Zeynep Tufekci has a great piece in the Atlantic about the COVID-19 mutation first documented in the United Kingdom. Like I her, I discounted the initial news because viruses mutate and there have been many “doomsaying headlines” in the last year related to virus mutation.

To understand the difference between exponential and linear risks, consider an example put forth by Adam Kucharski, a professor at the London School of Hygiene & Tropical Medicine who focuses on mathematical analyses of infectious-disease outbreaks. Kucharski compares a 50 percent increase in virus lethality to a 50 percent increase in virus transmissibility. Take a virus reproduction rate of about 1.1 and an infection fatality risk of 0.8 percent and imagine 10,000 active infections—a plausible scenario for many European cities, as Kucharski notes. As things stand, with those numbers, we’d expect 129 deaths in a month. If the fatality rate increased by 50 percent, that would lead to 193 deaths. In contrast, a 50 percent increase in transmissibility would lead to a whopping 978 deaths in just one month—assuming, in both scenarios, a six-day infection-generation time.

The variant now being called B.1.1.7 is thought to be 50-70 percent more transmissible. I find myself in the unenviable place of wishing for just the regular, old-fashioned 2020-version of COVID-19 as we enter 2021.

As she notes, time is of the essence. Rapid vaccine dissemination is our silver bullet. We should prioritize the first dose.

A more contagious virus is an outsized risk for 2021.

Apple released their FY 2016 first quarter results today. Here are the summary data and some updated charts derived from those data. Here are 10 take-aways:

  1. It was the biggest quarter ever for iPhone unit volume (74.779M). The trailing twelve months (TTM) for iPhone unit volume is slightly above 4Q2015 and also the highest it has ever been. TTM is often used to gauge the rate of momentum and determine if it is slowing or accelerating.
  2. While iPad unit volume is up quarter-over-quarter, the TTM declined further in 1Q2016.
  3. Total unit volume for iPhones + iPads + Macs turned negative on a year-over-year basis for the first time ever.
  4. Total revenue volume for iPhones + iPads + Macs turned negative on a year-over-year basis for the first time ever, but total revenue which includes services and other products remained positive on a year-over-year basis.
  5. iPhone’s share of quarterly revenue increased from 63% to 68% – roughly inline with 1Q2015. The all-time high was 70.7% in 2Q2015.  iPad’s share of quarterly revenue increased slightly on a quarter-over-quarter basis, but is down about three percentage points from 1Q2015.
  6. For the first time since 3Q14, the average selling price of iPads increased on a year-over-year basis.
  7. Globally, Greater China experienced the greatest increase in revenue on a year-over-year basis (13.8%). Greater China remains roughly 24% of total revenue.
  8. as Apple illustrates in their supplemental material, currency had an impact on these results. Adjusting to constant currency,  overall revenue would have been up 8% instead of the reported 2%. Revenue growth in Greater China would have been up 17% instead of the reported 14%. Revenue for Europe and the Rest of Asia Pacific would have been up 18% and 19% respectively instead of the reported 4% for each market.
  9. Apple reported an active installed base of 1 billion devices that have been engaged with Apple’s service within the past 90 days.
  10. Apple provided 2Q16 revenue guidance of $50B to $53B – the first decline since the birth of the iPhone in 2007.

Apple reports Fiscal second-quarter financial results after the close of the markets today and so brings the week-long exercise where pundits spend the first half of the week talking about what Apple will say followed by the second half of the week where the selfsame pundits talk about what Apple said. Here’s some food for thought:

Apple has enjoyed a tremendous run and each subsequent quarterly result is more heavily scrutinized than the last. It has been 11 years since Apple reported a year-over-year decline in revenue. That simple statistic sums Apple’s “big” problem. It is a problem all large companies face – how to produce the growth rates once enjoyed now that you are grown. Eleven years ago, Apple reported quarterly revenue of $1.48B. That figure has grown 30-fold over the subsequent years. Analysts today are looking for $43.54B – slightly lower than a year-ago.

Last quarter iPhone sales represented about 56% of total revenue. By far, the largest share of company revenue. Analysts are expecting 38.2M in the quarter – with a range of 34M to 43M. To beat consensus, I think Apple will need to have shipped more lower-end models (4S and 5C) during the quarter. This will show-up in the average price of iPhones sold during the quarter. But it will also point to traction in emerging markets – places like China and India – so I think Apple will tout this fact if it materializes. Geographic expansion is how most large companies grow (think Coke and Pepsi) and Apple will need that within their arsenal in addition to any new product classes (read: wearables) or service sectors (read: streaming services, mobile payments) they might enter over the next two years.

In the year-ago quarter, Apple sold 37.4M iPhones so the average expectation of 38.2M represents a roughly 2% year-over-year increase. Everything I’m tracking suggests the first calendar quarter of 2014 has been dismal for tech. I take the under on iPhone sales and think the figure will be close to 37M for the quarter.

Last quarter, iPad sales were the second largest share of total revenue – representing about 20% of total revenue. The current consensus quarterly estimate for the iPad is 19.3M – with a wide range between 15-22M. Again, everything I’m watching suggests a pretty strong headwind in 1Q14 for spending on consumer tech. There are also a number of items specific to the tablet market. Lower tier and lower priced tablets have continued to gain momentum as the market has matured. These tablets are getting better and in an expanding set of use cases are “good enough.” Moreover, tablet ownership in the US is approaching 50 percent. Households are holding onto tablets longer or buying secondary and tertiary units for the household. I take the under on iPad sales and expect a figure closer to 17M – a year-over-year decline of about 13 percent.

Here are some historical slides that I’ll update once the results are in later today. 

With the recently past U.S. government shutdown I came to the quick and uncomfortable realization that the government is far to heavily integrated into my daily life.  I was in Europe, Africa, and the Middle East for most of the U.S. Government shutdown and still felt the impact. While in Paris I used my one free weekend day to visit Normandy – where I found the U.S. cemetery closed.

We all saw the reports of the potential delays in “government services” like approving new smartphones or verifying pilots are sufficiently trained to fly. My favorite article during the shutdown was found in the Wall Street Journal.Skateboarders See a (Kick)Flip Side to the Government ClosingWith Washington Plazas Empty and Patrols Down, a Banned Sport Is Suddenly On.

Politically, I’m a classical liberal. I believe balance can and should be found between being fiscally conservative and socially responsible. As an economist I understand the implications and repercussions of sequestration measures but I also believe these are temporary imbalances needed to drive us more closely to the classical liberal state I believe is optimal. The “market” won’t do it perfectly and timing is always questionable, but eventually we will get the desired outcome. I don’t need the government checking and approving everything for me before I use it or buy it. I will – as many do – essentially free ride off of the market. I’m not convinced we need the government – our government – influencing the smartphones we use or where we skate.

I serve on the Board of Directors for a local youth baseball program. The program runs a small concession stand. They grill hot dogs and hamburgers – sell chips, candy, and cold drinks. In the past they’ve had to be “certified” by the Fairfax County Health Department. This year they received notice that “Effective July 1, 2013, a Health Department Permit to Operate will no longer be required to serve food for a youth athletic concession stand. In the past, the Health Department has conducted food safety workshops for volunteers who work at the concession stands.  It is no longer required that volunteers attend food safety workshops.”

This development was probably driven by budget cuts.  I hope it was.

I’m not convinced even full fledged restaurants should be inspected by health inspectors. If someone gets sick – word will get out. This is especially true today. News travels fast in the digital age. Review sites and social networks will ensure the problem is rectified or the establishment will simply go out of business. Arguably – digital also has a longer half-life than a sign hung in the window by the food inspector. Restaurants today really can’t afford one bad digital review. A digital review hangs in the window forever.

I don’t believe capitalism always gets its right. Life is messy.  Solutions – meaningful solutions – require a good degree of altruism. This requires people – not institutions and at the root of markets are people. Agents working out their destiny – and implicitly providing information and value to others.

Following successful CES Unveiled events in London, Paris, and Tel Aviv – I spent 3 days in Ethiopia.  It was my first trip back to Africa since 1999 when I was in Egypt and it was really my first trip deeper into the heart of Africa’s Africa.

A few quick thoughts from my three short days there.

Africa is Massive. The land mass is overwhelming. You know it intuitively. But only really grasp the enormity by being there. China is 3.75M square miles. The United States is 3.79M square miles. Africa is 11.76M square miles.

Africa is Growing. Certainly no surprise to anyone. Africa is growing. Ethiopia is growing.  Ethiopia’s GDP is averaging 10-11 percent annual growth over the last decade. This growth – itself a confluence of factors – is producing numerous intersecting outcomes.

Africa is in transition. As a result of its growth, Ethiopia and Africa broadly are transitioning quickly. This was clear in Addis where you’d catch glimpses of goats being herded across busy city streets.

China is colonizing Africa. Of course I’m not suggesting colonization in the traditional sense, but the presence of China was felt during my three days in Ethiopia. I saw a number of Chinese facilities. I saw hospitals built by the Chinese. I saw Chinese cement factories. I was told the major road project outside of Addis had been completed by the “Chinese.”

A few personal observations:

Americans generally misunderstand the geography of Ethiopia. Americans generally recall the numerous commercials from the 1980s depicting a country ravished by drought and as a result I think many picture an arid country. While it is true that over 400,000 died during the widespread famine that affected Ethiopia and Eritrea from 1983 to 1985,  I think most Americans fail to recognize the influence government policies and human rights abuses had – causing the famine to come earlier, strike harder, and extend further. I flew into Addis, but traveled as far south as Hawassa into the Great Rift Valley. I was surprised by the tropic-like environment – with a large number of lakes and rivers.

Addis is the 3rd highest capital in the world and walking towards the outskirts of the city by the U.S. embassy, you could feel (and see) the gain in elevation. Ethiopia has peaks over 14,000 feet, but surprisingly these never appear to get snow.

Diffusion of innovation in practice.  In Ethiopia I traveled to a small village outside of Shashemene. There a farmer walked me around his assorted plots of land where he was growing a number of grains (teff) and vegetables (corn). He showed me a “new” form of planting he had learned from a few Americans involved in agriculture and he had began employing the “new” practice in the last year or two. He told me Ethiopian farmers typically employed broadcast sowing where the seed is spread across the field.  The “new” form he showed me was row sowing where the seeds are planted in rows. He said the yields for this “new” form of planting are much better than broadcast sowing and he was teaching other farmers how to do it. Of course, American agriculturalists have known this for sometime and the technique has even been diffused for decades to backyard family gardens.


















The summer starts and ends with a holiday.  With the latter holiday now behind us I thought I’d take a moment to provide an update on my views of the current state of the financial markets.

On August 7th – I moved an additional 5 percent of my portfolio into cash – and am still considering moving a further share into cash. Stocks through August 2nd were up about 17 percent for the year – but my assessment continued to be that things were unstable and finally warranted a reallocation. Since August 2nd the market has been down around 4.49 percent. August was the worst month since May 2012 when the market was down 6.27 percent.  It is only the third monthly decline in the last 15 months. I don’t think it will be the last down month for the year.  I expect September and October could also be down months for stocks.

Even with August’s poor performance, stocks remain up 14.5 percent in 2013 – with the total return being 16.15 percent. The total return for stocks last year was 16 percent and I still question the markets ability to best that return when we finally close the book on 2013. I expect 2013 will be an up year – the question remains how up.

Underlying Fundamentals Lacking

The underlying fundamentals of the market remain unsatisfying. With 99 percent of issues reporting, 2Q13 earnings have set another record (both operating and as reported). While earnings estimates for 3Q13 have declined 2.1% since the end of June, they remain 2.6% above 2Q13 – consequently on track to set another record.

What I find unsettling is that the record earnings growth is coming not through sales growth but through near all-time high operating margins. Companies continue to report strong earnings because they remain extremely lean.  Operating profit margins remain near all-time highs – something I don’t believe is sustainable over the longer-term. Over the long-run I want to see strong sales growth.  As sales growth increases, companies will need to invest in order to capture those sales and as a result operating margin will – or should – decline.

Sales growth increased slightly in 2Q13.  Annual growth increased to 2.9 percent from 2.5 percent in the first quarter. Both figures are well below the average annual sales growth of 4.3 percent.  Operating margins remained near all-time highs and have thus supported record operating profits.

At the start of the year I had expected 4.3 percent sales growth for 2013.  Average sales growth.  I expected operating margins to recede to something closer to 8.7 percent.  I expected multiples to expand in 2013 to 16 times earnings.  Currently, sales growth is 2.9 percent with operating margins of 9 percent and earnings multiplies of 16.7 percent.  These relationships were even more pronounced when August started. I think the market today is close to where it will close the year. I could also see further downside, with the market closing the year in the 1560 to 1590 range.

Cycle Update

We are 53.7 months into the current bull cycle – dating back to March 9, 2009.  The average bear market lasts 56.5 months.  If you exclude the 1990 to 2000 bull market – which ran 113 months – the average drops to something closer to 51 months. I think this bull market has the foundation to be longer than average but by the end of the year we will be beyond the average life cycle of most bull markets. Looking to 2014 should raise many questions for investors.

Uncertainties Gyrate

The future of Federal Reserve leadership remains uncertain. Fed tapering – timing and extend – remain uncertain.  Watch the September 17th/18th Fed meeting for more on this – unless Friday’s employment report is horrible. Future Fed leadership remains uncertain. Consumer and corporate spending have remain tepid and questionable. Consumer spending is of key importance as we head into the ever-important holiday season. Egypt and Syria and who knows who’s next produce a tremendous amount of weight on the market. Mortgage rates have moved 150 basis points in only a few months.  Housing is slowing. Issues impacting the economy are questionable.

I don’t expect these uncertainties to ease before year-end.

The Smithsonian launched their first major crowdfunding campaign to support it’s first-ever exhibition on the yogic art. Crowdfunding is in many ways simply a way of pre-selling an offering. You can gauge interest before bring a product or service to market.  You can go direct to the consumer and avoid being handicapped by lack of distribution.

Moving forward I expect we’ll see more campaigns from the likes of museums and other public works organizations like PBS.  We’ve already seen crowdfunding used to fund movies. Because special exhibits often have niche but enthusiastic audiences or require altruism  crowdfinancing is the perfect fit for museums to not only raise necessary funds but also to determine if planned exhibits or other programs will have the anticipated draw.

Today most of these are unidirectional – museums create the campaign.  But I could also see a future where like-minded consumers join together to raise funds necessary to support programs and exhibits they are interested in – and thereby influencing museums and other organizations.  Creation and curation can steadily become bidirectional because crowdfunding can easily facilitate the creation of campaigns from either the producers or the consumers.

Yesterday Best Buy announced they were exiting Europe through the sale of the 50 percent stake in their European joint venture to their partner in the JV – Carphone Warehouse. The deal totals roughly $775M – 573M in cash at closing, $124M in common stock of Carphone Warehouse with a 1-yr lockup period, $39M in cash plus 2.5% interest paid on the first anniversary, and $39M in cash plus 2.5% interest paid on the second anniversary.

In November 2012 Best Buy held an Analyst and Investor Day I attended in New York City. When asked about International expansion, Hubert Joly had a very insightful response.  The typical mantra is international is where the growth is so if you want to grow you have to be growing into international markets and especially emerging markets. But Joly suggested instead one has to think deeply about what elements of retailing scale well and what elements don’t scale well.  I think he is exactly right.

Specific to BBY, Best Buy Europe was a net drag on annual earnings.  In FY11 the business lost $101M. But more generally, efforts like international expansion require focus and inevitably reduce focus on other elements of the business.  In retailing, international expansions don’t scale well. They have to be run essentially as entirely different companies.  That aspect has been a struggle for many retailers as they initially sought to open and expand their online business units. When they first entered the world of online retailing they treated online as a separate business than their core brick and mortar business.  Today retailers are beginning to think differently.  They are beginning to think about omni-channel approaches which should ultimately help them achieve greater scalability.  Some recent stats related to this from BBY:

  • 70% of BBY customers do research on bestbuy.com before buying in stores
  • 40% of bestbuy.com orders are picked up in stores

There is clearly a close relationship between what is happening online and what is happening within the confines of a brick and mortar store.  A similar relationship probably exists for most retailers. Consumers don’t differentiate and while there might be operational differences, retailers should also seek to minimize the differences they create between their different channels.  Digital generally scales well.

Retailers need to think more deeply about what scales well and what doesn’t scale well.

I’m traveling to Hong Kong today and as a general practice when traveling I typically try to read through a few broadsheets.  Before boarding I typically grab the Wall Street Journal, Financial Times, and a local paper for whatever city I’m in.  Reading through the weekend edition of the Wall Street Journal I was amused by and took note of the op-ed by Maine Governor Paul LePage wherein he wrote an appeal to gun manufacturers like Beretta (Maryland), Magpul (Colorado), and Colt (Connecticut).  These firearm manufacturers are currently domiciled in states that have enacted or are in the process of enacting tougher state gun laws.

While Congress is slowing moving its own enhanced gun laws foward, states are jumping out ahead.  Not an atypical move.  State legislatures often want to set national precedence and influence the national debate by enacting laws that are often stricter than their contemporaries or  existing laws at the federal level. This is pretty typical with social issues like same gender relations, drugs, obesity and food restrictions,  abortion, health care costs, energy efficiency, immigration, and guns.

As some states have moved quickly to enact tougher gun laws, Maine’s LePage fired the first shot (pun intended) at what is likely just the start.  States are quickly lining up on one of the two sides of the gun debate.

Governor LePage’s is worth a quick read: Beretta, Colt and Magpul—Come to Maine

Equity markets continue to reach for new highs in 2013 – up over seven percent year-to-date and hitting new highs on Wednesday. As enter first quarter earnings seasons, it seems like an appropriate time to share my expectations for equity markets in 2013.  Most of the following comes from the presentation I give in early March each year at CEA’s annual Economic Retreat. My assessment of current markets and expectations for 2013 haven’t changed significantly in the last month.

0313 sales growth

We are now four years into the stock market recovery.  Over this time, equity prices are up roughly 130 percent since setting a low on March 9, 2009.  Bull markets typically last 57 months and over that period are typically up 164 percent. With history as our guide stock prices should continue to increase for another year or so – presuming the current bull market looks like the past.  We likely overshot on the downside and could certainly overshoot on the upside – suggesting a longer and stronger bull market than history would dictate.  If history is our guide, the S&P500 would need to close at 1,786 in 9 months – up 13.9% from current levels – in the current bull market to achieve a return of 164 percent over 57 months.

The current consensus (bottom-up) estimate is calling for $112 in S&P500 operating earnings while the consensus (top-down) is calling for $111 in S&P500 operating earnings.  The average Wall Street estimate is wrong.

0313 operating margin

Let’s start with a simple approach to earnings estimates – operating earnings are a function of operating margin and sales growth.  With that as our guide, let’s take a look at some history. In 2012, S&P 500 sales were approximately $1092.  Operating margin was 8.9 percent in 2012 which equates to S&P 500 earnings of roughly $96.8.  Sales revenue grew 3.8 percent in 2012. As you can see in the chart, S&P 500 sales growth has averaged 4.3 percent since 1994 and is also evident, sales growth has started to slow over recent few quarters.
A similar story is true with operating margins. Operating margins have averaged 7.3 percent since 1994.  At the 2012 level of 8.9 percent, operating margins are near all-time highs.
Let’s now pull these two things together. The chart below lays out a simple earnings estimate approach.  As you can see, earnings growth and operating margin run along the axes. We are left with grid of possible S&P earnings. As the chart clearly shows, earnings expectations of $111-$112 requires certain sales growth and operating margin pairing.

0313 valuation approach

Sales growth of 11 to 12 percent paired with operating margin of 9.5 percent would produce earnings of $111 to $112 for the year. Similarly, you can achieve $111 to $112 in S&P 500 earnings with earnings growth of 6 percent and a higher operating margin of 10 percent.  Finally, with sales growth of two percent operating margin must increase to 10.5 percent.  The dilemma should be evident. To realize earnings in the $111 to $112 range, either sales growth must accelerate or operating margin must accelerate. Under either scenario, either sales growth must be above it’s current and long-run trend or operating margin must be above it’s current and long-run trend. Analysts have overestimated year-ahead S&P 500 earnings in 5 of the last 6 quarters.
More realistic expectations suggest earnings growth has some potential to possibly accelerate (and revert towards the mean), while operating margin declines slightly (and also reverts towards its mean). For 2013, I expect S&P 500 sales of $1,138 and operating margin in the range of 8.7 percent.  This results in S&P 500 operating profits of $99 for 2013.  With minimal growth in operating profit, most equity market appreciation will come from earnings multiple expansion and this is one area where I think expansion is warranted. Despite continued concerns of contagion risk from Europe, investors are starting to feel less risk averse.