Cooling Inflation Fears Aids Equities; Strategic Thinking About Digital!

“The essence of strategy is choosing what not to do.”  —Michael Porter

Perception is strong and sight weak. In strategy it is important to see distant things as if they were close and to take a distanced view of close things” Miyamoto Musashi, legendary Japanese swordsman

Nearly everywhere I go, or every event I attend, people are looking down at their cellphones or tablets. This practice becomes more frequent, and probably will ownly accelerate in the future. Are kids and teenagers going to become less attached to these devices? Probably not. As such, and given the dramatic rise in value given to those who dominate the digital domain, every business, especially if you are publicly traded entity, is thinking about their digital strategy. Taking the big picture, if every organization has made this a priority, how much different is one approach going to be from another? Is there a competitive advantage there? Some of this depends on the position of the entity, so something like an Amazon, which has access to billions of bits of data about its customers that spans decades, has plenty more to work with in anticipating buying patterns than a startup. Still, Amazon competes with the Costco’s, Walt Mart, and Target’s of the world that are pouring resources into its artificial intelligence capabilities. So they each have to think about the amount of data, the quality of it, and what unique insights can be gleaned from those who mine it? How might this apply to a smaller entity, which might not necessarily be in a retail business?

For those of us in smaller organizations, data should obviously be used to help drive all kinds of productivity gains in terms of making more effective decisions and improving operational efficiency. From a longer term perspective, I wonder how effective it is to compete with larger organizations on terms that favor them. In my case, the idea that I can create an algorithm that has the ability to compete with Vanguard, Fidelity, and Schwab is probably far fetched. I am not going to even think about that. I do compete with any entity which operates in equity analysis and investing in areas of the market where I think I have as good a chance of understanding that management team, their strategy, and the business. By limiting the sphere of what I am trying to accomplish for clients, the objective is to obtain better results for them. Over the long term, if I do this well enough, at some point, maybe I can consider building a data driven strategy to enhance what I currently do. Just something to ponder as we go into the summer, of which I am looking forward to and I hope you are too.

In the markets this week, import prices rose less than expected, which helped ease inflation fears. The dollar remains strong, which has helped European equities but remains a headwind for those invested in emerging markets. On the earnings front, NASDAQ heavyweight Nvidia had a monster quarter, which helped offset problems at security concern Symantec and a miss by Dropbox and Zillow early in the week. On the consumer side, Marriott posted a nice beat, as did footwear officianado Crox (how is that for a blast from the past?). In the oil market, the long anticipated decision by the US to say sayonara to the nuclear deal with Iran sent prices higher. There is a great deal of debate on how that action will effect the energy market. My own feeling is there are many cross currents, but long term, the reduction of capital spending over the last few years by the largest integrated oil companies, as well as national oil producers, will be hard to overcome by the increased production in the US shale areas. In combination with demand growth at the margin of 1.5 million barrels a day or more per year, I suspect oil at the current levels is going to be hard to sustain. Of course, the energy market is massive and plenty can happen, like an escalating conflict with Iran by any number of parties (especially Israel and Saudi Arabia) so take my guess with a grain of salt.

In the political realm, Mr. Trump’s speech about drug prices and eliminating middlemen gave a sigh of relief to the pharmaceutical industry. Mr. Trump also exhibited the qualities which fuels the passion on both sides of the aisle. For supporters, pulling out of the Iran deal was a promise kept and one which was long overdue, especially given the aggressive behavior of funding parties like the Houthi rebels, Hezbollah, and Hammas and their actions against US interests in the region. Conversely, the comments by a White House aide about Senator McCain, suffering from brain cancer, remind opponents about the lack of sensitivity with respect to human issues. It should be an interesting summer, and one where thinking strategically, as is usually the case, will remain quite important.

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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the Chartered Financial Analyst in no way means or guarantee performance better than market indexes.

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