MidSouth Week in Review: May 17, 2016

Weekly Update from Fund Manager Buzz Heidtke, MidSouth Investment Fund

May. 16, 2016 | RedChip Companies


From Buzz

Retailers got slammed this week on poor same store sales numbers. Macy’s’ and Nordstrom’s dropped 15% to 20% from last week’s high. Department store operators have been hit hard in the last year as consumers choose to spend on smartphones and electronics, dining out and travel, and invest in assets like vehicles and homes. And the other problem is Amazon who reported a 10% sales gain for the month.

Yesterday, Google temporarily became the largest capitalization company, replacing Apple, who made 2-year low. That’s not good news for Google. Ned Davis Research tracked the results of the highest-cap stock since 1972. The top guy at one time included the likes of: GE, IBM, Exxon and Microsoft. The bad news is that when they make the list they became horrible investments. During the 44-year period the S & P gained 7182% vs. only a 383% return for the big guys. It’s the law of big numbers at work.

Welcome to the exponential age! – A peak into the near future.

In 1998, Kodak had 170,000 employees and sold 85% of all photo paper worldwide. Within just a few years, their business model disappeared and they went bankrupt. What happened to Kodak will happen to a lot of industries in the next 10 years - and most people don't see it coming. Did you think in 1998 that 3 years later you would never take pictures on paper film again? Yet digital cameras were invented in 1975. The first ones only had 10,000 pixels, but followed Moore's law. So as with all exponential technologies, it was a disappointment for a long time, before it became way superior and got mainstream in only a few short years. It will now happen with Artificial Intelligence, Health, Autonomous and Electric cars, Education, 3D printing, Agriculture and Jobs. Welcome to the 4th Industrial Revolution. Welcome to the Exponential Age. Software will disrupt most traditional industries in the next 5-10 years. Uber is just a software tool, they don't own any cars, and are now the biggest taxi company in the world. Airbnb is now the biggest hotel company in the world, although they don't own any properties.

Artificial Intelligence: Computers become exponentially better in understanding the world. This year, a computer beat the best GO player in the world, 10 years earlier than expected. In the US, young lawyers already don't get jobs. Because of IBM Watson, you can get legal advice (so far for more or less basic stuff) within seconds, with 90% accuracy compared with 70% accuracy when done by humans. So if you study law, stop immediately. There will be 90% less lawyers in the future, only specialists will remain. Watson already helps nurses diagnosing cancer, 4 times more accurate than human nurses. Facebook now has a pattern recognition software that can recognize faces better than humans. In 2030, computers will become more intelligent than humans.

Autonomous cars: In 2018 the first self-driving cars will appear for the public. Around 2020, the complete industry will start to be disrupted. You don't want to own a car anymore. You will call a car with your phone, it will show up at your location and drive you to your destination. You will not need to park it, you only pay for the driven distance and can be productive while driving. Our kids will never get a driver's license and will never own a car. It will change the cities, because we will need 90-95% less cars for that. We can transform former parking space into parks. 1.2 million people die each year in car accidents worldwide. We now have one accident every 100,000km, with autonomous driving that will drop to one accident in 10 million km. That will save a million lives each year. Most car companies might become bankrupt. Traditional car companies try the evolutionary approach and just build a better car, while tech companies (Tesla, Apple, Google) will do the revolutionary approach and build a computer on wheels. I spoke to a lot of engineers from Volkswagen and Audi; they are completely terrified of Tesla. Insurance companies will have massive trouble because without accidents, the insurance will become 100x cheaper. Their car insurance business model will disappear. Real estate will change. Because if you can work while you commute, people will move further away to live in a more beautiful neighborhood.

Won't need as many garages if fewer people have cars, so living in the city may become more attractive as people like being around other people. That won't change.

Electric cars won’t become mainstream until 2020. Cities will be less noisy because all cars will run on electric. Electricity will become incredibly cheap and clean: Solar production has been on an exponential curve for 30 years, but you can only now see the impact. Last year, more solar energy was installed worldwide than fossil. The price for solar will drop so much that all coal companies will be out of business by 2025. With cheap electricity comes cheap and abundant water. Desalination now only needs 2kWh per cubic meter. We don't have scarce water in most places, we only have scarce drinking water. Imagine what will be possible if anyone can have as much clean water as he wants, for nearly no cost.

Health: The Tricorder X price will be announced this year. There will be companies who will build a medical device (called the "Tricorder" from Star Trek) that works with your phone, which takes your retina scan, you blood sample and you breath into it. It then analyses 54 biomarkers that will identify nearly any disease. It will be cheap, so in a few years everyone on this planet will have access to world class medicine, nearly for free.

3D printing: The price of the cheapest 3D printer came down from $18,000 to $400 within 10 years. In the same time, it became 100 times faster. All major shoe companies started 3D printing shoes. Spare airplane parts are already 3D printed in remote airports. The space station now has a printer that eliminates the need for the large amount of spare parts they used to have in the past. At the end of this year, new smartphones will have 3D scanning possibilities. You can then 3D scan your feet and print your perfect shoe at home. In China, they already 3D printed a complete 6-story office building. By 2027, 10% of everything that's being produced will be 3D printed. Business opportunities: If you think of a niche you want to go in, ask yourself: "in the future, do you think we will have that?" and if the answer is yes, how can you make that happen sooner? If it doesn't work with your phone, forget the idea. And any idea designed for success in the 20th century is doomed to failure in the 21st century.

Work: 70-80% of jobs will disappear in the next 20 years. There will be a lot of new jobs, but it is not clear if there will be enough new jobs in such a small time.

Agriculture: There will be a $100 agricultural robot in the future. Farmers in 3rd world countries can then become managers of their field instead of working all days on their fields. Aeroponics will need much less water. The first petri dish produced veal is now available and will be cheaper than cow produced veal in 2018. Right now, 30% of all agricultural surfaces is used for cows. Imagine if we don't need that space anymore. There are several startups who will bring insect protein to the market shortly. It contains more protein than meat. It will be labeled as "alternative protein source" (because most people still reject the idea of eating insects). There is an app called "moodies" which can already tell in which mood you are. Until 2020 there will be apps that can tell by your facial expressions if you are lying. Imagine a political debate where it's being displayed when they are telling the truth and when not. Bitcoin will become mainstream this year and might even become the default reserve currency.

Longevity: Right now, the average life span increases by 3 months per year. Four years ago, the life span used to be 79 years, now it's 80 years. The increase itself is increasing and by 2036, there will be more than one year increase per year. So we all might live for a long long time, probably way more than 100.

The world has always had an overpopulation problem within recent history, and all this will make it worse. Technology may grow by leaps and bounds, but human enculturation will not. We will have the same political greed for power and control, others kicking back, and wars will continue. The new technology will be evident in the tools of war, and the death rate could be staggering. Continued overpopulation will make cemeteries unpopular and there will be a push to replace them with something that does not take up space. Or continuing rent will need be paid to stay there.

Education: The cheapest smartphones are already at $10 in Africa and Asia. Until 2020, 70% of all humans will own a smartphone. That means, everyone has the same access to world class education. Every child can use Khan Academy for everything a child learns at school in First World countries. We have already released our software in Indonesia and will release it in Arabic, Swaheli and Chinese this Summer, because I see an enormous potential. We will give the English app for free, so that children in Africa can become fluent in English within half a year.

BuzzBits

  • The Golden Age is Over – Researchers at McKinsey predict investment returns on bonds and equities over the next few decades will drop by 1.5 to 4 percentage points from returns delivered from 1985 to 2014. And that’s assuming that economic growth recovers to the trend rate of the past 50 years – ThinkAdvisor

  • Lawyers - where there is rift in the loot, the business of the lawyer is to widen the rift and gather the loot – Arthur G. Hays

  • The Bull Market – is the second longest in history at 7 years, 2 months. Technically if the S&P fails by next Friday to reach a new closing high above its 5/21/15 2131 high, the bull’s length will be restated to 6 years and 2 months – BTN Research

  • The Bottom Half – of the college class usually concentrates on the more glamorous occupations like Vice President of the United States. Dan Quayle’s final grade of C in any subject was probably accomplished with less than six hours of study time, while the A student probably struggled with the books for more than 200 hours for an A. Simple math indicates six hours for a C is a greater intellectual accomplishment than spending 200 hours to get a meaningless A – Charles Schnabolk, MBA, 1989

  • Don’t Bet Against Buffett – On Jan. 1, 2008, Warren Buffett and Protégé Partners entered into a 10-year bet on which would perform better: a Standard & Poor’s 500 index fund or a portfolio of hedge funds. At the end of 2015, Buffett’s S & P 500 was up 65.7% since the bet began vs. 21.9% for the hedge fund portfolio – Enterprising Investor

  • Kosher Pot – The Orthodox Union gave its first medical marijuana certification to Vireo Health in Jan. For the pot to be considered kosher its ingredients would not come in contact with forbidden fungi such as pigs or insects – New York Times

  • It Pays to Wait – A high income person could begin receiving Social Security at age 62 and receive monthly payments of $1,894 vs. waiting until 70 and receiving $3,332 a month. To show the value of each choice, an immediate annuity at age 62, paying $1,894 a month for life could be had for around $342,686. An annuity purchased at age 70, paying $3,337 a month for life would cost around $510,725. If one assumes a 3% per year cost of living increase, the guy who began taking his payment early would be receiving $3,224 a month at age 80 vs. $5,764 a year for the person who waited - Buzz

  • Harvard – Beginning in 2017, members of single sex clubs, such as Fraternities and Sororities will no longer be allowed to hold leadership positions in campus groups – Wall Street Journal

  • Expensive – The median annual cost for staying in a nursing home is approaching $100,000 – Genworth Financial

  • www.Ordergreatcourses.com Someone once said that the average person spends more time on buying a refrigerator than on his investments. If this is applicable, you might consider a 24-part lecture series on “understanding investments” by a Duke economics professor. The lectures explain the various kinds of financial markets, the difference investments available, and the pros and cons of each. Each lecture is 30 minutes in length on DVD, including free video streaming, at a reduced price of $39.95. Course no. 5724
  • Mutual Fund Results – Less than one in five large-cap funds outperformed the S & P in the 1Q of 2016. More than 80% of small-cap funds outperformed the Russell 2000 index – Merrill Lynch
  • Only in California Two trucking companies have started charging $6 per California shipment after the state began requiring truckers to pay drivers for time spent refueling, on rest breaks and other periods – Wall Street Journal.
Buzz Heidtke
buzz@msifund.com

This material was prepared by MidSouth Investment Management LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices.




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