Wednesday, May 24, 2017

Fractal And Fundamental Gurus Agreeing On A Gold Mega-Bull

Back in early February, 2016,  I floated the screwball theory about gold following a fractal replication of the prior gold bull market of 1971-1980.  Fractal factors are best corroborated by sensible fundamentals, regular technicals, and respected opinion.  But the fractal things have an uncanny way of happening with or without the more proper analysis.  The markets do tend to "misbehave" as Mandelbrot, the founding father of fractal analysis, claimed in his classic book "The (Mis) Behavior of Markets".

My article of February 14, 2016 "Gold's Bull/Bear Status" explains this fractal view, and suggested a big move up in gold was beginning.  This did indeed happen as gold went form $1100 to $1370 in just four months, a 25% rise.  We've been consolidating that move, but as I showed here, the technicals now suggest a resumption of 2016's move.

I thought I was the only one noticing the two parabola progression going on in gold's behavior, with only a fractal pattern to explain it.  But I've found somebody saying the same exact thing, but from a purely fundamental perspective.  Luke Burgess gives a fundamental explanation here .  I doubt he has ever heard of the fractal explanation, but to summarize this, from my article:


As I showed in the article, many mega bull markets around the world have exhibited this basic pattern of two parabolas separated by a big downtrend.  It shows up a lot in big bull markets, especially involving currency and/or gold.  It is this same pattern that Luke Burgess discerns from the fundamental factors alone.  He derives this chart, which he claims we are repeating in our current gold market:


Before we look at his reasoning, just who is this Luke Burgess?  According to Streetwise Reports, he serves as investment director to two high-end investment advisory services, Underground Profits and Hard Money Millionaire.  He is a weekly contributor to Wealth Daily and has written for StockHouse and Goldseek.  He is a frequent guest on "Trader's Nation", "The Bill Meyer Show", and other radio programs.  He co-edits Gold World with Greg McCoach.  He was long gold until the summer of 2011, when he sold all gold stocks.  Then in October, 2015, very near the bottom of the four year decline, he went long again.  He has been playing this gold bull like a violin, so his opinion should be considered.  And his opinion is this.  The gold bull did not end in 2011 and is "going exactly as expected.  Investors simply can't see the forest for the trees" with the biggest part of the bull market still ahead.

The above chart is from his July, 2016 Wealth Daily article. His fundamental explanation for the 1970s gold bull market involves not wars, politics, catastrophe, recessions, or stock market declines, but gold as an alternative currency.  Stage One was when Nixon closed the convertibility of the USD into gold in 1971.  The dollar index declined by 25% from 1971 to 1973.  This was accompanied by the Great Recession One, the first global recession since WWII. Few today realize that this was about as bad as 2008.  The Dow was smashed by half, and the Fed went beserk (for that day) and chopped rates.

Stage Two was where the Fed's action worked for a time, and the recession eased. Gold declined for two years.  But the Fed's policies "eventually caught up with them" (Stage Three) and the dollar sank and we descended into the inflation pit sending gold into the late '70s blitz.

Burgess sees the same story driving the gold market today saying that "Nearly the same exact scenario started in 2001 and continues to unfold before our very eyes today" with 1976 being analogous to 2017.  Starting in 2001, the dollar began a plunge, then the Great Recession in 2008.  Burgess shows a side by side dollar comparison for '71-'73 vs '01-'08 with the dollar falling 120 to 92 and 120 to 72.  This was Stage One.  The Fed went beserk again, only more so with QE this time. And for a long time, it worked and the Great Recession has eased, which is where we are today, near the end of Stage Two.  The whole process today involves way more currency debasement against a way bigger mountain of debt than in the '70s.  This may explain why the whole fractal winds up being a 2X scale up (time-wise) of what happened before.  That's what fractals are all about - same thing, different scale.

So will wreckless monetary policy catch up with the dollar and cause a gold bull, or will we get away with it this time and go peacefully into calm seas? Burgess thinks not:
"make no mistake about it...The Federal Reserve and corrupt politicians can’t save the value of the U.S. dollar or your hard-earned assets, even if they wanted to.  Take control of your own money and do what the smart money did in 1976 ... buy gold."
Burgess points out the big bankers' market for gold where they lease it out amongst themselves effecting the gold lease rate.  He says the banks control the gold price more than anyone, and when they do a shuffle with it, running up the lease rates, it often signals a major move.  Such a lease rate run up is occurring right now:


There was a run up of rates going into late 2015, in front of the big move up in the gold price in 2016.  Currently, the 12 month rate (black line) has run up to its highest level since early 2009, which was just in front of the gold price running up to the 2011 peak of $1900.  So the lease rates are signaling a major move.

Does all this mean we must suffer another Great Recession and bear market soon?  For some reason we have been conditioned to think of gold as a reverse day-to-day barometer on the economy and thus the stock market.  Short term moves can reflect this, and the financial media dote on every bit of economic data released as an explanation for gold and stock market going opposite ways.

But there is another guru, a fractal practitioner, who is saying both the US stock market and gold are soon going much higher, hand in hand.  He is David Nichols, publisher of The Fractal Market Report and, like Burgess, he has been playing the gold market like a violin for many years.  Last August, he wrote a piece where he looked at some currency challenged third world countries and points out that when a government gets too powerful and self-serving, "capital gets scared and scrambles to find any kind of home that isn't a manipulated currency, or a bank that could confiscate, or debt that will inevitably default".  Capital finds a home like stocks, even if the real economy is mediocre or even bad.  This he says, is why Argentina's overpriced stock market is soaring in defiance of real economic justification.  Sound familiar?  Nichols titled his article "The US Is Becoming Argentina" and thinks our stocks will fly for similar reasons.  A quick check of where Argentina stands among the nations, as well as the Venezuela market he mentions, shows these two at the very bottom of GDP growth with inflation rates of 40% and 741%.  This is, of course, the extreme end game.  But Nichols sees the US starting to play.

Gold, Nichols says, will be the destination of much of the capital flight.  In August, 2016, with gold at the top of its sprint last year, he said this (from the above mentioned article):
Gold is responding to the switch to tangible assets.  It's got some work left to do to put the multi-year correction in the rear-view mirror, but once that happens, the "hot money" will pour right back into gold.
Since that top last August, gold has indeed done just what he predicted it would do.  It has done many months of consolidation "work" that appears close to an end.  He says the next phase should be the hot money pouring right back into gold.

Do I agree with him about joyful days ahead for both the stock market and gold, contrary to conventional wisdom?  Well, one thing that strikes me as I look at the history of gold is that you don't have to have a lousy stock market to have a gold bull market.  You just have to have a crisis of confidence in currency.  This was true in 2001-2007.  Here you had a booming stock market and no recession - just a bad drop in the dollar and resultant climb in gold.

Investor confidence with dollars in the bank seems to be the overriding factor for what gold does.  As another example of this, consider the roaring 1920s.  Here we had a booming stock market and economy.  We also had a booming gold market as measured by the few major gold miners' stocks. The gold price was set by the government then, so the handful of big miners was the gold market. The stock market and gold miners were climbing hand in hand, but there was a growing threat to dollars in the bank:

Gold miner climb "A" saw Homestead Mining appreciate by nearly 100% from 1924 to 1929, others had similar gains - and it had nothing to do with a Great Recession or a bad stock market.  It had everything to do with waning confidence in dollars in the banks.

Note the complete void of banking problems in the above chart in the 36 year cycle after Bretton Woods.  That's because this global event put us on the gold standard.  But as the monetary safe haven it created began to come under duress in the 1960s from government dollar killing practices, a gold mining bull market ensued, even though there were no Great Recessions and the stock market was good.  The only miner index for that period was BGMI, Barron's Gold Mining Index.  Take a close look at what it did in this nonrecessionary period:
All we needed was dollar-dumb policy.  The gold market saw the handwriting on the wall far before the president had to officially close the gold "window" in August of 1971.  It was pretty much the same with the housing tom foolery of 2002-2008.

So do we absolutely have to have another Great Recession and stock bear market to go along with a booming gold bull market?  Absolutely not if history is any guide.  The bad stuff seems to happen after the gold bulls have seen it coming for years.

Wednesday, May 17, 2017

Gold Miners Are At A Technical Juncture To Watch

The gold miners have been in a limbo for months now, but that is approaching an interesting condition. To better appreciate just how interesting, it would be good to go back a couple of posts to "Will Gold Ride Again?" and read that first.

So what is gold doing now that's so interesting? The miners are replicating a breakout condition they did in early 2016. Back then, it was a breakout that ended the four year decline, now it appears to want to end a continuation pattern. This is the common consolidation pattern after a big move where the bigger trend is continued after a mostly sideways period:


Here we have the two pennant formations compared. The first was the end of the long four years of decline, then we had the sharp climb in 2016, then we have had the limbo going into 2017. If this breaks to the upside, it will have been the classic continuation pattern with a new bull leg ensuing, continuing the 2016 move. The A/D (Accumulation/Distribution) and CMF (Chaikin Money Flow) cycling is very similar. In both formations, there was a positive switch trend in place in money flow, and we are at the takeoff point in that cycling.

I've also shown what I call the MAPS divider (Moving Average Pair Separator) which is the best divider of bull and bear market I've found. This is the 140 day exponential moving average plotted with the 200 day alongside, the blue and red lines in the chart. All during the four year decline, the miner index kept below MAPS very consistently. Once the break occurred in early 2016, we had a brisk positive moving average crossover which has morphed into essentially no separation in 2017's consolidation. If the formation breaks to the downside, it will produce a negative cross and puts gold back into bear mode. If it breaks to the upside, it will keep the bull cross in place.

The forces that will move gold from here are many and complicated. If interest rates go up, the dollar is defended, the economy is OK, and gold goes down. But gold has historically gone up when rates start going up, as in the late '70s. We've had political turmoil in Britain, France, the US, and elsewhere, which should move gold up. But we had gold in bull mode before any of that came along - in the politically uneventful times.

I think the main fundamental controlling gold is probably its role as an alternative currency. That was the main concern in gold's bull market in the early 2000s as the debt/dollar situation grew worse. It was the concern after the financial crisis into the bull leg to 2011. And it is still probably the main concern.

Rick And Dave And Buster Are On The Same Beam.

If you've read my Forbes article on the new paradigm in restaurants and retail, as exemplified by Dave and Buster's, you will find what's happening at Rick's Hospitality of interest. I wrote an article on RICK back in 2013 at Seeking Alpha, and what they were about back then was certainly ahead of the curve in today's ongoing train wreck in retail. Just last week alone, Kohl's was down 9%, JC Penney was down 17%, Sears was down 12%, Macy's down 18%. The Rick's article was an exclusive and is available now with a Seeking Alpha Pro subscription. So I can't reproduce it here, but I'll comment on it.

The point of my Dave and Buster's article, as explained by Patrick Doyle of Domino's Pizza, is that if you are a restaurant or retailer looking to just serve good food or merchandise and prosper, you will probably be suffering in today's evolving environment, despite adequate offline consumer spending. "People still get out" as Doyle said. You have to also be serving up "experiential retail" as it is coming to be called. Rick's Hospitality, or Rick's Caberet as it was called before their name change, is all about just that.

Rick's is a growing restaurant/entertainment chain where the entertainment is "the most beautiful women in the world featured daily". It's a little like Hooter's but there's more fun with the girls. The dancers pay a "facilities use" fee to entertain and collect tips. They can make as much as $1000 in tips for a night's shaking of the booty. But before you dismiss them as a sleazy massage parlor that has somehow wound up a public company, be aware that no less than Forbes has not only put them on their America's 200 Best Small Companies List (they installed them at # 94) but they've also been written up at The Wall Street Journal, Fortune, Smart Money, and other places that don't normally cover massage parlors. They are simply some of the early settlers in the experiential retail frontier along with Domino's Pizza, Dave and Buster's and other's with the same idea - only their experience is a little more naughty.

And they combine naughtiness with alcohol, to make money, not trouble. In the tight margin world of competitive eateries, alcohol is everything. These beverages are market up more than anything on the menu. The study "Adding Value: Beverage Alcohol's contribution to Restaurant Sales Is Significant And Growing In Importance"  gives the numbers. Of the top 500 chains, only half deal with all the hassles of alcohol at all, and only eight are able to derive 30% or more of sales from it. Rick's is an elite player here with 40%. Alcohol at over 30% is sought after by everyone in the business.

This includes even the restaurant chain giant Darden. As I covered in my article, they are trying the new ideas too. I pointed out three comparables to Rick's:
The second sort-of comparable is Yard House Restaurants. This is a private seafood/pub combo with 44% of sales from alcohol and a focus on growth. They were snapped up by Darden (DRI) last year, who paid 1.8 times sales (compared to 0.8 for Darden itself) for Yard's 15-20% annual growth rate to add some punch to the Darden lineup.
Darden recruited them into their Specialty Restaurant Group, their SWAT team for future growth.
So the second of the quasi-RICK comps, Yard House, is also a case of blistering growth, but now available as an investment only in diluted form with DRI stock.
DRI has been performing well despite old style restaurant ("casual" dining) blues and the horrors of old style retail in general:


And so has RICK:


These charts don't look at all like most restaurant chains do nowadays.

But hasn't this been tried before - entertainment with meals? What about Buffalo Wild Wings and such? Well yes it has been tried here and there, and with great success. In my RICK article, I point out three comparables, BWLD, Yard House, and VCG. Eric Langan, CEO of Rick's has compared themselves to Buffalo in past presentations, with BWLD at 30% of sales from alcohol, Yard House is now in Darden, and VCG was merging with Rick's in mid 2010 after posting blistering growth numbers in the five years they were public! But the merger fell through, and the VCG chief bought up all the shares he didn't already own and it went private.

This new paradigm is not untested, and now several players are getting in on this new beam. And those that are able to execute geographical growth will likely be good growth stocks of the future. There is something of a store count barrier here at around the 30-50 store area where growth skills of management are severely tested, and parabolic growth ensues if they prove their skills there. I show this on a chart in the Rick's article for the history of Walgreens, Walmart, Lowe's, and Rick's. Dave and Busters is just beyond this barrier with about 80 locations, Rick's is at about 40. There will be many of the big chains trying to adapt their behemoths to the new concepts, but Rick, Dave, and Buster are growing with the right idea to begin with.






Monday, April 3, 2017

Will Gold Ride Again ?


What happened to gold the last six months could best be called being shot out of the saddle. But is it dead? If you look closely, it could be crawling back into the saddle to continue the crazy ride of 2016. Gold has been a bit schizophrenic lately, not knowing if it's a bear or a bull. Although thought of as a dog since Trump's election, it actually has outperformed all the Trump commodities YTD and has trounced the Dow by almost double so far this year - seeming determined to disguise its true identity.

Back on Feb. 14, 2016 as gold was threatening to go on a tear from its long 4 year slide, I published an article here, at TalkMarkets, and at Seeking Alpha called "Gold's Bull/Bear Status". To understand this update, you need to go back and read this. The article correctly suggested a rampage upward in gold, which is what it did throughout most of 2016. But are we still in the large scale twin parabola fractal pattern that was the premise of the article? Gold has a very strong tendency to follow fractal patterns, as do a lot of big bull markets, as I illustrated in the article.

I drew a broad sweep diagram of this twin parabola fractal over a year ago that predicted last year's gold fireworks. Where are we on that map now?


I have added the black dot to update this as of April, 2017. Despite all the short-term schizophrenia of the last few months, in the bigger picture, gold seems to still be on track to do a roughly 2x scale up of the 1970s gold bull market. If we are to replicate the previous gold bull with its downtrend in the midst of the parabolic rises, we need to replicate this:

And so far we are doing this:


The two downtrends look similar in that there is churning against the resistance early on, then a sharp resignation to the downward move well below the resistance, then a return to churning on the resistance again, which is where we're at now. MAPS is what I call Moving Average Pairs for the 140 day and 200 day EMA that I find is a good separator of bull and bear moves. If GLD does a convincing break to 125-130 soon with high volume, a second parabolic rise starts to come into play.

But it is so hard to imagine gold going into a big bull market when its natural enemy, higher interest rates, are surely on the way. We seem to be going in the direction of all of gold's natural enemies - a good stock market, a defense of the dollar, an improving global economy, and a political sea change in Washington similar to the Reagan Revolution of 1981 that accompanied the death of the previous gold bull.

But gold can be very contrary to what it's supposed to be doing. For example, you can have bull markets in both stocks and gold at the same time, as in 2002 to 2007. In 1979, the year gold went ballistic in the last bull, the Dow was actually up 4.2%. And as for interest rates, if the last gold bull market is any indication, we should anticipate ramping gold alongside ramping rates:



The price of gold is very complicated and contrary, and maybe something like the science of fractals
is the best guide to what it will do.

The lead practitioner of fractal analysis of gold that I discussed in my aforementioned article back in February, 2016, is David Nichols, who publishes the Gold Fractal Report. His short-term calls on gold are somewhat hit or miss, but for long-term moves (say over two years) his accuracy is uncanny. He correctly was saying for months in 2010, when silver and gold seemed unstoppable, that precious metals would turn into a major bear move, and he gauged the time to be February/March, 2011. Silver hit its blow-off top in April and gold closely followed with its top in August, and the great four year slide began.

What is Nichols saying for our present timeframe? In August he published an article with his call for two things - the US stockmarket and gold. In August, if you will recall, we had just suffered a brutal pair of sell-offs, one in late 2015 and the plastering of early 2016. This was before the election and few were thinking run away bull, no matter who won. Nichols bad-mouthed the bears and predicted a nice bull market in stocks:
They are expecting a repeat of 2008, with a deflationary spiral that sends assets crashing down. Many seem downright gleeful at the prospect of the market doling out a brutal punishment to those holding long positions. But that was last decade's battle. The world has moved on ...
And he had this to say about gold:
Gold is responding to the switch to tangible assets. It's got some work left to do to put the multi-year correction in the rear view mirror, but once that happens the "hot money" will pour right back into gold.
Since August, gold has indeed done some "work" just as he said, being shot out of the saddle and perhaps now clawing back to put the four year slide "in the rear view mirror" and setting the stage for gold's next run. Giddyup.


Friday, March 24, 2017

The New Paradigm In Restaurants And Retail

It's well known that the brick and mortar retailers are suffering in today's ebullient markets. The internet is changing the way we shop. And, it's changing the way we dine as well, giving a twin abysmal effect in the restaurant world. The restaurant stocks are generally flat and the big box retail stocks are falling off a cliff. People today are seeking a generous serving of digital experience with their meals as well as their merchandise.

A man with some thoughts on this digital-tom-foolery/food thing is the guiding light behind what has to be considered the most successful restaurant chain of our time. This outfit has seen its stock do over a ten fold gain the last seven years since Jim Cramer first recommended him as "bankable". I am referring to Patrick Doyle of Domino's Pizza, what Cramer has called a technology company that also happens to sell good pizzas.

From the Mad Money of 3/6/17, Jim Cramer interviewed Patrick Doyle, CEO of Domino's Pizza after they reported yet another stunning quarter from the badly suffering restaurant group. Cramer asked him about what he has dubbed the new stay-at-home economy, despite growing disposable income, and how Domino's is beating this new attitude. Doyle then relates how Domino's has used the new digital age and everyone's fascination with it to deal with what he sees as the "new" consumer, telling us that fully half of the staff at the home office of Domino's are technicians that oversee the new order options where hungry customers simply order food while on Facebook, Google, Netflix, or whatever. Cramer just shakes his head at this. As for "getting out" foot traffic, the traditional life blood of restaurants, Doyle sees a great new divide now developing in consumer-land. In his words from the interview:
I think what's happening, Jim, is there is a great convenience now ... what you're seeing is people still clearly go out, but it's got to be special. There's got to be something in a restaurant or retailer that's drawing people in, that's giving them this experience that's different than simply going in and buying ... In restaurants, if you're giving someone a really special experience, then I think you're going to continue to drive traffic into your restaurant ... I think if you've got a restaurant that's a sit-down restaurant that's not doing something really special, then I think you're going to hurt." 
Doyle noted that his company is one of the few that has gone from a majority over-the-phone to a majority digital operation. "That's not a long list" he said. Cramer responded, "It's not a long list, and you are at the top of it."

Investors tend to think of Domino's as the great leader in this march of eateries into the new digital entertainment world. But there is a much more obscure name that perhaps is even more of an example of this powerful revolution, and seems to be exactly what Patrick Doyle was talking about in the above quote. That name is Dave and Buster's. You've probably heard of them because they've been around since 1982, went public in 1995 and were taken private in 2005.

In October, 2014, they have resurfaced as a public company again with a new mission and the name Dave and Buster's Entertainment, Inc. with the Nasdaq symbol PLAY. And play is what now sets them apart - digital play. About half their typical store floor space is the latest and best digital arcade games. They renew about 10% of their games each year at a cost of about 2% of their sales. These videotronical games seem like so much foolishness to me, and I've never wasted a moment of my time with one. But I've learned to never underestimate how popular they are with everyone else and I take their investment implications quite seriously.

Dave and Buster's does the big screen TV sports thing as well, even being a corporate sponsor of the UFC. But from Buffalo Wild Wings to my neighborhood Applebee's, you see the bar/TV thing everywhere these days. It's the games that now are making Dave and Buster's "special" to those cocooned in the house, and as Doyle said above, this is drawing them out. How does all this show up in their results? Well, it has propelled them to an industry leading Average Unit Volume - and the games are why:
 (Source of all results images: Investor presentation)
 The 2% of sales going to buy the games each year is well worth it as it sends the unit volume soaring past virtually all of their competition. Soldier of Fortune at Seeking Alpha has an excellent article titled "Press PLAY On A Dave And Buster's Investment" from back in November, 2015 showing these investor presentations by the company - just about a year after PLAY began trading. The stock has gone from $37 to $60 since then. Mind you this was precisely during the big swoon in both retailer and restaurant stocks since late 2015. And this has everything in the world to do with Cramer's stay-at-home economy, a corollary to his FANG acronym (Facebook, Amazon, Netflix, Google) he invented some four years ago. Jayson Lusk, a food and agri economist has a blog where he describes the Restaurant Performance Index comparing it to food spending away from home:
Here we see the tale of woe for the eateries starting in mid 2015 - about the same time when PLAY's results went ballistic:

 

 The "spending away from home" in the previous chart appears to be stampeding away from restaurants in general and into Dave and Buster's - a clear case of highway robbery in market share. And the same could be said of Domino's, which has a TV ad out now imploring customers to not deal with them by phone anymore, even smashing, with a crane, a big box with a phone image shown on it. Deal with us by the internet, they demand in the ad.

The growth shown above remains pretty cheap with just a 2.7 multiple on the revenue and just 10.8 on the cash flow from operations, whose growth looks similar to the EBITDA cash flow. Forward PE is 24.8 per Morningstar numbers.

The results at Dave and Buster's really began peeling away from the restaurant group in 2013 while they were still a private company:



I suspect this was a prime reason for the public offering of PLAY in October, 2014. It was almost like offering a new public equity launched into a new growth story - just what IPO lovers like. And they are in the fast growth part of the curve geographically, having a fraction of the store count of most major chains, just 1.7 stores per state.



If the digital traffic draw is such a good idea, why won't everybody be immediately doing it? Well, the gradual use of about 2% of sales to refresh 10% of their games each year has produced something of a competitive moat for Dave and Buster's. Each of their stores has about 150 games. And Soldier of Fortune gives this estimate:
Any competitor wishing to enter the space at any sort of scale would be facing a massive capital outlay (I estimate $165-175 M) in order to match Dave and Buster's gaming arsenal.
And as if to play dealer's advocate to the gaming junkies, they dispense:
... a pre-loaded card that one swipes to play a given game, removing the headache associated with keeping track of the coins to play with and the paper tickets won. Importantly, this is an experience that is not easily replicated at home (or at a competitor, for that matter) - most people/restaurants don't have even one full-size arcade game, much less 150+ to choose from.
For their part, Domino's has, the last seven years or so, made the massive investment to make half their main office workforce internet technicians. It would be a stretch for any competitor to suddenly make that change.

The games habit is high margin. It produces a gross margin of 86% vs 73.4% for their food and a combined average total store gross margin for their nine chief competitors of 71.3% (2015 figures). Clearing away some bookkeeping issues and just looking at EBITDA margins:



Floor space is an item that makes the business model hard for competitors to copy. A Dave and Buster's store is something around 44,000 square foot, about what the first Walmart stores were. Even if a competitor wanted to dish out the near $200 million for the state-of-the-art games, where would they put 150 of them?

As the big box mall spaces currently being occupied by J.C. Penney, Sears, Macy's, and the like become available via hundreds of closings, something like a Dave and Buster's may snap up some of this space as they would divide it up. There isn't much competitive bidding at their store size as everything this big is looking to get out of their spaces.

In the '60s, big box was good, a mega draw. Now the big boxes are making dotcom their draw and dragging the big box as dead weight. Taking the average mall annual lease rate of $41 per square foot and applying it to a typical bigger Macy's being closed at something like 260,000 sq. ft. you have about $10.7 million a year being chopped out of a big store's profit before you even pay anyone to work there. That's bad when the per store TTM profit for Macy's is currently less than $1 million. And J.C. Penney and Sears are in much worse shape.

Moving into mall space vacated by a big box retailer isn't a new idea to Dave and Buster's. Last month, the Baltimore Business Journal reported them swooping into the space at White Marsh Mall left by a Sports Authority as that company collapses into bankruptcy. If a recent CNBC story is any indication, big floor space ventures are going to have their pick of vacancies as a historic wave of big box mall closings are on the way:
"I expect the closures to be worse, and I expect the malls to be hit more than any other shopping center type," Cushman and Wakefield's Brown said. His firm keeps a list of the major store closures announced each year. Until 2016, the highest number it had tracked was in 2010, when about 3,000 closings were announced. That number grew to 4,000 last year, and Brown predicts it will balloon to 5,000 this year. "There's no way around [it]," Brown said, referring to what he considers an inevitable drop in the occupancy rate this year. While many argue that turnover and other changes have always been a part of the retail industry, "the pace at which it's changing is more rapid than has ever been the case," Green Street's Sullivan said.
Mall owners like the big floor space "anchor" tenants,  and welcome big replacements when one closes. The many smaller tenants often have contingency clauses linked to the anchors, many times governing whether they stay or leave, and at what price. This gives an operation like Dave and Buster's some bargaining power. This mall opportunity is a two edged sword for Dave and Buster's. It affords them a fast and likely cheaper path to expansion, but it also gives their competition the same physical path to copy their business model and expand.

However, as mentioned above, Dave and Buster's has just a fraction of the store count as their main competitors, and they can more easily make a higher portion of their stores mall takeovers. And all their existing stores are already that big!  Their competitors have a great mass of stores too small to populate with games, and a big learning curve with them in new places. Dave and Buster's has 35 years of experience with the games.

They are already establishing a presence in the revolution as was noted in the 3/23/17 Investor's Business Daily article about how to "Amazon proof" your mall. Sandeep Mathrani saw a vision of the future on a trip to Dubai, where he saw malls with KidZania in them - entire kid size towns with currency and role playing. Mathrani is head of the U.S. mall giant General Growth Properties (GGP) and is bringing these new concepts here. The article echoes Patrick Doyle's "special experience" theme:
For Mathrani, KidZania is part of a shift toward "experiential retail" - away from department stores ... Other concepts have taken their place, including supermarkets like Wegmans Food Markets, entertainment hub Dave and Buster's Entertainment ..."
GGP owns 126 malls in 40 states and has gone on the offensive:
"Instead of just waiting for stores to go vacant, it has bought out leases and physical property from chains like Macy's (M), Sears Holdings (SHLD) and J.C. Penney (JCP). The company has now reclaimed more than 100 stores over the past five years, Mathrani said."
Could this mall revolution be a growth engine for PLAY? I would say yes. You could say that all this videotronical stuff is just a two year fad with the kids. But be careful. You're calling Cramer's FANG and Doyle's "new convenience" a fad, and will probably wind up looking like those that called the horseless carriage and telephone fads. I think "paradigm shift" is not too strong a description.

 

 

Sunday, March 5, 2017

Is A Major Copper Bull Being Unleashed?


When the earthquake hit in Washington last November, sliding everything to a more business friendly world, copper went on a Trump tear along with several other things. Does this have any staying power? Is there something in the world's wiring to back it up?

Jesse Moore has an excellent series of reports on copper at Seeking Alpha. He began predicting a bear-to-bull turn in copper back in March, 2016, when copper was in everyone's doghouse, including mine. He was saying that within 12-24 months the bear would be a bull. We are now 12 months from his call, and copper is stirring from its bear slumber. His first in the series was a country-by-country look at copper mining projects, and he compares his result with that of Chili's government. Why should we care about Chili's copper work? Because they are the biggest copper supply in the world, giving us about one third of the metal. The whole Chilean economy centers on copper. Then there is the International Copper Study Group (ICSG) that does a projection as well. Moore's summary:
I believe both groups have not taken proper account for delays in a startup or ramp of new mines, grade reductions in Chile, water shortages leading to unplanned shutdowns, reduced capital expenditure, and the replacement of risk taking CEOs with risk averse CEO's who have slashed budgets across the world. Copper is not iron ore, and it is not nearly as easy to find and produce. The current copper price does not support growing supplies, and it appears that some producers have begun to put their collective shovels down ... In reality, the world needs another mega-project before 2020, and we just don't have one coming. The major deposits are, for the most part, found. $3.00 will easily bring on plenty of supply, but again, my belief is it will be too late. My guess is that we start to see the shortage become obvious near the end of the first half of 2017, prices will overshoot and what we saw during the China boom won't be out of the question
"The China boom" he is talking about is what happened back in 2004, when China went ballistic building the future China - and over did it. China has been notorious for commodity hoarding to insure supply for their plans. And they did this with copper in 2004, when their Shanghai inventories did a rare thing. They rose above the LME (London Metal Exchange) inventories, the world's standard for metal storage, just in front of the crazy copper bull market that ensued back then. Moore shows on a chart that this rare occurrence has just now happened again, the first time since 2004.

 Don't Ignore China

We need to pay attention to China and Asian copper usage in general because it accounts for about 62% of total copper usage, the Americas just 14% according to the ICSG pie chart shown in Moore's article treating copper demand. So forget Trump's building ambitions, copper began its breakout before the election. We need to know what's up in China.

China's construction contracts have continued a high rate of growth despite their economic slump, as have car sales. A lot of China's recent copper interest may lie in the aluminum vs copper wiring battle. They have been using a lot of the aluminum wire, because it is a very abundant metal with stable pricing running a fraction of that for copper. But aluminum wire has its problems. It must be alloyed to make it strong enough for wiring and this makes it less conductive. Copper can be used in a more pure form, especially pure, newly mined copper as opposed to the 50% of annual copper usage that is recycled. Only about 8% of scrap is made into wiring. So copper wire places nearly all its demand on the newly mined half of supply. Aluminum is also is subject to corrosion from moisture and other things and must be replaced much more often than copper. China is considering going to all copper for its wires, and this Moore says, will make a big, abrupt difference in copper demand:
Nearly half of all China's copper consumption goes towards grid infrastructure, and China has recently been discussing abandoning aluminum wiring in favor of more expensive, but reliable, copper wire. The outcome of which could drastically effect the demand for copper over the short term
Altogether, 75% of global copper demand is for electrical wires. But a big problem with copper wire is price instability. This may explain a good bit of the stockpiling going on now in China.

Copper's Supply

On the supply side, copper mining has been suffering a pronounced decline in ore grades. In "Copper: A Bullish Decade Is Coming" Moore shows a graph for global mining revealing that copper content of ore coming out of the ground is half of what it was in 2008. The best fruit has been picked, and, unlike oil, there is no big shale bump to come to the rescue. Shale, as I have written about in other articles, is keeping oil prices moderate for at least a couple of years.

If nothing suddenly shows up like a copper shale, the projected departure of demand curve from supply curve is slated to transpire around 2019 according to mining.com and their infographic tour of copper. For 50 years, they've known about shale and the other "dreg oil" (bottom of the barrel) that would be flooded onto the market by a quantum leap to higher prices. There is no such thing for copper - just a continuous slide to more and more expensive grades of normal ore. The current labor problems of Escondida, the world's biggest copper mine and other disruptions may be bringing a looming copper deficit closer at hand. Mining.com isn't the only one projecting this timeframe. Moore includes an RBC Capital Markets chart saying the same thing.

These could be some of the reasons for "Doctor Copper Hiding in Shanghai Warehouse" as a Wall Street Journal online piece from about a year ago proclaimed, saying that, "the pickup in the price of copper isn't driven by a stronger Chinese economy." You could argue that all the price surge is from Chinese stockpiling and thus it will simply reverse when they figure they have enough. But as Jesse Moore points out, they did this same stockpiling thing in 2004, to the same level relative to the LME, after which copper did a huge climb. China probably knows the copper market better than about anyone, being much more dependent on it than any country. They seem to know that they will have to buy higher later.

So are we running out of copper? No we are not. In fact we have mined way less than half of what's in the ground and almost all of that is still in circulation! Roughly half of copper usage is recycled metal. Even for silver, the recycled portion of demand is just about one fourth. Copper is by far the most reused resource on the earth. We don't burn it up like oil. It's relatively rare and doesn't rust into oblivion like iron. It only takes 15% of the energy to recycle copper as it does to mine it. How much gets recycled and refined is a function of the copper price. How much of the low grade, expensive ore that gets dug out is also a function of the copper price. We should perhaps draw a distinction here between peak oil and peak copper. We are enjoying a reprieve from peak normal oil with shale, tar sands, and so on. This could be for years, but there isn't that much of it to be exploited compared to the normal copper that's left to be recycled and still in the ground. We are not running out of copper.

We Are Running Out Of Cheap Copper

The looming supply deficit being projected is all a matter of copper pricing. It will be about market pricing and what that will be bringing to the plate. And it will be about any sudden changes to copper demand, like a China switch away from the aluminum electrical wiring. Added mine capacity doesn't come quick or cheap. And 92% of new copper wire must be pure, newly mined copper.

This aluminum/copper wire problem in China is being further aggravated by the massive internet speed bottle neck going on now in our last mile networking. I discuss this in detail in my article "The Impending Super-Cycle In The All Glass Internet" noting that as China struggles to become a superpower, their internet speed ranks #82 in the world. As all new buildings everywhere are becoming very populated with our new web connected devices, wiring material is being pushed beyond its limits now.

The disruptive switch-over from copper hybrids to an all fiber last-mile in urban areas means a very expensive mess. So ever increasing speeds have dictated a next generation of DSL on the very old copper that's already there. This new standard known as G.fast is being deployed. It is a nice speed improvement, and often compared to broadband fiber based on lab results, but will suffer the usual shortcomings of anything imposed on copper. The fade with distance is very bad relative to fiber.  Also, there is a vast difference in the normal existing copper and what they are using in the lab for these tests. I refer you to Jim Wegat for this. He was an optics engineer for Terabeam, and when I asked him about this supposed equality of G.fast copper to fiber, he said it:
... is confusing the wiring in homes and neighborhoods with the high quality wire used in the study by Alcatel-Lucent. It is a bit like saying that a specially designed car broke the land speed record and since most Americans have cars they should be able to break the land speed record with their cars too.

If we are needing this super pure, pristine copper to handle our new last mile, the cruddy, slow aluminum is out of the question. No wonder they are wanting to tear out the aluminum.

Fiber vs Copper

If I were vice president in charge of China's building programs, I would just cut to the chase and future proof my structures with all fiber and not even mess with copper. But I suppose when you must deal with a complicated budgetary mess and calendar of progress that dictate less than ideal science, it's not as simple as that.

There is a lot of debate on the pros and cons of fiber vs copper for LAN and building cables. Copper cabling suffers from electromagnetic interference between cables, fiber is immune to electric or magnetic interference. Copper is subject to disruption from lightening and water. Fiber is immune to that. I am not an expert on all this. I will just offer what Commscope has to say per a write-up titled "Will Fiber Ever Replace Copper Cable" on their website concerning what's happening in China.

Data centers in China are averaging 40% fiber and 60% copper while the very large data centers are about 70% fiber. But with "intelligent buildings" copper still dominates in-building networks:

"This is mainly due to the high cost of fiber-to-the-desk (FTTD) system as well as fiber’s high requirements for application environment and routine maintenance. Therefore, in the market of intelligent buildings, the percentage of fiber usage is only around 30 percent, while copper cabling occupies the remaining 70 percent market share. "

The Chinese seem to be very cost sensitive, having put in a lot of the aluminum wire, and now are averse to the high cost of FTTD. And that 70% copper market share may be looking better because of a new technology they are developing called Power over Ethernet (PoE):
"...when it comes to the intelligent buildings market, copper cable is facing new opportunities brought on by the fast landing of the Power over Ethernet (PoE) application"
The extraordinary copper stockpiling pointed out by Moore that took place in 2005 and just recently in 2015 was done with little fan fare or publicity, as important as it is to investors. But in a Reuters report from 2015, cited in Moore's part two article on copper (demand) China's government gives us a glimpse of their plans for copper. China does things by five year plans, and this report covers the 2015-2020 plan with the title "UPDATE 1 - China Targets $300 bln Power Grid Spend Over 2015-2020 - Report" and cites government sources in China. That's a third of a $trillion spent on wires, a big number, but to put the numbers in perspective, the plan calls for installing transmission line length over 2015-2020 equal to more than twice the 2014 level. That's over twice the cable strung in five years than was strung in the previous one hundred. The report, in what would seem to be an understatement, said all this is “likely to provide a boost for sectors like copper.” And it also makes pretty clear the choice in the aluminum vs copper battle:
“The plan was aimed at increasing the reliability of power transmission, which would favour copper-based cables over cheaper alternative aluminium-based cables, said Yang Changhua, senior analyst at state-backed research firm Antaike.”
If you look at a historical chart of China's copper imports, as in this report, you see an interesting connection to these five year plans. Over the 5 year plan 2000-2005, copper importing was flattish going from 70 to 50 (10 thousand tons). Then after the unusual stockpiling blitz by China in 2005, when the Shanghai inventories exceeded the LME the first time, the 2005-2010 five year plan saw copper imports do a massive climb from 50 to 300. This was accompanied by a strong climb in copper from $1.43 to $4.27. In the five years since, the imports have again been flat, going from 300 to 300, with the price of copper drifting back down. In fact, if you overlay this China copper import chart with the copper price chart, you get a remarkable correlation except briefly for the 2008 financial crisis. Now, the Shanghai inventories have exceeded LME once again, and you have to wonder what's up with China's plans. Keep in mind that they probably know the copper market better than anyone.
 
So a big new wave of demand could be coming for newly mined wire grade copper. The supply projections above may have a tough time keeping up with it.

The supply would have to be accomplished with higher pricesA lot of what's going on in China probably applies to other emerging Asian countries, and that block is 62% of copper's demand. China apparently sees this as a big enough problem to justify a whole new round of stockpiling.

Another consideration with copper supply is its relation to gold. Copper is usually found wherever gold has formed, and you can't read much geology on miners without seeing "gold-copper, copper-gold" and similar terminology. The basic fact is that much copper is mined as a co-product or by-product with the vastly more lucrative gold content. If the price of gold is cutting production, a copper shortage has to run a ways before operations are being ramped up just for the copper. Thus you have to be mindful of the relative status of gold and copper bulls and bears. Right now we have gold looking bearish since late last year while a copper bull may be on its way. Almost always in history, gold and copper bulls have run in tandem. If now they are to run in opposite directions, it would be an oddity. Technically, gold is in limbo now between long-term bull and possible new bear in the $1250 area. So this bears watching. We will probably have a copper shortage if gold continues its long-term bull market, but if gold continues its retreat from last year, the copper shortage could become severe.


Friday, March 3, 2017

Insiders And The New Medicine


Biotech was the big outperformer for years up until mid 2015. After a big cool down, it looks to be reigniting.

There is a new medicine slowly taking hold over the years. To see it, you should be aware of the little project that, in 1990, the Department of Energy, The National Institutes of Health, and some international organizations began - The Human Genome Project. It was to be a 15 year globally coordinated effort that would map and sequence the human genome completely so that we could begin practicing this medicine.

And they did it. It was pretty much completed around 2003, two years ahead of the 15 year schedule and under budget. It was worth every penny of the roughly $3 billion the US government spent on it (in 1991 money). By the tabulations of FasterCures every $1 spent on the Project has triggered $178 in US economic activity. "An investment in knowledge always pays the best interest" they quote from Ben Franklin. They conclude that "As the largest, single undertaking in the history of life sciences, the Human Genome Project has paid back extraordinary dividends on the U.S. government’s investment." That total investment of $3 billion has produced, in 2012 alone, genomic endeavors resulting in $31 billion in US GDP, $19 billion in personal income, at a cost of about $2 a year for each US resident. Now that's a stimulus package.

The Project was pronounced done in 2003, and genomic medicine was eagerly anticipated. But practical, disease killing applications have not exactly been sprinkled on us like magical fairy dust. There is a kind of Moore's Law at work in getting genomic medicine into our every day life. In the early 2000s it cost about $50 million to get your genome mapped. That has steadily declined to less than $1000 now - something akin to getting a tooth pulled, but less painful. Getting your genome mapped is rapidly becoming a common part of good healthcare.

Investing In Modern Medicine

The approach in "modern" medicine has been to introduce chemicals concocted for a mass audience into your particular body to stop some bad thing it is doing. Because we're all different, that typically is done at the expense of upsetting the body's intricate chemical balances, producing a new set of problems. The era of side effects has resulted. The old school drug industry profits, and it's a whole new wing of the legal profession. Have you noticed that about every third commercial on TV now is a disclaimer that drones on ad nauseam about every bad thing some drug has ever done to anyone? From bleeding, pain with or without vomiting, to other unseemly discussions, it's getting so you can't even enjoy a meal while watching your TV. You don't take two aspirin and call in the morning anymore, you call 1-800-BAD DRUG. A hundred years from now, all this will seem like applying leeches.

Genomic medicine has a basically new approach in that it seeks to fix problems by having our body just do what it was designed to do - genetically. And this can now be tailored to each of our individual genomes. It uses the body's own processes to fix problems. "Immunotherapy" is all the rage now in biotech and it uses the body's own immune system to search and destroy disease. A genetically correct body would never get most of our debilitating disorders. It is only when genes are damaged or not working right that we are programmed to problems. As they say in this science, we will stop endlessly treating symptoms, and simply fix the programs.

Unless you're a doctor, probably the best way is to analyze, not these stocks, but the insiders buying the stocks. There are, of course, the officers of the company; and a sudden rash of buying or selling by them is often a good tell. But I like to focus on another type of buyer - the cross company career buyer. These are the very few who are often highly educated in the medical field and also are 10% owners and/or sit on the boards of several of these companies, and do massive, informed buying.

They also like to run biotech hedge funds and, because they know not only medicine, but the business of medicine, they tend to have dazzling track records of performance. There funds are not for everyone as the downdrafts are huge and the sector risk is extreme. But the buying by these very smart people should command your attention. Kevin Tang is one of those people. He founded Tang Capital Management in 2002. My personal favorite for medical insiders to watch is the Fabulous Baker Brothers (no relation to the 1989 musical). Felix Baker owns a Phd in Immunology and is the most massive inside buyer I know of. Julian Baker holds an A.B. Magna Cum Laude from Harvard (social studies) and this blend of intelligence founded Baker Brothers Investments in 2000, which offers their hedge fund, Baker Brothers Advisors, among a family of funds for institutional investing. Together, they are on the boards of several medical companies.

The Bakers' fund tends to run just a handful of heavy-weighted positions although they spread the money out over nearly a hundred names. What strikes me about the names they buy heavily is the high buyout rate. For example, as tabulated by J3 Information Services, the fund's holdings, in heavy positions at the end of 2013 were : ACAD, SLXP, XOMA, GHDX, SGEN, PCYC, INCY, and GEVA. Of those eight, four have been bought out at fat premiums. That's a .500 batting average for takeout homeruns in just three years.

The Bakers' Personal Shopping

These funds do well, but I find it more helpful to look at the yearly progression of the personal buying by the Bakers as they seem to not only know what to buy but when to buy it. When total yearly buying goes over around $20 million, the Bakers tend to do massive personal buying of select stocks, and very big climbs tend to start within three years or so. This only happens with about a half dozen stocks, but when it does, you should pay attention. As an example, let's look at Incyte Corp.
(click images to view)



After declining to flat stock action for many years, the Bakers began $30 M plus yearly buying in '07, '08, and '11, accumulating something like a $10 cost basis before the run to over $100. They apparently think the run is far from over with Julian buying an astonishing $260 million worth in '16, not to mention 10.6 million shares in non open market buys in February, 2017 per Morningstar, worth roughly $1.4 billion.

The Bakers seem to gravitate to the new genetic medicine. Incyte was a groundbreaking leader in the genomic revolution as Incyte Genomics, Inc. and was going about selling its library of mapping until the Moore's Law effect mentioned above made this an impractical business model. So they morphed into one of the best disease fighters after 2004, currently ranked  #4 on Forbes The World's Most Innovative Companies list.

Synageva BioPharma Corp. (GEVA) does recombinant genetics, and it also caught the attention of the Bakers. The company was formed when a Genzyme executive "was approached in early 2008 by Baker Bros. Investments to be the CEO of privately held Avigenics, Inc." according to the Wikipedia account, and this later went public as GEVA. If you construct a chart as above for the Bakers' buying, you find that after a decade of declining to flat stock performance, they bought $75 M of GEVA in '12, $200M in '13, and $267 M in '14 at an average stock price ranging from roughly $110 to $150. I bought GEVA based on this Baker activity and was rewarded with a $230 buyout of GEVA in May, 2015 by Alexion Pharmaceuticals. It "was the one of the largest premiums paid to any company over $5 billion in market cap since 1995" (Wikipedia).

Another rare case of Baker yearly buying going over the $20 M mark was Pharmacyclics (PCYC) where, after a decade of slumber, they bought a little over $15 M in '11 followed by about $24 M in '12 at prices ranging roughly between $10 and $60. PCYC was bought out in early 2015 at $261. And in mid 2013, Felix forked over $58 M at about $14 to buy some ACAD; it's now worth over twice that. Of course the Bakers are human, and they can buy losers as well, especially in the funds they operate. But when they go much over $20 M in personal yearly purchases, the success rate is extraordinary.

The Current Favorite Of The Bakers

There is one stock that has received the most intense Baker insider buying I have ever seen, and they operate squarely in the new medicine area. Genomic medicine is crossing an important threshold as noted in an article "Casey Analyst Forecasts Explosive Biotech Growth", from late 2012. In this interview with Casey's Research, they were asked about breakthroughs in the concept of using the body's immune system to deliver engineered cancer killers. Two were discussed:
The first is the recently approved use of antibody-drug conjugates (ADCs). Seattle Genetics (SGEN:NASDAQ) is the leader in this space, and its ADCs are created by bonding traditional chemo with antibodies selected from our own bodies that target very specific cancer cells. Chemotherapy, which is known as the "poison" in the oncological lingua franca "slash, burn, and poison," does precisely that to the entire body, causing horrific side effects in many patients. By piggybacking on the body's own mechanism for targeted immune response, chemotherapy can be rendered basically inert except when it comes in contact with cancer cells. This means more chemo can be delivered safely, working wonders on metastatic cancers and other difficult-to-target, small, multiple-growth cancers.
From the SGEN site, we see that genomic science is facilitating all this as they:
:... have also formed a strategic collaboration with Oxford BioTherapeutics to jointly discover novel ADCs for cancer. Under the collaboration, OBT will generate panels of monoclonal antibodies against novel tumor-specific antigens identified using its proprietary Oxford Genome Anatomy Project database
Seattle Genetics is a small speculation enamored with science, not profits. But a development in 2010 could change that. From an Xconomy article in 2011 "Seattle Genetics, On The Verge Of Going Commercial, Seeks To Keep Its Scientific Soul":
A little science background is required to see why this matters. Other biotech companies have had a lot of success with targeted therapies over the past decade, making genetically engineered antibodies that specifically zero in on markers on tumor cells, while mostly sparing healthy cells - unlike typical chemotherapy. Seattle Genetics has gone a step further, by turning genetically engineered antibodies into what amounts to a “smart bomb” against cancer. The company’s technology links the targeting antibody to a potent toxin, which gets unleashed on the tumor.
This idea of putting a cancer poison warhead on a genetically crafted antibody missile isn't new. As the article explains:
Most of these efforts to soup-up antibodies have failed over the years, but Seattle Genetics proved it had solved the puzzle last year in a pair of clinical trials.
So this 2011 piece claimed that Seattle Genetics "proved it had solved the puzzle last year" inducing the company to "start putting together a commercial plan." This was 2010, which interestingly enough was the year the Bakers began their massive buying of the stock in earnest:



You have to wonder what's up with that. This is the most intensive buying I have seen from the Bakers, or anyone. That's about $1 billion of one person's personal bank account invested in one dangerous stock.

Since the Bakers began buying up shares of INCY and SGEN hand over fist, INCY has not only been placed in the top five World's Most Innovative Companies list by Forbes, they have been added to the Standard and Poor's 500 index as announced on Feb 24, 2017. This will dictate some index fund buying. The Motley Fool announcement went on to say:
Incyte will be a fine addition to the S&P 500. It has a fast-growing drug franchise in Jakafi, a decent pipeline, and after a string of high-profile pipeline failures from competitors, faces close to zero competition for the drug's market opportunity. The company has staying power -- and so does today's move.
And the "going commercial" plans of SGEN have been proceeding with a Feb 10, 2017 announcement of a major deal with Immunomedics to license one of the cancer "smart bombs" that has received Breakthrough Therapy Designation from the FDA. According to Cynthia Sullivan, CEO of Immumomedics:
"After a long and robust process, we concluded that licensing our lead asset, sacituzumab govitecan, to Seattle Genetics, the leading ADC company, would give us the best opportunity to advance this product on behalf of advanced stage cancer patients."
Looking at the massive buying figures like those above may prompt one to sell the kids and bet the farm on whatever people like Tang and Baker are buying heavily. But as in the '90s with the revolutionary internet, genetic medicine is here to stay, but most of the stocks will go away. The key insiders will likely be our best guess for the stocks that will be the mega winners.

















Sunday, February 26, 2017

The Impending Super-Cycle In The All-Glass Optical Internet

Technology lagged the Trump rally at first, but now appears to be coming to life. There is one area of tech that may be contributing to that.

There is a Gigabahn in our information superhighway that has been compared to Germany's famous Autobahn, where there is no speed limit except for urbanized or congested stretches, and they typically fly at around 100 mph. Their trips are badly bottlenecked by the last few miles to their home or office. (click on images for full view)

The biggest problem facing the age of the web, other than perhaps security, has always been the immense difference in data speed as light waves vs electricity waves. They built the main trunks of our network with plenty of fiber optic overcapacity, and they have been doing the local switching into our computers by converting the lightwaves into electrical waves and pretending they are to be dealt with as in the party line era. With a lot of cleverness, that has worked OK, but with net traffic doubling every year, we have now come to the limits of that optical denial.

Local area networking with optics is an inevitable revolution of the future. Fortunately, smart minds have been developing light wave switching to do what the very old school electricity switching has always done. If the experts are right, we are about to enter a quantum leap closer to the lighted "cathedrals of glass" in George Gilder's all glass view of the future. There are several public companies involved in "last mile" fiber optics that are the can openers that let the 100 gigabit light speed shining across the globe into our neighborhoods. A lot of this is done with the simple prism effect. There is a super cycle in this can opener function coming as explained in the Investor's Business Daily article "Fiber Optic Super Cycle: Raising The Speed Limit On The Gigabahn's Last Mile."

Clearfield, Inc. (CLFD) Oclaro Inc. (OCLR) EXFO Inc. (EXFO) Ciena Corp. (CIEN) and Acacia Communications (ACIA) are some of the small pure play investments in this anticipated super cycle. The experts think this super cycle is just beginning.

I have traded Clearfield over the years twice for 44% and 130% profits, but I would have done many times better had I just held it after my first buy. The growth, despite all the cycles, has been that massive.

What's all the crazy explosion about? You could say it's a leftover (or maybe "hangover" would be a better term) from the internet bust of over 10 years ago. If you will recall, everything went nuts over the future growth of traffic on the 'net. The telcos frantically laid a fiber-optic backbone to replace the hopelessly slow copper, and mindful of the high cost of continual upgrades, laid in a pretty vast oversupply of capacity. This is commonly referred to as "dark fiber" until end-user demand eventually lights it up.

There is still dark fiber and excess capacity left in the backbones. But the internet traffic growth has been catching up to the last mile distribution systems. This part of the network was sped up with many different half measures using on-demand switching strategies that worked well on the old copper or copper/fiber combos. The basic problem with all the combos is that information on light travels at the speed of light, which is umpteen thousand times the speed of electricity in copper, or silver or any conductor. It has always been cheaper and a little more convenient to speed up the combo switching than tearing up the neighborhood and installing pure optic to the premises.

Is there really a "super-cycle" coming in optical last mile?  Metro traffic jams and upgrades do tend to run in erratic cycles. But they say a super-cycle happens about every 10-15 years, and a big new one is emerging being fueled greatly by the "Web 2.0" phenomenon - Netflix, Facebook, and the whole FANG revolution. They have started buying their own net equipment to squeeze product to their customers. This isn't your teenage daughter's web anymore. Now we have presidential campaigns being waged on Twitter, and our new president has a full blown audience before his first old fashioned press conference. The IBD piece above states:
During "every prior optical cycle, there has been one major driver and a couple of minor drivers," said Needham analyst Alex Henderson, who as argued that the uptrend could be a telecom industry "super cycle." "This cycle looks quite different than that in the sense that there are at least three major drivers and a couple of smaller drivers as well." As a result, the fiber-optics group ranked No. 3 on Thursday among the 197 industries tracked by IBD, up from a No. 95 ranking six months ago
The huge new FANG imposed driver is being complemented by another major driver - a pressing upgrade cycle in China. As they try to emerge as a superpower, their net speed is ranked #82 in the world, and they are seriously attacking that.

Local systems, foreign and domestic are being strained to keep up with traffic on the internet.  According to Wikipedia, the traffic pouring out of the fiber backbones is doubling every 9 months. According to the above IBD article:
The problem is, we've now got these fibers that have 90 channels of 100-gig traffic on them, and they're dumping into a metro core that's 10, 15, 20 years old that can accommodate 10 to 40 gigs of traffic, Henderson said. "That's like trying to drink out of a fire hydrant with a sippy straw.
FTTH stands for Fiber To The Home, which is about the same as FTTP (Fiber To The Premises) and other FTTs that are sometimes collectively called FTTx - or simply last mile fiber. There is now a sharpening need for all-fiber last mile installations.
The disruptive switch-over from copper hybrids to an all fiber last-mile in urban areas means an expensive mess. So ever increasing speeds have dictated a next generation of DSL on the very old copper that's already there. This new standard known as G.fast is being deployed. It is a nice speed improvement, and often compared to broadband fiber based on lab results, but will suffer the usual shortcomings of anything imposed on copper. The fade with distance is very bad relative to fiber.  Also, there is a vast difference in the normal existing copper and what they are using in the lab for these tests. I refer you to Jim Wegat for this. He was an optics engineer for Terabeam, and when I asked him about this supposed equality of G.fast to fiber, he said it:
:... is confusing the wiring in homes and neighborhoods with the high quality wire used in the study by Alcatel-Lucent. It is a bit like saying that a specially designed car broke the land speed record and since most Americans have cars they should be able to break the land speed record with their cars too.
Still, it's just been too much mess to upgrade all the copper we've built into our advanced countries. Thus, if you look at a global fiber penetration chart, it's the emerging markets where they are enjoying higher FTTP rates. The United Arab Emirates already has all fiber to 75% of premises with South Korea at 68% and Hong Kong at 57%. At the other end of the scale, there is France with 3%, and both the US and China with a mere 9%. In the copper infested nations, the switchover is a complicated mess. What we need is simplification!

This is Clearfield's heart and soul. In a story, on this company, Bloomberg starts off with the statement "Clearfield Simplifies Fiber Distribution." Putting all the moving parts together in a last mile light-wave distribution system is an incredibly complicated, disruptive, and costly thing. In the Bloomberg article, they give us the general description of Clearfield's offerings. I am no tech geek, but the thing that stands out to me is the phrase "delivering the industry's only fiber management platform that is built upon a single architecture. Scaling from 12 to 1728 ports". This ease of assembly and a gradual scaling of a customer's build out (so as not to bankrupt the premises) all on one platform (no big interfaces and what have you) is exactly what you see stressed at Clearfield's website. If you go there, the first thing plastered on your screen in big letters is "Scalable Fiber Management". They say:
Based on the patented Clearview™ Cassette, our unique single-architected, modular fiber management platform is designed to lower the cost of broadband deployment and maintenance while enabling our customers to scale their operations as their subscriber revenues increase...No matter which product line you are using….or whether you're networking in the Inside Plant, Outside Plant or In-Building, everything we do is based on the architecture of the Clearview Cassette. While it's designed to fulfill all the "musts" of fiber management, the cool thing is that your technicians learn it once and then the cassette becomes like using legos….simply rearranging the pieces, depending on your fiber network solution!

Clearfield's selling point is that they are the least painful way to get the limitless bandwidth and "future proof" nature of light waves sent to your screen. Clearfield has the kind of insider ownership I like. With CLFD, you actually have more insider ownership (18%) than mutual fund ownership (11%) and almost as much as institutional ownership (23%). It is somewhat undiscovered, except by the insiders. Despite all the cycling fiber has done, this company has produced steady, strong growth over the years:

If these are the results just before a super cycle, there's a chance they may get even better! This, of course applies to, EXFO, CIEN, CSCO, LPTH, and the whole local optical group.