Amazing inflows to bonds and outflows from stocks – this kind of movement does NOT happen at stock market tops.

By now you are aware that the S&P 500 fell 3.6% in January.  Such a drop is not good, but certainly not all that bad.  While the drop from top to bottom was a brisk 6.1% in 21 days, the recovery has been an even more brisk rise of 6% in only 9 days!

The reversal would appear to have legs if the following charts on inflows to bond funds and outflows from equity mutual funds and ETFs are reliable contrarian indicators.  First – these moves are spectacular!  We had a bona fide, “fire in the theatre”, “head for the exits” event in the first week of February – right about the time the equity markets hit their lows – or as I like to say, “hit the point of the thud”.  There was a record inflow to bond funds as nearly $15 billion sought the safety of bonds.  Over $20 billion ran away from stocks – also a record.

What is remarkable is that the equity markets fell as little as they did. The stability was perhaps attributable to the very positive earnings performance this earnings season.

As you may already suspect – the panic exhibited by fund flows is a positive contrary indicator that is consistent with the brisk recovery we have seen and should see more of in the coming days.  In fact, analysts at Minyanville (here) found that in all 8 prior occasions when the S&P 500 dropped similarly as it did in January/Feb. since 1928 that the market was fully recovered within 2 months.  It looks like we will beat that average easily.

The following two charts are courtesy of Deustche Bank by way of Matt Phillips.  The original data was compiled by EPFR. Record weekly bond fund inflows

 Record Equity fund outflows Feb 5 2014

While the two charts undeniably show that the “great rotation” from bonds to equities may have been interrupted in early February it is certainly NOT conclusive that the “great rotation” has been stopped.  The following chart from EPFR does an excellent job displaying the trend in the shift away from bonds to equities. Cumulative bond - equity flows Feb 2014

Our call is with the bulls.  Our read of the data is the great rotation is still only in its early inningsJeb B. Terry, Sr. February 17, 2014

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The tipping point on time spent using smartphones over PCs was breached last year.

We look at our smartphones 150 times per day according to one of our portfolio company’s management teams.  That means not only are we spending lots of time on our mobile devices but we are “inspecting” our devices in a way and with a degree of attention that is profoundly more engaged than the way we typically “watch” TV or surf the internet on our PCs.  The TV ad world is driven by measurement of the time people spend watching various shows.  Time spent on mobile devices now far exceeds time spent on PCs.  At the margin – mobile taking time share from all other forms of media.

Here are some comments from Business Intelligence (here) relating to a recent Nielsen study.

  • People spend seven hours more per month on their smartphones than they do on PCs.  That equates to 27% more time on smartphones than on PCs.
  • Smartphone hardware improvements and an aggressive rollout of 4G LTE connectivity have led to a snowball effect — people found more opportunities to use apps and mobile websites since cell coverage improved dramatically, and their phones also became better at supporting popular and time-intensive activities — games, streaming video, or viewing photo-heavy social media feeds.
  • Roughly 58% of the U.S. mobile subscribers aged 13 and above now have smartphones.

Time spent per user - mobile v PC 2-13-14The market for multiple forms of monetization including ads, subscriptions and in-app purchases is still in its early days.  2014 may prove to be pivotal in the shift of ad dollars away from conventional media – think TV – to mobile formats – and by that I mean other than Facebook news feeds and Google searches.

Aberdeen’s portfolio is broadly exposed to opportunities in the mobile ecosystem.  Jeb B. Terry Sr. February 16, 2014

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Oh My! . . . The Dow seems to be tracking the climb on 1928-1929! Are we headed for a repeat? . . . Seems doubtful.

Scary picture . . .  This has been making the rounds on the internet lately.  The reporters of the story are a true testament that fear sells better than optimism.  A casual glance at the chart does seem to imply a possible correlation of the current rise compared to the famous rise in 1928-1929.            Dow 1929 vs Dow 2014-notional 2-14-14

But hold on bear breath . . .

The clever analysts at Bespoke Investment Group (here) paused for a minute and noted that the jiggering of the two “Y” axis had more to do with the “correlation” than the actual rate of climb.  The following chart is a classic illustration of “form” (the above chart) being trumped by “substance”.

Not so scary picture . . . It seems that in the ’28-’29 episode the Dow rose 96%!  The Dow is only up 24% now.  Hmmm . . . there is a big difference in the two periods –eh?  And guess what – the Dow was still up more AFTER the crash than the Dow is up currently!  Dow 1929 vs Dow 2014 - percent change 2-14-14

The market is NOT as extended or overbought as in the past.  Earnings continue to beat expectations.  We at Aberdeen are not presently concerned about the technicals or the fundamentals of the U.S. stock market. Failing a “black swan” event (such as the long awaited Japan or China debt bomb(s)), we are positioned for more upside.  Jeb B. Terry, Sr.  February 16, 2014.

The Internet of Things (fka M2M) is finally reaching a take off point

We have been following the promise and predictions of “machine to machine” aka “M2M” and now aka the “Internet of Things” or “IoT” for over 10 years.  There has been sound logic and much innovation but there was never the full complement of low cost sensors and communication devices, adequate wireless bandwidth, configuration of a cloud based big data infrastructure and multiple business cases to induce all the players in the ecosystem to get on board.  In short – it was a classic case of “solutions in search of needs” as I have written about in the past (see my post here).  The technology was increasingly adequate but still “early”.  It now seems we are entering a period where in fact, not theory, we have “needs in search of solutions”Hence, the projections I am about to reference may have the highest degree of validity we have seen to date.

The projections have been offered by the familiar and usual suspects – Gartner says there will be 26 billion connected devices, ABI Research says 30+ billion devices, Cisco believes there will be 50 billion connected devices – all by 2020.  The chart of Cisco’s projections follows below.

IoT proj by Cisco Jan 2014

A recent article pointed out that even if we reach Cisco’s projection “we would have only penetrated about 3% of all objects that potentially could be connected to the Internet of Things.” How do you like them apples?!

Of course logical questions are which businesses will most benefit from the surge and how should we invest to ride this wave.  Its simple – The IoT is all about what? – Its about being “connected” of course – most of which will be wireless.  Its also about being able to gather data from billion of sensors and to be able to analyze all that data in a reasonably fast fashion to generate courses of action.  There will be many, many hardware/chip/cable makers and other “stuff” that will make up the “connective tissue” of the IoT.  We at Aberdeen are choosing to stay focused on software and service providers – the companies that will operate all that stuff and will develop and likely host all the software that will command and respond to all the connected devices. This wave has years to go and will generate multiple trillions of dollars of value.  Jeb B. Terry, Sr.  February 9, 2014

4G/LTE Smartphone users Are 10 Times More Extreme in Their Data Usage

The tide of mobile data use continues to rise . . . fast.

A recent post by the Yankee Group had this to say . . . “A new study from JDS Uniphase’s Arieso unit finds that 4G/LTE’s fatter pipes are resulting in fatter usage patterns as well, and that just 0.1 percent of 4G/LTE users consume half of all downlink traffic vs. 1 percent of all 3G users who do so.  Total Telecom reports the study also found that iPhone users posted the most data consumption, and that those using Apple’s newest iPhone 5S consume seven times more data than those using 3G iPhones in developed markets and 20 times more than 3G users in emerging markets.”

4G/LTE changes consumer behavior.  Consumers are rapidly upgrading to 4G/LTE enabled smartphones (encouraged by novel and aggressive pricing by carriers).  Indeed, we seem to be at a tipping point.  The roll out of 4G/LTE in China to hundreds of millions of users and the scale launch of small cells in US are triggering the production of more smartphones at lower prices capable of driving even more mobile data usage.  Consumers are being educated by mass media.  They are in the “monkey see, monkey do” phase where 4G/LTE penetration is visibly sufficient to encourage later adopters to upgrade.  The carrier operating advantages for 4G/LTE and the opportunity to steal market share are driving increased marketing spending.  There is increasing urgency for them to find ways to harvest more ARPU through mobile data revenue such as ad supported activity, content, services and commerce.  The chart below shows Yankee Group’s forecast for global mobile data revenue to reach $559 billion by 2017.

The takeaways from the Yankee Group report are not just about network capacity constraints, they are also informative about the rate of change in patterns of video consumption, the advertising ecosystem around video, the continuing explosion in mobile app based entertainment and services and the inevitability of surging mobile advertising and commerce.  The Aberdeen portfolio is invested in numerous companies that benefit from the mobile data tide.  Jeb B. Terry, Sr.  January 26, 2014

Global mobile data rev forecast 1-25-14

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2014 earnings are estimated to rise faster than 2012 and 2013. Estimates for “as reported” earnings for 2014 have been raised 13% this month – this is good.

We are moving into the heart of the 4Q 2013 earnings season and hence there will be a great deal of focus on whether companies beat estimates and raised guidance.  So far, the collective estimates for S&P 500 earnings have been raised 13% just since year end.  Operating earnings are presently estimated to rise 13% in 2014 – an acceleration over the estimated 10.5% increase in 2013 and the ~1% increase in 2012.  There will be the requisite amount of blather about the P/E ratio.  While it can be said it is not low, it cannot be said it is unusually high.  That is of course unless you torture the numbers enough and ignore the margin enriching impact of the increasing weight of software related businesses on aggregate corporate earnings.  Aberdeen focuses on very high growth technology companies.  Our portfolio’s weighted average estimated revenue growth for 2014 is 37.5%.  This compares to the 2.5% estimated topline growth for the S&P 500.  Jeb B. Terry, Sr. Jan. 20, 2014

SP 500 est 2014 eps 1-20-14

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A New Year brings new forecasts – here is a chart of the continuing massive growth in smartphone and tablet shipments – 1.3 billion smartphones and 314 million tablets in 2014 . . . WOW!

The smartphones shipped in 2014 will be nearly 2X the number shipped in 2012.  There will be 2.4X more tablets shipped in 2014 than in 2012.  Those are HUGE numbers.  BI Intelligence has again provided an informative chart projecting smartphone and tablet shipments out to 2018.  We don’t need to tell you that the implications of that growth are far reaching.  Aberdeen has multiple investments that address aspects of this growth.  We are investing in hardware, software, security, content, advertising and platforms that all enable and benefit from this transformation.   Jeb B. Terry, Sr. Jan. 18, 2014

2014-2018 SP and Tablet shipment forecast Jan 2014

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Mobile Video is booming, regular TV – not so much. 2014 will see increasing shift in investment and ad dollars to address the young demographic who dominates everything mobile.

“The audience for video on a mobile phone is growing three times faster than that for time-shifted TV” says BI Intelligence in a recent report.  They used the following numbers from Nielsen:

  • In the third quarter of 2013, the audience for video on mobile phone grew 38% over the same quarter in 2012. The U.S. audience for video on a mobile phone is now 53.1 million people.
  • Over the same period, the audience for time-shifted TV – watching TV on-demand or on a DVR – increased 11%.
  • The audience for traditional TV was flat, while the audience for video on PCs declined 8%.

BI Intelligence believes “traditional media companies will increasingly look to acquire mobile-centric upstarts in order to bolster their digital video businesses, and fend off competition from media startups and on emerging video platforms.”  We concur.  Aberdeen has multiple investments that address aspects of this shift in audience.  Jeb B. Terry, Sr. Jan. 18, 2014

YoY Video Audience Growth 1-18-14

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The Yield Curve is steepening and this is GOOD! It’s a signal for strengthening markets.

I have refreshed some of my macro charts and am pleased to report that the yield curve as defined by the spread between the 10 yr Treasury rate and the Fed Funds rate has widened significantly.  As can be seen in the following chart – a rising yield curve has been a good signal for a strong gain in the NASDAQ (and other indices).  The level and rate of change in the yield curve is not unlike the moves seen in 2002-2003 and 2009.  The implication is the NASDAQ may continue to rise albeit at a slower rate until the yield curve flattens materially.   Jeb B. Terry, SR.  Jan. 13, 2014

Yield curve v NASDAQ 1-12-14

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The “January Effect” seems to have statistical merit. Up Januarys have tended to lead up years. Down Januarys are not conclusively bearish

Yardeni Research published a nifty scatterplot of the performance of the S&P 500
during each January and its full year from 1947 through 2013.  Over the past 67 years covered by the analysis, January and its full year have been up 55% of the time. During only four years (1966, 1994, 2001, and 2011) were up Januarys followed by full-year declines. Down Januarys aren’t necessarily bearish.  There were 11 down Januarys that opened 11 up years. There were 14 down Januarys followed by full-year declines.  My view is it’s more about the earnings and interest rate outlook than the calendar that determines the market.  Jeb B.Terry, SR.  Jan. 12, 2014

January effect scatter chart 1-12-14

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