Monday, January 20, 2014

Meeting Minutes


We had an awesome meeting at Houlihan's.  We had 4 attendees: (from left to right) VJ Arjan, Tommy Schultz, another who chooses to remain anonymous, and Ry Zamora also joined us later on.


CES 2014


Although we discussed the coming market environment, the highlight of our discussion was the 2014 Consumer Electronics Show in Las Vegas that occurred during the first week of January.  The convention lasted 3 days and there were about 150,000 attendees who were able to experience over 3,000 new products, which included everything from silicone toothbrushes and air drones, to curved TVs and butt-shapers.

Frankly, there were some products making their debut that have the potential to transform our lives over the next couple decades should these technologies become mainstream.  Here were some of the products that we discussed:


Oculus Rift

The coolest product at the show had the be the Oculus Rift.  If you haven't heard of this device and technology yet, you will very shortly.  It is a virtual reality gaming/experience. 

Please check out a video describing the experience below, it will blow you away:


http://www.youtube.com/watch?v=y-0tHVUjCbg

The graphics are so detailed and realistic that many users of the demo version after some time in the virtual world had trouble distinguishing reality from the virtual world.  The potential for this technology does not apply just to gaming, an industry that is going to be completely transformed by this technology, but it could be used, for example, for surgeons who want to perform surgeries from half-way around the world, or even an online virtual marketplace.


Toyota Hydrogen Fuel Cell Cars


Toyota made the astonishing announcement that it will sell hydrogen fuel cell models in 2015.  It is an enormous bet regarding the fuel for the future.  We all discussed how energy sources based on fossil-fuels and coal are, one, eventually going to run out, and, two, as they are considered highly pollutive agents, the prevailing trend has been to find an alternative, some of which have included electric, solar, and hydrogen.

Toyota's decision to choose hydrogen fuel cells is critical as they have deemed the energy source safe for consumers around the world, a product they say of testing this technology for the past two decades.  Also, as the world's largest car manufacturer, if they are successful in making this a mainstream energy source for automobiles, it is likely that other major car manufacturers like GM, Honda, Ford, and Nissan will follow suit.

We discussed the potential roadblocks to hydrogen fuel cells as well as well.  Tommy remarked how hydrogen molecules, in order to be used as fuel, need to be in a highly compressed, cold, liquid state.  It takes a good deal of energy to keep hydrogen in this compressed usable state.  Should it become uncompressed, there is the risk, albeit small, that it can become flammable (note the Hindenburg accident of 1937 below).


The greatest roadblock may be that consumers can only refuel at hydrogen fueling stations, which would mean that there would be an enormous expense involved in building these all over the country and hence may not be economically viable.  There are already EvGo electric filling stations across the country that Toyota's hydrogen fuel stations would be competing against. At the moment, Toyota has plans to build hydrogen fueling stations only in California. 


(EvGo electric filling station)
If, however, hydrogen fuel becomes mainstream, it may be extended so far as to even be used to power homes.  

It may be good to note that there certainly were a share of naysayers who said the same for railroads in the 1800s, and the automobile in the early 1900s.  The prevailing modes of transportation of the times slowly became obsolete.


4K


YouTube made the announcement that it will be investing heavily in Ultra-HD or "4K".  It is 4 times the number of pixels on a Blu-Ray movie.  There are so many pixels, in other words, each dot per image is so small, that critics have argued that the human eye is simply incapable of seeing all of them.  An example this stunning video resolution is attached for your viewing below (make sure to turn on the highest resolution available by clicking on the settings button):


Netflix also announced that it will stream movies online in 4K on new TVs coming onto the market in 2014.


Samsung S5

Samsung is possibly deliberately leaking information about its new phone, the S5.  Rumorville has it that that its new S5 phone, which is probably going to debut or even be released in March, will have an iris scanner.  So instead of using your finger to unlock your phone or entering a certain password, the phone unlocks by scanning your iris - pretty nifty.

This technology, if it is indeed implemented, presents a quandary from a legal standpoint.  Tommy mentioned that according to a recent ruling by the Supreme Court, agents of law enforcement can legally coerce a person to release what they have (fingerprint, iris scan, etc.) but cannot coerce what someone may know.


All these technological innovations and progress makes one wonder if the cinematic world of Star Wars and Star Trek is really that far away from happening in real life.  Does the story of mankind end up being an Orwellian world after all?


The Rise of Women



Tommy explained to us how the world of the future is likely to be dominated by women rather than men. (By the way, in defense of women, VJ agreed wholeheartedly as he felt that it was high-time that men got their proper due after millenniums of gender subjugation and impothe patriarchal society.) 

He argued that the world economies are shifting from a manufacturing to a service-based economy, which fits nicely with the skill sets that women currently provide.  There is further proof in the widening gender gap of college admissions - currently the ratio is at 60% for women and 40% for men.  He continued that with more and more women entering the workforce, the gender pay discrepancy will eventually disappear, and women will hold equal if not greater sway than men.



According to the book, The End of Men by Hanna Rosin, this paradigm shift will lead to a complete transformation of the institution of marriage.  Several millenniums ago, from the hunter-gatherer era up till the 20th century, women were not able to support themselves, whether it required hunting for animals or working machinery in factories.  
Therefore, the institution of marriage for women was one in which they "traded" sex and companionship for security.

However, with the advent of the service-based economy and the invention of the soft-skills of the Technology and Information Age, women do not need to rely upon men anymore and can support themselves financially.  Therefore, single motherhood and a continued rise in divorce rates can be expected in the future.

Tommy explained that he wouldn't be surprised if women start having children in-vitro (so-called "test-tube babies") and that there may be a chance of birth defects over the course of several generations.


Cyber-attacks



Although we at the Scarlet Kings have touched on this topic several times in the past, we are seeing the reality of cyber-attacks and cyber-terrorism unfold.  In the first week of January, Target announced that over 110 million credit card numbers were stolen by hackers; Neiman Marcus made a subsequent announcement their systems were breached as well at the cost of over 40 million card numbers. 

These numbers are staggering - the thefts from just these two companies alone equals half the population of the United States.  The last such large-scale cyber attack occurred in 2007, when an underground hackers team called ShadowCrew led by now imprisoned hacker Albert Gonzalez, stole 45 million credit card numbers from TJ Maxx.

What is even more astonishing is that Target and Neiman Marcus both admitted that these hackers have had access to their databases for several months, perhaps even years, before the breach was caught.

VJ asked the group, who picks up the tab for the fraudulent credit charges and even slew of lawsuits that will very likely ensue.  Tommy mentioned that if companies have security standards in place according to the Payment Card Industry Security Standards (an open global corporate security council funded by American Express, Discover, JCB International, Mastercard, and Visa), then the card carriers would carry that load; if companies' security standards are not up to snuff, then they take on the liability.

Jamie Dimon, CEO of JPMorgan Chase, recently issued a clarion call to attention regarding this matter:

"It is absolutely essential for the legitimate businesses across the world to finally wake up to the cyber security reality that is confronting them right now.  The Target and Neiman Marcus breaches are just the tip of the iceberg.  They are going to continue to pick off the weakest elements."

The financial repercussions resulting from possibly decade-long lawsuits even have the potential to ruin not only the company from which the theft occurred but the card carriers as well.


Economic outlook for 2014



We discussed the market environment for the coming year.  One thing we all agreed upon was that it would be a rare occurrence indeed to top off market returns from 2013.  The consensus is that although the economy will grow, it certainly won't like it did last year, and in regards to share prices, there could even be a potential decline or correction.

Although, there may be reason to believe that the economy continues on to new highs and that the recovery in housing may continue to spur growth in the overall market, there are warnings signs on the horizon as well.

- A recent Barron's article (source listed below) suggested that the aggregate analyst expectations are perhaps too optimistic, and that it is more likely that the market will slow down its growth compared to last year.  Ultimately, share prices are dependent upon investor expectations and if investor expectations are set higher than what reality may warrant, the reality will eventually sink in, and will lead to eventual lower share prices. 

http://blogs.barrons.com/stockstowatchtoday/2014/01/10/stocks-here-comes-the-fear-again/

- The big news last week was payroll numbers, which showed that the U.S. added just 74,000 jobs in December, well below the 200,000 economists had predicted.  The unemployment rate fell to 6.7%, but that may have been due to the amount of people leaving the workforce (if they are considered "discouraged workers" and have stopped looking for a job altogether).

Deutche Bank's global head of foreign exchange, Alan Ruskin, mentioned that if anything he sees "faster unemployment rate downward trend much more than weak payroll growth" due to a slide in the participation rate, which may overstate the strength of the economy.

- There is also concern of the time this bull market has lasted.  As Jim Stack, President of InvesTech Research, recently stated, "over 82 years there have been 15 bull markets; the average duration or life span of these previous bull markets has been 3.8 years, and the vast majority of bull markets have ended between 2-5 years.  So not only is the current bull market a full year longer than the norm, it is about to become the fourth longest bull market since 1932.  If that doesn't make you nervous, it should."



Certainly, there may be sectors that could be poised for a rebound.  VJ mentioned that he may see a continual correction coming in emerging markets and precious metals, which have under-performed U.S. assets over the last year, as a good buying opportunity.  

Several of the emerging market countries (Brazil, India, Indonesia, Turkey, and South Africa) will have major elections.  It may provide the catalyst that could send emerging market shares lower.  

There is also the looming question regarding China's bubble-like property prices, which is not indirectly being acknowledged by the Communist Party of China.

At the moment, he sees that Turkish (ticker symbol: TUR) and Chilean (ticker symbol: ECH) shares have been beaten down due to changes in government policies and volatility in the currency markets spurred by policy decision by the Federal Reserve. 


(STRATFOR's Post-China 16 new emerging economies)

He also sees that Africa may start to make headlines over the next year.  African markets have historically been shunned by Western investors due to the enormous political uncertainty and rampant corruption that has plagued its people for decades.  However, according to global intelligence agency STRATFOR, there may be pockets of stability developing that could lead to prosperity for its markets, particularly Kenya, Tanzania, and Uganda.


Potential Investments

Here were some potential investments that were discussed:

Subsea 



Ry mentioned this oil and gas drill constructor as a value play.  According to his valuation, a fair price for the company would be at $21 per share.  It is currently trading underneath that target, at $19.35.

Medicinal and Recreational Marijuana companies


Speaking strictly on its merits as an investment and without condoning the substance, VJ mentioned that the legalization of recreational marijuana in the state of Colorado and Washington over the last couple weeks (with California to follow suit shortly) has some huge potential for profits.  Although there are legal issues laden with the use of marijuana that may come to loggerheads soon as some states accept the use of the drug more than others, and some do not tolerate it at all, once the drug becomes mainstream, it is a matter of looking out for the company or companies who figure out how to make tons of money from it. 


The next meeting will be on Sunday, February 2nd, 2014.  (Yes, it is the same day as the Superbowl, but may I remind you that gametime will be at 5:30PM...so you can still make the meeting : )  )

For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com

Also it seems that there are many domestic and international readers who are following our blog posts not only in the United States but all over the world including Europe, Latin America, and Asia. If you wish to be added to our email list, please email at scarletkings@gmail.com

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