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.

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

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”).

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.

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.

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.

It’s hard to predict when a stock market crash will occur, so the best defense is to be prepared.

Today’s infographic comes to us from StocksToTrade.com, and it explains what happens when a large enough drop in the market triggers a “circuit breaker”, or a temporary halt in trading.

These temporary halts in trading, or “circuit breakers”, are measures approved by the SEC to calm down markets in the event of extreme volatility. The rules apply to NYSE, Nasdaq, and OTC markets, and were put in place following the events of Black Monday in 1987.

Circuit Breaker Rules

Previously, the Dow Jones Industrial Average (DJIA) was the bellwether for such market interventions.

However, the most recent rules apply to the whole market when a precipitous drop in the S&P 500 occurs:

Upon reaching each of the two first thresholds, a 15-minute halt in trading is prompted. This is the case unless the drop happens in the last 35 minutes of trading.

Upon reaching the third threshold (-20% drop in S&P 500), the day’s trading is stopped altogether.

Can Circuit Breakers Stop a Market Crash?

In theory, the use of circuit breakers can help curb panic-selling, as well as limit opportunities for massive gains (or losses) within a short time frame. Further, by creating a window where trading is paused, circuit breakers help make time for market makers and institutional traders to make rational decisions.

Regulators and exchanges hope that all of this together will give investors a chance to calm down, preventing the next market crash.

But do circuit breakers actually work? While they make logical sense, recent evidence from China paints a murkier picture.

The Illusion of Safety

In Paul Kedrosky’s piece from The New Yorker, titled The Dubious Logic of Stock Market Circuit Breakers, he makes some interesting points on the series of market crashes in China from late-2015 to early-2016.

To understand why circuit breakers can make markets less ‘safe,’ imagine that you’re a Chinese trader on a day when markets are approaching a five-per-cent decline. What do you do?

– Paul Kedrosky, The New Yorker

Kedrosky continues by explaining that a market participant in that situation would try to get as many sell orders in as possible, before the circuit breaker is triggered.

Further, when the markets re-open, the same trader would again sell immediately to avoid the second breaker (which triggers an end in trading for the day). Each time the breakers get triggered, it creates a market memory of the events, and traders try to avoid future shutdowns by selling faster.

Preparation is Key

Whether they work or not, it is essential for investors to understand the rules behind circuit breakers, as well as how markets think and react after these pauses in action.

In the event of a market crash, this preparation could help to make a difference.

Courtesy of VisualCapitlist

With the “FANG” trade getting long in the tooth, so to speak, Wall Street analysts are now scrambling to formulate new acronyms to accommodate the most robust names in Big Tech today. FAANG, FAAA, FAAMG and now FANTASY have been brought forward adding companies like Microsoft, Tesla and Nvidia to the original FANG Fab-Four of Facebook, Amazon, Netflix and Google.

As market warning signs so, they don’t get better than this. Widely accepted market acronyms don’t evolve gracefully. They pop. Remember the BRICS (Brazil, Russia, India and China) and NINJA loans – (No income, no job)?

What most investors miss is that universally understood and enthusiastically embraced acronyms reflect peak sentiment. They are a market narrative boiled down to its most simplistic and easiest to grasp form. Repeated over and over and appearing everywhere, they are cognitive ease at its best. Like pieces of sea glass, all of the rough edges have been worn away over time and everyone can hold them.

In my book “Moods and Markets” I noted that “Big Truths” – like the simplistic market narrative “Homes are a great investment” – always materialize at peaks in sentiment.  At the top, everyone believes a very simple story. 

Market acronyms, though, are that simple story on steroids. Who needs a full five word phrase when four simple letters will do? Acronyms are a special breed of narrative found only at an extreme in mood.

What is so interesting at this particular juncture is that we don’t have just one acronym in full froth today, but two:  FANG and VIX – the latter being short-hand for the stock market’s volatility index. Investors, including now many retail investors, have been betting that the VIX is going to continue to fall – expecting that market fluctuations are going to get smaller and smaller over time. 

To these eyes, both acronyms appear to be peaking simultaneously, suggesting a very turbulent time ahead; not only for Big Tech, but for the markets more broadly. Again, acronyms pop, they don’t evolve. With two bursting at once, the sound may be deafening.

To be clear, nothing exceeds like excess and even the most simplistic market narrative can go on longer than you ever imagined. At the same time, the current scrambling for a successor to FANG suggests that time is quickly running out.

Courtesy of Peter Atwater via LinkenIn

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:

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.

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

The graphic above shows a timeline of some of the biggest data breaches on record. Each bubble represents the number of records lost in any given breach, with the most sensitive data clustered toward the right side.

This data visualization comes to us from Information is Beautiful. Go to their site to see the highly-recommended interactive format that visualizes the same data, while providing additional details on each specific hack.

Before 2009, the majority of data breaches were the fault of human errors like misplaced hard drives and stolen laptops, or the efforts of “inside men” looking to make a profit by selling data to the highest bidder. Since then, the volume of malicious hacking (shown in purple) has exploded relative to other forms of data loss.

From Millions to Billions

Increasingly sophisticated hacking has altered the scale of data loss by orders of magnitude. For example, an “inside job” breach at data broker Court Ventures was once one of the world’s largest single losses of records at 200 million.

However, it was eclipsed in size shortly thereafter by malicious hacks at Yahoo in 2013 and 2014 that compromised over 1.5 billion records, and now larger hacks are increasingly becoming the norm.

Small But Powerful

The problems caused by hacks, leaks and other data breaches are not just ones of scale. For example, the accidental 2016 leak of information from spam/email marketing service River City Media stands out at an alarming 1.37 billion records lost. However, sorting by data sensitivity paints a different picture. The River City leak – represented by the larger blue dot below – is surpassed in severity by hacks at Yahoo, at web design platform Weebly, and even at adult video provider Brazzers.

Much of the data lost in the River City hack was made up of long lists of consumer email addresses to be used for spam email distribution, while the other hacks listed compromised items like account passwords, banking information, addresses, phone numbers, or health records. While having your email address become the target for spam exploitation is a serious annoyance, the hacking of much more sensitive personal data has quickly become the norm.

The fact that more and more of our data is being stored “in the cloud” and among devices on the Internet of Things means that increasingly sensitive types of data are now more vulnerable than ever to being hacked. This looks to be even more cause for concern than the rapidly rising volume of records that have been exposed, whether intentionally or by accident.

Courtesy of VisualCapitalist

We are having a hard time finding high-quality companies at attractive valuations.

For us, this is not an academic frustration. We are constantly looking for new stocks by running stock screens, endlessly reading (blogs, research, magazines, newspapers), looking at holdings of investors we respect, talking to our large network of professional investors, attending conferences, scouring through ideas published on value investor networks, and finally, looking with frustration at our large (and growing) watch list of companies we’d like to buy at a significant margin of safety. The median stock on our watch list has to decline by about 35-40% to be an attractive buy.

But maybe we’re too subjective. Instead of just asking you to take our word for it, in this letter we’ll show you a few charts that not only demonstrate our point but also show the magnitude of the stock market’s overvaluation and, more importantly, put it into historical context.

Each chart examines stock market valuation from a slightly differently perspective, but each arrives at the same conclusion: the average stock is overvalued somewhere between tremendously and enormously. If you don’t know whether “enormously” is greater than “tremendously” or vice versa, don’t worry, we don’t know either. But this is our point exactly: When an asset class is significantly overvalued and continues to get overvalued, quantifying its overvaluation brings little value.

Let’s demonstrate this point by looking at a few charts.

The first chart shows price-to-earnings of the S&P 500 in relation to its historical average. The average stock today is trading at 73% above its historical average valuation. There are only two other times in history that stocks were more expensive than they are today: just before the Great Depression hit and in the1999 run-up to the dotcom bubble burst.

(dshort.com)

We know how the history played in both cases – consequently stocks declined, a lot. Based on over a century of history, we are fairly sure that, this time too, stock valuations will at some point mean revert and stock markets will decline. After all, price-to-earnings behaves like a pendulum that swings around the mean, and today that pendulum has swung far above the mean.

What we don’t know is how this journey will look in the interim. Before the inevitable decline, will price-to-earnings revisit the pre-Great Depression level of 95% above average, or will it maybe say hello to the pre-dotcom crash level of 164% above average? Or will another injection of QE steroids send stocks valuations to new, never-before-seen highs? Nobody knows.

One chart is not enough. Let’s take a look at another one, called the Buffett Indicator. Apparently, Warren Buffett likes to use it to take the temperature of market valuations. Think of this chart as a price-to-sales ratio for the whole economy, that is, the market value of all equities divided by GDP. The higher the price-to-sales ratio, the more expensive stocks are.

This chart tells a similar story to the first one. Though neither Mike nor Vitaliy were around in 1929, we can imagine there were a lot of bulls celebrating and cheerleading every day as the market marched higher in 1927, 1928, and the first eleven months of 1929. The cheerleaders probably made a lot of intelligent, well-reasoned arguments, which could be put into two buckets: first, “This time is different” (it never is), and second, “Yes, stocks are overvalued, but we are still in the bull market.” (And they were right about this until they lost their shirts.)

Both Mike and Vitaliy were investing during the 1999 bubble. (Mike has lived through a lot of more bubbles, but a gentleman never tells). We both vividly remember the “This time is different” argument of 1999. It was the new vs. the old economy; the internet was supposed to change or at least modify the rules of economic gravity – the economy was now supposed to grow at a new, much faster rate. But economic growth over the last twenty years has not been any different than in the previous twenty years – no, let us take this back: it has actually been lower. From 1980 to 2000 real economic growth was about 3% a year, while from 2000 to today it has been about 2% a year.

Finally, let’s look at a Tobin’s Q chart. Don’t let the name intimidate you – this chart simply shows the market value of equities in relation to their replacement cost. If you are a dentist, and dental practices are sold for a million dollars while the cost of opening a new practice (phone system, chairs, drills, x-ray equipment, etc.) is $500,000, then Tobin’s Q is 2. The higher the ratio the more expensive stocks are. Again, this one tells the same story as the other two charts: Stocks are very expensive and were more expensive only twice in the last hundred-plus years.

What will make the market roll over? It’s hard to say, though we promise you the answer will be obvious in hindsight. Expensive markets collapse by their own weight, pricked by an exogenous event. What made the dotcom bubble burst in 1999? Valuations got too high; P/Es stopped expanding. As stock prices started their decline, dotcoms that were losing money couldn’t finance their losses by issuing new stock. Did the stock market decline cause the recession, or did the recession cause the stock market decline? We are not sure of the answer, and in the practical sense the answer is not that important, because we cannot predict either a recession or a stock market decline.

In December 2007 Vitaliy was one of the speakers at the Colorado CFA Society Forecast Dinner. A large event, with a few hundred attendees. One of the questions posed was “When are we going into a recession?” Vitaliy gave his usual, unimpressive “I don’t know” answer. The rest of the panel, who were well-respected, seasoned investment professionals with impressive pedigrees, offered their well-reasoned views that foresaw a recession in anywhere from six months to eighteen months. Ironically, as we discovered a year later through revised economic data, at the time of our discussion the US economy was already in a recession.

We spend little time trying to predict the next recession, and we don’t try to figure out what prick will cause this market to roll over. Our ability to forecast is very poor and is thus not worth the effort.

An argument can be made that stocks, even at high valuations, are not expensive in context of the current incredibly low interest rates. This argument sounds so true and logical, but – and this is a huge “but” – there is a crucial embedded assumption that interest rates will stay at these levels for a decade or two.

Hopefully by this point you are convinced of our ignorance, at least when it comes to predicting the future. As you can imagine, we don’t know when interest rates will go up or by how much (nobody does). When interest rates rise, then stocks’ appearance of cheapness will dissipate as mist on the breeze.

And there is another twist: If interest rates remain where they are today, or even decline, this will be a sign that the economy has big, deflationary (Japan-like) problems. A zero interest rate did not protect the valuations of Japanese stocks from the horrors of deflation – Japanese P/Es contracted despite the decline in rates. America maybe an exceptional nation, but the laws of economic gravity work here just as effectively as in any other country.

Finally, buying overvalued stocks because bonds are even more overvalued has the feel of choosing a less painful poison. How about being patient and not taking the poison at all?

You may ask, how do we invest in an environment when the stock market is very expensive? The key word is invest. Merely buying expensive stocks hoping that they’ll go even higher is not investing, it’s gambling. We don’t do that and won’t do that.

Courtesy of Mauldin

Past tense; that is.  A big move is coming in the S&P 500 and it will take everyone’s breath away. Simply put: The S&P 500 has traded in a multi-year consolidation range with a high of 2134 and a low of 1810. A breakout or breakdown out of this range could result in a measured technical move of the height of the range, i.e. 2134 – 1810 = 324 handles. Consequently a break toward the upside would target 2458 (15% above all time highs) and conversely a breakdown would target 1486 and represent a 30.4% correction off of all time highs.

I’ve outlined the bear arguments in detail in Feeding the Monster, so I won’t bother rehashing them here. However, in analyzing the larger market structures an interesting duality is emerging: A fight for control between the historic precedence of earnings and technicals and a very much divergent development in money supply, one of the key drivers behind stock prices since the financial crisis.

This duality can be summarized in one chart:

Speaking for a breakdown so far is the historical similarity in structure of the monthly RSI and a decrease in GAAP earnings since 2015. Furthermore the $SPX has broken its ascending trend line in 2015 coinciding almost perfectly with the peak in GAAP earnings. These 3 developments are bearish in any historical context.

Note though something curious has happened during the same time: While price has recovered dramatically since February the continued decrease in earnings has made stocks the most expensive in years with a GAAP P/E ratio north of 24.

Another key consideration: M1 money supply has continued to rise and print new record highs, not really deviating from the path it has embarked on ever since the financial crisis.

The reasons are generally well known as the Fed is a key source of influence:

While the Fed has ended QE3 in October 2014 and is supposedly on some sort of rate hike path the evidence shows that its balance sheet has not only not decreased but it has stayed in a range and even made new highs in 2015. Just like the S&P 500. Imagine that:

And this issue highlights the battle for control here and the argument for a break higher:

A: A potential continued increase in M1 money supply which just made a new all time high in April:

B: Should earnings revert higher (against current trend) then the combination of increased money supply & improved earnings would support the notion of an equity move toward the upper measured move target.

And perhaps markets are anticipating this move as evidenced by a sudden breakout in the cumulative advance/decline index:

However, and possibly a warning sign that things are not as well as they suddenly seem: The $NYSE composite index just barely managed to get back to 2007 highs, a somewhat unimpressive result considering that it took over $4.5 trillion in Fed balance sheet expansion and a $10 trillion increase in US debt to get back to the same levels. And note it too, just like the $SPX, broke a key trend line in 2015:

The bottom line: This is a big battle for control. On the one hand fundamentals and technicals suggest a breakdown of size may well be in the cards, while on the other hand, continued “highly accommodative” central bank policies coupled with perhaps an incremental relative improvement in earnings to come may result in a breakout making stocks even more expensive than they are now, the classic blow-off top scenario if you will. Clarity will only emerge once the range is decisively broken in either direction.

Whoever wins this battle gets the big move. 324 handles.

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

The freezing cold and no million dollar signing bonus would be enough to send me to Silicon Valley.  I grew up next to Lake Michigan and I'd take West coast weather any day..........unless there was more money involved.  Yes, I can be bought. *lol*

Chart: Retail Apocalypse 2017

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

The steady rise of online retail sales should have surprised no one.

Back in 2000, less than 1% of retail sales came from e-commerce. However, online sales have climbed each and every year since then, even through the Great Recession. By 2009, e-commerce made up about 4.0% of total retail sales, and today the latest number we have is 8.3%.

Here’s another knowledge bomb: it’s going to keep growing for the foreseeable future. Huge surprise, right?

Signs of a Reckoning

Retailers eye their competition relentlessly, and the sector also has notoriously thin margins.

The big retailers must have seen the “retail apocalypse” coming. The question is: what did they do about it?

Well, companies like Sears failed the shift to digital altogether – in fact, it is even widely speculated that the former behemoth might file for bankruptcy later this year.

The majority of other companies, on the other hand, are trying to combine “clicks and bricks” into a cohesive strategy. This sounds good in theory, but for established and sprawling brick and mortar retailers with excessive overhead costs, such tactics may not be enough to ward off this powerful secular trend. Target, for example, has had impressive growth in online sales, but they still only make up just 5% of total sales. As a result, the company’s robustness is also in doubt.

Wal-Mart took another route, which could potentially be the smartest one. The company hedged their bets by buying Jet.com, which was one of the fastest growing online retailers at the time. Later, they followed up by buying an online shoe retailer to help fill a perceived gap in footwear. Recent reports have surfaced, saying that these acquisitions are leading to staff shakeups, as the company re-orients its focus.

After all, going online is not just a tactic to boost sales in the new era of retailing. It has to be a mindset, and one that is central to the company’s strategy. Hopefully Wal-mart gets that, otherwise they will also be in trouble as well.

Apocalypse Now

In the midst of all of this is what is described as the “retail apocalypse”.

There are two main metrics that are pretty black and white:

Number of Bankruptcies: We’re not even one-third through 2017, and we already have about as many retail bankruptcies as the previous year’s total. If they continue at the current pace, we could see over 50 retailers bankrupt by the end of the year.

Number of Store Closings: So far we’ve seen roughly 3,000 store closings announced in 2017, and Credit Suisse estimates that could hit 8,600 by the end of the year. That would easily surpass 2008’s total, which was 6,200 closings, to be the worst year in recent memory.

Here’s some of the companies that have already filed for bankruptcy:

• Gordmans Stores
• Gander Mountain
• Radioshack (again)
• HHGregg
• BCBG Max Azria
• Eastern Outfitters
• Wet Seal
• The Limited
• Vanity Shop of Grand Forks
• Payless Inc.
• MC Sports

And here are the store closings occurring as a result of the retail apocalypse:

Courtesy of VisualCapitalist

Most economists surveyed by The Wall Street Journal expected Federal Reserve officials to begin winding down their $4.5 trillion portfolio of bonds and other assets this year.

Nearly 70% of business and academic economists polled in recent days expected the Fed will begin allowing the portfolio, also called the balance sheet, to shrink by allowing securities to mature without reinvesting the proceeds at some point in 2017. Of the economists who expected a shift in the Fed’s balance sheet strategy this year, the majority predicted the process would begin in December.

In last month’s survey, just 22.2% of economists expected the Fed to begin shrinking its portfolio this year. Fewer than a quarter of economists in the latest poll expected the Fed to wait until the first quarter of next year to start to whittle down its portfolio, compared to a third last month.

In recent weeks, Fed officials have said they are discussing plans to start gradually reducing the large bondholdings the central bank accumulated during and after the financial crisis through asset-purchase programs aimed at lowering long-term interest rates and boosting economic growth.

The Fed wants to shrink the balance sheet to an undetermined size now that the economy is growing moderately, although officials haven’t decided exactly how to do it or when to start.

The central bank currently reinvests the proceeds from its maturing assets, and could decide to taper the pace of those reinvestments over several months or cease them altogether.

Fed Chairwoman Janet Yellen and other senior officials have stressed that they want the process to be gradual and predictable.

“Expect the Fed to announce tapering strategy details at the December meeting with reinvestments beginning to decline in January 2018,” Deutsche Bank Chief U.S. Economist Joseph LaVorgna said in the latest WSJ survey.

When Will the Fed Act? / Expectations for the next interest-rate increase in June have soared since the Fed last raised rates in March Source: WSJ Survey of Economists

Some of the business and academic economists polled this month said they view shrinking the balance sheet as complementary to tightening monetary policy through gradual increases in the Fed’s benchmark short-term interest rate, the federal-funds rate, since shrinking the balance sheet would likely cause long-term rates to rise.

Scott Anderson at Bank of the West said he expects the Fed to raise the fed-funds rate in June and September and then pause rate increases “for a while as they start to scale back their balance sheet.”

Gregory Daco of Oxford Economics expected the Fed to hold off on raising rates in the final quarter of this year once it begins addressing the balance sheet. “The Fed is eager to mop up excessive liquidity,” he said.

On interest rates, most economists surveyed expected the Fed to hold short-term interest rates steady at its May 2-3 policy meeting, and next raise them in June.

Fed officials raised the fed-funds rate last month by a quarter percentage point to a range between 0.75% and 1% and penciled in two more moves this year.

Nearly 80% of the economists surveyed expected the Fed will raise rates at its June 13-14 policy meeting, up from nearly 70% in last month’s survey. Just two out of 61 economists polled in April expected the next rate increase in July, 10 expected it in September and only one predicted officials will hold off until December to next raise rates.

While most economists forecast the next rate rise in June, they were divided over when the Fed will move after that. More than half, 55.7%, expected the central bank to increase interest rates to a range of 1.25% to 1.5% in September. Just under a third, 31.1%, expected the third rate increase of 2017 in December.

Economists saw just an average 14% probability of a rate increase in May.

The Wall Street Journal surveyed 61 economists from April 7 to 11, but not everyone answered every question.

Courtesy of WSJ

Stan Druckenmiller recently elucidated: “Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”

Even with the bond market’s muted response to the Federal Reserve’s plan to begin winding down its almost $4.3 trillion portfolio of mortgage and Treasury securities, there are plenty of reasons why the calm probably won’t last.

Out of style for almost a decade, volatility may be on its way back if you take a closer look at the mechanics of the Treasury and mortgage markets. Despite the Fed’s mantra of seeking to carry out its policy shift in a “gradual and predictable manner,” analysts say the effects of ending the reinvestment of the proceeds from maturing securities will still be felt.

This is the “most highly anticipated event in central-bank history,” said Walter Schmidt, senior vice president of structured products at FTN Financial in Chicago. “We’ve known this for two years. We’ve been waiting for this.”

While the three rounds of Fed asset purchases that became known as quantitative easing sapped volatility, former Fed Chairman Ben Bernanke’s comments in May 2013 that the central bank was considering scaling back purchases showed how quickly that can change. The so-called taper tantrum sent yields surging.

As the Fed begins to unwind, here are four reasons why we may see a renewal in volatility:

1. MBS Supply/Demand Shift

The Fed owns $1.77 trillion of agency mortgage-backed securities, about 31 percent of the market. As the central bank’s MBS holdings begin to roll off, mortgage spreads to Treasuries are going to have to widen to adjust for the additional supply, which some analysts estimate will begin at around $5 billion a month.

Since the Fed concluded quantitative easing in October 2014, the spread between Fannie Mae 30-year current coupon and Treasuries has been sitting between 90 and 114 basis points, below its historical average of about 137 basis points. Mortgage spreads may widen five to 10 basis points once the market prices in a certainty of tapering reinvestments and another 10 to 20 basis points over the longer term, Citigroup Inc. analysts estimate.

2. Increased Convexity Hedging

If the Fed decides to pause interest-rate hikes while letting the balance sheet shrink, mortgage rates are still going to rise because a large source of demand is disappearing. As a result, prepayment speeds, the pace at which borrowers pay off loans ahead of schedule, are going to fall, which will cause the duration of the securities to increase.

It’s still a double whammy if the Fed continues to raise rates. Fed tightening would push up the effective fed funds rates, also reducing prepayment speeds and increasing the average duration of the securities.

When rates rise, hedging against so-called convexity risk grows as the expected life of mortgage debt increases. That happens when refinancing slows and tends to leave holders more vulnerable to losses as lower-duration securities are more vulnerable to rising rates. By protecting against those potential losses (selling Treasuries or entering into swaps contracts), traders can end up making the bond market more turbulent.

3. Rise in Term Premium, Withdrawal from Risk Assets

As the market prepares for the Fed’s unwind, it should place upward pressure on the 10-year term premium, a measure of the extra compensation investors demand to hold a longer-term instruments instead of rolling over a series of short-dated obligations. The premium could rise 47 basis points over the course of 2018 and 2019 due to the reduction in duration, according to Bank of America Merrill Lynch strategists. Higher term premiums, coupled with increased mortgage duration could also cause a steepening of the five- to 10-year yield curve.

There’s also a chance that an increase in term premium triggers a withdrawal from risk assets such as equities, which have risen to record highs during almost a decade of accommodative Fed policy, though “the risk asset link is not as certain,” according to Bank of America strategist Mark Cabana.

4. Surge in Front-End Treasury Rates

The front end of the Treasury market will have its own set of issues when the balance sheet starts to shrink. The Treasury Department will have to decide which portion of the curve it wants to issue more securities: The front-end, where Treasury bills outstanding comprise less than 13 percent of marketable debt, or the long-end to take advantage of 30-year bonds trading around 3 percent.

“Treasury is going to need to increase front-end supply pretty notably,” Cabana said. “Banks losing reserves will be looking to replicate those assets.”

Assuming Treasury ramps up bill supply, rates on debt maturing in less than one year would likely rise, forcing up the overnight rate on Treasury repurchase agreements. That may cause usage at the Fed’s fixed-rate overnight reverse repurchase agreement facility to sink, as investors will pivot away from the operation.

“Overall, this should pressure rates higher, with banks having relatively more securities to finance in the repo market as time goes on,” said Scott Skyrm, managing director at Wedbush Securities in New York.

Courtesy of Bloomberg

The US pharmaceutical industry is on the brink of a new ecosystem — but it's not taking off as smoothly as expected.

Up until the past few years, biologic drugs made from living cells didn't face competition once they lost patent protection. That's been changing with the introduction of drugs called biosimilars. But their rollout hasn't exactly been the game-changing experience some had expected.

"We believe that biosimilars will capture meaningful market share, but the disappointing commercial success so far with less than $2 billion annual sales illustrates that the bar is high," Morgan Stanley analysts said in a report on Wednesday. That's in large part because of the economic challenges that biosimilars face, the report says. 

Biosimilars are a bit more complicated than your average competing medicine: Unlike generics for chemical-based drugs like antibiotics that can be interchangeable with branded versions, the copycats of biologic medications, produced using living cells, have a few more caveats. 

As it stands right now, biosimilars can't be used interchangeably with branded versions, meaning if you were to get a prescription for a branded biologic, you wouldn't be able to opt for the "generic" one at the pharmacy as easily as you could if the drug was, say, a statin. 

It also takes more time, energy, and money to get a biosimilar approved, compared to a generic medicine. To develop a biosimilar, it usually takes about eight years and can costs about $250 million. In comparison, a generic takes a quarter of that time (about two years) and costs a tenth of the price ($5 million) to produce.

Having more biosimilars in the US would be a big deal: It might be the best way to drive down the cost of biologic medications that have been around for a while. The savings of putting people on far less costly biosimilars — even just new patients who have never taken the original — are estimated to be billions of dollars. Express Scripts, a pharmacy benefit manager, estimated in 2013 that the US could be saving $250 billion over the next 10 years because of biosimilars.

The biologic medicine market is roughly $200 billion, according to Morgan Stanley, which makes that $2 billion a bit lackluster.

The biosimilars haven't come at much of a discount to their branded counterparts (between 15% to 30% discounts to the branded drug's list price, compared to generics that can typically charge 80-90% off the branded version). As a result of the still-relatively high cost, many people haven't transitioned over to biosimilars in the same way people have observed with generic drugs.

"While we acknowledge that biosimilars could represent a real sales opportunity, we believe that the economics of biosimilars remains challenged," the note said.

Morgan Stanley highlighted a few "winners," companies that are in the best position to make a profit off biosimiars, both from a company perspective and the drugs they're going after. Celltrion, Sandoz and Amgen are best placed, according to the US bank. 

Morgan Stanley

Trump's pick to lead the FDA, Dr. Scott Gottlieb echoed the disappointment in his hearing before a Senate committee Wednesday. 

"Many of us have been disappointed by the economic savings we’ve seen from biosimilars so far," Gottlieb said. "But I do think there’s a lot of opportunity for these to have meaningful impact on consumers and spending going forward."

Gottlieb also pointed to some approaches he might take as commissioner, such as addressing whether biosimilars could be used interchangeably, like how generics are used.

With those changes, it's possible the future of biosimilars could shake out closer to expectations.

Courtesy of BusinessInsider

Wall Street pros say bull markets don’t die of old age. But after eight years of rising stock prices, being on the lookout for signs of a market peak makes good financial sense.

No bull lasts forever. Good times eventually are followed by bad ones, as investor euphoria gives way to fear and despair. The performance history of the Standard & Poor’s 500 stock index drives home the point: The 12 bull markets since the 1930s have all been followed by bear markets, or downturns of 20% or more, according to S&P Dow Jones Indices. The average bear market decline is a sizable 40%. Then there’s the mega-bears like the 2007-2009 rout during the financial crisis that knocked the S&P 500 down 57% and the nearly 50% slide after the internet stock bubble burst in 2000.

The current bull run, the second-longest in history and one that's generated a fourth-best gain of 254%, will eventually tire out, hit one final peak and head lower like all the rest.

The only question is when?

James Stack, a market historian and president of money-management firm InvesTech Research, says there are seven warning flags that can signal trouble ahead. The more flags that are present at one time, the more danger there is. Only one of those warning signals is now flashing yellow, he says.

The other good news, he adds, is that bull markets don’t typically “end with a big bang.” Market tops are usually slower-moving events that play out over many weeks, which gives investors time to prepare.

Here are Stack's seven warning flags:

The more bullish, optimistic and confident the investing public is, the riskier the market becomes. “Bear markets bottom in doom and gloom," says Stack. "Bull markets peak when optimism is highest.”

So what are signs of “extreme optimism”?

Bullish headlines in the news, such as the recent Barron’s cover story, “Next Stop: Dow 30,000.” Hot IPOs, like Snap's 44% jump in its debut last week. A dearth of scared investors, measured by a closely followed "fear gauge," dubbed the VIX, which is now hovering near an all-time low. Skyrocketing consumer confidence measures, such as the Conference Board’s February survey, which registered its highest reading in 15 years. The Dow Jones industrial average’s recent run of 12 record highs in a row also fits the bill. Rising stock valuations are another red flag, and currently the market is trading at close to 20 times earnings, well above the historical average and double where it traded back in March 2009.

“We have exuberance now,” Stack says, noting this is the only yellow flag from the market so far.

The 8-year-old bull has been powered by zero interest rates for nearly a decade. But the Federal Reserve has hiked short-term rates twice in the past 15 months to 0.75%. Fed chair Janet Yellen warns that three more hikes of a quarter percentage point apiece could come this year, with the next hike possibly coming at the Fed's meeting next week. Future markets place nearly 90% odds of a rate increase on March 15, according to CME Group.

In the past, stock market uptrends have been derailed by the Fed hiking rates faster and more aggressively than expected. Higher rates slow down the economy, which hurts the profitability of U.S. companies, a key propellant of stock prices. Higher rates also make it harder for borrowers to keep up with their debt payments, which could dent consumer spending and undermine the health of businesses with high debt loads.

“Fed policy," Stack says, "is a very important wildcard.”

“Bear markets and recessions go hand in hand,” Stack says. Seven of the past eight bull markets were undone by economic contractions, RBC Capital Markets data show. Recessions cause job losses, crimp consumer spending and squeeze corporate profits. Signs of trouble include weaker-than-expected incoming economic data, especially the Conference Board’s Leading Economic Index, which consists of 10 data points that predict future economic performance. If quarterly GDP, or economic growth, starts to slow, that’s another red flag, Stack warns. Any signs that the manufacturing or services segments of the economy are turning down is also a bad sign. The latest reading on fourth-quarter 2016 GDP, however, was 1.9%, down from 3.5% in the third quarter, but far from the recessionary danger zone. First-quarter 2017 economic growth is estimated at 1.9%, Barclays says.

American shoppers account for roughly two-thirds of U.S. economic activity. So any signs that consumers are not spending as much is cause for alarm. In February,  the Conference Board's closely followed consumer confidence index hit 114.8, its highest level since July 2001. That’s a far better reading than when confidence plunged below 30 in 2008 during the financial crisis.

When stock market leaders, or bellwether stocks that are sensitive to changes in the economy, start to turn down after profitable advances, that's an early sign that investors are losing confidence in the market, Stack says. Stocks to watch: ones that do best when times are good, such as banks, transportation companies and businesses that sell stuff to consumers that isn’t needed for daily survival.

A rising market driven by fewer and fewer stocks is a bearish sign. Clues  include more stocks going down than up on a daily basis and more stocks hitting 52-week lows than highs. “It is one of the most reliable bear market warning flags,” says Stack.

.

When the number of stocks hitting their lowest price levels in a year starts to swell, and if the new low list grows day after day, it’s a sign that the "smart money," or professional investors, are bailing out of the market. “It means investors are becoming desperate to sell, even ... at a loss,” Stack says.

For now, most of these warning flags are not flashing yellow, says Stack. But the fact the bull market has lasted so long makes him “nervous and more watchful of these warning flags.”

Courtesy of USAToday