Neighborhood social networking app Nextdoor expands into France

LONDON (Reuters) – Nextdoor, a social network that acts as an alternative to industry giant Facebook by linking up neighbors rather than friends or colleagues, will launch in France on Thursday.

Members can use the San Francisco-based company’s mobile app and website to ask their neighbors for advice on everything from babysitters to organizing local sports clubs or how to contend with household rodent invasions.

Founded in 2011, Nextdoor drew in 12 million unique monthly visitors in the United States last month, according to app measurement firm SimilarWeb, and France will be its fourth European market.

It began testing in 200 neighborhoods in Paris early in January ahead of Thursday’s official launch across France, where it calculates 40,000 distinct neighborhoods exist.

Nextdoor has taken off in the Netherlands where it launched in 2016, followed by Britain later that year.

In the Netherlands, Nextdoor attracted 240,000 unique visitors to Nextdoor.nl in December, SimilarWeb data shows. It ranked among the top 10 social networks, according to data from AppAnnie, which measures mobile downloads.

In Britain there were 655,000 unique visitors to Nextdoor in December 2017 according to SimilarWeb.

It also launched in Germany in mid 2017 (reut.rs/2rTIDs5), but has yet to draw in many members, independent data sources show. The company does not publish its own membership data and declined to comment on user figures by country.

The Nextdoor service is free for users in European markets, with no sponsored advertising. It began testing sponsored advertising in the United States last year.

The firm has raised more than $285 million in funding from major venture investors including Benchmark, Greylock Partners, Tiger Global Management, Kleiner Perkins Caufield and Byers, according to Crunchbase data.

Reporting by Eric Auchard; Editing by Susan Fenton

Tencent-led group to invest $1.6 billion in menswear firm Heilan: sources

HONG KONG (Reuters) – Tencent Holdings Ltd is leading a deal to invest 10 billion yuan ($1.59 billion) in Chinese menswear group Heilan Home Co Ltd, upping a retail rivalry with fellow internet giant Alibaba Group Holding Ltd, sources with knowledge of the matter said.

China’s second-largest e-commerce company JD.com Inc and online clothing platform Vipshop Holdings Ltd will also be among the group that plans to acquire less than 10 percent of the company for 5 billion yuan, one source said.

Another 5 billion yuan would help set up an industrial investment fund to focus on deals that fit with Heilan’s business, the person said, requesting anonymity because they were not authorized to speak to the media.

Heilan had a market value of about $8.13 billion as of Monday, when it halted shares from trading, pending deal announcements.

Tencent, JD.com and Vipshop declined to comment. A Heilan spokesman was not immediately available to comment.

The proposed deal, which could be announced as early as Friday, extends a recent push by Tencent, China’s biggest social network and gaming company, into bricks-and-mortar retail to further compete with Alibaba.

Heilan which has clothing brands such as HLA and SANCANAL, has been a long-time partner of Alibaba’s online marketplace Tmall.

But last month Tencent, which has a market capitalization of $563 billion, said it would invest 4.2 billion yuan for a stake in Yonghui Superstores. It is also looking to take a stake in the China business of French supermarket retailer Carrefour.

The recent moves reflect a wider, long-running stand-off between Tencent and Alibaba, which have made competing investments in areas as diverse as bike-sharing apps, food delivery and gaming.

JD.com, in which Tencent is a top-10 investor, traditionally leads against Alibaba in online retail sales of electronics and home appliance products, but lags behind in the fashion business.

Tencent and JD.com last month jointly made an $863 million investment in Vipshop, in a bid to tap the country’s young female shoppers and gain access to consumer and transaction data to help them compete with Alibaba’s online payment platform Alipay.

Jiangsu-based Heilan was set up by Zhou Jianping, one of the richest people in China’s fashion industry, in 1997. It runs more than 5,000 stores, mostly in China, and recorded 12.5 billion yuan in operating income in the first three quarters last year, its website showed.

Reporting by Julie Zhu; Editing by Stephen Coates

The Risk Of The Roth IRA Revolution

Source: Google from Retirement Planning website

Bulls Make Money, Bears Make Money, Pigs Get Slaughtered”

Nothing is truer than the above when people start to believe they gain an advantage by converting their IRA losers into Roth winners. If you read my previous article on the Myths of Roth IRAs, which you can find here, you may already know the answer. In the light of the new tax laws that have done away with the Roth recharacterization there may be a new emphasis on trying to gain more spendable money in retirement by being concerned with tax-free growth in the Roth. Once again I will show, through demonstration why it doesn’t matter where the growth occurs. What matters is the tax rate you pay on the front end versus the tax rate you pay in retirement when you spend the money.

My wish is not to try and make you an IRS or tax expert but to at least give you enough information for you to understand some of the challenges in trying to navigate the environment of what are called tax-advantaged retirement accounts. In doing so I hope to dispel some myths or at least provoke you to investigate on your own some of the math surrounding these tax-advantaged accounts.

Ground rules

First, some definitions and abbreviations are in order:

I will use the term Roth to indicate any number of what are typically tax-advantaged retirement accounts funded with after-tax dollars for which you can withdraw all contributions and earnings tax-free later. These come in many different forms such as the Roth IRA, Roth 401k, Roth 403b, and others. I will use the term IRA to indicate any number of tax-advantaged retirement accounts funded with pre-tax dollars for which you withdraw all contributions and earnings paying ordinary income tax on them at the time of withdrawal. You could find many types of these such as Traditional IRA, Traditional 401k, 403b, SEP-IRA, 457b, SIMPLE IRA, and others. It should be noted that it is possible to have a mix of after-tax and pre-tax dollars in most of these accounts, but when I use the term IRA from now on, I will only be considering these accounts will all pre-tax dollars in them.

Let’s review what I call the 3 most common levels of tax advantage that you can receive when investing. With the new tax code, it is slightly different now so I will restate it here.

Level one-half: This typically comes out of what is called a taxable account from the generation of long-term capital gains or qualified dividends. Our current progressive tax code gives these gains a reduced tax rate that results in a reduction in the taxes paid. For instance, if your income is otherwise in the 10-12% tax bracket, dividends and long-term capital gains will fall to the 0% tax bracket, until they fill up that bracket. If your qualified dividends and other income are high enough to move you into the 22-35% bracket, the dividends and capital gains will be taxed at 15% for those brackets. I call it level one-half because there is no reduction on taxes for the deposits put in the account to start. The reductions for even the qualified earnings, while some can be essentially tax-free, this only occurs if you keep your total income and earnings below the 22% bracket point.

Level one: This level is occupied by both the IRA and Roth accounts which get either a tax break when you put the money in the account or a tax break when you take the money out. As I explained in my previous article these accounts are on equal footing for equal tax rates in and out.

Level two: This is occupied by the Health Savings Account which is known as the HSA. This account when used properly for medical expenses and accompanied by a high deductible health insurance plan will result in two levels of tax savings, one on the money contributed and a second on the tax-free withdrawals when the money is used for IRS approved medical expenses.

This article is only concerned with the level one retirement accounts and how the IRA and Roth can be thought of in most cases as equals. It is true that the Roth and IRA each have unique characteristics that may be appropriate or at least appealing to different investors. The short list of some of these is described below.

Roth:

Tax deferral on all earnings inside the Roth if you follow IRS guidelines. Tax-free withdrawal of all contributions and earnings (subject to 5-year holding period plus age restriction of 59½). Tax-free withdrawal of your contributions at any time or age from a Roth IRA. A note on this as it applies to employer sponsored plans is that you should check with your plan administrator as each plan has their own set of rules as to when withdrawals are allowed. Tax planning flexibility – Since there are no forced withdrawals by age 70½, you have more tax-planning flexibility during retirement. If a Roth IRA owner dies, certain of the minimum distribution rules that apply to traditional IRAs will apply to the Roth.

IRA:

Tax deferral on contributions during working years will lower your taxable income while working and can increase some tax credits. Increasing some tax credits could actually allow you to save more. The required minimum withdrawals must begin prior to April 1st of the year after you turn 70½. The RMD for any year after the year you turn 70½ must be made by December 31st of that later year. If these are not made you can incur a 50% penalty on any amount not taken that was due. Inherited IRAs have a complete set of RMD tables and rules which will not be discussed here.

There are many other nuances to the above two types of accounts and even within different types of Roth or IRA accounts, most of which can be found in the IRS publication 590, which has now been split into two parts – pub 590-A (contributions) and pub 590-B (distributions).

Assumptions for Roth Conversion

In order to make what is commonly called an apples-to-apples comparison of these Roth and IRA accounts we must use the following assumptions:

Because we can never know what future tax rates will be, each evaluation must be done at the same tax rate for each account, both at the start of the test period and the end of the test period. Each evaluation must be done from the aspect of how much money did the investor need to earn to fill the account to begin with. For all evaluations I will assume that the investor earned an extra $10,000 to put towards retirement savings. The tax rate was always 22% now and in the future. That the taxpayer is greater than 59.5 years old so that a penalty-free conversion is possible. See my previous article for how to do this conversion if you are less than 59.5, but why it is exactly equal to what I am illustrating here in an apples-to-apples comparison.

Let’s now continue on to see if we can bust up the notion of why it doesn’t matter how much tax you pay on the conversion, other than the obvious fact that it limits the size of conversion you do.

I lost 40% on my Netflix (NFLX) why not convert it to a Roth and then hope for the best in my Roth.”

Let’s compare some Netflix stock, which lost almost 40% a few years ago and was converted from an IRA to a Roth at that point in time, to what might have happened if no conversion was done. Below are the results.

While you might think that paying lower taxes is an advantage, the math shows that the tax rate in and tax rate out are what is important. Even though by doing the Roth conversion the investor paid $1320 less in lifetime taxes from this investment there was no more spendable income in retirement because of it.

The Roth Revolution

Why do I say Roth conversions are good for the national debt?”

This is easy, according to the Investment Company Institute; there is over $15 trillion in IRAs [including Roths] and other Defined Contribution Plans at this point in time. I don’t know the exact Roth / IRA split of this number, but I am pretty sure it will be leaning towards the IRA side of the equation. With the new lower tax brackets most people can do a Roth conversion for less so they may be considering it, without realizing that how much tax they pay now is not the whole story. However, as in my opening bullet point, this is very good for the national debt. In fact the faster millionaires buy into this strategy the better I believe it will be for all of us. With less debt there is less reason to raise taxes in the future. A Roth conversion is a great way to instantly increase government income. If you have read my many articles and comments on this subject you may know that I am not sure it is best for the average investor. It does have its place and I certainly have always maintained that everyone should have some Roth money to diversify their tax situation in retirement. I just don’t think it should be overdone.

Finally, I will explore what I have seen in some publications as a Fear Of Missing Out of tax-free income in retirement. This FOMO of tax-free income has blinded the investing public to what I have recently called in a comment stream the upside and downside risk of getting your future tax rate wrong. In other words, when we make any investing decision based on future events or tax rates that are unknown it is important to know both your possibility for gains to your spendable retirement income or the losses to your spendable income.

I will illustrate this with a few simple examples that a retiree may see during their lifetime. Let’s start out with case number 1, which is for the high-income earner who wishes to convert a large portion of her sizable IRA into a Roth to pass down to her children. Let’s consider she is doing Roth conversions in the 35% bracket because that is where she has been for most of recent history. Let’s shoot for a tax-free Roth benefit to each child of $1M and compare that to the options of a taxable IRA distribution. The equivalent size of the IRA at a 35% taxable income level is just $1M divided by the decimal created from the subtraction of 1 minus the tax-rate. This math results in $1M / .65 or $1.538 million.

Below is a table indicating the results from case 1 showing both upside and downside risk to their spendable income at different withdrawal tax rates. Assumption is that the beneficiary is married and spouse is not working and there are no investment returns in the life of the inherited account. Positive investment returns would certainly make the dollars larger in the examples but not on a relative or percentage basis. Also there are no state taxes.

As can be seen from the above, the upside risk if you stay with the IRA is about $400,000 (40%) more spending money for someone without a job inheriting the IRA. There is relatively no downside risk at all to staying with the IRA since the original owner converted the Roth in almost the highest marginal bracket. Even if the beneficiary draws the total IRA amount out in one year, the extra $1.538 million only caused the child to pay an effective tax rate of 32.8%.

The above highlights one of the reasons that make the Roth conversion or Roth contribution in higher tax brackets so problematic. Conversion taxes are paid on the marginal income in your highest tax bracket at the time. While the money is also spent in your marginal brackets as well, the starting point of this marginal bracket is usually much lower and can actually start out at zero if your other income is less than the standard deduction. Let’s look at another case in a lower tax bracket while working.

In case #2 the worker wants to end up with the same $1 million in the Roth account but through most of his career his working tax rate averaged 25%. This means to convert to his desired Roth he needs to have $1.333 million in the IRA to convert. Let’s compare the child that inherits the $1 million Roth to the one with the $1.333 million IRA at various spending rates. Below is a table indicating the results from case 2 showing both upside and downside risk to their spendable income at different withdrawal tax rates.

In this case what you see is that the upside to downside risk has changed from a spread of 40% (40% upside to 0% downside) to a spread of 21% upside [gain] to almost 10% downside [loss]. This is still a two to one advantage to the upside.

I will do one final example in which the worker keeps all Roth contributions or conversions in the 15% tax bracket. This case 3 is shown below.

In this final case the upside risk [gain] in staying with the IRA is about 7% for the inherited IRA owner that keeps her AGI within the $101,000 income limit. In the worst case, if the whole IRA is withdrawn in one year while working with an addition $100k taxable income the downside risk [loss] is almost 20% extra in taxes. However, it is highly unlikely that the taxpayer would need to withdraw the whole amount in one year. If the taxpayer keeps her total AGI at the $190k level there is no downside or upside risk and she can draw down the IRA over a number of years.

Summary

While RMDs can raise your taxable income and your tax rate in retirement they should not be something that is feared to extremes. In an article I wrote entitled Surviving the Tax Bite of Retirement, I pointed out that over the previous number of years the personal exemption, standard deduction, and the top of each of the tax rate bracket have grown by around 2% per year. With completely revised lower tax brackets for 2018 and the foreseeable future this has only improved the odds of you having a lower tax bracket in retirement, compared to while you were working. Hopefully, you have learned that this favors the IRA owner and the results are not insignificant. Who would not want 10-20% extra money in retirement or for their beneficiaries? I do understand that on the other end you do not want to be seen as the one who increased someone’s taxes with an inheritance. I personally think it is up to you to educate your heirs and make them see that a little bit of tax on a larger sum of many can in many cases be better than no tax on a smaller pool of money.

In my volunteer work helping people with their taxes each season there are always cases where having some of their retirement in a tax-deferred IRA could have resulted in some tax-free withdrawals from that IRA, due to their low income level. The converse is also often true – that with a Roth account it would have been possible to lower how much of their retirement savings goes to the taxman. It is never a bad idea, in my opinion, to have both Roth and IRA funds going into retirement.

Conclusion

For more detailed information on these subjects covered I suggest reading at least a couple of times the two IRS publications mentioned at the outset. Understanding the rules can avoid costly mistakes on the road to retirement as well as later when you are in retirement. I have also written an Instablog article titled Roth Vs. Non Roth (401k, 403b, 457, Etc) & The Time Value Of Money which adds a casino example to the mix that you may find interesting.

I also want to shout out a special thanks to Bruce Miller, who made my job much easier by providing a tax calculator for the new tax law going forward in 2018. He also wrote a good article on the subject which you can find here.

All tax calculations were done using the new 2018 law as best we know at this time.

This study is only as good as the data presented from the sources mentioned in the article, my own calculations, and my ability to apply them. While I have checked results multiple times, I make no further claims and apologize to all if I have misrepresented any of the facts or made any calculation errors.

The information provided here is for educational purposes only. It is not intended to replace your own due diligence or professional financial or tax advice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Apple's Earnings: What I See Looming On The Horizon

Apple’s (AAPL) long awaited fiscal 1Q18 is now just around the corner.

The company will report the results of the quarter on February 1st, after the closing bell. The Street is anticipating revenues of $86.75 billion, a YOY increase of about 11% that would nearly match last quarter’s top line growth rate. EPS estimates of $3.81 would represent Apple’s largest earnings number on record, although it is unclear to me if any of the estimated $38 billion in tax payments from cash repatriation would impact the bottom line already this quarter (Apple reports earnings results in GAAP terms only).

Credit: Digital Trends

Phones, phones, phones

As I have argued recently, “performance of the iPhone X may help to set the course for the rest of the year in terms of financial results expectations and stock sentiment.” This being the first full quarter following the model’s introduction in early November 2017, I believe all eyes will be on smartphone sales this week. If the iPhone X sputters, as a few sell-side analysts have been predicting, the stock could face headwinds in the near term.

The graphs below might help to support these short-term concerns. Activation of new smartphone models introduced in calendar years 2016 (iPhone 7 and 7 Plus) and 2017 (iPhone 8, 8 Plus and X) accounted for roughly 16% and 14% of all iPhones activated by the end of each respective holiday quarter.

But because the iPhone X was not released until November 2017, the adoption of newly-introduced devices, including models 8 and 8 Plus, happened much more slowly this past year. Most iPhone sales, at least in the first half of fiscal 1Q18, seem to have come from older models – understanding that activation does not equal sales, yet the data seems very telling to me.

Source: DM Martins Research, using data from Mixpanel

Exiting the quarter, the iPhone X appears to be performing well in terms of activation, surpassing the iPhone 8 and 8 Plus in popularity. So if softness in smartphone sales is confirmed in fiscal 1Q18, I find it more likely to be reflective of product launch timing than indicative of a weak super cycle.

But it’s not all about phones

Although the iPhone super-cycle is a key pillar of many Apple bulls’ investment theses, the story does not end there. I see Apple well positioned to benefit from increasing consumer sentiment (see graph below) and discretionary spending activity across its product and service portfolio.

Source: CCI historical data from OECD

Back in November, I discussed how “Apple has been one of the few winners coming out of the undergoing (laptop and desktop) consolidation.” Last quarter, Mac revenue growth shot up to about 25% YOY. Fiscal 1Q17 saw an improvement (see graph below), suggesting fiscal 1Q18 will face slightly stronger comps this time. Still, I anticipate both units sold and ASP to come in on the healthy side this quarter, particularly as Apple expands its product offering across multiple price points from the low-end Mac Mini ($499) to the recently-released iMac Pro ($5,000).

Source: DM Martins Research, using data from company reports

Elsewhere, I have no reason to believe that Apple’s Services segment will see a dip in its growth pace. The company continues to be well on track to double the division’s revenues between 2016 and 2020. Helping to support this mission is what appears to be a recovering Chinese market, which finally showed signs of having a pulse last quarter. As the installed base in the country returns to growth, the lagging effect on Services revenues is likely to follow.

Possible short-term risks, bullishness intact

All factors taken into account, I continue to believe AAPL will perform very well in the long term. The company is riding the tailwinds of an increasingly robust global economy, and a pickup in consumer discretionary purchases is likely to benefit the tech company. It does not hurt that (1) cash repatriation should further support the stock through increased investments, a potential bump in dividend payments and share repurchases, and (2) the stock still seems de-risked enough to me, trading at a forward P/E of only 14.9x and PEG of 1.7x (see graph below).

Chart

AAPL PE Ratio (Forward) data by YCharts

For now, I remain an AAPL holder, and find it unlikely that I will dispose of my shares any time soon. If short-term weakness related to iPhones in fact materializes, I believe a potential hit that the stock might take would be an opportunity for investors to accumulate shares on the dip.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Intel Gives You 9-10% Through 2020

Intel: Buy, Sell or Hold?

I won’t hold you in suspense. Here’s my recommendation:

Firs, the easy part. If you own Intel (INTC) then HOLD. I would not buy and I would not sell. You’re in a good place right now. I’m going to explain all of that very soon.

Next, if you’re thinking about buying, you can see that Intel’s been moving up, and it spiked up today, which I also talk about later.

So, if you’re “into” the momentum and the growth story, then you’re probably looking at something like a 12% rate of return through 2020, assuming Intel’s P/E moves to up around 15. Although, after the spike today, I’d have to revise that down to probably 10-11% per year.

If you believe that Intel is more likely to float around the 10 year average P/E that’s between 12 and 13, then your annual rate of return drops to around 6%. And really, considering the spike today, it’s more like 5%.

Let’s combine things together to come up with a worst case to best case range. You’re probably looking at something like 5% to 12% annual gains. And if I had to dial this in, it’s probably 9-10% per year through 2020. If that’s acceptable, then this becomes a BUY for you.

Is this simple? You bet! However, to help guide your thinking and to go much deeper, I put together my story for you. There’s way more to the Intel investment thesis that you need to know.

Let’s get started!

Circle of Competence

I’m not a fan of most technology stocks. However, I remember when I broke my rules back in September 2012. That’s when I first bought Intel (INTC). It hasn’t been smooth sailing, that’s for sure. I’ll come back to this point.

I’ve got a bunch of education, including some time formally learning about information systems, internet technology, programming, databases and that sort of thing. Most of that formal training was rooted in management principles and business operations.

I’ve also got real world experience, like being a webmaster, business analyst, software engineer, software manager, and human-computer interaction consultant. I won’t bother you with more details on this. You’ve just suffered enough puffery.

The key point is that despite the education and experience I still have a strong aversion to investing in technology. It moves too fast. Empires rise and fall. I’m keen on stability and predictability. I think that most investments in technology are doomed because the uncertainty is too high.

While we all think we can tolerate change and disruption, the human mind hates this chaos and willpower isn’t enough to prevent buying high and selling low. The rational mind has a difficult time preventing the subconscious mind and brain chemicals from screwing over your wealth. Greed, envy, fear are alive and well. Don’t blame me, that’s the human condition. It’s baseline.

To emphasize, despite my education and experience I still don’t like to invest in technology. However, I don’t completely hate world class industrial companies and manufacturers.

Intel Beer Goggles

I was having a conversation with a guy over a beer. He wouldn’t stop talking about so many different technologies. He was a geek, no doubt, but also an investor and business owner. He was flying from one company to the next. I started to tune out. Then he brought up Intel, and I paid attention.

He was talking about the size of Intel. He explained more details about the famous tick-tock schedule. He brought up Andy Grove. Many tumblers started to line up and unlock Intel in my brain.

Here’s a feel for that vibe:

There is much more. What you should notice is that technology was NOT my #1 consideration. In fact, I repeatedly tried to kill this investment idea. But, the size, scope and strength of INTC greatly impressed me.

Intel As A Dirty Smokestack Company

What really worked to shape my mind was this: I ignored INTC as a technology company and instead viewed it as an industrial and manufacturing company. I felt this was justified given what I knew about the company. Throw in some savvy marketing and great leadership, and you’ve got a totally different type of company. Innovation with a steady hand was obvious to me.

I don’t love industrial or manufacturing companies. They are cyclical and there’s a lot of volatility. But, the best of them are easy for me to understand and I also tolerate lumpy earnings. Two examples are Deere & Company (DE) and Cummins (CMI). I looked at INTC much like I looked at DE and CMI, looking past price volatility and earnings swings.

One thing that was especially important with INTC was how it handled cash and debt. INTC’s got an S&P Credit Rating of A+ and does a fine job with capital. It impressed me, tremendously. If you’ve got cash and the tide goes out, you’re probably going to be fine.

So, that’s a lot of the “soft” thinking that I remember. It’s what I could pull out of my old notes and a couple of emails that I sent to myself. I’m going to shift into what numbers I was looking at, and when exactly I was buying.

The Dot Com Horror

I almost decided against INTC because of this:

And, although it was a complete overreaction, I looked at how an investment in INTC in August of 2000 through September of 2012 generated a loss of over 63%, or as you can see below, a lovely (8%) annualized loss. Spooky!

Remember, that’s what I was literally looking at and thinking about. So, the charts alone included an extreme price. Plus, look at the earnings from 2000 through 2009. That’s about a decade of painful stagnation!

And, in 2012, we were really just starting to feel a little better about the economy. And, not by much, I might add.

The Truth About Dividends And Buybacks

One bright spot was that dividends were generally going up:

Of course, you already know how this was accomplished.

Since INTC’s earnings weren’t growing, this “growth” was somewhat artificial. The payout ratio in 2000 was about 5%, then 15% in 2001, then 23% in 2005, then 48% in 2009 and then around 40% in 12.

The “first order” thinking here quite obvious. INTC decided to reward shareholders with dividends.

What about share buybacks? Here’s what I was looking at, roughly speaking. You can see a lot of money pouring in; cannibals.

Chart
INTC Stock Buyback (Annual) data by YCharts

Again, the “first order” thinking here is that INTC decided to reward shareholders. I mean, that is actually true here. While we can debate the effectiveness of the buybacks, the intention and the actions seem pretty clear to me.

But, I strongly believe that something else happened between 2000 and 2012:

I was seeing a transformation at INTC: From an internet hot stock company to a mature, “smokestack”, technology blue chip.

At the time, no one was really giving INTC credit for this maturity. It was damn slow and to an impatient eye. It was easy to miss. To be very blunt, this is when any why I started to get excited.

I felt like I found some alpha! My strong desire for stability, consistency, loyalty and tenacity my investments was showing up in INTC.

It was a very pleasant surprise…

And That’s When I Started Buying

I started buying on 15-Sept-2012. Then, here’s what came next:

  • Added on 28-Sept-2012 (price unknown)
  • Added on 09-Oct-2012 (price unknown)
  • Added on 20-Nov-2012 ($19.66)

My average cost was $21.80 and I was satisfied.

Other than collecting my dividends, I didn’t do anything special with INTC. I just sat there. I kept watching and learning.

But then…

I Got An Itch

Here’s what I was looking at, from the buys I made in late 2012:

I started selling off some blocks of INTC, capturing 25-30%.

  • Sold on 23-Dec-2013 ($25.22)
  • Sold on 11-Feb-2014 ($24.48)
  • Sold on 17-Mar-2014 ($24.68)

That said, I stopped selling. I decided to hold.

You can see that from that point forward by a year or two that INTC was creeping up and up. I felt pretty good about pulling some “quick gains” off the table, and I felt pretty good about seeing INTC move steadily upward.

Where We’re at Today

Roughly speaking I’m sitting on overall gains of around 125-130% in about 5 and 1/2 years. Annualized that somewhere around 16-18% per year.

Not from genius. I created a little bit of luck. Opportunity met preparation. And look, this isn’t a 10-bagger or anything spectacular. However, it does give me confidence that:

  1. buying low and holding is quite rational
  2. taking some profits is not the end of the world
  3. dividends are important and smooth things over
  4. research and due diligence are required
  5. price doesn’t always reflect value
  6. long-term thinking can provide some “alpha”
  7. any single chart in isolation is a liar

Today (26-Jan-2018), INTC is spiking in price in a big way:

  • Q4 beats
  • data center growth
  • upside guidance

The value was there before this spike but now we see how facts intersect with the emotions of the general market.

Right now, Mr. Market is thrilled and offering up shares at higher and higher prices. When Mr. Market is so excited, I slump, grumble, and moan a little. Mostly, I walk away and ignore the cheers and celebration.

I read the news coming directly from INTC, and sip on my coffee, scrolling my way through the comments. So many cheerleaders!

Well that looks nice.

…the growth story is catching on.

$50+ soon.

Looks amazing to me. I knew altera purchase was just the beginning.

This thing is similar to MSFT 2 years ago. It can easily double in 3 years

Yeah baby. Love the bump in divvy and the outlook. Long INTC

Intel huge moat …

Love INTEL! Long time!!

Of course, you get the point.

It all smells so good, right?

Up, up, and away…

What I Am Doing With INTC Today!

Nothing.

Just holding.

No buying, no selling.

Oh, sorry, I’ve got to go. My wife is yelling at me. Time to walk the dog.

Stay frosty.

Disclosure: I am/we are long INTC,CMI,DE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Universe At The Edge Of The Restaurant

We sit here. Whether it be the early morning coffee, or the late night Grand Marnier, we all sit here and ponder the markets’ universe. Our chairs are comfortable enough, but the swirling mass of data, and projections, that surround us, is anything but that. “It’s all going to Hell in a handbasket” or “Equities are headed to the Moon” and the Sayers of Sooth seems to be staring at parallel universes.

There is a theory which states that if ever anyone discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable. There is another theory which states that this has already happened.

– Douglas Adams

The total size of the assets of the world’s central banks are now 21.7 trillion, and they are growing by approximately $300 billion per month, according to Bloomberg data. Yardeni Research has updated its last report and now pegs the assets of the PBOC at $5.5 trillion, the assets of the ECB at $5.3 trillion, the assets of the BOJ at 4.6 trillion and, in fourth place, the assets of the Fed at $4.4 trillion. This totals $19.8 trillion for the world’s “major” central banks and, make note, this number is not decreasing or Flatlining but “Growing.” The assets of the major central banks were up 5% in December alone, according to Yardeni Research.

Yardeni Research also shows that BOJ’s assets are 92.9% of their nominal GDP while the ECB’s assets are 38.0% of their nominal GDP and the Fed’s assets are 22.4% of our nominal GDP. This should give you a comparative landscape for judgment. What we are actually looking at here, in my view, is money created from nothing but “Pixie Dust.”

The economists call it “Quantitative Easing” but it is actually a parallel universe where money is digitally concocted from nothing and tossed out to be spent. at will, on the markets. You see, it is money for the markets alone, because there are no goods or services or virtually any costs, in this newly created central bank economic universe.

There comes a point. I’m afraid, where you begin to suspect that if there’s any real truth, it’s that the entire multidimensional infinity of the Universe is almost certainly being run by a bunch of maniacs.

– Douglas Adams

Oh no!

The significance of all of this newly created money is beyond compare when considering the debt and equity markets, in my estimation. This $21.7 trillion, in newly minted assets, is larger than any economy on Earth, according to data provided by the IMF. The central banks have created a whole new nation, if you will, out of “Pixie Dust,” without any government, without any voting and without any representation.

You may say that each central bank reports to a specific government, but the money that they have created and provided to all of the world’s economies now reports to no one. It has already been tossed out of the various vaults and is useable just like the old, created by some country, money. We once thought all of this impossible. We have learned otherwise. It is Bitcoin, nationalized.

The impossible often has a kind of integrity to it which the merely improbable lacks.

– Douglas Adams

This 21.7 trillion is actually a “free cash flow.” It is unencumbered by wages, or cost of goods sold, or any other data attributed to arriving at the “free cash flow” of a corporation or a government. It is just money, after all, and the cost to make it was almost NOTHING. There are no capital expenditures.

Investopedia states,

Free cash flow (FCF) is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.

Let us then turn to data provided by the St. Louis Fed. They stipulate that the Corporate Cash Flow of the United States was $2.231 trillion at the end of the 3rd quarter of 2017. This data may be found here.

This is at a time when the GDP of the U.S. was $19.74 trillion, according to the Bureau of Economic Analysis. This means that America’s “Free Cash Flow” was 11.30% of our total GDP. Consequently, since the central banks’ creation of money is not encumbered by any capital expenditures, at all, no cost of goods or services, zero, this means that the “real value” of the $21.7 trillion is 8.87 times its stated value if compared with the United States in terms of the “actual” effect on both the debt and equity markets.

In other words, the comparison of the central banks’ $21.7 trillion in assets is most accurately compared to the “free cash flows” of a government. This pegs its “actual” significance at a whopping $175.094 trillion, if considered, again, utilizing the “free cash flow” of the United States. Consider that for a moment. Where did this unnamed country come from?

There is no problem so complicated that you can’t find a very simple answer to it if you look at it right.

– Douglas Adams

Given this massive and unprecedented “Free Cash Flow” I state, with a good deal of certainty, that it is the money the money and the money that is driving equity prices higher, keeping yields relatively low and compressing all risk assets in upon their benchmarks. The economists may call it Quantitative Easing, but I say that the central banks used “Pixie Dust” and poured it into the markets and that we have entered a sort of financial Wonderland where every day is “Happily Ever After.”

The markets are flying!

There is an art … or rather, a knack to flying. The knack lies in learning how to throw yourself at the ground and miss.

– Douglas Adams

S&P 500 Earnings: The Rally Is Being Supported By The Earnings Numbers

This we rearranged the presentation of earnings data a little bit to show the S&P 500 earnings growth and forward estimate growth in a different light. Also shown is the S&P 500 earnings yield relative to the 10-year Treasury or “Fed Model” calculation, showing the S&P 500 is still undervalued relative to the 10-year Treasury yield.

What a start to the year.

Note the accelerating pace of the growth in the forward 4-quarter estimate. I thought going over 10% growth was a big deal in November, December ’17, but in fact the “forward 4-quarter” growth rate has now accelerated to 15%.

Lots of Large-cap Technology companies reporting next week. Large-cap growth has been the “style-box” leader for a while now.

Microsoft (NASDAQ:MSFT) reports Wednesday night after the bell, while Amazon and Apple report Thursday night after the close.

Microsoft is up 9.5% year-to-date already in ’18 after its 40% gain in ’17. I would not be surprised to see the stock consolidate some of its 13 month gains, though Microsoft is a huge beneficiary of tax reform, almost as much as Apple (NASDAQ:AAPL). (Long MSFT, AAPL, AMZN.)

Dollar Falls After Mixed Signals From Trump Administration

Disappointing US GDP and contradictory comments on currency strength at Davos burden dollar

The USD depreciated against majors as soft Q4 GDP numbers on Friday and mixed comments on the desired strength and weakness of the currency made at the World Economic Forum in Davos put downward pressure on the greenback. The Trump administration is pushing its tough stance on trade, but tried to soften the tone in an effort to be more inclusive. Economic fundamentals and monetary policy have been supportive of the currency, but political lack of stability has hurt the buck. Next week the market will focus on the U.S. Federal Reserve and the U.S. non farm payrolls (NFP).

  • US President Trump to deliver his first State of the Union Address
  • Fed anticipated to keep rates on hold at 1.25-1.50 percent
  • US forecasted to have added 184,000 jobs in January

Dollar Confused Ahead of US Jobs Report and Fed Statement

The EUR/USD gained 1.73 percent in the last five days. The single currency is trading at 1.2426 after contradictory statements from the Trump administration confused markets. Secretary of the Treasury Steve Mnuchin said on Wednesday that the weaker dollar was good for the US in relation to trade. The USD retreated and the EUR touched three year highs. Next day President Trump said the he ultimately wants to see a strong dollar as the currency is a reflection of the strength of the economy. The USD recovered some ground versus the EUR, but the damage had already been done and the EUR advanced 0.27 percent on Friday.

The first estimate for US GDP for the fourth quarter was released and it was short of expectations at 2.6 percent. The forecast the market was looking for was 3.0 percent, but given its the advanced estimate there will be two more released that could see the final GDP figure higher in the following months.

The EUR has been rising despite the words from European Central Bank (ECB) President Mario Draghi. The central bank kept its rate and massive quantitative easing program untouched. Draghi made sure to mention that stimulus would remain for as long as needed, but had to concede there were few chances it will change interest rates. The ECB President made a comment warning about using verbal intervention to talk down a currency when asked about the Davos statement from Mnuchin.

US President Trump will deliver its first Sate of the Union address on Tuesday, January 30, at 9:00 pm EST. Failing to avoid a government shutdown Trump will focus on the positives during his first year. His achievements in passing legislation came late in 2017 but he is sure to mention the tax reform bill. The stock market record breaking pace and overall strength of the economy while inherited will also be mentioned with the infrastructure plan something to look for in the immediate future. The USD got a Trump bump in late 2016 when just after winning the elections

The U.S. non farm payrolls (NFP) will be published on Friday, February 2 at 8:30 am EST. Economists are expecting the US to add 184,000 positions in January. Last month’s report came in lower than expected but the saving grace for the USD was that hourly wages grew 0.3 percent as expected. There are similar gains forecasted for January wages with a special emphasis on inflationary data as the Fed ponders what to do with stagnant wages despite a strong job component.

The USD/CAD lost 1.38 percent during the week. The currency pair is trading at 1.2323 with a weaker greenback sliding against a stronger loonie. The Bank of Canada (BoC) lifted its benchmark rate 25 basis points earlier in the month and Friday’s release of Canadian inflation coming in even lower than expected at -0.4 percent and validates the slowing inflationary rise view from the central bank.

The uncertain future of NAFTA had previously sapped the loonie from any positive impact from the interest rate hike, but comments this week about the importance trade by the Trump administration have lessened the anxiety about the trade deal. While the US representatives were sure to mention America first, even Trump conceded that America is not alone. The March deadline is fast approaching and negotiations have little to show for it. Elections in Mexico and the United States will make the trade deal a heavy politicized item in 2018. The biggest surprise at Davos from the White House was the apparent softening of their hard line on the Trans Pacific Pact (TPP). The now 11 nation deal was one of the first casualties of the administration and the remaining members agreed to go ahead without the US this week.

Oil prices have been boosted by the weak US dollar and encouraging signs that the global demand for energy is on the rise. The Organization of the Petroleum Exporting Countries (OPEC) production cut agreement was instrumental in stopping the free fall of crude. US shale producers were predicted to have ramped up their supply by now, but weather and other factors have stood in their way. The main risk for crude is a sudden revival of the US dollar that could trigger a sell-off in commodities with investors looking to book profits at current three level highs.

Market events to watch this week:

Tuesday, January 30
10:00am USD CB Consumer Confidence
10:30am GBP BOE Gov Carney Speaks
7:30pm AUD CPI q/q
9:00pm USD President Trump Speaks
Wednesday, January 31
8:15am USD ADP Non-Farm Employment Change
8:30am CAD GDP m/m
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
Thursday, February 1
4:30am GBP Manufacturing PMI
10:00am USD ISM Manufacturing PMI
Friday, February 2
4:30am GBP Construction PMI

*All times EST

Airbnb Adds Another Man to Its All-Male Board

Outgoing American Express CEO Kenneth Chenault is certainly keeping busy.

After being named to Facebook’s board last week, Chenault has now been added to Airbnb’s board of directors as well.

Read: Airbnb Has Some Breathtaking Listings in ‘Shithole’ Countries

Chenault is the company’s first independent board member, as well as its first African-American. However, critics have pointed out that Airbnb’s board remains all male. The short-term rental site has pledged that its next board hire will be female, saying that it is already in “serious discussions with a number of incredible people.” The company reportedly plans to include a woman before the end of the year.

Both minorities and women have historically been excluded from boards of tech companies—a prestigious and high-paying role. According to TheBoardlist, 68% of unicorn tech companies (those with billion dollar-plus valuations), have no women on their boards.

Read: Facebook Just Acquired This Company Focused on Authenticating ID Cards

Airbnb’s board currently consists of its three founders Brian Chesky, Nathan Blecharczyk, and Joe Gebbia, as well as venture capitalists Jeff Jordan and Alfred Lin. While there have been rumors that Condoleezza Rice, Valerie Jarrett, and Meg Whitman could be named to the board next, Recode reports that sources say these are not the names under consideration.

Airbnb is currently preparing for an IPO. It is valued at $30 billion, making it the second-most-valuable startup in the U.S. after Uber, according to data from CBInsights.

SK Hynix fourth-quarter profit rockets to record; chip demand seen surging this year

SEOUL (Reuters) – South Korea’s SK Hynix capped a record year in profit with a blockbuster fourth quarter and predicted a further surge in demand for memory chips this year, easing market concerns that the chip boom might be over.

The stock rose 5 percent on Thursday’s news after sliding about 20 percent since early November amid falling prices for NAND flash memory chips, used in USB drives and mobile phones, a mainstay for the company.

SK Hynix said fourth-quarter operating profit nearly tripled to a record 4.5 trillion won ($4.2 billion), higher than the 4.3 trillion forecast by analysts. Revenue jumped 69 percent to 9 trillion won. That lifted annual earnings to an all-time high of 13.7 trillion won.

Demand for more firepower, especially from servers in data centers, are seen driving 2018 profits for the world’s second-biggest memory chip maker after Samsung Electronics Co Ltd, SK Hynix said in a call with analysts and investors.

SK Hynix’s rosy outlook boosted investor confidence in the chip sector that had taken a hit after Samsung’s profit guidance earlier this month fell short of analysts’ estimates. This week, Texas Instruments Inc posted its slowest revenue growth in four quarters on softer demand for its chips.

“There had been various concerns such as the market slowing, NAND price dropping — but from today’s call, it doesn’t look like a slowdown is happening,” said Lee Seung-woo, an analyst at Eugene Investment & Securities.

“There were also worries that the Intel bug issue or the sluggish sale of Apple’s iPhones might hurt memory chip demand, but the company dispelled them,” he said.

SK Hynix said it has not detected any slowdown in memory chip demand due to the Intel security issue, for which patches were released to counteract vulnerabilities that slowed some servers. The problem could even increase server demand as it affects high-traffic work that might have to be supplemented by server expansion, the company said.

In answer to a question on China’s smartphone makers resisting higher memory chip prices, SK Hynix said low-end smartphones have little room to handle rising memory prices and the firm will consider such matters in pricing, without elaborating.

To meet demand, especially from server clients, SK Hynix said it is considering moving up the construction of a new chip production line from year-end as originally planned. However, the new line wasn’t expected to contribute to chip supply this year because of the time it takes to install and test equipment.

For the industry as a whole, SK Hynix predicted NAND chip supply would grow in 2018, gradually easing a shortage. Supply of DRAM chips, used in mobile phones, computers and servers, will remain tight due to limited production capacity.

The company said that slower sales of some smartphones would have little impact on overall DRAM demand as other phone and PC makers would snap up the chips.

Total memory chip industry revenue in 2017 was a record $132 billion, up from $80 billion in 2016, and is set to rise further to $150 billion in 2018 before falling to about $130 billion in 2019, according to research provider Gartner.

Reporting by Joyce Lee; Editing by Sandra Maler, Rosalba O’Brien and Malcolm Foster