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Big Data Comes to the Farm
June 13th, 2014By Monty Guild.
Although the prospect seems far-fetched, the second-oldest profession is on the cusp of a technological revolution. Farmers have faced a long transition over the past three centuries in which their ancient art has become more and more of a science. But the pace of that change may soon increase radically, driven by forces which have been transforming other sectors of the economy as well. The watershed emergence of automation and big data is poised to come to the American agricultural heartland.
Ultimately, this could be a period of disruptive innovation in farming not unlike the 70s rise of tech culture in Silicon Valley.
The overarching description of this new farming revolution is “precision agriculture.” A new product from Monsanto (NYSE: MON), which is now available to corn farmers in Iowa, Illinois, Minnesota, and Indiana, illustrates the trend.
Monsanto Assembles the Pieces of a New Paradigm
Monsanto’s FieldScripts is the result of a marriage that might have seemed unlikely, but may drive profits for the company in a wholly new market beyond its hybrid and GMO seeds and crop protection chemicals. Last October, Monsanto bought a private company, the Climate Corporation, which had been founded in 2006 by two Google alumni. Following in the footsteps of projects like Google Earth, the Climate Corporation assembled a massive database — topographical maps of 25 million American fields, combined with weather and climate data, weather simulation modeling, and soil fertility data.
The Climate Corporation had been in the business of providing those data to farmers. But Monsanto, which paid $1 billion for the company, realized that by marrying its database with Monsanto’s own deep database about its corn and soybean varieties and their yield performance under various conditions, they could potentially provide an extremely precise “prescription” for farmers.
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In 2012, Monsanto had made another strategic acquisition: a company called Precision Planting, which builds farm equipment that can sow, fertilize, and reap automatically according to a precise program.
Farming Automation Has Been On the Rise, and May Be About to Take a Quantum Leap
Adding all these pieces together — Monsanto’s yield data, the Climate Corporation’s soil and weather data and models, and Precision Plantings’ hardware, and you have the basis for FieldScripts: an automated, big-data-driven way to maximize yield for farmers. The program Monsanto prescribes can tell farmers what varieties of corn are appropriate for which of their fields. It can tell them which parts of their fields are likely to be more productive, and concentrate more planting there. And it can execute the whole program with machinery that is largely automated — often needing human babysitters rather than operators.
But Does It Work?
On average, farmers who tested FieldScripts over the past two years of its development saw corn yields rise some 5 percent — by about 5 to 10 bushels per acre. That’s an impressive feat.
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And of course, the system generates still more data as it is deployed. Think of a crowd-sourced application such as Google’s traffic-savvy Waze, which crunches user data (speed and location) to help drivers avoid congested roads. The more drivers use it, the more useful it becomes to all of them, because the more accurate its picture of current traffic conditions.
More Use, More Data, Higher Effectiveness
FieldScripts will also continue to generate data that when refined and applied, may allow the system to create even more incremental gains for farmers. Monsanto believes that precision agriculture will ultimately allow American corn farmers to increase their average yield by 25 percent. This may be why it thinks that the total addressable market for farm data analytics and applications could be $20 billion annually.
There are other competitors of Monsanto’s size entering the space as well. DuPont’s (NYSE:D) Pioneer division, like Monsanto a heavyweight in crop protection and hybrid and GMO seeds, has launched a product called Encirca, which is similar to FieldScripts though not as ambitious in its data sweep. Nevertheless, it believes that the system could generate $500 million in revenues.
Both Monsanto and DuPont are viewing the space as an area of key importance. The Climate Corporation’s vice president of marketing said of FieldScripts, “We view this as a platform that is as important to Monsanto as biotech.”
Proprietary Data?
The fact that these systems, once deployed, continue to generate data, creates some questions in the minds of farmers, as expressed by groups such as the American Farm Bureau.
For one thing, FieldScripts, for example, gives farmers a program telling them which seed will perform the best in which piece of ground under which conditions and with which crop protection products. But will it only be telling farmers about which Monsanto seed varieties, and which Monsanto products, will work best? Monsanto says no; the system will suggest a competitor’s product if it would work better, and that if the system functioned otherwise, it would lose credibility.
With the firm deploying proprietary data, though — and harvesting ever more of those data from farmers — some are skeptical. Some fear that with proprietary systems, farmers will get “locked in” to one of the big competitors, since data will not be portable from one company’s system to another.
Who Owns the Data?
This raises another keen issue for farmers, who apparently are as concerned about privacy and data security as any other segment of the population. They want to know who will own the data they generate, as year after year their data feed back to Monsanto or DuPont increases the company’s trove and becomes more and more valuable. So far, companies have agreed in principle that farmers should own their own data — that those data should not be sold or given to third parties, or used for other purposes than the farmers’. But contracts have not consistently reflected those principles — so farmers are forming co-operative groups to advocate for their data. Farmers’ caution may be due in part to the poor reputation thatMonsanto has acquired for the aggressive manner in which it has pursued what it regards as infringement of its intellectual property. Farmers may think that a company that has played hardball in such matters before may also be willing to play hardball with them.
A Swarm of Startups
Both of these issues — data freedom and data ownership — show how this nascent transformation of agriculture could be similar to the Silicon Valley culture of the 70s which gave birth to a host of hardware and software innovators, permanently removing computing from the private domain of the previous generation’s giants such as IBM (NASDAQ: IBM).
Although the field is now dominated by big players, the whole thrust of precision agriculture may mitigate against them, and in favor of upstarts.
Farmers and Capital Expenditures
For one thing, farmers are notoriously wary of big capital expenditures, and so far, the precision agriculture offerings are in the same mold as other large, expensive machinery. It won’t make sense for many farmers — and even if it could boost yield, if the expenditure would be too much of a stretch, they won’t invest. The wave of farm consolidation that some readers may remember from the 80s “Farm Aid” era instilled some bitter lessons. But this technology intrinsically lends itself to smaller machines, to homespun solutions, to the open-source
The Dashboard of FarmBot, an Integrated Open-Source Precision Agriculture System
Source: http://go.farmbot.it/
“maker” culture (think “farm hacking”), and to small, innovative startups offering products along those lines. Entrepreneurial farmers are already leveraging off-the-shelf tech components and ubiquitous smartphone adoption to create sensors, collect data, and feed them alerts. One such farmer we read about was ahead of the game — creating a DIY drone to fly over his 250-acre family farm monitoring the light reflected off plants’ leaves. Those data can be crunched to determine the “normalized difference vegetation index,” a value that helps determine which plants and which areas of a field are healthy. Although such agricultural drones have been in use in Japan for some time, they are not yet in wide use in the U.S.
These individual makers and hackers may be the forerunners of the nimble startups that ultimately take over the landscape — just as upstart Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) rose from garages to conquer the territory of IBM, and just as the ubiquitous pocket-sized smartphone is the ultimate progeny of the mainframe.
Big Data and the Return of the Small
Instead of giant machines moving over huge swaths of land, the future of agriculture may be hosts of small machines doing precision work in precision areas. They may be like fieldworkers of the past, but they won’t be humans — they’ll be robots. Just not giant ones. This also is the direction that agriculture’s new developments are pointing in.
Good for Efficiency… and Good for the Environment
If you have a twinge of regret at this vision of a big-data driven automated agricultural future, with a romantic notion of farming being challenged, it’s worth noting as well that these trends have the potential to markedly improve efficiency. And that doesn’t just mean high yields; it means lower inputs, especially of agricultural chemicals. Precision application, in this case, driven by data about what farming methods are effective where and under what conditions, could mean the application of less pesticides, herbicides, fungicides, and fertilizers — since they will be more likely to go where they’re needed. Farmers will like the efficiency and the increased yields.
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Is Google Fiber Going to Eat Your Internet Service Provider?
March 4th, 2014By Monty Guild.
Google has its fingers in so many technological pies that it’s hard to keep track of them — even the ones not hidden in Google X, the company’s development lab.
One of those pies is Google’s small and early-stage project to deliver high-speed internetthrough its own fiberoptic network. And high-speed does mean high-speed — so-called “gigabit” internet at speeds 100 times those typical of current broadband.
So far, Google Fiber has been rolled out to two cities — Provo, UT, and Kansas City. But the company recently announced that it had targeted 34 more cities across the U.S. as its next targets for expanding the network, including San Jose, CA, Portland, OR, Phoenix, AZ, and Raleigh Durham, NC. In the announcement, Google noted the momentum building behind next-generation highspeed internet from city administrations which recognize the educational and economic significance of broadband access. With the administrators of the target cities, they’ve been discussing “what it would take to bring them Google Fiber… [working] closely with each city’s leaders on a joint planning process.”
[Must Listen: Technology Revolutions Coming Faster – Now About Every Five Years]
The Sign of Things to Come?
Source: Kurzweil Accelerating Intelligence
What’s in It for the Cities?
Why are cities eager to talk to Google? The pricing plans for Google Fiber in Provo and Kansas City explain the reason.
For $120 a month, customers get gigabit internet and TV. For $70 a month, customers get gigabit internet. For zero dollars a month, customers get “standard” broadband access speeds. That is, Google is essentially offering city governments free universal broadband access for their residents, for the price of cooperating in planning the network. It seems a small price to pay, given the potential economic benefits to the city.
Reaction From Analysts
Goldman Sachs estimates that a nationwide rollout of Google Fiber could take $140 billion incapital investment. They question whether Google really wants to get involved in the relatively low-margin business of providing internet plumbing (currently, Google’s pretax profit margin is higher than that of Comcast).
Skeptical analysts suggest that Google Fiber is a card that Google is playing in the ongoing “net neutrality” struggle.
“Net Neutrality”
Net neutrality is a voluntary principle — not a law — which says that the companies running the internet’s pipes won’t give preference to some data over other data on the basis of payment or other criteria. All the data should treated equally.
Advocates of net neutrality say that it is necessary to avoid anticompetitive practices, and think it should be written into law. Opponents of net neutrality laws think that such laws would reduce the power of service providers to maintain high quality for the data customers want the most.
Some internet service providers have disregarded net neutrality in the past, but only in marginal areas — for example, constricting the bandwidth used by peer-to-peer file-transfer protocols, which are often used for piracy.
But recently, Comcast and Netflix reached a deal which skirts the edge of net neutrality, with Netflix getting a preferential “onramp” into Comcast’s delivery system. At peak times, some 30 percent of U.S. internet traffic can come from Netflix streaming — so this deal will mean less annoyances for customers as they watch highdefinition movies.
Google is of course watching these developments very closely. It delivers its data through other people’s pipes — and it clearly doesn’t want a situation where it has to be bidding against competitors (such as Facebook and Twitter) for preferential treatment. So some analysts think Google Fiber is a shot across the bow of service providers — saying to them in essence: “If you drop net neutrality, we can just build our own pipes.” They may not be serious about doing it — they may just be sending a message.
But Maybe They’re Serious
Others believe that Google’s view is long-term enough that they could well be planning for dominance in the provision of broadband internet. One analyst writes: “It may not make a huge difference for Google or for the incumbents in the next one, two or three years, but Google is taking the long view and we think in five or more years, it could turn out to be a significant, profitable business for Google and headwind for incumbents.”
Google knows that competition — from Twitter, Facebook, and other online ad venues — will be gradually eroding their advertising business, which currently comprises the lion’s share of their revenues. Many of the plans we have heard from Google’s creative spirits will eventually be doing the heavy lifting for the company. Google Fiber, while it may or may not become a dominant force in broadband service provision, certainly gives us reason to think that Google’s leadership is not asleep at the wheel.
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The “Internet of Things” for Consumers — Almost Here, or Still Too Soon?
January 24th, 2014By Monty Guild.
The Consumer Electronics Show (CES) in Las Vegas is an annual Mecca for trend-seekers in tech. This year, one of the central themes of the show is one that we have touched on before in this letter — the “internet of things.”
The internet of things simply refers to the networking of smart devices to the internet, so that businesses and consumers can interact with them remotely via computer, tablet, or smartphone. It’s really the near-universal availability of smartphones that is driving consumer enthusiasm for these connected devices. Smartphones are really powerful universal pocket computers, and thus can act as remote monitors and controls for anything that’s connected to the internet.
Of course, the other driver is Moore’s Law — with controlling chips dropping in price to the point where incorporating them into a previously “dumb” device is not prohibitively expensive to the average consumer.
Industry has led the way in smart devices, but the trends noted above suggest an imminent breakout into the consumer space, where there is vast potential for expansion.
[Hear More: Alex Daley: Technology Revolutions Coming Faster – Now About Every Five Years]
Smart Homes for Consumers
Any mechanical device that would benefit from remote monitoring and control is a possible node in the internet of things. If you think of questions you’ve asked yourself after leaving the house (did I lock the door? did I turn down the thermostat? did I leave the stove on? did I turn off the lights?), you have an initial list of smart devices that would be useful — potentially enhancing safety and delivering savings.
One of the first movers is Nest Labs, a company which makes smart thermostats and smoke detectors. A Nest thermostat communicates with household WiFi and permits users to monitor and adjust their home environment remotely. Similarly, a smart lock could be monitored, opened, and closed remotely — you would know when you’d forgotten to lock the door, and you could open it for a visitor without the need to be home or to have a spare key. A smartphone application can serve as a home automation hub — such as the Iris system offered by Lowe’s, which can cover locks, thermostats, security cameras and alarms, and pet doors. Nest Labs was acquired by Google this week.
Lowe’s Iris Offers Home Automation Via the “Internet of Things”
Source: Lowe’s
And more home appliances will eventually be added to such services — ovens and refrigerators, for example.
Timing Is Key for Investors
Some observers saw the internet of things coming long ago — perhaps too long. Apple co-founder Mike Markkula saw it coming 30 years ago, and tried to capitalize on it with the foundation of Echelon Corporation (which now makes smart meters). But the infrastructure was not yet in place to support it. “I was 20 years too soon,” he says — a common lament for those who see emergent tech trends. The idea may be brilliant, and the long-sighted investor may be correct in believing that its adoption may be an eventual sure thing. But that does not mean that the time is right to invest — it may be too early.
Certainly the landscape is more favorable for the takeoff of the internet of things than it was in the 1980s or 1990s. We believe that this trend is very real; and the tenor of opinion in the tech sector is extremely bullish.
Analysts estimate that there will be 30 to 50 billion networked smart devices by 2020, up from some 10 billion today. These additional devices will drive revenues far beyond those associated simply with hardware manufacture — associated services, as well as the generation of vast amounts of data, will also be powerful drivers of value.
Watch for Pitfalls
However, there are still potential pitfalls for investors.
Many of the brilliant new ideas will be incubated in startups — who will then find their ideas implemented by much larger rivals able to leverage their powerful market position to dominate the newcomers. So finding early movers in whom to invest can be a risky business — while the existing giants, such as Cisco, are unlikely to have their needle moved much by the expansion of the smart device space. This will be most likely, perhaps, in the realm of hardware, where big players such as Home Depot, Lowe’s and others will be able to offer integrated, turnkey solutions to consumers.
Further, although the infrastructure is far more developed and robust than it was when the internet of things was a twinkle in the eyes of visionaries, there are compatibility issues still to be ironed out. Consumers are used to thinking of connectivity that simply works — their home WiFi, and perhaps Bluetooth. But there are many more rival radio communication systems and standards, which have not yet fallen into uniformity. This poses a risk for hardware manufacturers — but also an opportunity for manufacturers of network hubs that can communicate across many platforms.
In short, while we see clearly the secular promise of this space, we are cautious in evaluating potential winners — and our tendency is to look more to service providers than to hardware manufacturers.
Data, Data Everywhere
The other aspect of the internet of things worth watching is the implications of enhanced data collection. Networked cars will be able to send detailed information to insurers on drivers’ habits — potentially allowing them to make much more finely-tuned actuarial decisions about consumers. Some consumers would welcome that — while others, even safe drivers, would view such data collection as intrusive.
And of course, all the cloud-based home automation devices would be able to collect big data on consumers’ habits — big data which could prove extremely lucrative for the companies that own it. (We noted that one of Nest Labs’ early investors was Google — and as we prepared this letter, Google announced its acquisition of Nest for $3.2 billion.)
Besides the privacy concerns, there are also straightforward security concerns — such as hackers being able to access home security systems and let themselves into locked houses. The recent massive data breach at Target and other retailers has, at least momentarily, raised consumer consciousness about hacking and data security. Winning service providers in the internet of things will have to provide especially robust protection and assurance to win consumers over to a world in which their homes (and someday their cars) will be remote-controlled.
So while we watch this space with great interest, we have a number of criteria in mind by which to judge which entrants are most likely to provide returns to investors.
For more commentary or information on Guild Investment Management, please go toguildinvestment.com.
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The Bullish Case for 2014: Productivity Growth Is the Key
January 16th, 2014By Monty Guild.
We are looking forward to 2014 with optimism, and we believe the key factor supporting the U.S. and global economies in the present phase of the economic cycle will be productivity growth. Our comments below were prompted by a similar analysis recently published by John Hook of Hook Analytics.
Gross domestic product (GDP) is the market value of all goods and services produced in an economy. This is a nominal value — it must be corrected for inflation to give us “real” GDP. It’s the real growth of GDP that we are interested in as investors. While there are always sectoral and company-level growth differences, it is the outlook for real GDP growth that will give us a “rising tide” or a “falling tide”… and gives us a view of the current economic environment.
We believe this view is of critical importance for investors. Many investors waited out some or all of 2013 on the sidelines and failed to benefit from the market’s gains. Although we don’t expect a ride without bumps in 2014 — a correction of 10 percent or more wouldn’t surprise us — we believe that when the year ends, the U.S. market should be higher by about 10 percent. As the year progresses, the awareness that the economy is showing accelerating growth will ease some of the lingering fears that remain from the Great Recession.
Components of Real Growth
Real GDP growth has two components: population growth, and productivity growth. Population growth by itself will raise GDP, simply because there are more people working, producing, and earning — and demanding goods and services.
However, there are two factors that make population growth insufficient as a driver for growth — and as a driver of corporate profits. First, population growth is basically in a state of decline. It has been observed around the world over the past two generations in particular that worldwide population has grown at a slower pace as the total world population has risen.
It is becoming apparent to demographers that economic development leads to a gradually falling population growth rate. In some highly-developed European countries (as well as in Japan), the population growth rate has even turned negative — meaning that in the absence of immigration, their population would actually be shrinking.
And second, population growth, even where it is positive, is simply not very robust — not robust enough to sustain the returns for which investors are looking.
Productivity Growth: The Holy Grail
Since population growth is a small component of real GDP growth, the overwhelmingly important factor for investors to consider is productivity growth — that is, growth that comes not just from an increase in the number of workers and consumers, but that comes from an increase in how much each worker is able to produce.
Wikimedia Commons
The graph above shows the cost of a three-pound chicken expressed in terms of hours worked by an average non-supervisory worker in the U.S. — that is, how long would someone have to work to purchase that chicken? The steady improvement over the past century came from productivity growth. Productivity growth makes goods and services more abundant and accessible to consumers — and drives corporate profits for the firms that produce them.
Key Factors in Productivity Growth
Productivity growth rates rise and fall in cycles, just as overall economic activity does. We believe that the present phase of the economic cycle favors rising productivity growth, and we will be attentive to the factors that support it — or work against it. We believe that attentiveness is necessary to enable investors to correctly identify the stage of the economic and stock market cycle.
The first major component of productivity growth is technological innovation. Technological innovation has of course been a key growth driver during all of human history — but it became critically important during the initial phases of the industrial revolution. This was particularly due to technologies allowing manufacturers to exploit new energy sources.
Those two factors — the application of technological innovation to the provision of goods and services, and the discovery and refinement of new energy sources — are key elements of the productivity growth acceleration we believe is getting underway in the U.S.
Computers and the New Industrial Revolution: Big Data, Robotics, and AI
The revolution in computer technology is ongoing, and has been since the 1970s, but it is far from exhausted. One recent sub-revolution, the internet, is now about 20 years old, but more recent aspects of the computer revolution — such as big data analytics, robotics, and artificial intelligence — are really just beginning. (This is why the advent of computing has been heralded by some analysts as a “third industrial revolution” after the initial industrial phases of the 19th and 20th centuries.)
Shale Energy
Besides the cutting edges of the revolution in robotics and AI, we also note the tremendous significance of the shale energy boom. We have made many observations in our letters letter about the astounding effects of new technologies for exploiting shale oil and gas reserves. Even just in the past year, we have seen refinements of shale drilling techniques which promise to bring the U.S. closer to energy independence — earlier than the most optimistic estimates from the beginning of the shale revolution.
Energy played a crucial role in the long term productivity growth of the world economy, and the ongoing shale revolution in the U.S. promises to give the U.S. economy a significant edge in the coming years. We anticipate that technological revolution in this sector is far from finished — and that further improvements will result in still further acceleration of reserve and production growth.
Other Sectors
Of course these two sectors are far from the only sectors where ongoing technological revolutions promise accelerating productivity growth. Two additional sectors where we have seen extraordinary technological changes are biotechnology and materials science — and we expect that more productivity-enhancing innovations are in store.
So Why the Anemic Recovery?
With these extremely bullish technological factors in place, the question remains why the recovery from the Great Recession has seen historically low productivity growth.
The graph below shows annual productivity increases for the average U.S. non-farm worker. Recessions are shaded in gray. You can see that a recession is usually followed by a steep improvement in productivity. This is “creative destruction” at work — inefficient business are destroyed, and survivors become much more lean, healthy, and vigorous.
However, you will observe that although the familiar pattern did occur after the Great Recession, it is not as vigorous as other recoveries.
Source: Federal Reserve Bank of St Louis
In short, technology is not the only factor. Other factors must be favorable in order for technological innovation for occur — and for its benefits to be realized. We discuss these below — as well as our reasons for believing that some of these other factors may be set to improve in 2014.
Social and Legal Factors in Productivity Growth
Technological innovation does not exist in a vacuum. It exists within a social and legal framework. The proper framework — and its proper functioning — are essential if technology is to produce the greatest productivity benefits.
This is the reason we pay attention to global political and regulatory frameworks. Our analysis embraces political-economic factors, as well as technical and fundamental analysis.
From this perspective, we can see some of the reasons why productivity growth has lagged historical levels during this recovery. It has been held back by other factors, even though technological innovations are extremely favorable drivers.
The Rule of Law
We believe, along with Oxford economic historian Niall Ferguson, that one of the significant features of western cultures is their upholding of the rule of law. In essence, the rule of law means security in one’s person and property from theft, whether from other citizens or from corrupt and unscrupulous government.
Where such rule of law exists, it permits the accumulation of productive capital; where the rule of law does not exist or is impaired or challenged, the accumulation of productive capital is also hindered. This means that whatever technological advances there may be in theory, cannot be realized to their full extent in terms of productivity growth where the rule of law is challenged.
This factor, we believe, is more bullish for the U.S., Europe, and Japan than it is for China, Russia, and many other parts of the developing world. Any movement in U.S. politics materially advancing adherence to the rule of law will prove beneficial for productivity growth.
Regulatory Organization
A progressive political agenda saw the pendulum swing to the left during President Obama’s first term, and led to a greater emphasis on the government’s role as a promoter of economic equality and a redistributor of wealth. We do not view the Obama administration as challenging the U.S.’s established rule of law, but increasing the government’s involvement and intrusiveness. We do believe that the pendulum may actually swing away from increasing regulation during 2014. Any lessening of the regulatory burden that U.S. businesses must face, would permit greater productivity growth.
A further factor affecting productivity growth is the balance between regulation and deregulation. There are times where less regulation can be good for the economy, and at other times it can be damaging. For example, a major cut in regulatory burden combined with tax incentives for investing in new companies implemented in the 1980s aided in unleashing U.S. productivity growth in the 1980s and 1990s. On the other hand, after undergoing significant deregulation in the late 1990s, the financial sector undoubtedly laid the foundation for the crisis of 2008 and the Great Recession — making it obvious that more and better regulation was required. In our view, what is necessary is moderate and intelligent regulation.
Conflict
A final factor worth considering is war. In the past, we are sad to say, war has often been a driver of productivity growth. This is probably because many wars — such as the “European civil wars” of WW1 and WW2 — served to clear away negative and oppressive regimes and helped establish the rule of law and beneficial regulatory frameworks. The establishment of the EU, the rise of Japanese economy, and the increase in global trade and cooperation that followed had their direct roots in European and Japanese determination not to repeat the horrors of the world wars.
More recent wars have offered fewer productivity gains. The more recent conflicts, especially those that have occurred during the global “War on Terror,” have not offered much in terms of improved productivity. They have raised a spectre of an energy shortage for the developed world, and in doing so, they helped focus U.S. energy production companies on the opportunity for producing more energy within the U.S., but in general, they have not added to global productivity.
Manufacturing Growth Trends Up
We were pleased to see manufacturing data finishing 2013 strongly — with an especially strong showing by one sub-component, new orders. Rising new orders suggests labor market improvement as well.
Summary: Increased Manufacturing and Productivity Gains Set a Bullish Tone for 2014
We believe that the fundamentals are in place to support accelerating productivity growth in 2014, and that this growth will be the backbone of market performance in the coming year. And as we have observed before, we have already begun to see data points supporting our thesis. We believe the market is a leading indicator of the recovery of “animal spirits,” and that companies burned by the Great Recession are ready — and are already beginning — to ramp up capital expenditure.
(Texas, of course, has been one of the prime beneficiaries of the shale revolution — so it was already “primed for launch.”)
And of course, we have the historical positives which we have been commenting on for months — historically low inflation, an improving labor market, and still — despite the initiation of the expected Fed tapering — accommodative monetary policy. We will be watching out for higher interest rates; in their absence, the U.S. stock market should perform well for the year.
[Related: Long-Term Outlook Still Bullish; Expect Correction to End With “Intense Selling”]
Source: Investor’s Business Daily
Average Regional Capex Plans by Federal Reserve district — First and Second Half of 2013
Chinese IPOs a “Minefield”
In October 2012, the discovery of considerable fraud and misconduct in newly public Chinese companies prompted the central government to shut down the mainland’s IPO market. With new a new regulatory framework in place — part of the raft of reforms put out by Party leaders last year — that freeze will soon thaw.
Almost 800 companies have applied to be newly listed on the Shanghai and Shenzhen stock markets. Analysts expect the first slate of offerings primarily to include large state-owned enterprises. We expect these will be very high quality offerings in terms of the risk of corruption.
The government has very strong motivations to avoid the problems it experienced in 2012. Part of the regulatory change is intended to enhance enforcement mechanisms by using more market reliance. Under the previous regulatory regime, the China Securities Regulatory Commission (CSRC) controlled all aspects of the offering process, including pricing and timing. Now, their function will just be to ensure the applications meet regulatory requirements, and the companies and their underwriters will determine pricing and timing. This will allow the central government to concentrate on those underwriters — and penalize them for misconduct.
Nevertheless, analysts are not sanguine about the prospects for listings by honest companies. They point out that after the first tranche of offerings, the sheer number of companies going public causes them to question the thoroughness of the government’s vetting process. In spite of the new regulatory regime, and in spite of the government’s anxiousness to see that it goes smoothly, the fact remains that China’s business culture implies higher risks than in the U.S and other developed markets.
Effect on U.S. Markets
The effect on U.S. markets is likely to be muted. For now, equities traded in Shanghai and Shenzhen are available to non-Chinese citizens only through the vehicle of mutual funds run by government-approved foreign investment houses. A spate of offerings on these exchanges may affect Hong Kong, but will therefore have little direct effect on other markets — except that it may pull capital away from some Chinese stocks listed in the U.S or elsewhere.
Our broad view on China remains the same. We watch it as a barometer of the global economy, but for now, with a few specific exceptions, we are not interested in owning Chinese equities. We will watch the efforts at regulatory reform and towards the rule of law that continue to develop from Xi Jinping’s administration.
For more commentary or information on Guild Investment Management, please go to guildinvestment.com.
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