Target $40.6
Walmart $212.4

However, it’s not enough to beat Amazon.

The online retailer alone is worth $356 billion, making it one of the largest companies by market capitalization in the world.

The Death of Traditional Retail

Ten years ago, the future of brick and mortar retail sill looked bright. The aforementioned retailers were worth a collective $400 billion, and Amazon was only valued at $17.5 billion.

But disruption often comes without warning. Or if there were warning signs, they went unheeded by retailers.

Big box and department store sales plummeted, as consumers increasingly went online to do their shopping. This year, it is estimated that revenues are equal to just 62% of their totals in 2006:

Big Box and Department Store Sales ($ Billion)
Big Box and Retail Store Sales

Retailers without the right strategy saw their market caps plummet.

Sears went from being worth $27.8 billion to $1.1 billion (a 96% decrease), while JCPenney went from $18.1 billion to $2.6 billion (a 86% decrease).

Here’s the full damage over the last 10 years to brick and mortar stores:

Store 2006 Value ($B) 2016 Value ($B) % Change
Total $400.4 $297.8 -26%
Sears $27.8 $1.1 -96%
JCPenney $18.1 $2.6 -86%
Nordstrom $12.4 $8.3 -33%
Kohl's $24.2 $8.8 -64%
Macy's $24.2 $11.0 -55%
Best Buy $28.4 $13.2 -54%
Target $51.3 $40.6 -21%
Walmart $214.0 $212.4 -1%

Amazon, on the other hand, did okay for itself.

The online retailer gained 1,934% in value over the same time frame, making it one of the most valuable companies in the world, and a key piece of Jeff Bezos’ business empire.

Courtesy of VisualCapitalist

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Wall Streets Top Picks For 2017 With Trump

We are into the homestretch of 2016, and the markets have seen strong upside this year, benefiting from the domestic economy's resilience and the election of Donald Trump.

With just four sessions to go, the Dow Jones Industrial Average has been a up a solid 14.4 percent, the S&P 500 has risen 10.8 percent and the NASDAQ Composite is 9.1 percent higher — with all the three major averages trading off their all-time closing highs.

Among the ten S&P sectors, eight have been in the green. Old economy stocks such as energy, material, industrial, financial, utility and telecom are all up by double-digit percentages. Technology stocks are also up decently. However, the healthcare sector has taken a hit.

Though it is tough to replicate the performance of 2016, given the tougher comparisons and the uncertainty around policies amid the political leadership transition, Wall Street does see some opportunities that are compelling.

Here is a compilation of some top picks recommended by Wall Street analyst for the year 2017:

RBC Top Small- And Large-Cap Picks For 2017

Large-Cap Picks:

  • Netflix, Inc. NFLX 1.92%: Subscriber additions, New content and new international launches.
  • Facebook Inc FB 0.92%: Muted expectations concerning 2017 earnings and two messaging platforms with one billion users, namely WhatsApp and Messenger.

Small-Cap Pick:

  • Yelp Inc YELP 2.93%: Conservative consensus estimate providing scope for outperformance, revenue and margin expansion opportunities.

Deutsche Bank's Top Bank Picks for 2017

The firm believes higher Fed rates in 2017 will boost net interest margin and earnings per share, although the same is expected to hit tangible book value/capital and may reduce buybacks.

Top Picks Among Regional Gaming Stocks

Deutsche Bank's Carlo Santarelli is favorably biased toward regional operators heading into 2017, given favorable macro-economic indicators and the potential for policy-related boosts to the regional gaming consumer.

RBC's Top Tech Picks For 2017

Large-Cap Picks:

  • Apple Inc. AAPL 0.43%: iPhone 8 supercycle of upgrade activity, growing services business and the possible repatriation of foreign profits.
  • Broadcom Ltd AVGO 1.16%: Deal integration, improved capital structure.
  • NVIDIA Corporation NVDA 6.88%: Tailwinds from virtual reality, artificial intelligence and autonomous driving.
  • Cisco Systems, Inc. CSCO 0.85%: Mix shift away from switching and routing, continued M&A and the potential for repatriation.
  • Texas Instruments Incorporated TXN 1.1%: Gross margin upside and sales growth acceleration driven by market share gains.

Mid- And Small-Cap Picks:

Northland Securities' Top Pick For 2017

  • Silicon Motion Technology Corp. (ADR) SIMO 2.51%: Recent selloff creates significant opportunity for price appreciation — Outperform rating with $60 price target.

MKM Partners' Top Picks For 2017

  • Alibaba Group Holding Ltd BABA 0.19%.
  • Marriott International Inc MAR 0.93%: Stronger corporate transient demand, accelerating share repurchases and execution of revenue and cost synergies from Starwood acquisition.

Altria Is Wells Fargo's New Top Pick For 2017

  • Altria Group Inc MO 0.46%: Due to increased probability of the deal.

Akamai: Oppenheimer's Top Mid-Cap Pick

  • Akamai Technologies, Inc. AKAM 1.2%: 2017 will see vertical integration, driving new revenue streams and disruption. Communication industry to benefit from the incoming Trump administration and Republican Congress.

Courtesy of Benzinga

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It's Not What You Think. Market Myths Debunked

"A lie told often enough becomes the truth" - Vladimir Lenin

Imagine for a minute you lived centuries ago when people believed the earth was flat, or the earth revolved around the sun, or that planets were Gods, or that disease was angry spirits or supernatural powers. You'd have an explanation for everything ... only it would be wrong. And that "wrongness" would stand in the way of true understanding and true progress until they were discarded as falsehoods.

And so it is with the Stock Market. Let me explain.

First, let me be perfectly clear. I'm a statistician so I'm not referring to philosophical or political or gut feelings or anything other than Statistical Misrepresentations. Fact, not opinion.

I can hardly go a day without reading an article or hearing a TV pundit or someone regurgitate misconceptions that are so integrated in our minds ... we believe them to be the truth.

These misconceptions cause us to make investing mistakes because we take them as axiomatic when they are fantasy.

I am constantly amazed how often misconceptions about really fundamental aspects of the market persist. Not just amongst lay investors, but pundits and professionals as well. It just seems, at times, that investors WANT to be misled. I guess it gives them some sort of comfort ... even if it is wrong.

So, let's see if we can correct some of these misconceptions.

Let me take the most prevalent ones one at a time.

Average Market Returns:

I have to admit, I came across three articles today that made projections based upon Stock Market Average Returns. They all quote some historic average return over some historic period. In one particular article, the last 10 years was presented as an Average Annual Return of 9.05%.

The Stock Market Average Return is a meaningless metric. And here's why.

Average returns are relevant only if they are independent of each other. An example would help.

Let's say the market went up 15%, then down 15%, then up 15%, then down 15%. The average return is ZERO. But, let's do some math.

Start at $1,000.

1) In year one, the 15% goes to $1,150.

2) In year two, when it goes down 15%, it's down $173 to $977.

3) In year three, when it rises 15%, it goes up $147 to $1,124.

4) In year four, the 15% drop is $169 to $955.

The average is ZERO. The result is negative 4.5% ... or negative 1.125%/year. Reversing the up and down years renders the same result.

This results because Averages only work if the events are independent of each other. When one compares performance to averages it is an apples to oranges comparison.

One must look, NOT at average returns but CAGR (compound average growth rate), which takes into account this interdependence of events.

Let's take a microscope to recent events and see how it works, in real-time, not in theory:

For dramatic effect, I'll use the three year period of 2008, 2009 and 2010.

S&P Average vs. CAGR

2008 - 36.55%
2009 + 25.94%
2010 + 14.82%
Average Annual Return + 1.40%
CAGR - 2.75%

This differential represents a swing of over 4%. No wonder investors have trouble understanding how they lose money when the average seems to make money.

Examining the last 10 years, the "average return" of the S&P 500 was 9.05%, but the CAGR of the market was only 7.25%.

In fact, if we look at slices of returns over the last 100 years, we will find that Average Returns overstates CAGR by about 2% per year. WOW.

Here's a chart that shows the pattern for the S&P 500:

Average Returns vs. CAGR

Average Return CAGR
1928-2015 11.40% 9.50%
1966-2015 11.01% 9.61%
2006-2015 9.03% 7.25%

Remedy: There is a very simple remedy to this misconception. Do not use Average Returns, look instead to CAGR (compounded annual growth rate). That is the only way to judge performance.

Significance: This is a very significant distortion for a number of reasons. If we assume that long range historic returns are indicative of long range future results (I'm not saying they are ... that's for another article). If someone wants to project accumulation goals or withdrawals in retirement, they will severely overstate the results if they use Average Returns rather than CAGR. This is magnified as their projection will use compound interest on an overstated metric. Ye 'ole double whammy.

It also distorts inter-market comparisons, say comparing S&P to DJI or Nasdaq or Small Cap or whatever. When we are presented a distortion of reality, this distortion, when and if, compared to another distortion, well, two distortions don't make a right.

Let me move on to the next myth.

Inflation Rates:

No, I'm not going to argue about whether or not the metric used to determine the CPI or inflation rate is proper. I'm simply going to extend the argument I just made about Averages versus CAGR.

I'm going to save lots of typing by simply stating that when values are substantially unidirectional - that is they are mostly either up or down as opposed to up and down - an Average will understate, not overstate CAGR. Inasmuch as the last 60 years experienced only one year of negative inflation, it is certainly unidirectional.

We always hear about "some" Average Inflation Rate being XYZ. For instance, one Average Inflation Rate for the last 10 years was reported at 1.7%. However, that understated the CAGR when, using the exact same time period and rates would be closer to 1.9%.

Remember, this is statistical hocus-pocus which must be added to any hocus-pocus in the design of the metric, itself.

So, if anyone is wondering why they have trouble making financial progress it's very simple: returns for the market are statistically overstated and the inflation rate is statistically understated.

Moving on to the next myth.

Mean Reversion:

This is mostly used as a fancy way to say "What goes up must go down". In that context, it's more of a mis-application than a mis-representation. However, the effect is just as devastating, as it influences behavior that is inconsistent with maximizing returns.

When the market rises, as it has now, we hear a lot about mean reversion. This seems to make sense and play into the basic investor fear of a retrenchment. To better understand why mean reversion has nothing to do with this, let me start with an analogy.

We see an Olympic 100 meter swimmer dive into the water for her race. As she uses her left hand for the first stroke, she pulls slightly to the left. Then comes the right hand and that stroke moves her slightly back to the center-line. So, what we observe, is constant forward motion that travels in a jagged, or zig-zag, pattern.

Now, if the swimmer mean reverted, she'd go out to the 40 meter line, reverse course, swim back to the 20 meter line, reverse again to the 30 meter, reverse again to the 25 and so on ... back and forth .... until she settled near the 25 meter line and sunk in exhaustion.

So, the swimmer clearly doesn't "mean revert". Or does she? She actually does, but the mean reversion applies to the zig-zag, not the forward motion of the swimmer. So, the swimmer moves on towards the finish line ... the mean reversion (zig-zag) does not cause her to fall back ... just takes a little longer to get where she's headed.

It is the same with the market. The market shows mean reversion, not in the price of the market, but in the Growth Rate.

Let me give an example.

Assume the historic annual growth rate of the market is 8% and it is trading at $2,200. It goes up 14% to $2,500. Mean reversion of price would mean it would drop to $1,900 so the average price was $2,200.

However, mean reversion of the growth rate would lower future growth until that "excess" 6% is absorbed. Now, this could happen by growing 1% less (7%), for the next six years or growing only 2% the next year.

So, if growth rate mean reverts the market can go higher. It just goes higher at a slower rate to compensate for the excess growth.


Mean reversion does NOT mean "what goes up must come down".

But, you ask, we all know the market goes up and down, isn't that mean reversion? Absolutely NOT ... in the sense it is vernacularly applied ... which is to imply the market will drop. It is the same pattern we observe in the zig-zag of the swimmer. The market mean reverts to its growth rate, not its price.

If you think about it you'll understand why there's always a bounce-back on a drop. Sometimes the bounce-back comes quickly, sometimes it's dragged out.

Significance: Yes, the market will go up and down. No one denies that. However, it will not mean revert to some previous price ... it mean reverts to a growth rate. So, we can witness an ever increasing market that is mean reverting at the same time.

Now, many will try to time the zig-zag, knowing that it is just a temporary condition. This can be done very successfully. However, those that sell or stay out of the market, expecting the price to mean revert generally find themselves losers. I know several that sold out in June 2013 when the S&P 500 hit $1,600. It was an "all time high" and surely would mean revert. Now, with the market nearly 50% higher, they are still waiting. Hope you're not one of them.

Summary: Many investors and even some professionals can be easily misled by what seems to be an accurate portrayal of market conditions. Very few actually have the training to understand the mechanics of the market. Most fall victim to "slogans" and misrepresentation.

This article illustrated how the market is systematically portrayed as being more robust than it really is ... that inflation portrayals use the same techniques to understate the true rate and that investors are wrongly influenced to sell when they should be holding or buying.

It is my hope, that through this article, I can challenge the reader to question even the most basic of "slogans" and accepted practice.

Caveat: In this article I put forth the concept that the Market has a "fundamental" growth rate around which it mean reverts. This is the current thinking amongst most statisticians and market gurus. There is a tremendous amount of scholarly articles and studies indicating this to be so.

Personally, I disagree with the "field" on this. My personal opinion is that the growth rate, itself, mean reverts around some other fundamental value or values that are not easily and currently understood.

Since I promised just a factual presentation and not a philosophical or "gut" opinion, it was beyond the scope of this article.

Courtesy of SeekingAlpha

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The Run In Small Caps. Will It Continue In 2017

The stock market went on quite a tear in the 3+ weeks immediately following the election, with the month of November especially beneficial for small-cap stocks.

Before delving into what it all might mean for small-cap investors, here's a quick rundown to help contextualize just how dynamic a month it was:

  1. This was the best November in the history of the Russell 2000 Index. featuring its highest monthly return since October 2011 when small-caps were just emerging from a precipitous decline.
  2. The performance spread between small-cap and large-cap was the widest in 14 years (since April 2002). The Russell 2000 gained 11.2% for the month versus respective gains of 3.9% and 3.7% for the large-cap Russell 1000 and S&P 500 Indexes.
  3. Small-cap value enjoyed a good year's worth of results in one month! During November, the Russell 2000 Value advanced 13.3% compared to 9.0% for the Russell 2000 Growth.
  4. Small-cap value earned an even bigger advantage quarter-to-date, thanks to better performance during the mini-correction earlier in the quarter. From 9/30/16-11/30/16, small-cap value was up 9.6% versus a gain of 2.2% for small-cap growth.

What drove small-cap value?
The strength of small-cap value has come from cyclical (and diverse) sectors including Financials, Industrials, Consumer Discretionary, Energy, and Materials.

Financials benefited from a steepening yield curve that should help to boost bank profits, while optimism about accelerating economic growth helped Industrials and many Materials stocks. The U.S. consumer has ratcheted up spending, and rebounding commodity prices helped both Energy and, again, Materials.

Small-Cap Cyclical Sectors Lead in November
Russell 2000 Sector Returns November 2016 and QTD

Small-Cap Cyclical Sectors Lead in November

1Real Estate, formerly part of Financials, became a separate GICS sector on 8/31/16. 

What does this mean for small-cap investors?
To be sure, this is all welcome news, especially for small-cap active managers with a cyclical tilt.

After such a remarkable run, it’s also understandable to ask, perhaps with a bit of trepidation, where small-caps go from here. We are contrarians, after all.

What Does a Post-Trump Market Mean for Investors?

First, the current rally has exacerbated an already pronounced shift from growth to value while also solidifying a move from large-cap to small-cap.

The post-election environment has also seen a dramatic rotation away from safety—bonds and defensive stocks most notably. Investors have shown increased confidence in the potential for accelerated economic growth and a likely policy shift from monetary to fiscal—chiefly in the form of tax cuts and projected spending increases on infrastructure and defense.

How much of this is accurate and how much has already been priced in remain to be seen. Certainly, we see these as the critical questions to be answered going forward.

It is not uncommon for major events (political or otherwise) to create outsized, short-term swings that manage to correct themselves as the future becomes clearer. We would not be at all surprised to see a correction over the next few months.

After all, one result of the uptick is that many stocks now sport very high valuations based on these great expectations.

As always, we think certain fundamentals will continue to matter as the interest rate environment (and with it the economy as a whole) returns to a more historically normal (and, in this instance, possibly inflationary) pattern.

From our perspective as small-cap specialists, we see the key fundamentals going forward as earnings, profitability, the ability to self-fund, and valuations that we believe do not fully reflect these positive attributes.

We view small-cap value's leadership as still comparably new and that the cycle will remain favorable for both small-cap value and active approaches to the asset class.

Stay tuned…

Courtesy of Royce Funds

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The noise and bustle on the streets of India’s biggest cities is a defining characteristic of a country that’s home to over a billion people.

Every year, millions more leave their traditional homes in rural towns and villages and head into urban areas. The United Nations World Cities Report 2016 says 9.6 million people will move to New Delhi by 2030.

To qualify as a megacity under the UN definition, an urban area must have a population of 10 million people. The UN takes into account urban sprawl and measures populations beyond official city limits. On these criteria, India currently has five megacities.

1. New Delhi The capital city has a population of 26.5 million people
2. Mumbai India’s financial hub has a population of 21.4 million people
3. Kolkata An important trading hub, with 15 million people living in urban area
4. Bengaluru The ‘Silicon Valley’ of India; 10.5 million people call it home
5. Chennai Home of the Indian motor industry, as well as 10.2 million people

Other urban areas in India are growing rapidly as people look to cities for jobs and financial security, as well as the chance of a better education for their children. This rural-to-urban migration will result in two more urban areas becoming megacities by 2030, says the UN.

1. Hyderabad A strong IT hub and tourism centre. It may be home to 12.8 million by 2030
2. Ahmedabad The heart of the textile industry is expected to house 10.5 million by 2030

The UN’s World Cities report finds that big cities "create wealth, generate employment and drive human progress". On the downside, megacities are also responsible for driving climate change, inequality and exclusion, as well as the breakdown of traditional family structures, which leaves elderly people isolated and vulnerable.

 Challenges for megacities

Megacities and mega-slums

Many millions of people who move to India’s growing cities will miss out on the economic benefits of urban living. The UN report says the number of people living in slums across the developing world rose from 689 million to 880 million between 1990 and 2014. The Dharavi slum in Mumbai is home to an estimated one million people. New arrivals are not totally deprived of opportunities, however. According to the Economic Times of India, the slum has an economic output estimated at $1 billion a year.

 Global patterns of urbanization
Image: UN World Cities Report

The global rise of megacities

The drift from rural to urban living is not exclusive to India; it's happening across the developing world. The UN report says 500 million people currently live in 31 megacities around the world.

What's more, the number of cities with populations of more than 10 million people will rise to 41 by 2030. Most of that growth will happen in Asia and Africa. The two continents will be home to 33 of those 41 megacities by 2030.

Courtesy of WorldEconomicForum

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The Top 10 Emerging Technologies Of 2016

Sometimes the world is not yet ready for a new technology to enter the fray.

Virtual reality, for example, sat on the sidelines for many years. The industry went into hibernation around the time of the Dot Com Bust, and it has only recently re-emerged with promise.

It is only today that big companies like Microsoft, Google, Samsung, HTC, and Facebook have the infrastructure, peripheral technologies, and capital in place to properly commercialize the technology. Now, instead of using primitive 300 x 200 pixel LCD displays that were prohibitively expensive in the 90s, we are looking at a world where display will be in beautiful 4k quality. Meanwhile, accelerometers and gyroscopes can measure head movement, and modern computing power can reduce lag and latency. It took many years, but finally the true potential of VR is being realized.

Like virtual reality, there are 10 other emerging technologies that are finally ready for prime time. Some, like the recent advances in artificial intelligence, have been decades in the making. Other emerging technologies such as the blockchain are relatively new phenomenons that are also ready for their time in the spotlight.

Emerging Technologies of 2016

  1. Nanosensors and the Internet of Nanothings is one of the most exciting areas of science today. Tiny sensors that are circulated in the human body or construction materials will be able to relay information and diagnostics to the outside world. This will have an impact on medicine, architecture, agriculture, and drug manufacturing.
  2. Next Generation Batteries are helping to eliminate one of the biggest obstacles with renewable energy, which is energy storage. Though not commercially available yet, this area shows great promise – and it is something we are tracking in our five-part Battery Series.
  3. The Blockchain had investment exceeding $1 billion in 2015. The blockchain ecosystem is evolving rapidly and will change the way banking, markets, contracts, and governments work.
  4. 2d Materials such as graphene will have an impact in a variety of applications ranging from air and water filters to batteries and wearable technology.
  5. Autonomous Vehicles are here, and the potential impact is huge. While there are still a few problems to overcome, driverless cars will save lives, cut pollution, boost economies, and improve the quality of life for people.
  6. Organs-on-Chips, which are tiny models of human organs, are making it easier for scientists to test drugs and conduct medical research.
  7. Petrovskite Solar Cells are making photovoltaic cells easier to make and more efficient. They also allow cells to be used virtually anywhere.
  8. Open AI Ecosystem will allow for smart digital assistants in the cloud that will be able to advise us on finance, health, or even fashion.
  9. Optogenetics, or the use of light and color to record activity in the brain, could help lead to better treatment of brain disorders.
  10. Systems Metabolic Engineering will allow for building block chemicals to be built with plants more efficiently than can be done with fossil fuels.

Courtesy of Infographics

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Investors, advertisers, and business leaders around the world are still trying to understand millennials, the generational group that will shape commerce for the foreseeable future. In the past, that’s why we’ve looked at millennial investing and banking preferences, their favorite brands, and even what real estate professionals need to understand about the generation.

Today’s infographic from Adweek is of particular interest, because it focuses on a very particular subset of millennials. The data in the graphic is from a survey of nearly 500 nominees for the Forbes 30 Under 30 list. While the subject range is broad, it’s a good snapshot of how some of the brightest millennials in business think.

What’s interesting is that there on some topics there was a surprising consensus, while others had a diversity in responses.

In terms of consensus, 97% of the brightest millennials agreed that they were optimistic about the future, and 80% said they still believed in the “American Dream”. In a less surprising consensus, a mere 10% of the group preferred a smartphone brand other than Apple.

The question that had the most diverse answers asked respondents about the biggest challenge facing the world today. The division here was substantial, with the following breakdown in answers: climate change (27%), terrorism (24%), and economic growth (22%), and other (27%).

As a final point, it was also interesting that only 32% of respondents were looking to start their own company. Millennials are often characterized as an entrepreneurial generation, so we were surprised that the majority of this select group was not actively looking to go in that direction.

Courtesy of: Visual Capitalist

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The Top 10 Millenial Brands

The market for U.S. millennials is expected to blossom to $1.4 trillion by 2020, according to international consulting firm Accenture. While this generation of digital natives is already a primary marketing target today, in the upcoming years millennials will make up a hefty 30% of all retail spending in the country.

However, millennials are complex and notoriously difficult to read, even for professional marketers. With values that seem to contradict one another, it’s a challenge for companies to successfully gain market share with this audience.

As millennials mature, researchers are gaining ground on the needs and wants of this generation. This week’s Chart of the Week shares data from a comprehensive survey of 3,500 millennials that were asked, without any prompt, about their favorite brands over the past three years. The results, which can be found in deeper depth here, help give us some insight as to what millennials look for in a brand.

Tech Brand Disparity

It’s likely that no one will be surprised to learn that tech brands are among the best polling for millennials.

Apple claimed the top spot in the shortlist of the Top 10 millennial brands, while Samsung, Microsoft, Sony, Amazon, and Google all helped to round out the group.

That said, what did surprise is the lack of showing by other prominent technology brands. Facebook, a company that reaches more than a billion people every day, came in at an extremely disappointing 65th place. That’s behind companies such as LG (20), Dell (28), HP (36), HTC (48), ASUS (52) and eBay (53). It’s even behind dreaded telecom companies like Verizon (61) and AT&T (62).

Meanwhile, Twitter, IBM, Intel, Paypal, and LinkedIn didn’t even register on the Top 100 radar.

Why are some tech brands rocketing up the rankings, while others are falling flat?

Some, but not others?

According to Moosylvania, the researchers behind the survey, there was a major commonality between the top brands for millennials.

They found that millennial cohorts prefer fun and entertaining content to news and information in their social media feeds by a margin of six-to-one. Norty Cohen, CEO of Moosylvania, elaborated on this:

"Entertainment provides a natural opportunity for a brand to connect as shareable content. These cohorts are marketing themselves, and when a brand doesn’t take itself too seriously but instead provides fun that can be shared, it works."

Could Facebook be the destroyer of fun, by monetizing people’s news feeds? Are IBM and LinkedIn too “businessy” to poke fun at themselves? Perhaps Paypal is too financial – a damning trait, since not a single Top 100 brand was a bank or financial institution.

This may explain why a higher degree of millennials are happy to leave traditional and boring financial institutions in the dust. In a previous chart, we showed 49% of millennials are much more open to engaging tech companies for financial services, while only 16% of people of other generations feel the same. It may also be a problem that rising fintech companies such as Venmo, Lending Club, Nutmeg, and others can solve.

Courtesy of: Visual Capitalist

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Smartwatches Overtake Swiss Watches

According to the latest research from Strategy Analytics, global smartwatch shipments reached 8.1 million units in Q4 2015, compared with 7.9 million Swiss Watch shipments. It is the first time ever that smartwatches have outshipped Swiss watches on a global basis.

Cliff Raskind, Director at Strategy Analytics, said, “We estimate global smartwatch shipments reached 8.1 million units in Q4 2015, rising a healthy 316 percent from 1.9 million in Q4 2014. Smartwatches are growing rapidly in North America, Western Europe and Asia. Apple Watch captured an impressive 63 percent share of the global smartwatch market in Q4 2015, followed by Samsung with 16 percent. Apple and Samsung together account for a commanding 8 in 10 of all smartwatches shipped worldwide.”

Steven Waltzer, Analyst at Strategy Analytics, added, “We estimate global Swiss watch shipments reached 7.9 million units in Q4 2015, falling 5 percent from 8.3 million in Q4 2014.  Global demand for Swiss watches is slowing down, and major players like Swatch are struggling to find growth.”

Neil Mawston, Executive Director at Strategy Analytics, added, “The Swiss watch industry has been very slow to react to the development of smartwatches. The Swiss watch industry has been sticking its head in the sand and hoping smartwatches will go away. Swiss brands, like Tag Heuer, accounted for a tiny 1 percent of all smartwatches shipped globally during Q4 2015, and they are long way behind Apple, Samsung and other leaders in the high-growth smartwatch category.”

The question now is, who can gain market share as usage grows and who will lose?

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What Might Happen In China In 2016

In debates about whether growth is a percentage point up or down, we too often lose sight of the absolute scale of China’s economy. No matter what rate the country grows at in 2016, its share of the global economy, and of many specific sectors, will be larger than ever. My snapshot of China in 2016? An increasingly diverse, volatile, $11 trillion economy whose performance is becoming more and more difficult to describe as one dimensional.

The reality is that China’s economy is today made up of multiple subeconomies, each more than a trillion dollars in size. Some are booming, some declining. Some are globally competitive, others fit for the scrap heap. How you feel about China depends more than ever on the parts of the economy where you compete. In 2015, selling kit to movie theaters has been great business, selling kit to steel mills less so. In your China, are you dealing with a tiger or a tortoise? Your performance in 2016 will depend on knowing the answer to this question and shaping your plans accordingly.

Many well-established secular trends in China will continue in 2016. The service economy’s expansion is perhaps most prominent among them. In this piece, as usual, I won’t spend much time on the most familiar things. Instead, I will highlight what I believe will become the more important and more visible trends in 2016, either because they are now accelerating to scale or a discontinuity may become a tipping point. (For a quick summary, see sidebar, “The China Orr-acle: Gordon’s predictions for 2016.”) I hope you find my ideas valuable.

The 13th five-year plan—few surprises

Much of China’s 13th five-year plan will seem pretty familiar, as it has been flagged in advance at the Fifth Plenum and elsewhere. Perhaps the only challenge will be to interpret the plan’s intent clearly through the new “party speak” now coming to dominate government pronouncements.

The GDP growth target will still be 6 percent–plus, which will be softened a bit but not eliminated by parallel quality-of-life goals: the environment, health, income, and the like. Achieving the growth target will remain the core objective of fiscal and monetary policies, so expect lower interest rates and pressure on the exchange rate versus the US dollar in 2016. Financial reforms aimed at moving more of the economy toward a market-based allocation of capital will continue.

Meanwhile, there will be more progress on interest-rate deregulation, on the IPO process (registration rather than approval), on permitting new entrants (especially from the tech sector and from abroad) into financial services, and on reimplementing laws suspended in the summer of 2015. The plan will promote decentralization, but the reality is likely to be greater centralization. More infrastructure will be built, mainly to enhance intraregional development—for example, around Greater Beijing.

Green initiatives, reinforced by December 2015 commitments made in Paris and the “red alert” in Beijing that same month, will take center stage. The central government will make such big and visible commitments to its citizens that local authorities will have to mount a serious effort to deliver. There will be tougher emissions standards and more spending to support the development of nonfossil fuels. Green finance will be available. Both private-sector and state-owned companies will rebrand their ongoing initiatives as green. China will explicitly build new export engines from its emerging global leadership in green products; for example, expect to see lots of Chinese-made air-filtration products in Delhi and the rest of India in 2016. Beyond green initiatives, going global will remain a key theme, as detailed in the One Belt, One Road program.1

Finally, the plan will recognize China’s success in raising labor productivity over the past decade and prioritize the acceleration of productivity growth, for both capital and labor, from 2016 to 2020. The plan will raise the implications of higher productivity for workers: the disappearance of many traditional well-paying jobs and the need for increased labor mobility and for the lifetime renewal and development of skills. But I am concerned that implementation will be left to local administrators and that the regions requiring the most help will have the lowest amounts of money to invest in reskilling the workforce and the least impressive actual skills to deliver.

Fewer jobs, flatter incomes—and, potentially, less confidence

The workplace in China is already changing dramatically in ways that will create many individual losers—for example, workers in industry sectors in secular decline (such as steel or textiles) or in industries where technology is rapidly displacing people even as output grows (like financial services or retailing). The government must help these workers reskill themselves to deliver on its commitment that all parts of society will benefit from economic growth and to keep people actively engaged in the economy. It will not be enough for officials to visit major local employers, as they did during the global financial crisis, and press them to retain all their current workers.

Official government figures, which probably skew to the positive on jobs, show that construction lost 15 million positions over the past year. Mining, a much smaller employer, has lost millions more. Workers from these sectors have few skills relevant for the modern service economy, yet many are in their peak working years. Reskilling must happen at scale. Not everyone can deliver e-commerce packages and, besides, the wages from that kind of work aren’t likely to bring people into the urban middle class.

Government must persuade the people that it is committed to giving them the skills they need to be relevant in the workforce at all stages of their careers. But for everyone from migrant workers to university graduates, the state educational system isn’t delivering. China must roll out education, training, and apprenticeship solutions quickly and at scale to become the moderately well-off society its leaders aspire to achieve. This will be both complex and expensive.

Pressure for higher productivity and on jobs overall will lead to lower growth in household income and, potentially, an erosion of consumer confidence in 2016. Consumer spending has been responsible for well over 50 percent of GDP so far this year. If the government doesn’t handle less-confident consumers quite carefully, the kind of behavior the stock market experienced last summer will roil the broader economy.

The maturing of investing: More options for Chinese investors and foreign investment managers

Chinese investors today remain dependent on bank deposits and property. Yet after the volatility of the property and stock markets in 2015, investors want to diversify into more stable vehicles. The number of wealth managers seeking to address this need has increased massively. Often, their main challenge is not finding clients but rather credible products to sell. The main challenge for investors is to find advisers they can trust; most simply push the products that give them the largest commission.

Companies are responding to these developments. Larger wealth managers are moving online to deal directly with investors. Online lending sites are becoming broader wealth managers and acquiring mutual-fund distribution licenses. With interest-rate cuts likely in the year ahead, this may be a good time to invest in plain-vanilla bond funds, which are easily sold online. If retail investors conclude that the renminbi’s devaluation is a one-way bet, expect a sudden rush to invest in companies that manage nonrenminbi funds. Whatever happens, sinking money into a second, third, or even fourth property will no longer be a major way of investing in China.

Opportunities for foreign fund managers and brokers are growing as a result of regulatory changes, with international companies recently receiving approval to open 100 percent–owned investment-management operations and a foreign-controlled brokerage operation. The historic distribution problem that has held back many funds is being solved as a result of both the emergence of better wealth managers and the rapid acceptance of online distribution, initially thanks to Alibaba’s and Tencent’s push into money-market funds.

If your company does go after this opportunity, don’t forget the volatile mind-set of Chinese investors: if a product makes a loss, they still expect to be bailed out. Taking personal responsibility for investment decisions isn’t well accepted. Foreign fund managers must be prepared to deal with anger online and in person when a product they sell doesn’t live up to expectations. While I hope that in 2016 the government will allow more investments to fail and will stop organizing bailouts, progress will be incremental.

Manufacturing in China is changing, not disappearing

The closely watched manufacturing purchasing manager’s index (PMI) remains below 50, which indicates deterioration, leading to talk that the country may be nearing the end of its time as a manufacturer for the world. Let’s be clear: manufacturing is not about to become irrelevant in China. However, the country is evolving toward extremes of performance: the truly awful and the genuinely competitive.

Many companies—indeed entire sectors—may be nearing a PMI permanently below 50, but this doesn’t mean that the emergence of internationally capable Chinese manufacturers will do anything other than accelerate. I wrote two years ago about the lack of marketing skills in many Chinese companies and their reluctance to hire functional expertise outside their existing networks. That has changed incredibly quickly. Chinese CEOs incessantly ask me for names of functional experts, especially in data, marketing, and specific international markets. It’s great to see the follow-through and the hiring.

In 2016, we will realize that in many parts of the economy, a smaller Chinese manufacturing sector is actually a stronger global competitor than ever before. One indicator will be more international acquisitions by Chinese manufacturers. A second will be more multinationals blaming their lower growth not just on a slowing Chinese economy but also, specifically, on local competitors that are moving upmarket to gain share inside and outside China.

Some manufacturing sectors in China do have massive overcapacity and many mediocre producers. But the country also has successful innovators in many industries, some highlighted in the recent MGI report The China effect on global innovation. By aggressively adopting what we might consider Western concepts—lean and modular design, scaled learning, agile manufacturing, and intelligent automation—many companies are combining low costs with aggressive innovation. Their skills are spreading widely across China’s manufacturers.

Multinationals in China are facing up to this double challenge of lower growth and better local competition. A few are quietly exiting; I have met excited private-equity investors negotiating to buy their assets. More are adjusting their aspirations from “invest for the future” to “make money today” and lowering their cost structures to match. Some will move aggressively on the front foot. In 2016, more multinationals will attempt to purchase Chinese competitors—if you can’t beat them, buy them.

Agricultural imports are rising and rising

In 2016, China’s growing food needs will drive agricultural imports to record highs in both volume and value. A wider range of countries than ever before will find agricultural-export opportunities there.

Russia is one example. Its reorientation toward China, following the imposition of Western sanctions, has taken time to play out in agriculture—border inspection points and the like had to be scaled up. (This reorientation happened much more quickly with oil; China reduced its dependence on the Organization of Petroleum Exporting Countries to around 50 percent, from more than 65 percent, largely by increasing imports from Russia.) Nonetheless, Chinese imports of grain and oilseed from Russia reached 500,000 tons in the first nine months of 2015, compared with just 100,000 for all of 2014. Even significant volumes of corn from Ukraine are pragmatically finding their way across Russia and into China.

The full impact of the free-trade agreement with Australia won’t be seen until 2016. I expect rapid growth, particularly in meat. The Australian government’s recent decision to turn down an investment on national-security grounds will only temporarily deter Chinese investors from putting more money into Australian agriculture. Several had previously made approved investments, and others are sounding out international partners to invest jointly in new Australian projects. And a more economically stable Argentina will compete with Australia to provide beef to China and with Ethiopia to provide alfalfa at scale to feed China’s dairy herds.

After a pause in 2015, US farmers should increase their exports to China not just in soybeans (historically more than 40 percent of US agricultural exports to the country by value) but also in cereals, intermediate goods, and, especially, branded processed foods. These might be sold directly to middle-class consumers through the growing online market for groceries. Food safety will remain a theme that benefits US and other international producers of branded foods.

More centralization

The Chinese media, especially during President Xi’s increasingly frequent trips abroad, made it clear that economic decision making has been centralized over the past two years. China will become still more centralized in 2016, rolling back decentralization where it had unintended outcomes. For example, after local governments received authority to approve new power plants, more than 150 new coal-fired ones were green-lit in the first nine months of 2015—more than three times the number approved in 2013, under the old centralized decision-making process. Unsurprisingly, coal-producing areas granted the largest number of approvals for plants that weren’t required under any realistic demand projection, even setting aside the question of whether any new plants at all should be coal fired. State-owned enterprises are behind most of these projects and would expect to be bailed out if they fail. Thus, for multiple reasons, such decisions will be recentralized.

A second example is pensions. Mainland pension funds are still controlled largely at the provincial level, but shortfalls are covered by the center. That gives local governments little incentive to improve their investment performance—90 percent of the assets are held in bank deposits. The coming centralization will try to remove perverse incentives and to professionalize the overall approach to investments. Already, Guangdong and Shandong have entrusted part of their assets to the National Council for Social Security Fund. More regions will follow in 2016.

The consolidation of state-owned enterprises to create fewer but larger companies, each possibly dominating its industry, is a third example. And increased ideological conformity, as demanded by the Communist Party’s new rules, is almost by definition centralizing; people look to the top for approval of not just what they do but also of what they say and how they say it.

A major test of centralization’s effectiveness will come if consumer confidence starts to decline in 2016. Will the central government be able to pull the right levers quickly enough to create a good outcome nationwide? No one set of levers is likely to be fit for purpose across the entire economy. There will be no greater test of economic competence.

Moving people at scale—the middle class, not peasants

Despite prodigious investment, many Chinese cities cannot build enough quality infrastructure to avoid massive day-to-day congestion. Even though the new five-year plan will commit the country to build more of it, that will not solve these problems; growth has simply outstripped potential solutions. For example, Beijing’s population officially grew by 60 percent, to 21 million, in just the past 14 years—and unofficially by significantly more.

Wealthier cities will seek to follow Beijing’s lead in transferring large numbers of jobs and people out of city centers. In Beijing’s case, this policy has not involved moving migrant workers but rather 400,000 to 2 million middle-class residents—depending on which version of the plan you look at—by shifting many government offices out of the city center. Attempts to create satellite cities have generally failed to date; people have moved but jobs haven’t, so the satellites have become dormitory communities for commuters who add to the daily traffic congestion. Beijing is privileged in having money, land, and millions of government workers it can direct to move, but other cities will study what happens there and emulate it if they can find enough land.

Movies in China: $$$

A Chinese movie will gross $500 million domestically in 2016. As a benchmark, the highest-grossing movie of all time on US domestic screens is Avatar, at $760 million. This year’s leading domestic productions in China were Monster Hunt (which has grossed $380 million as of September) and Lost in Hong Kong (more than $200 million). The leading international movie, Furious 7, grossed almost $400 million in China. The country’s box office has been set to grow by almost 50 percent in 2015, and new screen additions alone should deliver 20 percent–plus growth in 2016. More than half of the top-ten movies for 2015 (as of late November) are domestic productions, and 60 percent of the box office comes from Chinese movies. The country’s producers and directors have clearly tapped into what excites local moviegoers (and what censors permit).

A risk to this rosy scenario comes from online movies, which are growing even more quickly. Legend of Miyue, an 81-episode historical drama, was recently launched, simultaneously, on broadcast and online channels through Tencent Video and LeTV. It attracted 700 million hits online in just 24 hours. No wonder Alibaba has invested more than $4.8 billion in a leading video platform. Consumers seem to want both the cinema and the mobile-device experience. I believe this trend will continue, and we will see new milestones for the big screen in 2016.

China continues to go global, with the United Kingdom as a new focal point

China’s outbound investment will accelerate in 2016, with One Belt, One Road–related initiatives driving much of it. A second driver will be distressed-asset acquisitions in basic materials and related sectors: Chinese acquirers may plan not to extract the assets in the near term but simply to stockpile them as long-term insurance. Finally, a growing share of the acquisitions will come from private-sector companies that aspire to global leadership. These companies are increasingly sophisticated buyers, conducting quality due diligence, working with traditional advisers, and focusing on countries where they think that warm political relations will make it easier to do deals.

In 2015, for example, the political relationship between China and the United Kingdom reached new highs, capped by President Xi’s extended visit to Britain in October. Chinese investment in that country is spreading well beyond flagship properties—to sectors ranging from automotive to luxury yachts to oil to pizza—with the goal of acquiring technology, brands, talent, and market access. These moves build off investments in all long-established UK industrial companies with bases far from London.

Following the confirmation of a nuclear-power deal, there’s also a perception in China that almost no acquisition in the United Kingdom will be blocked for political reasons. On almost every trip there, I can now be certain to meet multiple Chinese private entrepreneurs looking for investments and partnerships. In 2016, I anticipate large financial-sector investments as London moves to become a leading renminbi offshore market and possibly also Chinese acquisitions of UK asset managers. There is growing investment in UK research as well. Expect announcements of partnerships between Chinese private-sector companies and leading UK universities, especially in medical, biotech, and advanced materials.

Other countries will seek to emulate this path to attracting Chinese investment at scale.

I won’t predict when China will win the World Cup. Realistically, it will qualify for the next couple of tournaments only if FIFA goes ahead with its idea of increasing the number of participating teams to 40. But as the example of England proves, not winning international competitions is no barrier to having a highly successful, incredibly valuable domestic soccer league. In 2016, China can really start to move in that direction.

As always, don’t overfocus on short-term noise about Chinese GDP growth. Try to identify the medium-term direction of the parts of the economy relevant to your business. Enjoy China in 2016!

Courtesy of McKinsey

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Negative Growth. Thank You Deflation And QE

Investors may wade into unknown territory next month as the Federal Reserve readies the first rate hike in nearly a decade amid a corporate earnings recession.

S&P 500 earnings are on track to close their first reporting season of negative growth since the Great Recession and estimates call for sub-zero growth in the current quarter as well.

Even if the trend reverses next year, as expected, a Fed rate hike in December could mark an unprecedented conflict between a tightening cycle starting at the same time as earnings fall into recession.

"We can't think of any instances when the Fed was hiking during an (earnings) recession," said Joseph Zidle, portfolio strategist at Richard Bernstein Advisors in New York.

"In the last six months one can point at a lot of different things. But if you think about fundamentals, falling corporate profits and the threat of rising rates" are behind the market stalling, Zidle said.

With more than 90 percent of S&P 500 components having reported, S&P 500 earnings are down 0.9 percent in the third quarter. Absent surprisingly high numbers from the companies left to report, it will be the first negative growth quarter since the third quarter of 2009.

Fourth-quarter estimates are for a 2.4-percent earnings contraction, according to Thomson Reuters IBES data; that would set up the two quarters of declining earnings, required for a bona fide 'earnings recession.'

That already occurred in the second and third quarters, according to FactSet Research Systems, which calculates its quarterly results slightly differently than does Thomson Reuters.

Furthermore, the decline in revenue has been steeper than that in earnings, a bad sign for investors who like to put money into companies that are growing sales and not just cutting costs or buying back their own shares. Last quarter's sales are seen falling 4.3 percent and estimates for the current quarter are for a 2.7-percent decline.

It is hard to argue that those numbers correspond to an economy that is on the brink of becoming too hot and in need for monetary policy tightening.

The bulk of the S&P 500's earnings declines come from the energy and materials sectors as commodity prices have tumbled to multi-year lows.

The Fed, then, could be looking at the earnings decline as it does low inflation: a problem that will take care of itself once the declines fall out of the comparisons.

But if the Fed does decide to raise rates despite the gloomy earnings, that could hurt investors who may get whipsawed by the diverging cycles in the market and the economy.

Conventional wisdom calls for a defensive position - buying healthcare, staples and telecoms - when corporate profits are falling, and aggressively buying cyclicals like energy and materials at the start of a tightening cycle. Both are happening at the same time.

"Rising interest rates are always a negative for stocks, period," said RBA's Zidle. "In most (tightening) cycles, corporate profits are booming so much that the rise in profits is more than offsetting the drag of interest rates."


The Fed maintains its mantra of being data dependent when it comes to tightening monetary policy, and though it has strongly hinted of a December move, it also has acknowledged that it watches stock prices.

Investors are reacting accordingly: Last week the S&P 500 came within 1 percent of its record high set in May, but Friday it was on track to close its worst week in two months.

"Since 2013 every time the Fed signals a rate hike (the stock market) throws a tantrum, and that’s a little bit of what we’re seeing now," said Michael Arone, chief investment strategist at State Street Global Advisors' U.S. Intermediary Business in Boston.

"Over the last couple years, every time this has happened the Fed has decided not to raise rates so we shall see if that cycle is broken in December."

Courtesy of Reuters

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3Q Earnings Worst Since 2009

This U.S. earnings season is on track to be the worst since 2009 as profits from oil & gas and commodity-related companies plummet leaving many to wonder, is the worst behind us or is there more to come?  Is China's growth story over or taking a 'rest'?  We've lived on ghost cities creating demand for so many years; where is the next growth story?

So far, about three-quarters of the S&P 500 have reported results, with profits down 3.1 percent on a share-weighted basis, data compiled by Bloomberg shows. This would be the biggest quarterly drop in earnings since the third quarter 2009, and the second straight quarter of profit declines. Earnings growth turned negative for the first time in six years in the second quarter this year.

The damage is the biggest in commodity-related industries, with the energy sector showing a 54 percent drop in quarterly earnings per share so far in the quarter, with profits in the materials sector falling 15 percent.

The picture is brighter for the telecom services and consumer discretionary sectors, with EPS growth of 23 percent and 19 percent respectively so far this quarter.

When compared with analyst expectations, about 72 percent of companies have beaten profit forecasts. That's only because the consensus has been sharply cut in the past few months, Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management says in a telephone interview.

For the year as a whole, S&P 500 earnings are expected to fall 0.5 percent, data compiled by Bloomberg shows. For 2016, earnings growth is now seen at 7.9 percent, down from 10.9 percent in late July.

Next year's consensus is “still very optimistic,” Asseraf-Bitton says, citing the lack of positive catalyst seen for U.S. stocks in 2016 as well as the negative impact from the sharp slowdown in the U.S. energy sector.

By contrast, the euro-zone is the only region worldwide where earnings are expected to “grow significantly” in 2015, according to a note from Societe Generale Head of European Equity Strategy Roland Kaloyan.

Euro Stoxx 50 earnings are expected to rise 10 percent in 2015 and 5.7 percent in 2016, data compiled by Bloomberg shows.

Courtesy of Bloomberg

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