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Hold Stocks? Time to Sell?
By Shlomo Maital
There are a thousand good reasons why I never give advice on the stock market, and why, if I did, you should ignore it. I myself hold no shares at all, in anything.
But here are some facts worth pondering. Thanks to New York Times journalist Gretchen Morgenson for her insights. Note that the NASDAQ exchange is reaching new record highs.
“This is the third longest bull market in 80 years, and we are starting to see some deterioration develop.” (a money manager Morgenson quotes).
“We are at an inflection point.” (co-chief investment officer).
“Many investors may be quick to sell their shares in a swoon, amplifying a downturn… [especially] investors who have bought shares on margin, using borrowed money, and those who have been pushed into the market in search of returns because of low interest rates.” (Note: The bull market is fueled almost exclusively by the latter two groups).
“Money borrowed to buy stocks tends to be nervous money.”
“The Federal Reserve will always be there to save the day”. This is a wrong assumption.
“Apple shares have lost 11.3 per cent despite the fact that earnings per share were up 45 per cent over last year”.
Morgenson counsels, “It’s probably not a bad idea to be watchful for [distinct market shifts]…”. I agree. Be careful!
Wrong-Way RMB?
By Shlomo Maital
Financial Times reports that “China devalued the yuan by the most in two decades, a move that rippled through global markets as policy makers stepped up efforts to support exporters and boost the role of market pricing in Asia’s largest economy. The central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China ended a dual-currency system in January 1994. The People’s Bank of China called the change a one-time adjustment and said its fixing will become more aligned with supply and demand.” The renminbi is seriously undervalued; its purchasing power is about 4 RMB per dollar, not 6. So why devalue it, send it in the other direction?
What is going on?
Well, depends who you believe. Financial Times’ ‘take’ is that China is starting a currency war, a la 1930’s, with countries competitively devaluing their currency to gain export markets and stimulate their economy, while exporting unemployment. The small 2 % devaluation shows China’s leadership is “desperate”:
According to conventional wisdom, wars are easy to start and difficult to end. Similarly Beijing’s devaluation, the biggest one-day currency move since 1993, represents the latest skirmish in an emerging battle which, analysts warn, may be hard to reverse. The move marks a shift in China’s historical policy during times of economic stress. In the late 1990s, the country was widely credited with containing the destruction from the Asian financial crisis because it held fast to the renminbi exchange rate in the midst of competitive devaluations throughout the region. In the global financial crisis of 2008, Beijing also refused to devalue even as its exports, a key driver of the economy, evaporated overnight. But now, in the midst of a pronounced and persistent Chinese economic slowdown and continued appreciation pressure resulting from the renminbi’s “dirty peg” to the soaring US dollar, China’s leaders have decided to take the plunge. “This shows how desperate the government is over the state of the economy,” said Fraser Howie, a China analyst and co-author of Red Capitalism. “If they were trying, as the central bank said it was, to bring the exchange rate back into line with market expectations then they have failed miserably as the market is now just expecting further devaluation.”
But here is Neil Irwin’s ‘take’, in The New York Times: China is seeking twin goals, keeping the flagging economy going and establishing the RMB as a global currency, by allowing market forces to work, rather than pegging the RMB artificially to a soaring dollar.
And my own view: With the dollar losing its pre-eminence as a world currency, largely because the Fed has printed far too many of them, for domestic policy purposes, the world does need a strong well-managed global currency. It could be the RMB?
Who is right? Well, dear reader, in this, as in other issues, you’ll have to think for yourself. The main thing is, be sure you are fully aware of the real issues the world faces, and not some of the puff pieces that fill our newspapers and news websites. China, and everything that goes on there, is one of those key issues.
Freedom? Or Security? Do We Have to Choose?
By Shlomo Maital
A Pew Global Attitudes survey asked this question, a few years ago:
Which is more important?
Freedom to pursue life’s goals without state interference, or
State guarantees that nobody is in need.
The results: 58 % of Americans chose freedom; only 35 % chose security.
In Britain it was the opposite. Some 55% chose state guarantees, and 38 % chose freedom. In Germany, France and Spain, 62 % chose state guarantees.
Here, in a nutshell, we have the reason why America has a great deal of entrepreneurial energy, and enormous social and economic inequality. And why Europe has a terrible dearth of entrepreneurial energy, and strong infrastructure and social safety nets.
In his New York Times column, Roger Cohen even goes so far as to blame America’s obesity on the choice of ‘freedom’. Taxing sugar-laden drinks would never fly in America. Raising gas taxes is a non-starter, even though the U.S. highways are crumbling.
Benjamin Franklin, that creative entrepreneurial American who invented public libraries and many other things, spoke up for freedom, in 1776. At the time, he was right. America’s democracy had just been born. As a new-born baby, it needed strengthening.
But today? My question is — Are “freedom” and “social safety net” really, necessarily, perforce “Either-Or” choices? Must we choose? Are there examples of nations that have both?
Take Denmark, a very well off, prosperous European nation, wisely not part of the Euro block, which has very high taxation, superb social safety net and security, and a great deal of innovation and entrepreneurship. If entrepreneurs truly seek to create value, rather than become billionaires, they will not be deterred by high rates of taxation that generate revenues to support the safety net. If the wealthy earn 8 per cent on their wealth after-tax, park their money in tax havens, while the middle class barely earns 1 or 2 per cent, is it not reasonable to allow the middle class access to the same privileges, the same 8%?
No, “freedom” and “social safety net” are not either/or. They are only if we believe they are. Freedom and social safety net CAN BE both/and. That is how it should be. Now, the question, is, how do Europeans gain more entrepreneurial freedom without ruining their safety net, and how do Americans get a proper safety net without ruining their entrepreneurial energy. It’s NOT that difficult!
Conquering Ebola: How They Did It
By Shlomo Maital
As usual, the deaths and suffering from Ebola got far more media attention than the team of brave and creative people who have conquered it. (Global New York Times, Aug. 1-2, 2015, p. 6)
It started in Canada. Researchers at the Public Health Agency of Canada created an experimental vaccine (yup – that’s right, a government agency!). They took a piece of the virus’s covering and combined it with an animal virus (vesicular stomatitis virus), to set off an immune reaction against Ebola. I can only imagine the risks involved in working with such a virulent and often-fatal virus, in a lab.
A private biopharm company, NewLink Genetics, based in Ames Iowa, licensed the breakthrough vaccine, and last November, Merck, Big Pharma, did too.
The clinical trial was crucial. It was led by the WHO, Guinean Health Ministry, Doctors Without Borders, Epicentre Research and the Norwegian Institute of Public Health.
Among the clinical trial innovations: a beer-keg-shaped storage device, the Arkteck, that kept the vaccines at minus 80 degrees without electricity, so that they could be transported. The keg was invented by Global Good, a collaboration between an investment company Intellectual Ventures and Bill & Melinda Gates’ Foundation.
None of those vaccinated in the trial, about 4,000 people, contracted the disease, even when exposed to it. The main use will be to vaccinate medical workers exposed to Ebola, rather than huge populations.
What do we learn from this? Simple. To tackle a really hard problem, you need to put together global collaborations – governments, NGO’s, companies big and small, volunteers, African governments, and they need to work together seamlessly, each contributing his or her own creativity and energy. In the end, courageous lab workers did the job, but it took the whole ‘village’ to save a child, or many many of them.
The whole ebola virus vaccine eco-system deserves a Nobel.
Everyone Deserves a Second Chance – Let’s Try to Help
By Shlomo Maital
Doug Deason
Doug Deason is a wealthy businessman, president of Deason Capital Services and a philanthropist, head of the Deason Foundation. And he has a message.
When he was 17, in 1979, he broke in to his neighbors’ home and threw a party, while they were out of town. (Actually, their son had given him a key). The party got out of hand. The police were called. And Deason was charged with felony burglary. Note that word: Felony. A federal crime. You get a year or more in jail, in a Federal pen.
If he were poor and black, his life would have basically ended. With a criminal record, he certainly could not have started a business in investments, or perhaps in anything. All he could have done was continued along the path of crime… after a youthful stupid mistake that really harmed nobody.
And this is precisely what happens to a great many young people in the U.S.
According to the U.S. Bureau of Justice Statistics (BJS), 2,266,800 adults were incarcerated in U.S. federal and state prisons, and county jails at year-end 2011 – about 0.94% of adults in the U.S. resident population. Additionally, 4,814,200 adults at year-end 2011 were on probation or on parole. One percent of adult Americans are in jail. A large proportion are African-Americans. As many as 100 million people have some criminal record.
Deason pleaded guilty to a misdemeanor (criminal trespass), paid a fine, served six months of probation – and then his conviction was expunged, erased. He got a second chance. And he made the most of it.
Deason is a Republican. He and others are pushing for criminal justice reform. “Years ago, I made a mistake and got a second chance. Every American should be able to say the same thing,” he says.
Deason’s company has a policy of hiring nonviolent criminals. He worked with the Texas State Legislature (not known as a bastion of liberal democracy) to pass a bipartisan “second chances” bill, that takes effect on Sept. 1.
But I think there is another key point here. You really cannot legislate second chances. It is up to us, the people, to offer second chances, to forgive, and to help those who have made that one huge mistake and are paying for it forever. Of course there are risks. But when there is no second chance at a normal life, the only option is a life of violence and crime. Why in the world does America’s criminal justice system not understand that?
Matteo Renzi Revives Italy
By Shlomo Maital
The attention of the business press has been almost entirely focused on the bad-news story of Greece. While Greece suffers, almost un-noticed Italian Prime Minister Matteo Renzi, who took over in 2014, has fulfilled his promise to revive the Italian economy. He has cut public spending, slashed deficits, modernized the judicial system, and reformed the sluggish labor market. (All these reforms are equally vital in France – but Hollande is neither able nor willing to undertake any of them).
Renzi’s Jobs Act, passed March 1, ends the system that gave some employees ‘jobs for life’. Companies that hire a previously unemployed worker in 2015 get a three-year grace period on social security contributions. This makes hiring much more worthwhile. As a result, consumer confidence in Italy is now, July 2015, at a 10 year high (the graph does not include the latest few months).
Car sales are up. Youth unemployment is way down. Demand for exports is strong. And debt payments are falling sharply, from the present high level of 5 per cent of GDP to a targeted 1 per cent by 2020.
Renzi’s reforms now enable insurance companies and securitization companies to lend directly to businesses, attracted by a tax break for firms that issue new equity.
Renzi has cut corporate taxes by 6.5 billion euros, and imposed electoral reform for Italy’s lower house. He is trying to slash the amount of pending litigation by half and reduce the length of trials from three years to one.
Renzi is only 40 years old. When appointed, he was 39, making him the youngest Prime Minister in Italy since 1861. His reforms deserve far more attention. (See The Financialist: Italy’s Reform Agenda). Few believed he could fulfill his promises when he took office. But he has. Perhaps France could take a few lessons from Renzi.
Euro Disney Pricing: Pure Mickey Mouse!
By Shlomo Maital
If you’re a manager or entrepreneur, here is a 100% certain proven way to get into hot water. Take the advice of economists. I should know – I am one of them.
EuroDisney is a good example. According to basic microeconomic theory, if you can segment markets with different prices, then you set prices inversely to the price sensitivity (or, elasticity) of demand. Low sensitivity? High price. High sensitivity? Low price.
Many Europeans buy Disney packages on-line. That means that Disney can charge people from different countries, different prices, because the Internet knows where you are. And of course, that’s just what Disney does. Disneyland Paris practices “geo-blocking” (Global New York Times, July 30, p. 18). “For an identical stay, the Euro Disney website often offers higher prices on German computers than on French ones.” Euro Disney had 14 million visitors last year with prepackaged prices. This year? Geo-blocking.
So what’s wrong with price discrimination, if you’re a monopoly and can get away with it? For one, it is not legal. The European Commission says national borders are supposed to be erased, and prices should be the same for all.
But worse than that — discriminatory pricing causes major resentment. Imagine that you bring your family from Berlin to Disney Paris, and find that your neighbor, on the merry-go-round, from Paris, paid half what you did. I know – it happens all the time on airplanes. Nearly everyone on the plane has paid a different price, from very high to very low.
Disney could say: If we charged one price, we’d have fewer customers, and would have to charge EVERYone much more to recover our costs. But this is pure Mickey Mouse!
When economic theory and profit maximization collide with basic fairness and empathy for customers, paying high prices, empathy should win. In the long run, it is simply good business. Beware of what economists advise. It is based on math, not on people.
The New Pricing Model: “Name Your Price. Really!”
By Shlomo Maital
Harvard Business School’s Working Knowledge has an interesting piece by Michael Blanding, about research by marketing assistant professor Shelle M. Santana. Santana studied “pay what you wish” (PWYP) pricing.
PWYP? According to economists, it makes no sense. If you can pay, say, one cent, or nothing, why of course that’s what everybody will do.
Yet another case where economic theory misleads.
“Research shows,” notes Blanding, “that when people are able to set their own prices, almost everyone pays something – and sometimes well over the suggested price.” Santana says she was interested in the broad variance of prices people pay, under PWYP, and who pays a little, and who pays a lot, and when.
She found that by controlling the environment and context, she can influence what buyers are willing to pay.
Some examples of PWYP? Radiohead’s In Rainbows album has ‘name your price’ downloads. Dallas Theater Center has Pay What You Can nights to attract new patrons. Boston Pedicab has an ‘open fare’ system. Panera Bread has four nonprofit Panera locations with PWYP (I wrote a blog about one, some time ago).
In one experiment Santana and a colleague designed a PWYP promotion for a pack of gum at a student café at NYU. At one scenario, their sign showed a pair of hands shaking, and read “It’s Your Turn to Set the Price Today”. At a second, the sign showed a group of hands in a circle, that read: “Because We’re Partners, It’s Your Turn to Set the Price Today.”
Guess which sign got the highest price? Of course – the second sign got an average price of 69 cents, compared with 57 cents for the first. That’s a 21 per cent difference.
Why? Creating a communal norm… pro-group, rather than just pro-self. Moreover, customers are willing to pay more, often much more, when a portion of the proceeds is donated to charity – something many companies discovered long ago.
Harvard Business School Working Knowledge, 22 July 2015. “Research and Ideas”
Internet of Things (IoT): It’s Not Hype
By Shlomo Maital
If you’re like me, you may be skeptical of the term “Internet of Things”. I am so tired of hearing about refrigerators that know how to order milk. This is not a compelling value proposition. But after reading a new McKinsey Global Institute report, I am a lot less skeptical.* Here is a summary.
Definition: “The Internet of Things: sensors and actuators connected by networks to computing systems, to monitor and manage the health and actions of connected objects and machines, including people, animals and the natural world.”
“The Internet of Things has the potential to dramatically improve health outcomes, particularly in the treatment of chronic diseases such as diabetes that now take an enormous human and economic toll…. Technology suppliers are ramping up IoT businesses and creating strategies to help customers design, implement, and operate complex systems – and working to fill the gap between the ability to collect data from the physical world and the capacity to capture and analyze it in a timely way.”
“We estimate that the Internet of Things has a total potential economic impact of $3.9 trillion to $11.1 trillion per year in 2025. (At the top end, the value of IoT impact would be equivalent to 11 per cent of the world economy, or $99.5 trillion in 2025.”)
“By viewing IoT applications through the lens of “settings” we capture a broader set of effects.. a settings lens helps capture all sources of value – we identified nine settings where IoT creates value: Human (devices attached to or inside the body); Home (where people live); Retail environments; Offices; Factories; Worksites; Vehicles; Cities; Outside. “
“ Capturing [the potential of IoT] will require innovation in IoT technologies and business models, and investment in new cpaabilities and talent.”
So: Innovator! Can you think of ways that connecting things digitally brings real value to people? Which of YOUR things would you like to see connected? Start with a setting; proceed to thinking of the sensors you need; and continue by thinking about how you would use the sensors’ data to create value. This is a future industry waiting to be invented.
* McKinsey Global Institute. The Internet of Things: Mapping the value beyond the hype. 2015.
What Goes Up Comes Down: China’s Stock Market Decline
By Shlomo Maital
Between mid-March and early June, less than three months, China’s stock market created $3.5 trillion in new capital gains for its investors. Many of them are working people, who scrimp and save and buy shares. They were richly rewarded.
Between early June and July 7, the Chinese stock market fell by one-third, wiping out $3.5 trillion in capital gains. Over the 12-month period to July 8, the Chinese stock market is still up by 75 per cent!
Once again, for the millionth time, investors learn that whatever goes up, can and will come down. When it does, it often comes down pretty abruptly.
The so-called “crash” in China’s stock market has been greeted with what could be seen as a hasty, panicky intervention by regulatory officials, who suspended trading in over 90 percent of the 2,775 shares listed on Chinese exchanges, as the government tries to quell a sell-off. I still believe that most small investors in China are not selling, are wisely holding on to their shares, and believe, rightly, that they will bounce back.
It all depends on your time perspective. If it is a one-month horizon, well, this is a crash. If it is a one-year horizon, then, Chinese shares are still up by 75 per cent, from July 2014 to July 2015. See the chart below.
With a bit longer perspective, that one-month 33% drop doesn’t seem as steep, does it? And I believe most Chinese investors bought in to the market well before the decline of the past month. If they bought in before March, they are still ahead. That $3.5 trillion in losses is purely paper, purely perception. Why not measure the gains between July ’14 and July ’15?
There is no need for government intervention. The model of Hong Kong (Hong Kong authorities bought shares after the 2008 global collapse, and ended up profiting when share prices rebounded) is not one China Mainland should follow. Sometimes, “do nothing” is the best and wisest policy, in health care and in financial regulation.
TIMnovate 