Telecom Watchlist / Industrial Evolution

Posted on December 15, 2004 | Leave a comment

There are clear innovations and implementations of current technology that can be safely called inevitable. One of these is ubiquitous wireless. We will be surrounded by secure broadband available by subscription, and compatible with wireless devices. Wireless devices compatible with broadband will include laptops, PDAs, phones, and electronics built into vehicles, etc.

If this is true, then some industries will join the buggy-whip industry:

Phone companies: why pay for phone service if your wireless phone is a tiny part of a cheap broadband service. Internet traffic incurred by telephone quality duplex audio is a drop in the bucket.

Cable providers: If I have access to streaming video straight from the media companies, why pay a cable company for anything? I might pay HBO for access to their channel, but there is no room for Comcast. The old line between broadcast and cable TV will be irrelevant.

Traditional and Satellite Radio: Internet radio is already catching on. When devices and wireless grow to maturity, there is no need for radio. Your music preferences will be targeted much more specifically than a set of 20 FM stations can satisfy, making the listening experience far better. The 2-way directionality of streaming radio (broadcasters know what IP addresses are listening, and when) make the value proposition for advertisers far better. Finally, the global nature of IP eliminates the problems of range and signal quality.

I don’t mean to sound gloomy, in fact, this is not a gloomy forecast. Leaving horse drawn buggies for cars was a major milestone in economic advancement. So too, leaving single-application wires for IP-based wireless broadband is going to be a great milestone. Communications technology is the lubricant of innovation and trade. I would expect global growth to accelerate into these advancements, and remain at a generally accelerated pace thereafter.

In this speculative possible state of the world, investors might benefit from:

underweight companies with revenues largely based on phone, cable, and radio

underweight traditional-radio advertising companies

overweight equities

overweight internet advertisers and IP-intelligence aggregators

overweight internet applications providers

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Posted in Early Stage, Economics, Investment, Stocks, Tech, The Future

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Agricultural Commodities

Posted on December 14, 2004 | Leave a comment

Recommended reading: Mark Faber’s analysis of agricultural commodities (MP3 Audio / Transcript).

Favorite Excerpt:

Some commodities may have overshot already, but agriculture is one of my favourites because food production in China has been declining. They have a water problem, and through the industrialization and the construction of golf courses there’s less land available for agriculture.

So I would go and look at some agricultural commodity prices that haven’t moved much yet like corn, soya beans, wheat, sugar. The Swiss drink 50 times more coffee per capita than the Chinese, but the Chinese have a population 200 times larger than the Swiss so their market is already larger. If they go to the per capita consumption level of the South Koreans, Taiwanese, Japanese – non-traditional coffee drinkers –
they will take up three times the coffee crop in the world.

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Posted in Commodities, Economics, Investment

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The Impact of the Investment Industry on the Economy

Posted on December 14, 2004 | Leave a comment

The rise of the investment industry drives up competition, drives down prices, and ends up subsidising consumer spending.

As capital has become more available, fixed costs have become less important in competitive industries. Overcoming a billion-dollar fixed cost to achieve gross margins above the market ROI has become commonplace. As investments lead to market expansion for companies, competition becomes more intense. The impact is even stronger with smaller fixed-cost businesses. As competition increases, profit margins fall and consumers are the ultimate beneficiaries.

When profit margins fall in an industry, companies may not achieve the ROI they expected, and investments grow increasing downside risk.

In this speculative possible state of the world, investors might expect:

  • more downside risk from the equity markets,

    (underweight equities relative to other asset classes)

  • more default risk from the corporate bond markets,

    (underweight credit risk relative to high credit quality)

  • more downward pricing pressure (aka lower inflation),

    (overweight bonds relative to other asset classes)

  • higher profit margins available to larger-cap companies

    (overweight large cap relative to small cap)

I left out another impact: as competition lowers prices for consumers, consumption goes up even if spending stays the same. More consumption means more demand for commodities. Supplies of commodities may grow, too, if investment improves mining, agriculture, etc. If demand growth exceeds supply growth, expect commodity prices to rise.

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Posted in Economics, Freakonomics, Investment, Public Policy

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Silver continues big 2-day drop

Posted on December 10, 2004 | Leave a comment

The past couple days of US dollar strength has corresponded with a sharp drop in the prices of many precious and industrial metals, among other commodities. Oil has rebounded a bit from its more recent downward trend. It feels to me like a buying opportunity.

Dollar weakness is not done yet; I don’t see the fundamental causes of dollar weakness subsiding for many years. Commodity demand should also continue to grow for many years. Together, these point to higher dollar denominated prices for commodities. Precious and industrial metals prices, in my view, are particularly well suited for growth. As the economic production of the globe grows, so too does the percentage of metals used in production. Silver acts both as a precious metal and an industrial metal. I anticipate it will see increasing demand from investors trying to avoid US dollar weakness, as well as manufacturers.

One of the great industrial benefits of silver is its exceptional heat conductivity. In an age of growing demand for electronics, heat dissipation is a core concern. Silver is a major ingredient in thermal conductive paste that is used to connect heat sinks. In some cases, recycling can recover traces of silver for reuse, but the demand is high and growing.

Silver is supplied in large part as a byproduct of mining for other metals. The mining of new silver has not grown much in the last 75 years. As the US Gov’t has depleted its silver reserves, that supply has satisfied the industrial and investor demand to such a degree that the price has not trended upward beyond an inflationary-type growth rate. Low, slow-growth supply combined with higher, faster growth demand points to a good long term opportunity.

As always, a lot of things could go wrong with this story. The world could become enamoured once again by US investments, and drive up the value of the dollar. The world could experience a production slowdown, reducing the demand for commodities. Synthetic replacements could reduce the demand for silver in manufacturing. Precious metals could fall in favor with investors who shift toward more economically productive investments. All of these could hurt silver prices. But I like the odds.

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Posted in Commodities, Economics, Investment

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Commodities Outlook

Posted on December 9, 2004 | Leave a comment

Commodity prices are falling today, but don’t join the selling momentum.

Productivity is rising rapidly. Manufacturing techniques are being shared globally at a faster rate then ever before.

Almost 1/2 of the entire human population entered the global economy since 1990. Trade has opened up in previously closed economies. The new labor is bringing labor costs down globally, simultaneously raising per capita consumption by many multiples in many countries.

Low interest rates mean that debt is cheap. Equity investments are also readily available because taxes on capital are down.

To review: Productivity up, labor costs down, global demand up, and cost of capital down. The implication is a very large increase in commodity demand. Prices have already risen quite a bit in many commodities markets, but the causal factors are long-term, and we should expect the effect to be long-term as well.

Finally, if you are investing in commodities using US dollars (I know I am), then you should also consider the currency value. The dollar has fallen more against many major currencies than the commodity prices have risen. This implies that commodity prices have even further to rise.

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Posted in Commodities, Economics, Investment

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