Overvalued Stock Markets

Warren Buffett seems to think so. Here some excerpts from the Bershire Hathaway 2017 Annual Report.

There are four building blocks that add value to Berkshire: (1) sizable stand-alone acquisitions; (2) bolt-on acquisitions that fit with businesses we already own; (3) internal sales growth and margin improvement at our many and varied businesses; and (4) investment earnings from our huge portfolio of stocks and bonds. In this section, we will review 2017 acquisition activity.
In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.
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Retail Bankrupcies grow by 110% yoy

Retail Bankruptcies Soared by 110% This Year

The fact that physical retail is hurting is old news. But the extent of its suffering became clear last week when news and research organization Reorg First Day reported that retail bankruptcies rose 110% in the first six months of this year compared with the same period a year ago. The consumer discretionary sector accounted for 24% of all bankruptcies this year, according to the ratings agency Fitch.

In its report, Reorg First Day released a chart listing major retailers that collapsed this year. True Religion, maker of jeans and shorts, started the slide at the beginning of this year by declaring liabilities of between $100 million and $600 million. Among the high-profile companies that declared bankruptcy this year was kids’ retailer Gymboree, which declared liabilities of well over $1 billion. (See also: Gymboree Goes Bankrupt. Sears May Be Next.)

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The Stressed Out Consumer

GE plans to cater to the stressed out consumer.

GE executive says Americans are ‘more stressed out than ever’

American consumers’ stress levels are at an all-time high, according to surveys by GE Appliances.

“The average consumer is more stressed out than ever,” Rick Hasselbeck, the chief marketing officer of GE Appliances, told Business Insider. “Their well being is not where it should be physically, emotionally, socially, and financially. … People are struggling.”

He said consumers are increasingly time-starved and they are facing rising health care and technology costs, among other pressures, and “they need things that make their lives simpler.”

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Are LBOs Contributing to Bricks and Mortar Retail Declines?

The Private Equity Firms at the Core of Brick & Mortar Retail Bankruptcies

An astounding list of the meltdown: PE firms doomed the retailers.

One of the big forces in the brick-and-mortar retail meltdown are private equity firms that acquired retail chains via leveraged buyouts during the LBO boom before the Financial Crisis or more recently. Numerous of those retail chains have now filed for bankruptcy.

A PE firm typically borrows to undertake the leveraged buyout. But instead of carrying the debt at the firm, the debt is loaded on the acquired company, on top of the debt it had before the buyout, and it has to service that large pile of debt.

In addition, PE firms typically extract fees and “special dividends” from their portfolio companies which will fund them with additional debt. These fees and special dividends are tools with which PE firms extract profits up front. Lenders and other creditors carry the risks.

The final goal is to unload the portfolio company by selling it either to a large corporation or to the public via an IPO within a few years (seven years is a rule of thumb).


US Car Sales Down

US Auto Sales Fall for 2nd Year at GM, Ford, FCA, Toyota, BMW, Mazda. Total 2017 Sales Drop Below 2015

Tesla gets crushed by the big boys.

Total new-vehicle sales in the US fell 5.2% year-over-year in December to 1.6 million units. For all of 2017, sales declined by 320,000 vehicles, or 1.8%, to 17.23 million units. It was the first overall decline since the Financial Crisis.

Compared to 2015, sales fell by 249,033 vehicles, or 1.4%. These sales are vehicles delivered by dealers to their customers, or delivered by automakers directly to large fleet customers, as reported by Autodata.

For the big three US automakers and some import brands it was the second year in a row of sales declines (two-year percent change from 2015):

  • GM -2.7%
  • Ford -1.1%
  • Fiat Chrysler (FCA) -8.6%
  • Toyota -2.6%
  • BMW -12.6%
  • Mazda -9.3%



Dollar Stores Grow in Retail Sales

Dollar stores are dominating retail by betting on the death of the American middle class

Dollar General and other dollar stores are thriving while department stores struggle to survive — and their success is built on the death of the American middle class.

The Wall Street Journal reported that Dollar General has become one of the most profitable retailers in the US by opening more locations in places across the country that have continued to struggle economically.

“The economy is continuing to create more of our core customer,” Dollar General CEO Todd Vasos told the WSJ.

The company’s target shopper comes from a household making $40,000 or less a year.

“We are putting stores today [in areas] that perhaps five years ago were just on the cusp of probably not being our demographic, and it has now turned to being our demographic,” Vasos said.

As department stores like Sears and Macy’s have struggled to grow sales, dollar stores and other super-budget retailers are dominating.

From 2010 to 2015, dollar store sales grew from $30.4 billion to $45.3 billion in the US. While retailers close thousands of stores across the US, the WSJ reports Dollar General is planning to build “thousands more stores, mostly in small communities that have otherwise shown few signs of the U.S. economic recovery.”

Dollar stores’ success is based on their ability to provide what lower-income households need when they have no other options. Instead of selling items in bulk that allow for long-term savings, dollar stores sell small quantities of items that customers can afford — even if they end up paying more on a per-ounce or per-item basis in the long run.

“Essentially what the dollar stores are betting on in a large way is that we are going to have a permanent underclass in America,” Garrick Brown, director for retail research at the commercial real estate company Cushman & Wakefield, told Bloomberg.

Brown continued: “It’s based on the concept that the jobs went away, and the jobs are never coming back, and that things aren’t going to get better in any of these places.”


Self learning AI 

The Economist reports that AI programs can now learn by itself and beat human opponents in game contests.
The latest AI can work things out without being taught

IN 2016 Lee Sedol, one of the world’s best players of Go, lost a match in Seoul to a computer program called AlphaGo by four games to one. It was a big event, both in the history of Go and in the history of artificial intelligence (AI). Go occupies roughly the same place in the culture of China, Korea and Japan as chess does in the West. After its victory over Mr Lee, AlphaGo beat dozens of renowned human players in a series of anonymous games played online, before re-emerging in May to face Ke Jie, the game’s best player, in Wuzhen, China. Mr Ke fared no better than Mr Lee, losing to the computer 3-0.

For AI researchers, Go is equally exalted. Chess fell to the machines in 1997, when Garry Kasparov lost a match to Deep Blue, an IBM computer. But until Mr Lee’s defeat, Go’s complexity had made it resistant to the march of machinery. AlphaGo’s victory was an eye-catching demonstration of the power of a type of AI called machine learning, which aims to get computers to teach complicated tasks to themselves.

AlphaGo learned to play Go by studying thousands of games between expert human opponents, extracting rules and strategies from those games and then refining them in millions more matches which the program played against itself. That was enough to make it stronger than any human player. But researchers at DeepMind, the firm that built AlphaGo, were confident that they could improve it. In a paper just published in Nature they have unveiled the latest version, dubbed AlphaGo Zero. It is much better at the game, learns to play much more quickly and requires far less computing hardware to do well. Most important, though, unlike the original version, AlphaGo Zero has managed to teach itself the game without recourse to human experts at all.